Determination of Rates and Terms for Digital Performance of Sound Recordings and Making of Ephemeral Copies To Facilitate Those Performances (Web V), 59452-59593 [2021-20621]

Agencies

• Copyright Royalty Board, Library of Congress
• Library of Congress

[Federal Register Volume 86, Number 205 (Wednesday, October 27, 2021)]
[Rules and Regulations]
[Pages 59452-59593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-20621]



[[Page 59451]]

Vol. 86

Wednesday,

No. 205

October 27, 2021

Part II





Library of Congress





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Copyright Royalty Board





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37 CFR Part 380





Determination of Rates and Terms for Digital Performance of Sound 
Recordings and Making of Ephemeral Copies To Facilitate Those 
Performances (Web V); Final Rule

Federal Register / Vol. 86, No. 205 / Wednesday, October 27, 2021 / 
Rules and Regulations

[[Page 59452]]


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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 380

[Docket No. 19-CRB-0005-WR (2021-2025)]


Determination of Rates and Terms for Digital Performance of Sound 
Recordings and Making of Ephemeral Copies To Facilitate Those 
Performances (Web V)

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Copyright Royalty Judges announce their final 
determination of the rates and terms for two statutory licenses 
(permitting certain digital performances of sound recordings and the 
making of ephemeral recordings) for the period beginning January 1, 
2021, and ending on December 31, 2025.

DATES: 
    Effective date: October 27, 2021.
    Applicability date: The regulations apply to the license period 
beginning January 1, 2021, and ending December 31, 2025.

ADDRESSES: The final determination is posted in eCRB at https://app.crb.gov/. For access to the docket to read the final determination 
and submitted background documents, go to eCRB and search for docket 
number 19-CRB-0005-WR (2021-2025).

FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Assistant, 
(202) 707-7658, [email protected].

SUPPLEMENTARY INFORMATION:

Final Determination

    The Copyright Royalty Judges (Judges) hereby issue their written 
determination of royalty rates and terms to apply from January 1, 2021, 
through December 31, 2025, to digital performance of sound recordings 
over the internet by nonexempt, noninteractive transmission services 
and to the making of ephemeral recordings to facilitate those 
performances.
    The rate for commercial subscription services in 2021 is $0.0026 
per performance. The rate for commercial nonsubscription services in 
2021 is $0.0021 per performance. The rates for the period 2022 through 
2025 for both subscription and nonsubscription services shall be 
adjusted to reflect the increases or decreases, if any, in the general 
price level, as measured by the change in the Consumer Price Index for 
All Urban Consumers (U.S. City Average, all items) (CPI-U) from that 
published by the Bureau of Labor Statistics (BLS) in November 2020, as 
set forth in the regulations adopted by this determination.
    The rates for noncommercial webcasters are: $1,000 annually for 
each station or channel for all webcast transmissions totaling not more 
than 159,140 Aggregate Tuning Hours (ATH) in a month, for each year in 
the rate term. In addition, if, in any month, a noncommercial webcaster 
makes total transmissions in excess of 159,140 ATH on any individual 
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel 
or station in excess of 159,140 ATH at the rate of $0.0021 per 
performance in 2021. The rates for transmissions over 159,140 ATH per 
month for the period 2022 through 2025 shall be adjusted to reflect the 
increases or decreases, if any, in the general price level, as measured 
by the changes in the CPI-U from that published by BLS in November 
2020, as set forth in the regulations adopted by this determination.
    The Judges also determine herein details relating to the rates for 
each category of webcasting service, such as minimum fee and 
administrative terms, in the following analysis. ``Exhibit A'' to this 
determination contains the regulatory language codifying the terms of 
the Judges' determination.

I. Background

A. Purpose of the Proceeding

    The licenses at issue in the captioned proceeding, viz., licenses 
for commercial and noncommercial noninteractive webcasting, are 
compulsory. Title 17, United States Code (Copyright Act or Act), 
establishes exclusive rights reserved to copyright owners, including 
the right to ``perform the copyrighted work publicly by means of a 
digital audio transmission.'' See 17 U.S.C. 106(6). The digital 
performance right is limited, however, by section 114 of the Act, which 
grants a statutory license for nonexempt noninteractive internet 
transmissions of protected works. 17 U.S.C. 114(d). Eligible webcasters 
are entitled to perform sound recordings without an individual license 
from the copyright owner, provided they pay the statutory royalty rates 
for the performance of the sound recordings and for the ephemeral copy 
of the sound recording necessary to transmit it. 17 U.S.C. 114(f), 
112(e). Licensee webcasters pay the royalties to a Collective, which 
distributes the funds to performing artists and copyright owners. The 
statutory rates and terms apply for a period of five years. The Act 
requires that the Judges ``establish rates and terms that most clearly 
represent the rates and terms that would have been negotiated in the 
marketplace between a willing buyer and a willing seller.'' 17 U.S.C. 
114(f)(2)(B). The marketplace the Judges look to is a hypothetical 
marketplace, free of the influence of compulsory, statutory licenses. 
Web II, 72 FR 24084, 24087 (May 1, 2007). The Judges ``shall base their 
decision on economic, competitive[,] and programming information 
presented by the parties . . . .'' 17 U.S.C. 114(f)(2)(B), 112(e)(4) 
(emphasis added). Within these categories, the Judges' determination 
shall account for (1) whether the internet service substitutes for or 
promotes the copyright owner's other streams of revenue from the sound 
recording and (2) the relative roles and contributions of the copyright 
owner and the service, including creative, technological, and financial 
contributions, and risk assumption. Id. The Judges may consider rates 
and terms of comparable services and comparable circumstances under 
voluntary, negotiated license agreements. Id. The rates and terms 
established by the Judges ``shall distinguish'' among the types of 
services and ``shall include'' a minimum fee for each type of service. 
Id. (emphasis added).

B. Procedural Posture

    Following the timeline prescribed by the Act, the Judges published 
notice of commencement of this proceeding in the Federal Register. 84 
FR 359 (Jan. 24, 2019). Twenty parties in interest filed petitions to 
participate in the proceeding. Nine of those petitioners subsequently 
withdrew from the proceeding, and the Judges dismissed one of the 
petitioners because the Judges determined that he lacked the requisite 
substantial interest in the proceeding.\1\
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    \1\ The following parties filed petitions to participate: Accu 
Radio LLC (withdrew), College Broadcasters Inc. (settled), David 
Powell (dismissed), Educational Media Foundation (joined case of 
NRBNMLC), Live365 Broadcaster LLC (withdrew), LA RAZA MEDIA GROUP 
LLC (withdrew), Pandora Media LLC (Pandora), Radio Coalition LLC 
(withdrew), Sirius XM Radio, National Religious Broadcasters 
Noncommercial Music License Committee (NRBNMLC), National 
Association of Broadcasters (NAB), Feed Media, Inc. (withdrew), Dash 
Radio, Inc. (withdrew), Tunein Inc. (withdrew), National Public 
Radio (settled), Radio Paradise Inc. (withdrew), SoundExchange, Inc. 
(SoundExchange) (filing jointly on behalf of The American Federation 
of Musicians and the United States and Canada, Screen Actors Guild/
American Federation of Television and Radio Artists, The American 
Association of Independent Music, Sony Music Entertainment, UMG 
Recordings, Inc., Warner Music Group Corp., and Jagjaguwar Inc.), 
iHeart Media Inc., ICON Health & Fitness Inc. (withdrew), and Google 
Inc.

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[[Page 59453]]

1. Negotiated Settlements
    The Judges received two settlements, one between SoundExchange and 
certain public broadcasters and the other between SoundExchange and 
certain educational webcasters.
a. Public Broadcasters
    One of the settlements, among SoundExchange, National Public Radio 
(NPR), and the Corporation for Public Broadcasting (CPB), addressed 
rates and terms for certain internet transmissions by public 
broadcasters, NPR, American Public Media, Public Radio International, 
Public Radio Exchange, and certain other unnamed public radio stations 
for the period from January 1, 2021, through December 31, 2025. The 
Judges published the terms of the settlement in the Federal Register on 
October 29, 2019. The Judges received no comments on the proposal and 
approved the settlement on February 28, 2020.\2\
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    \2\ 85 FR 11857 (Feb. 28, 2020).
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b. Educational Webcasters
    The other settlement, between SoundExchange and College 
Broadcasters, Inc. (CBI), addressed rates and terms for certain 
internet transmissions of sound recordings by college radio stations 
and other noncommercial educational webcasters for the period from 
January 1, 2021, through December 31, 2025. The Judges published the 
terms of the settlement in the Federal Register on October 30, 2019. 
The Judges received no comments on the proposal and approved the 
settlement on March 4, 2020.\3\
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    \3\ 85 FR 12745 (Mar. 4, 2020).
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2. The Current Proceeding To Adjudicate Rates and Terms
    The Act provides that the Judges shall make their determinations 
``on the basis of a written record, prior determinations and 
interpretations of the Copyright Royalty Tribunal, Librarian of 
Congress . . .'' and their own prior determinations to the extent those 
determinations are ``not inconsistent with a decision of the Register 
of Copyrights . . . .'' 17 U.S.C. 803(a). Pursuant to 17 U.S.C. 803(b), 
the Judges conduct a hearing to create that ``written record.'' To that 
end, non-settling parties appeared before the Judges virtually for an 
evidentiary hearing. At the hearing, SoundExchange represented the 
interests of licensors. Several non-settling licensees also 
participated in the hearing.\4\
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    \4\ The non-settling licensees were Google, iHeart Media, NAB, 
NRBNMLC, Pandora, and Sirius XM.
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    The hearing commenced on August 4, 2020, and concluded on September 
9, 2020.\5\ The parties submitted proposed findings and conclusions 
(and responses thereto) in writing, prior to their closing arguments on 
November 19, 2020. During the hearing, the Judges heard oral testimony 
from 33 witnesses (some of them for both direct case and rebuttal 
testimony) and considered the testimony of eight witnesses on the 
papers. The witnesses included 13 qualified experts. The Judges 
admitted 748 exhibits into evidence, consisting of over 900,000 pages 
of documents (9227 MB of electronic files in eCRB), and considered 
numerous illustrative and demonstrative materials that focused on 
aspects of the admitted evidence and the permitted oral testimony.
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    \5\ The hearing was originally scheduled to commence on March 
16, 2020, but was delayed due to the coronavirus pandemic. See Order 
Granting Joint Motion for Continuance of Hearing (Mar. 12, 2020) 
(delaying commencement of hearing until April 28, 2020. In 
consultation with the participants, the Judges granted several 
additional continuances, until ultimately scheduling a virtual 
hearing employing videoconferencing technology to commence on August 
4, 2020. See Order Granting Joint Motion for Second Continuance of 
Hearing (Apr. 1, 2020); Order Granting Joint Motion for Third 
Continuance of Hearing (May 1, 2020); Order on Hearing Schedule and 
Related Pre-Hearing Matters (Jun. 10, 2020); Order Setting Virtual 
Hearing and Addressing other Hearing-Related Matters (Jun. 25, 
2020); Order Postponing Virtual Hearing (Jul. 14, 2020); Order 
Rescheduling Virtual Hearing (Aug. 3, 2020).
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    Pursuant to section 803(c)(1), the initial Determination in this 
matter was due no later than December 16, 2020 (i.e., 15 days before 
the expiration of the current statutory rates and terms). See 17 U.S.C. 
803(c)(1). On July 6, 2020, the Acting Register of Copyrights, at the 
request of the Judges, exercised her authority under 17 U.S.C. 710 to 
``toll, waive, adjust, or modify'' the timing provision in section 
803(c)(1) to account for the disruption and delay caused by the COVID-
19 pandemic. The Acting Register extended the Judges' deadline for 
issuing an initial Determination by up to 120 days, effectively making 
the deadline April 15, 2021. See Public Notice Regarding Timing 
Provisions for Persons Affected by COVID-19, U.S. Copyright Office, 
https://www.copyright.gov/coronavirus/ (last visited Jan. 11, 2021). 
The Register of Copyrights announced an additional 60-day extension on 
March 29, 2021, in the Copyright Office's NewsNet, Issue No. 889.

II. Context of the Current Proceeding: Prior Rate Determinations

    Congress created the exclusive sound recordings digital performance 
copyright in 1995. See Digital Performance Right in Sound Recordings 
Act of 1995, Public Law 104-39, 109 Stat. 336 (1995). At the same time, 
Congress limited that performance right by granting noninteractive 
subscription services a statutory license to perform sound recordings 
by digital audio transmission. In 1998, Congress created the ephemeral 
recording license and further defined and limited the statutory license 
for digital performance of sound recordings. See Digital Millennium 
Copyright Act, Public Law 105-304, 112 Stat. 2860 (1998) (DMCA).

A. Web I-Web III

    The Judges summarized the history of webcasting determinations from 
Web I through Web III in detail in their Web IV determination. See 
Determination of Royalty Rates and Terms for Ephemeral Recording and 
Webcasting Digital Performance of Sound Recordings, Final rule and 
order, 81 FR 26316, 26317-19 (May 2, 2016) (Web IV). The Judges hereby 
incorporate that discussion by reference into this Determination.

B. Web IV Determination and Appeals

    The Judges commenced the Web IV proceeding in January 2014. 
SoundExchange and a pro se petitioner, George Johnson d/b/a GEO Music, 
represented the interests of licensors. Seven licensees also 
participated in the hearing.\6\ The Judges approved two negotiated 
agreements, one for public broadcasters between SoundExchange and NPR 
and CPB, and the other for educational webcasters between SoundExchange 
and CBI.
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    \6\ The licensees were Harvard Radio Broadcasting, Inc., IBS, 
iHeartMedia, NAB, NRBNMLC, Pandora, and Sirius XM.
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    The Judges concluded that ``there is continued support in the 
marketplace for a different rate structure for commercial and 
noncommercial webcasters.'' 81 FR 26316, 26320 (May 2016). The Judges 
therefore adopted separate rate structures for noncommercial and 
commercial webcasters. With respect to noncommercial webcasters, the 
Judges adopted a $500 per station or channel fee for all transmissions 
by noncommercial webcasters up to a threshold of 159,140 aggregate 
tuning hours (ATH) for 2016 through 2020. For transmissions in excess 
of 159,140 ATH, the Judges set a rate of $0.0017 per performance for 
2016, which would be adjusted annually for changes to the CPI-U for the 
years 2017-2020. Id. at 26396.
    The Judges also identified a distinction between two different 
types of copyright owners. Based on the

[[Page 59454]]

record, the Judges observed that ``in the marketplace, Services have 
agreed to pay higher rates to'' major record labels (Majors) than to 
so-called independent labels (Indies). Id. at 26319. To gain clarity on 
whether the Judges could establish different rates based on differences 
among copyright owners, the Judges referred to the Register of 
Copyrights (Register) the novel question of whether the Act permits the 
Judges to differentiate based on types of licensors. The Register 
concluded that the Judges' question did not meet the statutory criteria 
for referral and declined to answer it. Id. In the absence of an 
adequate record to support such differentiation, the Judges declined to 
adopt separate rates for Majors and Indies. Id.
    The Judges also addressed potential distinctions between groups of 
licensees. In particular, NAB argued that simulcasting is different 
from other forms of commercial webcasting and therefore simulcasters 
(i.e., terrestrial radio stations that simulcast over-the-air 
broadcasts on the internet) should pay a lower rate than other 
commercial webcasters. Id. at 26320. Based on the record in Web IV, 
however, the Judges concluded that NAB did not satisfy its burden to 
demonstrate that simulcasting differs in ways that would cause willing 
buyers and willing sellers to agree to a lower royalty rate in the 
hypothetical market. Therefore, the Judges did not adopt a different 
rate structure for simulcasters than that which applied to other 
commercial webcasters. Id.
    SoundExchange and Pandora each proposed different greater-of rate 
structures employing a per-play rate and a percentage-of-revenue rate. 
All of the Services, other than Pandora, opposed such a two-pronged 
approach. The Judges concluded that the record did not support a 
greater-of rate structure in the rate period at issue in Web IV. Id. at 
26323. Rather, the Judges found that the statutory rate should continue 
to be set on a per-play basis for commercial webcasters. Id. at 26325.
    The Judges set two separate rates for commercial noninteractive 
webcasting. One applied to performances on subscription-based 
commercial noninteractive services. A separate rate applied to 
performances on nonsubscription services (i.e., advertising supported 
services that are free to the listener). Id. at 26404. The Judges set 
each of the rates for 2016 (the first year of the five-year statutory 
license term) and then applied an inflation-based adjustment to the 
rates for the remaining years of the license. The Judges looked to 
separate benchmarks to establish the rates. For commercial 
noninteractive subscription services, the Judges used a benchmark 
developed by SoundExchange's expert, Dr. Rubinfeld, to which the Judges 
applied a 12% ``steering'' reduction to reflect a lack of competition 
in that particular segment of the market among the providers of the 
copyright works. The Judges also credited a rate established in an 
agreement between Pandora and Merlin. Those two rates formed a zone of 
reasonableness, within which the Judges chose a per-performance rate of 
$0.0022 for 2016. Id. at 26405.
    With respect to the rate for commercial nonsubscription services, 
the Judges identified two usable benchmarks. One was based on a rate in 
an agreement between iHeart and Warner. The other was based on a rate 
from an agreement between Pandora and Merlin. Id. at 26405. The first 
represented an agreement between a service and a Major and the second 
between a service and Indies. The Judges used these rates to form a 
zone of reasonableness. The Judges selected a rate for 2016 of $0.0017, 
which took into account a greater number of streams from Major sound 
recordings as opposed to the percentage of streams from Indie sound 
recordings. The rates for 2017 through 2020 would be adjusted to 
account for changes in the CPI. The rate for the Section 112 license 
would constitute 5% of the royalty services would pay for performances 
under the Section 114 license. Id. at 26406.
    SoundExchange and George Johnson appealed the Judges' determination 
to the U.S. Court of Appeals for the D.C. Circuit. The court affirmed. 
SoundExchange, Inc. v. Copyright Royalty Bd., 904 F.3d 41 (Sep. 18, 
2018).

III. The Role of Effective Competition in Setting Webcasting Rates

A. The Concept of ``Effectively Competitive'' Rates

    In Web IV, the Judges held that the Copyright Act either required 
them, or permitted them, in their discretion, ``to set a rate that 
reflects a market that is effectively competitive.'' Web IV, 81 FR at 
2633 (emphasis added). The D.C. Circuit affirmed the Judges' conclusion 
that they had the discretionary authority ``to determine rates through 
the lens of an effective-competition standard'' (but held that the 
Judges were not required to do so). SoundExchange, 904 F.3d at 57.
    More particularly, the D.C. Circuit found reasonable the Judges' 
construction of the statutory ``willing seller/willing buyer-
marketplace'' standard as calling for the establishment of rates that 
would have been set in an effectively competitive market. In that 
regard, the D.C. Circuit pointed to testimony and record evidence--
referenced approvingly by the Judges--stating that ``neither sellers 
nor buyers can be said to be `willing' partners to an agreement if they 
are coerced to agree to a price through the exercise of overwhelming 
market power.'' SoundExchange, 904 F.2d at 56 (quoting Web IV, 81 FR at 
26331).
    Additionally, the D.C. Circuit grounded its affirmance on its 
finding that the statutory willing buyer/willing seller-marketplace 
standard was inherently ambiguous. Because of this ambiguity, the D.C. 
Circuit held that the Judges had properly exercised their statutory 
duty by considering ``the clear statutory purpose, applicable prior 
decisions, and the relevant legislative history.'' SoundExchange, 904 
F.3d at 55 (quoting Web IV at 26332). In particular, the D.C. Circuit 
took note of the Judges' reliance on their own webcaster rate 
determination that had immediately preceded Web IV:

    The [Judges] relied on one of [their] prior determinations in 
reasoning that, ``[b]etween the extremes of a market with 
`metaphysically perfect competition' and a monopoly (or collusive 
oligopoly) market devoid of competition there exists in the real 
world . . . a mind-boggling array of different markets, all of which 
possess varying characteristics of a `competitive marketplace.' '' 
[Web IV, 81 FR at 26333 (quoting Web III Remand, 79 FR at 23114 
n.37)].

SoundExchange, 904 F.3d at 57.

    In fact, the D.C. Circuit not only found that the Judges acted 
reasonably in this regard, but also that--when exercising their 
discretion--the Judges ``must consider `competitive information''' 
contained in the hearing record, in order ``to identify the relevant 
characteristics of competitiveness on which to base [their] 
determination of the statutory rates.'' SoundExchange, 904 F.3d at 56-
57 (emphasis added).
    Consistent with the D.C. Circuit's decision affirming Web IV, the 
Judges in this Web V proceeding again apply the standard that royalty 
rates for noninteractive services should be set at levels that reflect 
those that would be set in an effectively competitive market. Further, 
the Judges note that no party in this proceeding challenges the 
application of this effective competition standard, although 
SoundExchange and the Services offer vastly different understandings of 
how the Judges should apply the standard in this case.
    In Web IV, the Judges applied the concept of ``effective 
competition'' as a

[[Page 59455]]

counterweight to the ``complementary oligopoly'' power of the Majors. 
Web IV, 81 FR at 26368 (identifying the ``complementary oligopoly that 
exists among the Majors,'' allowing them to ``utilize their combined 
market power to prevent price competition among them . . . .''). Simply 
put, the Judges found that each Major is a ``Must Have'' licensor for 
noninteractive services (in the hypothetical unregulated market), 
meaning that each noninteractive service ``must have'' a license for 
the entire repertoires of Sony, Universal and Warner, in order to 
remain in business. Also, because the interactive market was proffered 
as a benchmark market in Web IV (as in the present proceeding), the 
Judges performed the same inquiry for that market, concluding that 
interactive licensees likewise ``must have'' access to the repertoires 
of each Major in order to survive commercially. Web IV, 81 FR at 26340, 
26342. From a more technical economic viewpoint, the ``Must Have'' 
status of the three Majors rendered each a ``complementary 
oligopolist.'' \7\ As explained in Web IV, this status allows each 
Major to wield the individual economic power of a monopolist, but the 
exercise of that power leads to royalty rates that are even greater 
than those that would be set by a single monopolist. Specifically, the 
Judges held:
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    \7\ ``Complementary oligopolists'' supply products or, as here, 
offer licenses, for access to products, that are ``perfect 
complements,'' meaning that the products or licenses they offer are 
essential, i.e., ``Must Haves,'' for a buyer/licensee in order to 
operate its business. Such products/licenses are known in economics 
as ``Cournot Complements.'' See Web IV, 81 FR at 26342-43.

    `[I]f the repertoires of all [Majors] were each required by 
webcasters (i.e., if the repertoires were necessary complements) . . 
. each [Major] would have an incentive to charge a monopoly price to 
maximize its profits . . . constitut[ing] higher monopoly costs . . 
. paid by webcasters to each of the [Majors].' . . . The Judges in 
this determination adopt this economic reasoning and will not allow 
such complementary oligopoly power to be incorporated into the 
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statutory rate.

Web IV, 81 FR at 26368 & n.142 (quoting Web III Remand, 79 FR at 
23114); see also Web IV, 81 FR at 26342-43 (summarizing corroborating 
economic expert testimony as (i) stating that the complementary 
oligopoly structure is ``even worse than a market controlled by a 
single monopoly supplier . . . [as] first identified by Antoine Cournot 
in 1838''; and (ii) explaining that Universal had argued to the 
Department of Justice that its merger with EMI ``would lead to lower 
prices because it would remove the Cournot Complements pricing effect'' 
between the merging entities.).
    In Web IV, the dispute regarding the ``effective competition'' 
standard focused essentially on the absence of horizontal price 
competition between and among the Majors--and whether such horizontal 
competition could be generated by noninteractive services in the 
hypothetical (i.e., unregulated) market.\8\ Based on the record in that 
proceeding, the Judges determined that the Services had successfully 
demonstrated how effectively competitive rates had been set, (i.e., via 
steering, discussed infra) even in the face of a complementary 
oligopoly.\9\
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    \8\ The section 114 statutory rate supplants an unregulated 
market rate, so the Judges must ascertain the rates that would have 
been set in such a hypothetical market. See Web IV, 81 FR at 26316, 
26333. In Web IV, though, in addition to receiving evidence 
regarding the hypothetical market, the Judges were presented with 
actual market evidence of effectively competitive rates from the 
noninteractive market. Id. at 26343 (``[T]he Judges are not left 
with mere hypotheticals . . . . Rather, the Judges were presented 
with hard and persuasive evidence that . . . reduced royalty rates 
in the noninteractive market and would do so in the hypothetical 
market as well.'').
    \9\ The more particular issue was whether noninteractive 
services could foment such horizontal price competition among record 
companies through the services' expressed intent to ``steer'' their 
algorithmically or humanly curated plays toward those licensed by 
Majors who agree to royalty rates lower than those of their 
competitors. Web IV, 81 FR at 26348 (``[T]he ability of 
noninteractive services to steer away from higher priced recordings 
and toward lower priced recordings (or threaten to do so) serves as 
a buffer against the supranormal pricing that arises from the impact 
of complementary oligopoly pricing . . . .'').
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    The foregoing findings regarding the ``Must Have'' status of the 
Majors in the interactive benchmark market are not challenged in this 
proceeding. However, SoundExchange argues that, unlike in the Web IV 
period, the benchmark interactive market now generates effectively 
competitive rates, because the present record demonstrates that Spotify 
has gained licensee-side power sufficient to offset, in whole or in 
part, the Majors' ``Must Have'' status. SoundExchange's Second 
Corrected Proposed Findings of Fact and Conclusions of Law ] 89 et seq. 
(and record citations therein) (SX PFFCL). The Services dispute the 
assertion that the record shows Spotify to have acquired such power or 
that the interactive market has otherwise become effectively 
competitive. Services' Joint Proposed Findings of Fact and Conclusions 
of Law ] 62 et seq. (Services PFFCL). (This issue is discussed in 
detail infra, section III.B.).\10\
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    \10\ However, the Services dispute the assertion that all three 
Majors would be ``Must Have'' licensors in the hypothetical 
noninteractive market. Services PFFCL ] 195 et seq. That issue is 
discussed infra, section IV.C.2.b in the Judges' consideration of 
Pandora's ``Label Suppression Experiments.''
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    Thus, the present record raises a new question: Have there have 
been changes in bargaining power between the Majors and Spotify in the 
interactive benchmark market such that the royalty rates in their 
agreements are consonant with the ``effectively competitive'' standard?
    In order to address this new question, the Judges find it first 
necessary to consider the concept of ``effective competition'' in a 
context dictated by the present record, one that did not arise in Web 
IV. To put this analysis in proper economic context, it is helpful and, 
indeed, necessary, to begin by identifying the aspects of the 
``effective competition'' standard that were addressed and determined 
in Web IV. In summary, those points are the following:
    1. The Majors possess ``complementary oligopoly power'' in the 
actual (unregulated) interactive market and in the hypothetical 
(unregulated) noninteractive market that ``thwart[s] price competition 
and [is] inconsistent with an `effectively competitive market' . . . 
.'' Web IV, 81 FR at 26335.
    2. Because there are a ``mind-boggling'' number of markets with 
various competitive characteristics, there exists a range of rates that 
may satisfy the ``effectively competitive'' standard--between the 
statutorily-created de facto zero rate for terrestrial sound recordings 
and the complementary oligopoly rate generated by the Majors' power as 
complementary oligopolists--each of which can be seen as a ``bookend'' 
for the range of potential rates. Web IV, 81 FR at 26334.\11\
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    \11\ To borrow from Tolstoy, perfectly competitive and perfectly 
monopolist markets all gravitate toward well-understood equilibria 
in the same way, but oligopolistic markets move in different ways.
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    3. The ``essence of a competitive standard is that it suggests a 
continuum and differences in degree rather than in kind,'' which 
dovetails with the Judges' statutory charge to ``weigh competitive 
information'' in order to ``decide whether the rates proposed 
adequately provide for an effective level of competition.'' Web IV, 81 
FR at 26334.\12\
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    \12\ Economists have acknowledged the pragmatic nature of 
applying the ``effective competition'' standard. See, e.g., Alfred 
E. Kahn, Antitrust Policy, 67 Harv. L. Rev., 28, 35, (1953) 
(``[T]here exists no generally accepted economic yardstick 
appropriate to . . . determine what degree [of monopoly power] is 
compatible with [effective] competition.''); J. Markham, An 
Alternative Approach to the Concept of Workable Competition 349, 361 
(1950) (The concepts of ``market competition are essentially 
pragmatic'').
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    4. When the hearing record provides actual evidence allowing the 
Judges to

[[Page 59456]]

determine whether a rate is effectively competitive, that evidence and 
the adjudicatory process vitiate the theoretical absence of an a priori 
``bright line'' to distinguish effectively competitive and 
noncompetitive rates. Web IV. 81 FR at 26343.
    In Web IV, the evidence demonstrated only one potential method for 
the amelioration of the ability of the Majors, as complementary 
oligopolists, to set noncompetitive rates. Specifically, Pandora and 
iHeart introduced evidence of agreements with Merlin and Warner, 
respectively, that incorporated ``steering'' into those agreements. 
``Steering'' in this context means the presence of contract provisions 
by which a licensee will increase the number of plays of the 
counterparty record company above its historic market share, in 
exchange for the record company's agreement to accept a lower royalty 
rate than other record companies. Web IV, 81 FR at 2366 (``The Judges 
find that steering in the hypothetical noninteractive market would 
serve to mitigate the effect of complementary oligopoly . . . and 
therefore move the market toward effective, or workable, competition'' 
together with ``the ever-present `threat' that competing [licensors] 
will undercut each other in order to [license] more . . . .'').
    But Web IV does not consider in detail whether evidence of any 
other economic factors could also serve to offset or ameliorate the 
complementary oligopoly power present on the licensor/record company 
supply-side of the market. And further, the Judges never intimated--let 
alone determined--that steering was the sole method by which the 
complementary oligopoly power on the licensor side could be 
ameliorated.\13\ Indeed, the Web IV Determination clearly explains that 
the steering adjustment is not a sui generis device for adapting a 
benchmark rate, but rather ``is of a class with any other adjustments 
necessary to harmonize the benchmark rate with the statutory 
requisites.'' Web IV, 81 FR at 26368.\14\
---------------------------------------------------------------------------

    \13\ In fact, Web IV makes clear that the Judges found the 
injection of steering into the market (actual or hypothetical) could 
be ``sufficient'' to ameliorate the anticompetitive impact of 
complementary oligopoly power--not that an injection of steering was 
necessary to do so. See Web IV, 81 FR at 26367-68; see also id. at 
26369 (Professor Shapiro noting that steering is only ``an example 
of price competition at work.'').
    \14\ In Web IV, the Judges did touch upon the potential for 
countervailing licensee power as a potential mitigating or 
offsetting factor. SoundExchange asserted that Pandora had 
significant (monopsony) market power in its own right in the 
noninteractive market that generated rates below effectively 
competitive rates in its benchmark agreement with Merlin. But the 
Judges rejected SoundExchange's argument, finding--in reliance on an 
analysis presented by Pandora's economic expert witness, Professor 
Shapiro--that ``Pandora's share of the Merlin Labels' [overall] 
revenues is far short of the level that would be necessary for 
Pandora to have undue market power in its negotiations with 
Merlin.'' Web IV, 81 FR at 26371. Implicitly, the Judges there 
indicated that, had Pandora possessed sufficient market power, that 
fact may have weighed in the Judges' calculus in reducing the 
effective competition adjustment, thereby increasing the effectively 
competitive statutory rate.
---------------------------------------------------------------------------

    Web IV also must be understood as limited by the fact that the 
parties implicitly agreed (given the facts of that case) to apply a 
particular conception of ``competition''--``price competition.'' In 
fact, although the parties and the Judges discussed extensively the 
meaning of ``effective competition,'' they intentionally did not 
provide a rigid definition for the concept of ``competition.'' This 
absence is unsurprising because the only form of competition at issue 
in Web IV was price competition--a standard neoclassical variant. Web 
IV, 81 FR at 26366 (``The Judges find that steering in the hypothetical 
noninteractive market would serve to mitigate the effect of 
complementary oligopoly on the prices paid by the noninteractive 
services and therefore move the market toward effective, or workable, 
competition. Steering is synonymous with price competition in this 
market . . . .'') (emphasis added). But the Judges did not have cause 
to examine in any detail whether, beyond price competition, it was 
appropriate to consider other dimensions of competition, of which there 
are several. See generally Donald J. Harris, On the Classical Theory of 
Competition, 12 Cambridge J. of Econ., 139, 141, 146 (1988) 
(contrasting the ``relative tranquility [of] the neoclassical 
conception of competition . . . formalized in a vast array of modern 
textbooks'' with ``a structure of oligopolistic firms in which price 
competition is simply one component . . . of a broader process of 
strategic rivalry among leading firms [and] other possible behavioural 
rules on price formation.'') (emphasis added).
    So, although the importance of effective price competition cannot 
be disputed, the Judges must consider whether, if such competition is 
lacking, other forms of market behavior either substitute for price 
competition or otherwise generate prices consonant with those that 
would be established through price competition in an effectively 
competitive market. In fact, as discussed below, the Judges have 
engaged in such analyses in prior cases.
    The first case in which the Judges considered other economic 
dimensions beyond price competition was the SDARS III proceeding. In 
that case, the Judges again addressed the complementary oligopoly power 
of the Majors, albeit in connection with a different and now superseded 
statutory rate-setting standard. SDARS III, 83 FR at 65320 n.82.\15\ 
There, the Judges noted that the licensor-side complementary oligopoly 
power could be ameliorated by the ``countervailing power'' of a 
licensee (Sirius XM in that case) that possessed a large share of the 
downstream market at issue (a monopoly share of the satellite radio 
market in that case). SDARS III, 83 FR at 65238.\16\
---------------------------------------------------------------------------

    \15\ The superseded statutory standard was set forth in 17 
U.S.C. 801(b)(1). Despite the different standard, the Judges applied 
the same hypothetical market approach in SDARS III, before 
considering whether that hypothetical market rate should be adjusted 
to account for factors set forth in the now superseded statute. 
SDARS III, 83 FR. at 65237, 65253.
    \16\ That countervailing power, the Judges noted, existed if the 
market in which the licensee operated is not subject to meaningful 
potential substitution from listening via another form of music 
delivery. Id.
---------------------------------------------------------------------------

    And, in the next rate-setting case, Phonorecords III, the Judges 
(in the majority and in the dissent) found that the licensors--owners 
of the copyrights for musical works--possessed complementary oligopoly 
power. The majority Determination found that this noncompetitive effect 
could be ameliorated--not only by steering or another form of price 
competition--but by the application of economic game theoretic modeling 
(specifically, the Shapley Value approach) that economic experts 
testified would have such an effect. Phonorecords III, 84 FR at 1947, 
1950 (``The Judges look to the Shapley Analyses . . . as one means of 
deriving a reasonable royalty rate (or range of reasonable royalty 
rates) . . . . The Judges . . . find that the Shapley Analysis . . . 
eliminates the `holdout' problem that would otherwise cause a rate to 
be unreasonable, in that it would fail to reflect effective (or 
workable) competition.'').\17\
---------------------------------------------------------------------------

    \17\ Although the D.C. Circuit vacated and remanded the 
Phonorecord III Determination, the general point stands: The Judges 
consider factors and methods other than price competition (via 
steering or otherwise) to determine whether a rate is ``effectively 
competitive'' and, more specifically, whether such other factors or 
methods counterbalance the rate inflation caused by the 
complementary oligopoly effect.
---------------------------------------------------------------------------

    The Phonorecords III Dissent, although certainly not discounting 
the value of the Shapley Value approach, asserted instead that the 
complementary oligopoly power could be better ameliorated by adopting 
the benchmark proposed by the interactive streaming service-licensees, 
which was essentially

[[Page 59457]]

the Phonorecords II rate structure, i.e., a benchmark based on the 
rates in effect in the prior rate period that had been adopted in a 
settlement between industrywide trade associations, the NMPA and DiMA, 
representing licensors and licensees, respectively. Phonorecords III, 
84 FR at 1993 (dissent) (``settlement agreements tend to eliminate 
complementary oligopoly inefficiencies, and provide guidance as to an 
effectively competitive rate.''). Thus, once again, a Copyright Royalty 
Judge applied a factor--countervailing power--other than the presence 
of price competition, to determine an effectively competitive rate.
    In this regard, it is important to note that the concepts of 
``effective competition'' and ``countervailing power'' are not mutually 
exclusive, but are better understood as complementary. Professor John 
Kenneth Galbraith, who developed the concept of ``countervailing 
power,'' defined it as follows:

    [W]ith the widespread disappearance of competition in its 
classic form . . . it was easy to suppose that since competition had 
disappeared, all effective restraint on private power had 
disappeared . . . . [However,] [i]n fact, new restraints on private 
power did appear to replace competition . . . . [T]hey appeared not 
on the same side of the market but on the opposite side, not with 
competitors but with customers or suppliers . . . countervailing 
power.

John Kenneth Galbraith, American Capitalism: The Concept of 
Countervailing Power 111 (1952).
    In Web IV, the Judges recognized the economist J.M. Clark as the 
individual who introduced into microeconomics analysis the concept of 
effective competition, which he originally described as ``workable 
competition.'' Web IV, 81 FR at 26341 n.96 (citing J. M. Clark, Toward 
a Concept of Workable Competition, 30 Am. Econ. Rev. 241 (1940)). Two 
decades hence, Professor Clark wrote a book that served, in his words, 
as an ``elaboration of [the] line of inquiry'' dating from his seminal 
1940 article. John Maurice Clark, Competition as a Dynamic Process at 
ix (1961). In that volume, Professor Clark took note of the 
compatibility between the concept of ``countervailing power'' and his 
own concept of workable/effective competition. Clark, supra at 5 
(noting approvingly Professor Galbraith's view that, if competition is 
found wanting, ``countervailing power'' serves as a ``rough 
substitute'' that can ``deprive monopoly of its arbitrary power . . . 
.'').\18\
---------------------------------------------------------------------------

    \18\ In his 1961 treatise, Professor Clark expressly ``shift[s] 
. . . from `workable' to `effective competition''', because ``[t]he 
theory of effective competition is dynamic theory,'' going beyond 
``the analysis of static equilibrium'' to ``bring[] in the . . . 
interplay between aggressive and defensive forms of competition . . 
. .'' Id. at ix. (emphasis added).
---------------------------------------------------------------------------

    Likewise, in American Capitalism, Professor Galbraith expressly 
acknowledges the interplay between Professor Clark's conception of 
effective/workable competition and the principle of ``countervailing 
power'':

    There remains the possibility that within the structure of the 
market shared by a few firms there are practical restraints on 
economic power--that there is an attenuated but still workable 
competition which minimizes the scope for exercise of private market 
power . . . . This line of argument has emphasized results . . . . 
The notion of workable competition takes cognizance of the . . . 
point that over-all consequences, while in theory are deplorable, 
are often in real life quite agreeable . . . . [W]hat is unworkable 
in principle becomes workable in practice . . . because the active 
restraint [on the exercise of market power] is provided not by 
competitors but from the other side of the market by strong buyers.

Galbraith, supra at 57-58, 112 (emphasis added); see also id.158 n.912 
(noting the ``originality of Professor J.M. Clark'' and crediting his 
1940 article for the development of the concept of workable 
competition).\19\
---------------------------------------------------------------------------

    \19\ Despite Professor Galbraith's well-known progressive 
leanings, his concept of ``countervailing power'' as a means for 
more competitively dividing profits between input oligopolists and 
oligopsonists has been well-received by ardent free market 
economists as well, including a Nobel Prize winner. See, e.g., 
George J. Stigler, The Economist Plays with Blocs, 44 Am. Econ. 
Rev., no.2, 7, 9, 13-14 (1954) (papers and proceedings) (agreeing 
that Galbraith's concept of ``countervailing power'' describes a 
context in which ``a monopsonist or a set of oligopsonists arises 
and shares the gains of a previously unhampered monopolist or set of 
oligopolists,'' because ``[i]t is true that as countervailers they 
might share monopoly profits . . . .''). However, Professor Stigler 
disagreed vehemently with the notion that the bilateral oligopolies 
formed through the exercise of countervailing power ``reduce prices 
to consumers'' or ``should in general eliminate, and not merely 
redistribute, monopoly gains.'' Id. at 9, 13. But such downstream 
effects are irrelevant to the Judges' statutory task of setting an 
effectively competitive royalty rate in the upstream market. 
Moreover, Professor Stigler cautioned that the presence of 
``countervailing power'' in a market will not necessarily ``place 
groups on a basis of equality with respect to one another . . . .'' 
Id. at 14 (emphasis added). Accordingly, even if Spotify has 
acquired some additional bargaining power, that does not mean that 
its bargaining power is equal to the complementary oligopoly of the 
Majors. That is, any new bargaining power enjoyed by Spotify could 
mitigate the Majors' complementary oligopoly power but not 
necessarily offset it in full.
---------------------------------------------------------------------------

    In sum, the inclusion of the concepts of price competition and 
countervailing power into microeconomic analysis--as already applied by 
the Judges in several determinations--makes it clear that the Judges 
must consider record evidence regarding both of these economic concepts 
in order to fulfill their statutory mandate to establish rates that 
would be set between willing sellers and willing buyers in the 
marketplace. The Judges discuss and apply both of these economic 
concepts below.

B. Evaluation of Arguments Concerning Effective Competition

1. SoundExchange's Claim That Spotify has Downstream Pricing Power That 
Mitigates or Offsets the Majors' Complementary Oligopoly Power
    SoundExchange asserts several bases for its claim that the 
complementary oligopoly power of the Majors has been mitigated in part, 
or offset in full, by the increase in Spotify's market power, which has 
manifested in the latter's ability to [REDACTED]. More particularly, in 
the agreements between Spotify and the Majors that immediately preceded 
their 2017 agreements,\20\ the contract rate for [REDACTED]. In all 
three subsequent 2017 agreements between Spotify and the Majors, 
[REDACTED]. Trial Ex. 5609 ] 24 (WDT of Aaron Harrison) (Harrison WDT); 
Trial Ex. 5611 ] 10 (WDT of Reni Adadevoh) (Adadevoh WDT); Trial Ex. 
5613 ] 31 (WDT of Mark Piibe) (Piibe WDT) ([REDACTED]).
---------------------------------------------------------------------------

    \20\ The 2017 agreements were the most recent agreements 
available for inclusion in the record in this Web V proceeding.
---------------------------------------------------------------------------

    SoundExchange identifies the following three interrelated sources 
for Spotify's alleged increase in pricing power in 2017 that generated 
this [REDACTED]:
    1. Spotify now generates [REDACTED]. SX PFFCL ] 306 et seq.
    2. Spotify can now [REDACTED]. SX PFFCL ] 311 et seq.
    3. Spotify now has the ability to steer a significant number of 
plays on Spotify-curated playlists. SX PFFCL ] 346 et seq.
    The Judges examine each of these assertions seriatim below.
a. Has Spotify's Increased Share of each Major's Revenue provided 
Spotify with Leverage to Obtain [REDACTED]?
    SoundExchange asserts that--between 2014 and 2017--there has been 
explosive growth in the subscription on-demand format. More 
specifically, SoundExchange notes that, whereas in 2013, U.S. retail 
revenue from on-demand services was approximately $0.9 billion, by 
2016, this revenue total had increased to approximately $2.8 billion 
and, by 2017, to approximately

[[Page 59458]]

$4.2 billion. This growth has continued, with 2018 retail revenue from 
on-demand services greater than $5.4 billion, and, by 2019, reaching 
$6.8 billion. See Trial Ex. 5604 app. 2 (WDT of Catherine Tucker) 
(Tucker WDT); Trial Ex. 4115 at 3.\21\
---------------------------------------------------------------------------

    \21\ The Services do not dispute the fact of significant growth 
in the subscription on-demand market over this period, but they 
assert that Professor Tucker's data appear to include ad-supported 
on-demand revenue as well as subscription on-demand revenue. Compare 
SX PFFCL ] 306, with Tucker WDT app. 2. This specific potential 
discrepancy does not alter the substance of the parties' dispute nor 
the Judges' analysis of this issue.
---------------------------------------------------------------------------

    Accordingly, SoundExchange maintains that the Majors have now 
become increasingly reliant on income generated by all the interactive 
services. Because of this changed circumstance, SoundExchange avers 
that the balance of pricing power as between the Majors and Spotify has 
changed, with the latter now in a position to bargain more aggressively 
for favorable rates and terms. See Trial Ex. 5602 ]] 119-131 (WDT of 
Jon Orszag) (Orszag WDT).
    The Services assert that this is merely a re-tread of the 
SoundExchange argument the Judges rejected in SDARS III. Although the 
Services dispute neither the growth in music industry revenue nor the 
growth of interactive streaming industry revenue from 2014 through 
2017,\22\ they assert that the revenue data does not support Sound 
Exchange's argument that a single service's growth--here, Spotify's 
revenue growth--supports the assertion that the Majors' complementary 
oligopoly power has been compromised. More specifically, the Services 
maintain that the important metric is the percentage of the music 
industry's total revenue generated by Spotify. In this regard, the 
Services take note that Spotify accounted for [REDACTED] [REDACTED] of 
the Majors' total U.S. revenue in 2017, and only [REDACTED] in 2018. 
Trial Ex. 1105 ] 64 (AWRT of Steven Peterson) (Peterson WRT); Trial Ex. 
4107 at 10 & n.17 (WRT of Carl Shapiro) (Shapiro WRT). Additionally, 
the Services' economic expert witnesses reject the idea that the 
Majors' complementary oligopoly power vis-[agrave]-vis Spotify has been 
compromised because of the latter's contribution to the Majors' revenue 
stream. These witnesses further aver that, because Spotify and its on-
demand service competitors offer essentially the same service at the 
same downstream subscription price, if one Major's repertoire was 
unavailable on Spotify, subscribers would turn to its competitors, thus 
abandoning Spotify in the process. 8/25/20 Tr. 3713-14 (Peterson); 8/
19/20 Tr. 2859 (Shapiro).
---------------------------------------------------------------------------

    \22\ ``The Services agree that streaming accounts for a larger 
percentage of the overall revenue for recorded music, however the 
industry's total revenue has increased substantially since 2013.'' 
Services RPFFCL ] 308.
---------------------------------------------------------------------------

    The Judges agree with the Services reasoning and conclusion, 
finding that the increase in revenues from the entire interactive 
services sector cannot support SoundExchange's argument that Spotify's 
pricing power vis-[agrave]-vis the Majors has strengthened.\23\ The 
Judges find that Spotify's relative pricing power must be evaluated in 
the context of Spotify's particular economic position. The Judges find 
nothing in the record to demonstrate that Spotify provides an on-demand 
service that is so unique to listeners as to imbue it with greater 
bargaining leverage.\24\ More particularly, even acknowledging that, 
ceteris paribus, a Major would prefer to avoid the loss of Spotify's 
[REDACTED] to overall music revenues, the substitutability of the on-
demand subscription services indicates to the Judges that the potential 
loss of Spotify's royalty payments to a Major would be quickly offset 
in the form of increased royalties from Spotify's competitors, as 
subscribers substituted alternative on-demand subscription services 
that offered the music licensed by all the record companies. Thus, 
there is no basis for the Judges to conclude that a Major would be 
willing to capitulate to Spotify by [REDACTED].
---------------------------------------------------------------------------

    \23\ The Services are correct in noting that the Judges rejected 
the same argument when asserted by SoundExchange in a prior 
proceeding. See SDARS III, 83 FR at 65238, 65245. However, each 
proceeding considers the facts as presented in the record of that 
pending proceeding, so the Judges are not constrained here by the 
factual record as presented in SDARS III.
    \24\ In the language of economics, Spotify and the other on-
demand services--such as Apple Music, Google, Amazon, and others 
with a smaller market footprint--may provide somewhat differentiated 
on-demand experiences inter se, but nothing in the record suggests 
that whatever differences exist make them anything other than mere 
``monopolistic competitors,'' rather than buyers/licensees with 
enhanced pricing power. See generally Robert S. Pindyck & Daniel L. 
Rubinfeld, Microeconomics 451 (8th ed. 2012) (In a 
``monopolistically competitive market . . . [f]irms compete by 
selling differentiated products that are highly substitutable for 
one another. . . . [T]he cross-price elasticities of demand are 
large but not infinite . . . [t]here is free entry and exit . . . 
[and] [i]n long-run equilibrium . . . the firm earns zero profit 
even though it has monopoly power [over its own brand].''). Further, 
the essential products offered by interactive services, as 
SoundExchange's industry witnesses all tout, are their sound 
recording repertoires, which makes a listener's selection of any 
particular streaming service of secondary concern compared to the 
ability to access all the music. See Harrison WDT ] 5 (identifying, 
as examples, 23 Universal artists who are ``some of the best known 
and most popular recording artists in the world''); Piibe WDT ]] 6-7 
(listing, as examples, Sony's own 23 artists who are ``superstars'' 
and ``legendary recording artists''); Adadevoh WDT ] 3 (listing, as 
examples, 10 Warner artists who are among ``today's most popular 
artists, within a roster of ``some of the most celebrated artists in 
recorded music history''). These artists and their recordings are 
not available only on Spotify.
    The chronic lack of profits and essentially identical downstream 
subscription prices persuade the Judges that the Services are 
correct that the on-demand streaming services lack of market power 
downstream and an absence of pricing power upstream. Further, the 
meteoric growth of Apple Music in the streaming market and the 
recent strong growth of Amazon and Google in the on-demand sector, 
show that the on-demand streaming market has characteristics of a 
competitive market. See Orszag WDT tbl.4.
---------------------------------------------------------------------------

    To make this argument from a different perspective, SoundExchange 
also looks at Spotify's U.S. revenue through the narrower prism of 
total U.S. subscription interactive revenues--noting that Spotify was 
responsible in 2016 and 2017 for a more considerable portion--almost 
[REDACTED]% of such domestic royalties. Orszag WDT ] 124, tbl.11. 
However, the Services aver that this [REDACTED]% figure needs to be 
placed in an appropriate temporal context. Specifically, they note that 
Spotify's share of U.S. gross subscription interactive revenues has 
actually fallen from 2015, when it was [REDACTED]% of the total, to 
2018, when it accounted for [REDACTED]% of the total. See Orszag WDT ] 
124, tbl.10.
    Because the specific issue under consideration is the alleged 
change in Spotify's pricing power since the execution of the parties' 
2013 agreements, the Judges find that the dynamic changes in 
subscription revenue shares during the relevant period is a more 
meaningful metric than the static [REDACTED]%-[REDACTED]% market share 
measure. Because Spotify's share of domestic revenues has diminished 
[REDACTED] since 2015--according to Mr. Orszag's own written 
testimony--there is no basis to support SoundExchange's claim that the 
Majors had become more dependent upon Spotify's revenue stream over 
this period. Moreover, because the decrease in Spotify's share of 
domestic on-demand subscription revenue coincided with the rapid growth 
of Apple Music's entry into the market, these data further confirm the 
substitutability of interactive services among the listening public, 
further diminishing the Majors' dependence on any single interactive 
service.
    Placing Spotify's royalty revenues in the context of two Majors' 
internal contract renewal discussions, SoundExchange relies on the 
testimony of two witnesses, for Sony and Warner

[[Page 59459]]

respectively.\25\ First, according to the Sony witness, the [REDACTED] 
9/2/20 Tr. 5228 (Piibe); Trial Ex. 5467 at 1. Moreover, Sony believed 
that Spotify was [REDACTED]. 9/2/20 Tr. 5368 (Piibe).
---------------------------------------------------------------------------

    \25\ The Judges discuss the separate negotiations between 
Spotify and the three Majors in detail infra.
---------------------------------------------------------------------------

    Second, Warner also emphasized the impact of [REDACTED]. In its 
internal documents discussing negotiations with Spotify, Warner 
executives expressed the importance of [REDACTED], with one executive 
stating: ``[REDACTED]'' Trial Ex. 4025 at 1. However, the Services 
point out that, in the very same document, Warner executives were also 
emphasizing that [REDACTED] and that Warner [REDACTED] Trial Ex. 4025 
at 1.\26\
---------------------------------------------------------------------------

    \26\ As the Judges discuss in greater detail infra, the interest 
Warner (or either of the other Majors) had in [REDACTED] is the only 
economically credible rationale for [REDACTED].
---------------------------------------------------------------------------

    Moreover, although the internal [REDACTED] deliberations summarized 
in Trial Ex. 4025 reference the [REDACTED], the recitation of that 
latter point is not economically relevant, let alone dispositive. 
Internal business documents that reflect information such as historical 
revenue or other accounting data but ignore crucial economic 
information regarding, for example, the fluidity of market shares, the 
elasticity of market demand, and the absence of barriers to entry, are 
not only lacking in economic relevancy, they obscure the identification 
of relevant economic evidence. See Geoffrey A. Manne & E. Marcellus 
Williamson, Hot Docs vs. Cold Economics: The Use and Misuse of Business 
Documents in Antitrust Enforcement and Adjudication, 47 Ariz. L. Rev. 
654 (2005) (noting in the analogous area of antitrust law, ``[r]eliance 
on accounting data, market characterizations, and statements of intent 
by economic actors threatens to undermine the economic foundations of 
antitrust jurisprudence, and thus the purpose of the antitrust 
laws.''). This caution extends from comments made by negotiators in the 
trenches up to discussions in corporate boardrooms. See William Inglis 
& Sons Baking Co. v. ITT Cont'l Baking Co., 668 F.2d 1014, 1028 (9th 
Cir. 1982) (discounting the probative value of ``boardroom 
ruminations'' in antitrust cases). In fact, Mr. Orszag is in agreement 
with regard to the primacy of economic testimonial analysis over such 
other evidence. 8/11/20 Tr. 1338 (Orszag) (``It's well understood in 
competition economics . . . that . . . economic analysis should play a 
dominant role'' relative to the role of statements of the commercial 
actors and internal company documents.) (emphasis added).\27\
---------------------------------------------------------------------------

    \27\ In Web IV, the Judges found that the existence of 
negotiations between Must Have record companies and interactive 
services did not prove that the latter had pricing power, because 
expert economic testimony explained that even monopolists will 
negotiate in order to estimate their counterparties' willingness-to-
pay. Thus, the Judges held: ``[T]he mere existence of . . . 
negotiations is uninformative as to whether the rates negotiated 
between the interactive services and the Majors are competitive.'' 
Web IV, 81 FR at 26343. Thus, evidence of negotiations must be 
examined contextually--on a case-by-case basis--to ascertain whether 
that evidence in fact reflects an effectively competitive 
environment.
---------------------------------------------------------------------------

    In sum, the Judges find that Spotify's share of the Majors' 
downstream revenue does not explain why [REDACTED].
b. Can Spotify [REDACTED]?
    SoundExchange asserts that the Majors could not reasonably 
[REDACTED], because [REDACTED]. SX PFFCL p. 105 et seq. First, Sony's 
testifying witness, Mr. Piibe, explained that the [REDACTED]. 9/2/20 
Tr. 5229-30 (Piibe). Further, according to a Warner analysis, 
[REDACTED]. Trial Ex. 5077. See also Harrison WDT ] 35 (``It would take 
time to [REDACTED] . . . .''). From this testimony and evidence, 
SoundExchange concludes that ``[REDACTED] . . . .'' SX PFFCL ] 317 (and 
record citation therein).
    The Services emphasize in response that this argument again ignores 
the fundamental bargaining point: That because [REDACTED]. Services' 
Corrected Reply to SoundExchange's Proposed Findings of Fact and 
Conclusions of Law ] 311 (and record citations therein) (Services 
RPFFCL). To that end, the Services point to the testimony of a 
[REDACTED] witness, who said that [REDACTED]. 9/9/20 Tr. 5932 
([REDACTED]). See also 9/2/20 Tr. 5424-25 ([REDACTED]) (noting that if 
[REDACTED]).
    With regard to the distinction between short-run and long-run 
effects, Professor Shapiro contextualizes the issue in an economic 
manner. Shapiro WRT at 7 n.16 (``the economics of bargaining teaches 
that bargaining power depends on the long-run impact on both parties of 
failing to reach an agreement, with future impacts suitably discounted 
as are all cash flows.''). That is, he considers the problem as a 
weighing of present discounted values to Spotify, on the one hand, and 
to a Major, on the other, over a one-year period,\28\ of a license 
negotiation impasse that leaves Spotify without the Must Have Major 
and, reciprocally, leaves the Major without the Spotify platform. The 
Judges find his analysis highly persuasive, and thus quote it at some 
length below:
---------------------------------------------------------------------------

    \28\ It was agreed that [REDACTED]. Peterson WRT ] 66; 9/3/20 
Tr. 5928-30 ([REDACTED]); see also 8/11/20 Tr. 1293-94 (Orszag) 
(``obviously there's a longer-term effect that would occur that 
would be adverse to Spotify''); Leonard WRT ] 77 (``[A] label would 
have a greater ability to wait out the impasse, given that it would 
continue to receive royalties from other sources, whereas the 
service's entire subscription revenues would potentially be at risk 
. . . .'').

    [C]onsider as an example the negotiations between Spotify and 
Sony. Sony is ``must-have'' for Spotify (as Mr. Orszag concedes), so 
if Spotify fails to sign a license with Sony, Spotify's interactive 
service will decline, fail to be commercially viable, and be forced 
to close down. Unquestionably, that makes an impasse very costly for 
Spotify, so Sony has a great deal of bargaining power in its 
negotiations with Spotify.
    Mr. Orszag['s] claim[ ] that Spotify has comparable pricing 
power comparable to that of a ``must-have'' service for Sony . . . 
does not withstand scrutiny. If Sony does not sign a license with 
Spotify, so Spotify is forced to stop offering Sony tracks, Sony 
will immediately suffer a loss of royalty income from Spotify . . . 
. According to Table 13 in the Orszag WDT, Sony received [REDACTED]% 
of its total revenue from Spotify in 2017.
    Mr. Orszag provides no explanation of why Sony losing up to 
[REDACTED]% of its revenue from recorded music is comparable, in 
terms of impact and thus bargaining power, to Spotify having to shut 
down its service altogether. Moreover, the [REDACTED]% figure for 
Spotify's share of Sony's revenue in 2017 is far too high as a 
measure of the revenue that Sony would have lost, had Sony music no 
longer been available on Spotify. Crucially, the [REDACTED]% figure 
represents the immediate impact on Sony, before any Spotify 
subscribers respond to the absence of Sony music.
    Quite soon, Sony's loss of income would be much smaller. As 
emphasized repeatedly by SoundExchange--indeed as a foundational 
pillar of its entire case here--a ``must-have'' record company bears 
a substantial opportunity cost of licensing to a music service 
because without its music listeners to that service will shift their 
listening time to other forms of music listening. By definition, 
that implies that when Sony does not license to Spotify, Sony will 
gain substantial revenue from other licensees and other forms of 
listening. As a matter of arithmetic, that means that Sony would 
lose less than [REDACTED]% of its revenue.
    As an illustrative example, suppose that Spotify would shut down 
after one year, due to its lack of Sony's ``must-have'' repertoire, 
and suppose that all of the former Spotify subscribers would replace 
their Spotify subscriptions with subscriptions to other interactive 
services that pay royalties comparable to those paid by Spotify. In 
that case, Sony would be made entirely whole after the first year. 
In that situation, Spotify would have very little pricing power in 
its negotiations with Sony, far less than Sony's power as a ``must-
have'' record company.

[[Page 59460]]

    Mr. Orszag and the label witnesses on which he relies emphasize 
the short-term cost to a record company of not licensing to Spotify. 
However, economic theory tells us that the correct measure of the 
cost to Sony of not licensing to Spotify in a bargaining context is 
the present discounted value of the revenue that Sony would lose in 
total. The present discounted value includes short-term and long-
term effects, weighting them appropriately given the time value of 
money.
    This is a critical point in understanding relative bargaining 
power in the upstream interactive services market. The underlying 
idea is relatively simple and hopefully intuitive: When two parties 
are bargaining, their bargaining power does not just depend upon how 
costly an impasse would be for each of them over the first day or 
week, but rather upon how costly an impasse would be over time. Mr. 
Orszag's analysis is unreliable because he focuses excessively on 
the short-term cost to a major record company of not licensing to 
Spotify and fails to account for the long-term effects.

Shapiro WRT at 7-8 (emphasis added; footnotes omitted).

    Applying an 8% annual discount factor--that Professor Shapiro found 
to be a reasonable cost of capital to use for generating present 
value--as well as other assumptions not challenged as unreasonable by 
SoundExchange--Professor Shapiro found that not licensing to Spotify 
would: (i) Cause Sony to lose only [REDACTED]% of the present 
discounted value of its royalty income; and (ii) by [REDACTED] 
contrast, cause Spotify to lose approximately 95% of the present 
discounted value of its revenue and profits. Shapiro WRT at 9. 
Accordingly, Professor Shapiro concludes that ``[c]learly, in this 
situation Sony would be in the driver's seat in negotiating with 
Spotify.'' Shapiro WRT at 9.
    The only rejoinder by SoundExchange, through Mr. Orszag, is that 
the record reflects a [REDACTED] than the weighting reflected in a 
present value approach that did not incorporate this [REDACTED]. 
However, the record is barren of any analysis [REDACTED] The Judges 
find this alternative not credible. Moreover, even if the Majors did 
[REDACTED], they would surely recognize (and, indeed, do not dispute) 
that [REDACTED].
    Indeed, the Services emphasize that the testimony of Majors' 
witnesses regarding the impact of [REDACTED] was speculative and lacked 
support--particularly as it related to [REDACTED]. See 9/2/20 Tr. 5388 
(Piibe) ([REDACTED]); 9/3/20 Tr. 5731-32 (Harrison) (admitting that 
[REDACTED]).
    Given the dearth of analysis in the record of the relative harms to 
Spotify and the Majors from a prolonged blackout, and the fact that 
such a consequence would spell Spotify's commercial demise, the Judges 
find that SoundExchange's assertion that [REDACTED], beggars belief.
    The Services also seek to diminish the evidentiary value of Trial 
Ex. 5077, on which [REDACTED] relies. That document, the Services note, 
is a [REDACTED]. Moreover, the Services point out that this document 
[REDACTED]. Services RPFFCL ] 315 (and record citations therein).\29\
---------------------------------------------------------------------------

    \29\ The Services also note that the reference to a [REDACTED] 
reflects a situation that arose in Mexico and that there is no 
evidence or testimony to support [REDACTED] implication that this 
foreign event is representative of what would occur in the United 
States. See Trial Ex. 5077; Services RPFFCL ] 317.
---------------------------------------------------------------------------

    In sum, the Judges find that SoundExchange's claim that the effect 
on a Major of its loss of the Spotify platform (i.e., going dark on 
Spotify) has altered the power dynamic between Spotify and the Must 
Have Majors to be incomplete at best, and almost certainly incorrect. 
In order to demonstrate that the power complementary oligopolists bring 
to the market and thus to the bargaining table had been neutralized to 
any degree, [REDACTED] needed to do more than [REDACTED]. Because the 
context of this analysis is to ascertain relative negotiating power, 
SoundExchange needed to demonstrate that the economic impact to the 
Majors of going dark on Spotify would at least approximate the impact 
of such an event on Spotify. This SoundExchange decidedly did not do. 
Rather, the evidence is clear--and the economic logic of maximizing the 
present value of profits and minimizing the present value of losses is 
compelling--that a Major going dark on Spotify would work expeditiously 
to contain losses and entice Spotify subscribers to maximize their own 
self-interest by moving to an interactive service that continued to 
play that Major's music.
    SoundExchange alternatively seeks to show that the Majors' 
bargaining power has been compromised vis-[agrave]-vis Spotify because 
Spotify [REDACTED]. SX PFFCL ]] 318-327 (and record citations therein). 
In response, the Services note the absence of testimony from artists 
themselves regarding whether they might depart from a Major who failed 
to secure a license deal with Spotify. In fact, the Services point out 
that testimony upon which SoundExchange does rely--[REDACTED]--
indicates [REDACTED] [REDACTED].'' 9/2/20 Tr. 5426-27 (Jennifer 
Fowler). And, in terms of the legal and practicable ability of 
[REDACTED]. 9/9/20 Tr. 5952-54 (Sherwood); 9/3/20 Tr. 5738 (Harrison).
    The Judges find compelling the absence of the testimony from any 
artists as to how they would react if the Major with which they had 
contracted lost the Spotify platform because of an impasse in licensing 
negotiations. In the absence of such testimony, the Judges put 
particular weight on the testimony, cited above, from [REDACTED] 
indicating that [REDACTED].
    SoundExchange also suggests that a Major would suffer several 
miscellaneous injuries if it reached an impasse with Spotify that 
resulted in that Major going dark on the Spotify platform. First, the 
Major would [REDACTED]. See generally Trial Ex. 5017; SX PFFCL ] 328 
(and record citations therein). However, the Judges agree with the 
Services that a Major's ongoing ability to obtain data from other 
interactive services would reduce the impact of such a data loss, 
especially as erstwhile Spotify subscribers--unhappy with the loss of a 
Major's repertoire--migrated to other on-demand services. Moreover, 
even the prospect of a short-term data loss is quite low, given the 
futility of a Spotify strategy of actually forcing a Must Have to go 
dark.
    Another damage which SoundExchange posits derives from the 
testimony of a Universal executive who was concerned that a [REDACTED] 
could [REDACTED] Harrison WDT ] 35; 9/3/20 Tr. 5724 (Harrison). The 
Judges find this testimony to constitute mere speculation, and 
meritless speculation at that. The Judges find it bordering on the 
absurd to contemplate that a licensing impasse between a single service 
and a single Major [REDACTED]. Other interactive services that are 
already competing vigorously in the market stand at the ready to 
acquire Spotify's subscribers and, given the low barriers to entry for 
streaming services, the concept of contestable competition means that a 
new competitor could also enter and compete for a share of the market. 
See Shapiro WRT at 9.\30\
---------------------------------------------------------------------------

    \30\ Further, Spotify's competitors (as well as aggrieved 
artists and social and mass media) would likely spread the word 
publicly regarding the music missing from Spotify in the event of a 
blackout of a Major, hastening the transition of Spotify customers 
to other interactive services. Ironically, as discussed infra, this 
is the very sort of accelerating demise that, according to 
SoundExchange (in convincingly criticizing Pandora's Label 
Suppression Experiments), would befall a noninteractive service that 
attempted to black-out a Major. If noninteractive ad-supported 
listeners--who pay nothing out-of-pocket to listen to music curated 
by the service--would switch away from the service if they became 
aware of the blackout of a Major, then, a fortioiri, Spotify's 
interactive subscribers--who do pay out-of-pocket to listen to music 
they demand--would certainly switch away from Spotify if it likewise 
blacked-out a Major's entire repertoire.

---------------------------------------------------------------------------

[[Page 59461]]

    Continuing with its speculation regarding miscellaneous harm, 
SoundExchange argues that, upon a licensing impasse with a Major, 
Spotify's subscribers would not abandon it because (i) subscribers pay 
monthly or yearly for their subscriptions, (ii) Spotify delivers well-
customized recommendations, (iii) subscribers have invested time in 
building their music collection, (iv) subscribers who purchased Spotify 
as a part of a bundle may be less likely to cancel their subscription, 
and (v) subscribers might anticipate a quick resolution to the 
licensing dispute. SX PFFCL ]] 339-343 (and record citations therein). 
The Judges agree though with the Services that these assertions are 
little more than rank speculations. As the Services point out, because 
on-demand plays account for [REDACTED]% of Spotify listening hours, the 
idea that subscribers would tolerate the loss of any Majors' repertoire 
because of behavioral impediments is not only unexplored, it assumes a 
remarkable irrationality among subscribers with regard to their own 
tastes and preferences. Further, SoundExchange's assertion of this 
speculative status quo outcome is 180 degrees from its immediately 
preceding speculative assertion that the entire subscription concept 
and market would collapse if a single Major went dark on Spotify. While 
there may be a rational argument why either outcome could occur, 
neither extreme is reasonable or based on record evidence. Moreover, it 
is not rational to posit that such a licensing disagreement would cause 
the industry both to remain in stasis and to disappear. Indeed, by 
making both arguments simultaneously without evidentiary support, 
SoundExchange seems willing to engage in the evidentiary equivalent of 
throwing spaghetti against the wall to see if any of it sticks.\31\
---------------------------------------------------------------------------

    \31\ SoundExchange also posits that whatever injury would befall 
the domestic industry would also injure the global music market. SX 
PFFCL]] 337-338. However, this assertion is likewise devoid of 
evidentiary support, as there is no adequate record support that 
foreign agreements are affected by the existence, vel non, of 
licensing agreements in U.S. interactive markets. See Services 
RPFFCL ] 338. As a general rule, the Judges have eschewed reliance 
on developments in foreign markets when the proofs are insufficient 
to demonstrate a posited connection between foreign and U.S. market 
that is relevant to these proceedings. SDARS II, 78 FR at 23058 (and 
precedent cited therein).
---------------------------------------------------------------------------

    In sum, the Judges find insufficient evidence to support 
SoundExchange's argument that a Major going dark on Spotify would lead 
to a ``parade of horribles'' befalling that Major so substantial as to 
imbue in Spotify a market power sufficient to [REDACTED].
c. Does Spotify's technological ability to steer plays on spotify-
curated playlists provide it with pricing power sufficient to mitigate 
or offset the Majors' complementary oligopoly power?
    The bulk of Spotify's argument in support of its claim that Spotify 
has a pricing power commensurate with the overall bargaining power of 
the Majors is based on Spotify's technological ability to steer plays 
of sound recordings toward or against a record company. This emphasis 
on steering is unsurprising, because in Web IV the Judges relied on 
evidence of the noninteractive services' ability to steer, and their 
credible threats to do so, as ameliorating the anticompetitive effect 
of the Majors' complementary oligopoly.
    More particularly, SoundExchange asserts that Spotify developed a 
substantial ability to influence listening on its platform subsequent 
to the execution of its 2013 Agreements with the Majors. See, e.g., 
Orszag WDT ]] 138-151; 9/2/20 Tr. 5414 (Fowler); 9/2/20 Tr. 5197-98 
(Piibe). Spotify's purported power to influence market share, according 
to SoundExchange, flowed mainly from its alleged ability to influence 
market share through economically strategic placement of sound 
recordings within Spotify-controlled playlists. Orszag WDT ]] 141-
146.\32\ By way of background, in July 2015, Spotify launched playlists 
personalized for its subscribers, including Discovery Weekly, to assist 
subscribers in identifying new music tailored to their listening 
preferences. Orszag WDT ] 62. Contemporaneously, Spotify began to 
prioritize those playlists and additional Spotify-curated playlists, 
for various genres, by giving them prominent and superior locations in 
its search and display features. Trial Ex. 5619 ]] 15, 17 (CWDT of 
Jennifer Fowler). See also SX PFFCL ]] 359-360 (and record citations 
therein). From 2015 to 2017, these Spotify-curated playlists increased 
as a share of listening on Spotify from less than 20% to approximately 
31% of Spotify platform listening. Orszag WDT ] 142.
---------------------------------------------------------------------------

    \32\ SoundExchange further notes that [REDACTED] has [REDACTED]. 
SX PFFCL ]] 370-71 (and record citations therein); Orszag WDT ] 148. 
Less significantly, SoundExchange avers that Spotify can also 
leverage its [REDACTED]. Orszag WDT ] 147.
---------------------------------------------------------------------------

    According to SoundExchange, the economic value of these Spotify-
curated playlists extends beyond a subscriber's initial accessing of 
songs on the playlist. Listeners also can add songs from those 
playlists onto their own playlists and into their own music 
collections, and, having positively experienced music curated by 
Spotify, they are more likely to search for music from the same 
artists, and thus from the same record company. SX PFFCL ]] 363-364, 
366 (and record citations therein).
    Consequently, SoundExchange avers that record companies consider 
playlists to be [REDACTED], and thus they devote considerable effort 
and resources to the development and implementation of playlist 
strategies. SX PFFCL]] 365, 367 (and record citations therein). 
Further, the [REDACTED]. See Trial Exs. 5070-5072; Harrison WDT ]] 49, 
52. SoundExchange further relies on the testimony of Michael Sherwood, 
a Warner Senior Vice President responsible for overseeing its Spotify 
and other streaming service accounts, Trial Ex. 5620 ]] 1-2 (WDT of 
Mike Sherwood), who testifies that [REDACTED]. 9/9/20 Tr. 5921-22 
(Sherwood).
    Moreover, SoundExchange emphasizes that Pandora's own economic 
expert witness, Professor Shapiro, acknowledges that, by the time 
Spotify and the Majors were negotiating their 2017 Agreements, Spotify 
already possessed the ability to influence listening and record company 
market share through its selection and placement of songs on Spotify-
curated playlists. 8/19/20 Tr. 2868 (Shapiro) (``Spotify has some 
ability to influence listening through a service-generated playlist. 
[Mr. Orszag] emphasizes that. I agree that they definitely have that 
ability.'').
    SoundExchange relies yet again on Professor Shapiro's testimony to 
argue that, when a streaming service such as Spotify has the technical 
ability to steer, its credible threat to steer against a Major during 
contract negotiations can constitute sufficient leverage by which 
Spotify can negotiate better terms for itself. See 8/20/20 Tr. 3067-68 
(Shapiro). SoundExchange's expert is in full agreement, testifying that 
in negotiations related to steering, as in negotiations generally, ``it 
is often the threat that can influence outcomes . . . as long as the 
threat is credible.'' 8/11/20 Tr. 1255 (Orszag) (emphasis added); see 
also id. at 1211-13, 1347-48.
    Continuing its attempt to build its steering argument on the back 
of Professor Shapiro's own testimony, SoundExchange points out that he 
admitted that a steering threat could be implicit as well as explicit. 
8/20/20 Tr. 3066-67 (Shapiro). Moreover, the evidence of [REDACTED], 
might be seen, Professor Shapiro recognizes, [REDACTED]. 8/20/20 Tr. 
3052 (Shapiro). For these reasons,

[[Page 59462]]

SoundExchange emphasizes, in Web IV Professor Shapiro testified that 
``if the services have substantial ability to steer'' then the market 
can be ``workably competitive'' notwithstanding that each Major remains 
a Must Have. See 8/20/20 Tr. 3036 (Shapiro).
    SoundExchange does recognize that, for Spotify to be able to 
transform its technological ability to engage in editorial steering 
into [REDACTED], its threats must be credible to a Major, so that 
actual steering is neither needed nor implemented. SX PFFCL ] 354 
(citing Orszag WDT ] 149). On this score, Professor Shapiro likewise is 
in full agreement. He testifies that steering threats are ``depend[ent] 
on the credibility of these threats'' as well as the ``fallback'' 
positions of the parties in the event the threat of steering leads to a 
failure of the parties to enter into a licensing agreement. 8/20/20 Tr. 
3053 (emphasis added).
    The Services strongly disagree with SoundExchange's steering 
argument. First, they minimize the economic importance of playlist 
listening--where steering might take place--notwithstanding its recent 
growth. In particular, they criticize Mr. Orszag for trumpeting that 
31% of all Spotify listening is to Spotify-curated playlists, when this 
figure obviously means that approximately 69% of all listening remains 
on-demand in nature and thus outside of Spotify's curatorial 
gatekeeping capacity. Thus, the Services argue, the defining feature of 
Spotify (and other interactive services) remains the offering to a 
subscriber of access to a virtually complete repertoire of songs for 
on-demand listening. Services RPFFCL ] 358 (and record citations 
therein). Google's economic expert, Dr. Leonard, takes note of a 
behavioral study of Spotify users [REDACTED] See Trial Ex. 2122 at 8. 
Dr. Leonard takes from the 69%:31% split referenced above and the 
[REDACTED] that ``[a] user's ability to play any song on demand remains 
a defining characteristic of interactive services and a driver of user 
demand for these services.'' Trial Ex. 2160 ] 73 (CWRT of Gregory 
Leonard) (Leonard WRT).
    Further, on a fundamental level, the Services assert that 
SoundExchange misapprehends the concept of steering, untethering the 
concept from its economic significance. The relevant form of 
``steering'' for purposes of this proceeding, the Services maintain, is 
one that generates price competition among the Majors. Services PFFCL ] 
64 (citing Web IV, 81 FR at 26343 (``[s]teering is synonymous with 
price competition in this market'') and SoundExchange, 904 F.3d at 52 
(affirming the Judges' decision that ``the likely effect of steering in 
the music industry would be to promote price competition'')).
    The Services distinguish Web IV in this regard by emphasizing that 
the Judges in that case had relied on two agreements that contained 
explicit steering provisions designed to generate lower royalty rates 
in exchange for additional plays--what the Services characterize as the 
essence of steering. First, the Services point to the agreement between 
Pandora and Merlin for Pandora's noninteractive service, which provided 
that ``the [REDACTED]'' as set out in the agreement. Web IV, 81 FR at 
26356. Second, the Services refer to the Web IV Judges' description in 
that determination of an ``iHeart/Warner Agreement [that] incorporates 
the same economic steering logic as the Pandora/Merlin Agreement.'' Id. 
at 26375.
    But, in the present case, the Services aver that the Majors had 
[REDACTED]. In fact, the Services maintain, Mr. Orszag concedes this 
point, testifying in response to a question from the Judges that 
[REDACTED].'' 8/12/20 Tr. 1536 (Orszag); see also id. at 1711 (Orszag) 
(``[REDACTED].''); Shapiro WRT at 16 (summarizing lack of evidence in 
Orszag WDT and noting ``when Mr. Orszag discusses how the major record 
companies have responded to the growing role of service-generated 
playlists, he does not claim they have reduced their royalty rates to 
encourage increased plays of their material''). In this regard, 
Google's economic expert witness, Dr. Peterson, noted that [REDACTED]. 
Peterson WRT ] 74.
    The Services also point to the hearing testimony of [REDACTED], who 
acknowledged that [REDACTED]. Specifically, they note that: (1) 
[REDACTED] 9/2/20 Tr. 5371-72 ([REDACTED]) (emphasis added); (2) 
[REDACTED].'' 9/3/20 Tr. 5698 ([REDACTED]) (emphasis added); and (3) 
[REDACTED] 9/3/20 Tr. 5531-32, 5480-81 ([REDACTED]) (emphasis added); 
see also Trial Ex. 4014 at 3 (``[REDACTED].'').
    Accordingly, the Services maintain that [REDACTED] present no 
evidence or testimony that [REDACTED]. See 9/02/20 Tr. 5435 (Fowler); 
9/09/20 Tr. 5949-50 (Sherwood). Accordingly, the Services note that, 
[REDACTED], Mr. Orszag was compelled to concede that competition for 
playlist slotting is not based on royalty rate discounts (or side 
payments). 8/11/20 Tr. 1313 (Orszag). The Services maintain that this 
testimony is powerful evidence ``undermining [the] theory that playlist 
competition is an outgrowth of steering-based price competition.'' 
Services RPFFCL ] 359. In fact, the Services note, [REDACTED]. See 
Services PFFCL ] 66 ([REDACTED]) (and record citations therein).
    The Services also take issue with Spotify's claim that the 31% of 
listening that occurs on Spotify-curated playlists is entirely subject 
to Spotify's steering capabilities. Specifically, the Services note 
that 17 percentage points of that listening (more than half of the 31%) 
occurs on algorithmically-curated playlists that are personalized for 
each user based on his or her listening behavior and thus outside 
Spotify's control.'' See Orszag WDT ] 61. Moreover, no SoundExchange 
witness provided any evidence that Spotify exerts any price-based 
influence over this algorithm (or over the autoplay algorithm), such as 
in the Pandora/Merlin agreement relied upon by the Judges in Web IV. 
See 9/2/20 Tr. 5406 (J. Fowler); 8/11/20 Tr. 1316 (Orszag).
    The Services also assert that SoundExchange is exaggerating the 
importance of playlists within Spotify's entire streaming platform. It 
notes [REDACTED] indicating that ``[REDACTED]'' Trial Ex. 2074. In the 
same vein, the Services take note of the testimony of a [REDACTED], who 
acknowledged that, for [REDACTED] 9/2/20 Tr. 5432-33, 5443 
([REDACTED]). Furthermore, the Services emphasize that SoundExchange 
relies essentially on supposition that playlist listening drives 
listeners' subsequent on-demand streaming decisions, noting the absence 
of any detailed studies that would confirm this hypothesis. Services 
RPFFCL ]] 365-366 (and record citations therein).
    The Services further note that, in the [REDACTED]. 9/2/20 5370-71 
(Piibe); 9/3/20 Tr. 5537-39 (Adadevoh).
    According to the Services, [REDACTED]. Essentially, according to 
the Services, [REDACTED]t. See Services PFFCL ]] 151-156 (and record 
citations therein).
    To make clear the scope of the relevant [REDACTED], the Services 
rely on the exact language of the 2017 agreements between the Majors 
and Spotify. The Services assert that this contract language, set forth 
below, [REDACTED], thus disposing of the very notion that [REDACTED]:
The Sony-Spotify Agreement
    [REDACTED]
    Trial Ex. 5011 at 36 (Sony-Spotify 2017 Agreement); see also Trial 
Ex. 5074 at 22 ([REDACTED] in Sony-Spotify immediately prior 2013 
Agreement) (emphasis added).

[[Page 59463]]

The Universal-Spotify Agreement
    [REDACTED]
    Trial Ex. 5037 at 45, 96 (Universal-Spotify 2017 Agreement); see 
also Trial Ex. 2062 at 38 ([REDACTED] in Universal-Spotify 2013 
Agreement).
The Warner-Spotify Agreement
    [REDACTED]
    Trial Ex. 5020 at 20, 36 (Warner-Spotify 2013 Agreement).\33\
---------------------------------------------------------------------------

    \33\ [REDACTED]. See Trial Ex. 5038 at 24 (``[REDACTED]''). See 
also 9/3/20 Tr. 5549-51, 5557-61 (Adadevoh) (acknowledging these 
provisions were intended to [REDACTED]).
---------------------------------------------------------------------------

    The Services note a consensus between SoundExchange and Services' 
expert witnesses that [REDACTED]. See, e.g., 8/12/20 Tr. 1709 (Orszag); 
Leonard WRT ] 66. More particularly, they point to Dr. Leonard's 
testimony that [REDACTED]. Leonard WRT ]] 60-63 (reviewing [REDACTED] 
provisions in the Spotify agreements); see also 8/25/20 Tr. 3716-17 
(Peterson); see also Peterson WRT ]] 69-70 (noting the [REDACTED]); 8/
12/20 Tr. 1699-1701, 1704 (Orszag) (acknowledging that [REDACTED]).
    SoundExchange maintains, though, that these [REDACTED] have not 
been sufficient to [REDACTED], as discussed supra). Specifically, 
SoundExchange argues:
    1. [REDACTED]. See, e.g., 9/3/20 Tr. 5702 (Harrison). SoundExchange 
notes that [REDACTED] construed the [REDACTED]. See Trial Exs. 4031 at 
37 ([REDACTED]) & 5020 at 20 ([REDACTED]).
    2. A service that curates its own playlist, such as Spotify, could 
[REDACTED]. See 9/3/2020 Tr. 5700-01 (Harrison) (discussing the 
Spotify-Universal agreement).
    3. There are significant [REDACTED], including the Majors' 
[REDACTED]. Orszag WDT ] 150 (``[REDACTED].''). And, even if a record 
company [REDACTED]. See id. [REDACTED]). Moreover, the [REDACTED]. See 
9/2/20 Tr. 5404-06, 5446-47 (J. Fowler).
    4. Even [REDACTED]. 8/11/20 Tr. 1317-18 (Orszag); accord Trial Ex. 
4017 at 4 (noting that [REDACTED]); Trial Ex. 2124 at 1 (``[REDACTED]); 
9/2/2020 Tr. 5204 (Piibe) (``[REDACTED]).
    5. Even if the [REDACTED], SoundExchange claims they would 
nonetheless be left with [REDACTED]. It asserts that [REDACTED]--but 
that would [REDACTED]. See, e.g., Harrison WDT ] 56; Adadevoh WDT ] 34, 
38 & n.27; Piibe WDT ]] 29-30; 9/3/20 Tr. 5482 (Adadevoh).
    Consequently, SoundExchange maintains, it is unsurprising that the 
record contains no evidence that [REDACTED]. See, e.g., 9/3/20 Tr. 5481 
(Adadevoh); accord id. at 5565 (Adadevoh) (noting that [REDACTED]). 
And, when Universal asserted to Spotify that the latter was [REDACTED]. 
9/3/20 Tr. 5702 (Harrison).
    Additionally, SoundExchange avers that, even assuming arguendo the 
[REDACTED] and effectively competitive. Specifically, SoundExchange 
explains that [REDACTED]. Accordingly, although Majors may want or need 
to [REDACTED] such as those quoted above, [REDACTED]. Rather, according 
to SoundExchange, Spotify is [REDACTED] or, importantly here, to 
[REDACTED]. See 8/11/20 Tr. 1254 (Orszag).
    That is, as Mr. Orszag explains, once a streaming service has 
successfully used a [REDACTED], the Major may in turn seek [REDACTED]. 
See 8/11/20 Tr. 1331-32 (Orszag). By similar economic logic, a Major 
that had entered a negotiation [REDACTED] may decide [REDACTED]. See 9/
2/20 Tr. 5203-05 (Piibe).
    Thus, SoundExchange maintains, the mere presence of [REDACTED], on 
which the Services rely, is hardly conclusive evidence that the market 
lacks effective competition. Rather, as Professor Shapiro himself 
acknowledges, in an effectively competitive market, a service might 
agree to accept an [REDACTED]. 8/19/20 Tr. 3089-92 (Shapiro).
    The Services respond, though, that the notion that the [REDACTED] 
was contradicted by SoundExchange's own witnesses. Specifically, as the 
Majors and Spotify negotiated over terms in 2016 and 2017, they 
[REDACTED]. See, e.g. 9/3/20 Tr. 5551 (Adadevoh) (agreeing that 
[REDACTED]''); see also 9/3/20 Tr. 5704-05 (Harrison).
    Moreover, the Services aver, the terms of [REDACTED] with the 
[REDACTED]. See, e.g., Peterson WRT ] 69. That is, while Spotify 
negotiated [REDACTED], Spotify remained [REDACTED]. Trial Ex. 5074 at 
22; Trial Ex. 5020 at 20, 36. Indeed, SoundExchange's own witness, Mr. 
Orszag, concedes that throughout Spotify's presence in the United 
States streaming market, [REDACTED] 8/12/20 Tr. 1703-04 (Orszag); see 
also Services PFFCL ] 100 (summarizing additional evidence).
    The Services also assert that there is no evidence that, as 
SoundExchange maintains, the Majors negotiated for [REDACTED]. Instead, 
the Services point to the Majors' imposition of [REDACTED]. See Shapiro 
WRT at 22 (noting the Majors' recognition that [REDACTED]).
    More particularly, the Services explain that the Majors' [REDACTED] 
ensured that a [REDACTED]. That is, unless other labels [REDACTED]. 8/
20/20 Tr. 3058 (Shapiro); see also 8/13/20 Tr. 1905-06 (Orszag) 
([REDACTED]''). The Services also rely on the testimony by Mr. 
Harrison, the Universal executive appearing at trial, who agreed that 
[REDACTED],'' and that ``[[REDACTED]'' 9/3/20 Tr. 5705-06 
(Harrison).\34\
---------------------------------------------------------------------------

    \34\ Because Mr. Harrison testified, without dispute, that 
Universal ([REDACTED]) could only use the [REDACTED], Universal 
apparently could not, for example, [REDACTED].
---------------------------------------------------------------------------

    Importantly, SoundExchange's position--that the [REDACTED] in the 
2017 agreements reflect a [REDACTED]--is inconsistent with 
SoundExchange's argument, itemized supra, that, for ``[REDACTED]'' SX 
PFFCL ] 388.
    In addition to their rejoinders to SoundExchange's [REDACTED] 
assertions, set forth supra, the Services take issue with each of 
SoundExchange's additional arguments regarding the [REDACTED]. First, 
they note that the only example SoundExchange could muster regarding 
potentially [REDACTED] was related to [REDACTED] entered into between 
[REDACTED]. However, there is no evidence in the record regarding how 
[REDACTED] interpreted the [REDACTED] and, further, that the context 
for any possible disagreement [REDACTED]. Further, there is no record 
evidence indicating that Pandora had the intent to influence, or did 
influence, [REDACTED]'s streams. Moreover, the Services note that there 
is no sufficient proof that the [REDACTED] in the [REDACTED] agreement 
are the same in all respects as those in the [REDACTED] agreement. 
Services RPFFCL ]] 389-390.
    The Judges find that SoundExchange's reliance on [REDACTED] is 
unavailing because [REDACTED]. Moreover, although [REDACTED] is a 
participant in these proceedings (represented by SoundExchange and its 
counsel), no [REDACTED] witness testified that [REDACTED] sound 
recordings was--to its understanding--a [REDACTED]. More broadly, the 
Judges find wholly undeveloped SoundExchange's speculative assertion 
that a service and a label may have [REDACTED]. Of course, they might 
have (or claim to have) [REDACTED], but that possibility hardly 
indicates that [REDACTED]. Moreover, the parties (services and labels) 
spend substantial sums on attorneys to draft contract language 
[REDACTED], the Judge are unwilling to

[[Page 59464]]

find that industrywide [REDACTED], as a class, are [REDACTED].
    Second, the Services' assert as meritless SoundExchange's argument 
that, even under [REDACTED], Spotify could [REDACTED]. The Services 
point out that [REDACTED]--the only label SoundExchange cites for this 
argument--prohibits ``any form of preferential or otherwise enhanced 
positioning, placement or status'' and provides that [REDACTED] Trial 
Ex. 5037 at 45, 96.
    Moreover, the Services aver that the Majors do not [REDACTED]. In 
fact, the Services note, in 2017, [REDACTED]. See Trial Ex. 4014; 9/3/
20 Tr. 5537-39 (Adadevoh) (reviewing Trial Ex. 4014, an internal Warner 
analysis of [REDACTED] and agreeing that Warner had found 
[REDACTED]'').\35\
---------------------------------------------------------------------------

    \35\ The Services also note that SoundExchange separately claims 
that the Majors [REDACTED]. This claim [REDACTED], belies 
SoundExchange's claim that it [REDACTED] The Judges agree with the 
Services.
---------------------------------------------------------------------------

    The Judges find that there is insufficient evidence to support 
SoundExchange's claim that it is hamstrung in attempting to [REDACTED]. 
Given the ostensible greater importance the Majors place in this 
proceeding on [REDACTED]--see Trial Ex. 2124 at 1 (``[REDACTED]--the 
Judges find that a Major would [REDACTED]. Moreover, [REDACTED].
    Further in this regard, the Services disagree with SoundExchange's 
claim that record companies would have ``[REDACTED].'' Rather, the 
Services point to, inter alia, Trial Ex. 2108, in which [REDACTED]. 
Trial Ex. 2108 at 2-3. The Services assert that this [REDACTED] shows 
the Majors have an available [REDACTED]. Further, the Services maintain 
that the mere fact that [REDACTED] is consistent with [REDACTED] rather 
than with speculation that [REDACTED]. See Services RPFFCL ] 395 (and 
record citations therein).
    The Judges find there is inadequate evidence to demonstrate that 
the Majors [REDACTED], for the reasons given by the Services. Further, 
consistent with the Judges comment regarding legal representation 
supra, the Majors have at their disposal highly talented commercial, 
corporate and litigation attorneys, who receive handsome fees for 
[REDACTED]. Although [REDACTED], a sufficient record of [REDACTED] must 
be demonstrated by a more persuasive record than exists in this 
proceeding. Finally, in this regard, if the Majors [REDACTED], why does 
SoundExchange argue that the [REDACTED]? If [REDACTED]? Indeed, the 
fact that there is [REDACTED] in the record, as discussed supra, does 
not mean that [REDACTED]; it points to the value of such [REDACTED]. 
The Majors' claims (1) that [REDACTED] and (2) that [REDACTED], are 
blatantly inconsistent.
    Accordingly, on balance the Judges find that there is insufficient 
evidence to demonstrate that [REDACTED] in their stated intent. The 
Judges take particular note of SoundExchange's acknowledgement, 
discussed supra, that the Majors (1) had [REDACTED], (2) did not 
[REDACTED], (3) found it difficult to [REDACTED], (4) asserted 
[REDACTED], (5) failed to [REDACTED], and (6) agreed to [REDACTED].
    Shifting from the issue of [REDACTED], the Services disagree with 
SoundExchange regarding the economic importance of this issue. They 
note that, pursuant to an internal Sony document, [REDACTED] 
comprise[REDACTED] and that, [REDACTED], replacing those [REDACTED] 
with [REDACTED] would only [REDACTED]. Trial Ex. 4017 at 4. See also 9/
03/20 Tr. 5544-45 (Adadevoh) ([REDACTED]); Trial Ex. 4014 at 3.
    The Judges agree with the Services that Spotify's [REDACTED] to 
suggest a sea change in Spotify's pricing power. And, there is no 
evidence that Spotify could alter its business model by engaging in a 
wholesale [REDACTED] with subscribers remaining indifferent to such a 
fundamental change in the service. This is critical because the Judges 
do not lose sight of the purpose of this particularized analysis of the 
benchmark interactive service, which is to determine if Spotify has 
changed in a manner that lessens or eliminates the complementary 
oligopoly power of the Majors, such that an effective competition 
adjustment in the target noninteractive statutory market is either 
unnecessary or should be reduced. A [REDACTED] (themselves generating 
but a minority of Spotify's listening) is wholly uninformative as to 
this issue.\36\
---------------------------------------------------------------------------

    \36\ The Judges discuss the negotiation of ``[REDACTED]'' with 
Spotify later in this Determination. But, the Judges note here that 
they find unavailing Mr. Orszag's attempt to de-contextualize the 
impact of [REDACTED] by his noting that a [REDACTED]% loss in Sony's 
market share would equate to a $[REDACTED] annual revenue loss. Mr. 
Orszag reports that in 2018 Sony's digital music U.S. revenue 
totaled $[REDACTED]. Orszag WDT tbl.13. Thus, the $[REDACTED] short-
term revenue loss posited by Mr. Orszag equals [REDACTED] about 
[REDACTED] one percent of Sony's total annual U.S. digital music 
revenue. Although $[REDACTED] is a large sum in many contexts, it is 
small in the present context, especially because the purpose of the 
exercise is to determine Spotify's pricing power relative to the 
complementary oligopoly market power of the Majors. Clearly the 
$[REDACTED] figure fails to reflect the appropriate magnitude of the 
impact of Spotify's [REDACTED]. Such distorted use of monetary sums 
is inappropriate. Cf. Pablo J. Barrio et al., Improving the 
Comprehension of Numbers in the News, Proc. 2016 Conf. Hum. Factors 
Computing 1 (Ass'n for Computing Mach. 2016) (``Unfamiliar 
measurements make up much of what we read, but unfortunately carry 
little or no meaning . . . as they can be difficult to interpret 
without the appropriate context.'') (available on Google Scholar at 
www.cs.columbia.edu (accessed June 9, 2021).
---------------------------------------------------------------------------

d. The (Partial) Evidence and Testimony Regarding the Majors' 
Negotiations With Spotify Leading to Their 2017 Agreements
    In addition to its foregoing arguments, SoundExchange relies on 
evidence and testimony regarding the negotiations between Spotify and 
the three Majors. Sound Exchange avers that this evidence and testimony 
show that in the run-up to the execution of the 2017 Agreements 
[REDACTED]. Accordingly, the Judges next consider that evidence and 
testimony.
    Before they weigh the record in that regard, the Judges take note 
of the nature and sequencing of that evidence and testimony. First, 
SoundExchange proffered this information in a disjointed manner. 
Multiple documents from the archives of the three Majors were 
introduced--primarily email correspondence between and among various 
executives within each Major--discussing the Spotify negotiations. 
However, none of the individuals who actually negotiated with Spotify--
and virtually none of the authors or recipients of these internal 
emails--provided oral or written testimony at the hearing. Rather, 
SoundExchange proffered witnesses from the Majors who had some 
knowledge of these documents and second-hand knowledge of the oral 
negotiations between their employers and Spotify.\37\ The Judges would 
have much preferred to hear from first-hand witnesses from the Majors' 
negotiating teams, who actually bargained with Spotify, in order to 
appreciate how the usual bargaining dominance of the Majors might (or 
might not) have been usurped by Spotify. Further, the documents to 
which the Majors' second-hand

[[Page 59465]]

witnesses testified are not always models of clarity, and these second-
hand witnesses could not go beyond the four corners of the documents to 
explain, identify or provide a sufficient economic context for these 
documents. See Manne & Williamson, supra at 645; see also Web IV, 81 FR 
at 26352 (When ``the Judges' task is to determine . . . economic 
significance . . . the contracts are but one . . . piece of evidence . 
. . [and] [w]here . . . a transaction is part of a complex . . . 
business relationship it is appropriate--even necessary--for the Judges 
to consider other evidence and analysis to determine the true economic 
value of the transaction.'') (emphasis added). And, to the extent oral 
negotiations between Spotify and the Majors, or between the Majors' 
negotiating teams and their superiors, were never summarized or were 
summarized in writings not in evidence, the record is incomplete in the 
absence of testimony from the Majors' negotiators and other direct 
decision-makers.
---------------------------------------------------------------------------

    \37\ The Judges admitted these documents into the record, 
finding them sufficiently authenticated, and, exercising their 
discretion to admit hearsay evidence, the Judges did not exclude 
these documents on that basis. But the issue of admissibility does 
not raise the same concerns regarding the weight to be given to 
documents written or received by relevant actors who were not called 
to testify to explain the context, completeness and ambiguities, if 
any, relating to those documents. Further, the actual negotiators 
could have been called to testify regarding oral negotiations (the 
Majors are all parties in this proceeding) and to explain and 
contextualize statements contained in internal emails. Thus, to the 
extent the record evidence of the Spotify-Majors negotiations is 
incomplete or uncertain, the Judges find that SoundExchange must 
bear the consequences of such deficiencies.
---------------------------------------------------------------------------

    Second, SoundExchange proffered only correspondence from the 
licensor side, that is, from the Majors. The record does not contain 
any documentary evidence (or testimony, for that matter) from Spotify 
regarding its negotiations with the Majors. Accordingly, there is an 
incomplete and one-sided record of the negotiations upon which 
SoundExchange relies.\38\ SoundExchange asserts that this 
incompleteness is inconsequential because what is relevant are the 
Majors' understandings and perceptions of [REDACTED].
---------------------------------------------------------------------------

    \38\ In previous proceedings, the Judges have considered 
negotiation documents when the record contained such material from 
both counterparties. That is not the case with the record here.
---------------------------------------------------------------------------

    The Judges agree that the Majors' understanding of Spotify's 
position [REDACTED] is the ultimate relevant factor in explaining how 
and why the Majors responded as they did in negotiations. However, to 
determine whether the Majors' claimed understanding is credible, and to 
weigh the value of each factor, the Judges would need to know much more 
about how Spotify bargained and the representations it made. The actual 
negotiators would have been the best witnesses to provide that level of 
detail to assist the Judges in determining whether the Majors' 
[REDACTED] is factually persuasive.
    This is crucial for two reasons. First, the Services offer up a 
quite different explanation. They argue that the Majors were simply 
utilizing their complementary oligopoly power to [REDACTED]. See 
Services PFFCL ]] 138-150 (and record citations therein). SoundExchange 
is making an argument that relies on facts that, if relied upon by the 
Judges, would lead to a radical departure from the bargaining analysis 
they identified and adopted in Web IV--one which is consistent with the 
economic framework of complementary oligopoly that has an unchallenged 
lineage dating back to the 19th century work of the economist A.A. 
Cournot. See Web IV, 81 FR at 26342. Such a departure from the prior 
bargaining framework is certainly conceivable, but the hearing record 
necessary to support the task should be substantial; instead, 
SoundExchange's presentation appears to the Judges to have been 
stitched together and, for the reasons discussed supra, lacking a sound 
basis in economics, as well as in the very principles and dynamics of 
bargaining that it applies to the hypothetical noninteractive 
market.\39\
---------------------------------------------------------------------------

    \39\ By contrast with the problematic record relating to the 
effects of Spotify's supposed new-found pricing power, and as 
discussed in detail infra, the Majors' internal documents and 
hearing testimony reveal [REDACTED]. As also discussed infra, the 
Majors' [REDACTED].
---------------------------------------------------------------------------

    The Judges keep these considerations in mind as they analyze below 
the parties' arguments regarding the import of the relevant strands of 
evidence and testimony regarding Spotify's negotiations with the 
Majors.
i. The Universal-Spotify Negotiations
    Universal and Spotify began their negotiations to replace their 
2013 agreement in [REDACTED], see Trial Ex. 4027 at 1, and completed 
the negotiations at [REDACTED]. See Trial Ex. 5037 at 1. Early in the 
negotiations, according to an internal company document, Universal 
identified [REDACTED] as an issue to be addressed. Trial Ex. 5410 at 1. 
SoundExchange notes that Universal's subsequent internal communications 
reflect its [REDACTED]. Trial Ex. 4016 at 1 (``[REDACTED]''); see also 
Trial Exs. 4019, 5429 at 1. Further, some Universal negotiators--again, 
who did not testify--expressed in internal documents their belief that 
[REDACTED], Trial Ex. 5422 at 1, with the author of an internal 
Universal email, adding [REDACTED]. Trial Ex. 5221 at 5.\40\
---------------------------------------------------------------------------

    \40\ Because the author of the email did not testify, the 
unusual placement and styling of this alleged quote (itself hearsay) 
was not the subject of examination at the hearing.
---------------------------------------------------------------------------

    When apprised of [REDACTED], according to an internal Universal 
email, Spotify acknowledged to Universal that it [REDACTED]. Trial Ex. 
5413 at 1. Consistent with [REDACTED], Universal's testifying witness, 
Aaron Harrison, acknowledged that [REDACTED]. 9/3/20 Tr. 5701 
(Harrison).
    In an attempt to [REDACTED], Universal ultimately proposed that 
[REDACTED]. Trial Ex. 5410 at 1. However, Universal's internal emails 
indicated that Spotify had [REDACTED] Trial Ex. 5421 at 1. Rather, 
Spotify took the position that it would be ``[REDACTED].'' Trial Ex. 
5414 at 1. Ultimately, the final 2017 Agreement included [REDACTED]. 
See generally Trial Ex. 5037. (However, as noted above, the 2017 
Agreement included [REDACTED].
    In response, the Services point out, as an initial matter, that the 
statements in Trial Ex. 5414 constitute double hearsay, in that they 
repeat [REDACTED] (the first hearsay) to a [REDACTED], which were then 
repeated in the exhibit (the second hearsay). The Services also argue 
that the Judges should give no weight to Trial Ex. 5521, which also 
contains double hearsay, viz., [REDACTED] [REDACTED] (the first 
hearsay), repeated in an internal email (the second hearsay). In any 
event, the Services maintain, no part of the [REDACTED] that would 
generate price competition.
    Moreover, the Services aver that these statements are flatly 
inconsistent with the acknowledgement by Universal's testifying 
witness, Mr. Harrison, that Universal [REDACTED], but rather Universal 
sought to [REDACTED] Trial Ex. 4016 at 1. Thus, Universal's negotiating 
stance, according to the Services, was to [REDACTED]. To that extent, 
the Services do acknowledge that Universal [REDACTED]--see Harrison WDT 
] 56; 9/3/2020 Tr. 5743-5744 (Harrison)--but Universal was [REDACTED]. 
Id. at 5744 (Harrison). Accordingly, Universal had to rely on the 
[REDACTED]. Harrison WDT ] 56. Additionally, the Services note that the 
2017 Agreement [REDACTED].
    The Services also contest SoundExchange's characterization of 
[REDACTED]. Specifically, the Services point to the [REDACTED], which 
requires that Spotify [REDACTED] and that Spotify would ``[REDACTED]'' 
Trial Ex. 2062 at 53-54 (2013 Spotify-Universal Agreement).
    In fact, Trial Ex. 5429 (a 2016 negotiation email cited by 
SoundExchange) acknowledged that the [REDACTED] Trial Ex. 5429 at 4. 
Moreover, according to the Services, Spotify's [REDACTED] rendered 
dubious, unsubstantiated, and unwarranted Universal's [REDACTED].
    Further, as an economic matter, the Services assert that 
Universal's [REDACTED] gives away the game--

[[Page 59466]]

Universal was seeking to [REDACTED] that the Services characterize as a 
``perverse conception of `price competition' to say the least.'' 
Services RPFFCL ]] 419-421 (and record citations therein). Moreover, 
the Services aver, in any event, the presence of [REDACTED] Spotify's 
agreements with the [REDACTED]. See Services RPFFCL ] 425
    The Judges find that the evidence and testimony relating to these 
negotiations, relied upon by SoundExchange, are insufficient to 
demonstrate that Spotify had acquired any greater pricing power in 
connection with the negotiation of the 2017 Agreement. The [REDACTED] 
in the 2013 Agreement [REDACTED] in the 2017 Agreement, as confirmed in 
Universal's own internal email. Further, as the Services point out, 
Universal's testifying witness, Mr. Harrison, contradicted the key 
point that SoundExchange is attempting to make with regard to these 
negotiations: [REDACTED] 9/3/20 Tr. 5701 (Harrison). This broad 
statement clearly undermines SoundExchange's assertion that 
[REDACTED].\41\ Further, because Universal's agreement to [REDACTED], 
the Judges agree with the Services that Universal's pointed attempt to 
have Spotify agree to [REDACTED] demonstrates that Universal was 
[REDACTED].
---------------------------------------------------------------------------

    \41\ The Judges find startling, though, the Services' 
dismissal--as a ``perverse conception of `price competition' ''--of 
SoundExchange's more nuanced claim that [REDACTED]. This is 
precisely the phenomenon that Professor Shapiro enthusiastically 
endorsed in Web IV and which the Judges adopted. Web IV, 81 FR at 
26366 (Professor Shapiro testifying that it was ``absolutely'' 
correct that ``the threat of steering . . . pushes [the record 
companies] . . . towards their original [market share] percentages 
to avoid being that odd man out who was the holdout for the higher 
price . . . .''). In any event, Mr. Harrison's testimony that 
[REDACTED] renders moot the Services' jarring attempt to repudiate 
the notion of a Major agreeing to lower rates in exchange for 
protection from steering. Moreover, if, hypothetically, the facts 
had demonstrated [REDACTED], then [REDACTED] might have made sense 
as a way for a Major to avoid the situation where it [REDACTED]. 
However, under SoundExchange's own theory of the case, as discussed 
elsewhere in this Determination, the idea that the Majors thought 
[REDACTED], would be a chimera, given that the Majors aver that 
[REDACTED].
---------------------------------------------------------------------------

    On a more general basis, the Judges find SoundExchange's portrayal 
of Universal as essentially a ``pitiful helpless giant'' in 
negotiations to be at odds with the reality of its status as a 
complementary oligopolist wielding a Must Have repertoire. It did not 
have to [REDACTED], but rather, ceteris paribus, could have [REDACTED].
    Additionally, SoundExchange's assertion that Universal [REDACTED] 
in the 2017 Agreement is problematic for two reasons. First, Universal 
claimed to be [REDACTED], so why did Universal [REDACTED]? Again, 
SoundExchange's characterization of this largest Must Have Major as 
some sort of pitiful helpless giant (like Gulliver restrained by the 
Lilliputians) is simply not credible, because, as discussed elsewhere 
in this Determination, Spotify would be out of business [REDACTED] 
without a Major's repertoire, whereas Universal and the other Majors 
would continue in business, as Spotify's listeners would migrate to a 
substitute streaming service. And, if the [REDACTED] as SoundExchange 
claimed (because, as discussed supra, a Major could not [REDACTED] then 
why was Universal (or any Major) [REDACTED]--especially given that 
SoundExchange proffered evidence that the Majors claimed [REDACTED].
    Moreover, in Web IV, SoundExchange provided substantial detail 
regarding how the Majors would respond to thwart an attempt by a 
service to engage in steering as a means of price competition. A Major 
would threaten to black out its repertoire on that service or actually 
do so (a threat that remains viable, as discussed in this 
Determination). Second, a Major could demand that all royalties be paid 
up front on a non-refundable basis, according to historic market 
shares, making subsequent market share deviations costly (i.e., the 
marginal cost of deviating toward a Major beyond its historic share 
would be a positive royalty, compared to the zero marginal cost of 
playing a marginal sound recording as part of a Major's historic share, 
because the royalties based on historic market share had been prepaid). 
Finally, in Web IV, SoundExchange noted that each Major could insist on 
an MFN or similar anti-steering/anti-discrimination clause, making 
deviations from historic share play a breach of contract. Web IV, 81 FR 
at 26364-65.\42\
---------------------------------------------------------------------------

    \42\ The very concept of licensors requiring historic shares to 
be maintained appears inconsistent with effective competition. In 
Web IV, the Judges noted that ``demands by the Majors to prevent 
steering by insisting that a noninteractive service not deviate from 
an historical (``natural'') division of market shares would be a 
classic example of anticompetitive conduct.'' Web IV, 81 FR at 26373 
(citing Blue Cross & Blue Shield United of Wisconsin v. Marshfield 
Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995) (Posner, J.).
---------------------------------------------------------------------------

    In Web IV, the Judges acknowledged the capacity of the Majors to 
engage in such conduct, and the Judges characterized such conduct as 
simply alternate expressions of their complementary oligopoly power 
that, under the statute, the Judges were intending to mitigate, in 
order to identify rates that would be set in an effectively competitive 
market. Web IV, 81 FR at 26373-74. In the present proceeding, 
SoundExchange has not provided a sufficient evidentiary basis to show 
that Spotify would be immune from such tactics. Moreover, it would be 
in each Major's long-run interest, acting alone, yet consciously aware 
of the parallel incentives of the other Majors, to threaten and, if 
necessary, follow through on such actions, because of each Major's 
individual Must Have status (and each Major's knowledge of the other 
Majors' Must Have status).\43\ Simply put, the Majors' power provides 
them with multiple tactics, which, if triggered, would confront Spotify 
with certain and prompt economic ruin, as its subscribers expeditiously 
defected to Apple, Amazon, Google, or one of Spotify's smaller 
competitors.
---------------------------------------------------------------------------

    \43\ Indeed, an important point made by Professor Willig, 
SoundExchange's Shapley Value and bargaining expert, regarding the 
noninteractive market is fully applicable here. Each Major, as a 
Must Have, would recognize its power to withhold (or threaten to 
withhold) a license in order to maximize the benefit of the bargain. 
See also Richard A. Posner, Oligopoly and the Antitrust Law: A 
Suggested Approach, 21 Stan. L. Rev. 1067, 1081a n.39 (1969) (A 
``meeting of the minds'' among oligopolists is ``illuminated by game 
theorists [who note that] mutual dependence . . . demands . . . 
collaboration [that is] . . . tacit if not explicit . . . .''). 
There is no reason to believe that this phenomenon does not exist in 
the unregulated interactive music licensing market. Kristelia A. 
Garcia, Facilitating Competition by Remedial Regulation, 31 Berkeley 
Tech. L.J. 183, 188 (2016) (``In an industry like music licensing . 
. . parallel pricing and tacit collusion can . . . remov[e] the 
threat of meaningful competition from the marketplace.'').
---------------------------------------------------------------------------

    Accordingly, the Judges reject the argument that Spotify's economic 
position generated a change in bargaining and market power [REDACTED]. 
Rather, it is apparent to the Judges that Universal must have had 
[REDACTED].\44\
---------------------------------------------------------------------------

    \44\ That [REDACTED] is discussed infra, section III.B.2, after 
the Judges consider the evidence regarding the negotiations between 
Spotify and Sony and between Spotify and Warner.
---------------------------------------------------------------------------

ii. The Warner-Spotify Negotiations
    At the outset of negotiations regarding the 2017 Agreement, Spotify 
represented to Warner that it had [REDACTED]. 9/3/20 Tr. 5479; 5526-27 
(Adadevoh).
    In response to a Spotify proposal for [REDACTED], Warner explored 
with Spotify a [REDACTED]. See Trial Exs. 5264 at 4; 5265 at 2; 9/3/
2020 Tr. 5495-96 (Adadevoh). According to Warner's testifying witness, 
Ms. Adadevoh--who did not participate in the negotiation sessions with 
Spotify--Spotify rejected this [REDACTED] proposal, and [REDACTED]. See 
Trial Exs. 5264 at 4; 5265 at 2; 9/3/2020 5495-97 (Adadevoh). According 
to Warner,

[[Page 59467]]

Spotify also rejected its subsequent proposal for [REDACTED]. Trial Ex. 
4020 at 1.
    In February 2017, Warner alternately proposed that, in 
consideration of a [REDACTED], Spotify [REDACTED]. However, Spotify 
refused. Trial Exs. 5520 at 2; 5038; 9/3/20 Tr. 5505 (Adadevoh).
    Ultimately, Warner agreed to [REDACTED]. According to Ms. Adadevoh, 
Warner agreed to [REDACTED], motivated in part by [REDACTED]. 
SoundExchange avers that Warner's [REDACTED] was reasonable because 
Spotify had [REDACTED]. Trial Ex. 5401 at 3. In this regard, Ms. 
Adadevoh testified at the hearing that Warner's perception of Spotify's 
[REDACTED] 9/3/20 Tr. 5490-91 (Adadevoh). Accordingly, she testified 
that Warner [REDACTED]. 9/3/20 Tr. 5531 (Adadevoh).
    During these negotiations, Warner attempted to determine whether 
its speculation was justified that Spotify might have [REDACTED]. 
Through this analysis, Warner was [REDACTED]. Nonetheless, according to 
SoundExchange, Warner's [REDACTED], but rather reflected the 
[REDACTED]. SX PFFCL ] 435 (citing Trial Ex. 4014 at 1; 9/3/20 Tr. 
5601-02 (Adadevoh)).
    Ms. Adadevoh testified that--notwithstanding the [REDACTED] that 
Spotify had [REDACTED]--Warner [REDACTED]. Trial Ex. 5612 ] 12 (WRT of 
Reni Adadevoh); 9/3/20 Tr. 5530-31 (Adadevoh). The importance of 
[REDACTED] was noted in an email written by Warner's lead negotiator 
with Spotify, who wrote that ``[REDACTED]'' the effect on WMG's 
[REDACTED] would be [REDACTED]. Trial Ex. 2124 at 1. The same email 
also stated that the [REDACTED] in Warner's 2013 agreement with Spotify 
did not [REDACTED]. Trial Ex. 2124 at 1; Adadevoh WDT ] 12.
    To underscore Warner's purported concern that Spotify might 
[REDACTED], SoundExchange also notes discussions on a Warner [REDACTED] 
regarding [REDACTED]. Trial Ex. 4025 at 1.
    Ultimately, Warner agreed to [REDACTED], which was included in its 
2017 Agreement with Spotify. Trial Ex. 5038; Adadevoh WDT ]] 11-12. 
According to Ms. Adadevoh, Warner [REDACTED] because ``[REDACTED]'' 9/
3/20 Tr. 5480.
    The Services respond first by noting that SoundExchange has ignored 
the import of Warner's complementary oligopoly power in connection with 
the bargaining dynamics. Absent consideration of this fact, they argue 
that Ms. Adadevoh's assertion that [REDACTED] is simply conclusory and 
hardly credible. Additionally, the Services maintain that there is no 
evidence linking [REDACTED] to either (1) a [REDACTED] or (2) a 
[REDACTED].
    The Services also assert that a key document on which SoundExchange 
relies, Trial Ex. 4022, actually identifies [REDACTED] in its 2017 
Agreement with Spotify.\45\ Among these drivers, according to the 
Services' understanding of this Warner document, was [REDACTED]. See 
Trial Ex. 4011 at 1 (``[REDACTED]'').
---------------------------------------------------------------------------

    \45\ The Services also identify several other ``drivers'' that 
led Warner to agree to the terms of the 2017 Agreement, 
predominantly relating to Warner's [REDACTED]. These other points 
are discussed infra.
---------------------------------------------------------------------------

    The Services also note that another document on which SoundExchange 
relies regarding the Warner-Spotify negotiations, Trial Ex. 5264, 
consists of double hearsay--providing a second-hand report of Spotify 
statements. Moreover, the Services claim the statements contained 
therein cannot even unambiguously be attributed to specific sources--
making it difficult to tell whether certain text reflects a Spotify 
statement, Ms. Gardner's reaction thereto, or something else entirely. 
Moreover, the Services point out that the testifying Warner witness, 
Ms. Adadevoh, did not claim to have personal knowledge sufficient to 
provide the requisite clarity.
    The Services also characterize as misleading SoundExchange's 
attempt to portray [REDACTED] as an example of Spotify's market power. 
Rather, they claim that an examination of Trial Ex. 5265 reveals that 
Spotify was [REDACTED] in the 2017 Agreement; rather, Spotify was 
making the practical observation that if a [REDACTED]. Trial Ex. 5265 
at 4-5. And, the Services add, allowing a [REDACTED] noted supra in 
Trial Ex. 4011.
    The Services also dispute SoundExchange's assertion that Spotify's 
refusal to provide Warner with [REDACTED] demonstrates Spotify's 
increased bargaining or market power. They note that it was Spotify's 
[REDACTED]. Moreover, the Services note that Warner made its proposal 
[REDACTED] (see Trial Ex. 5520) [REDACTED], belying Ms. Adadevoh's 
suggestion that [REDACTED]. Additionally, the Services point out that 
Trial Ex. 5520 also reveals that Warner sought to [REDACTED]--
underscoring the degree to which Warner recognized that it, too, 
[REDACTED]--and that Warner was willing to agree to [REDACTED] because 
of [REDACTED]. See Trial Ex. 5520 at 3.
    More broadly, the Services argue that, if it was true that Spotify 
had been [REDACTED], the negotiation files would have been [REDACTED], 
and yet, by contrast, the quantum of evidence on which Warner relies is 
remarkably slender. Services RPFFCL ] 434 (and record citations 
therein). And, with regard to the extant record evidence, the Services 
characterize as insufficient and unconvincing SoundExchange's attempt 
to recharacterize Warner's internal [REDACTED]. See Trial Ex. 4014. 
Continuing its attack on what it describes as SoundExchange's purported 
misstatement of the evidentiary record, the Services point to another 
SoundExchange document, Trial Ex. 2124, which includes, [REDACTED]--
contradicting SoundExchange's argument that the [REDACTED] (as 
discussed supra).
    Continuing its attack on the usefulness of the evidence relied upon 
by SoundExchange relating to Warner's negotiations with Spotify, the 
Services note that Trial Ex. 4025, apparently describing [REDACTED] is 
replete with double hearsay, in the form of a declarant's summary of 
third-party statements by other declarants. The Services state that 
there is no indication that any particular comment in this exhibit 
reflects Warner's final or official position, or that they are not 
merely the opinions of each individual. On the substance of this 
exhibit, the Services point out that this document contains [REDACTED], 
ignored by SoundExchange, which [REDACTED]. Services RPFFCL ] 438 (and 
record citations therein).
    The Judges find the Services' arguments convincing. Warner's 
internal correspondence indicates it was [REDACTED]. But, when it 
[REDACTED] Warner's contract with Spotify. On these facts, the Judges 
cannot find support for Spotify's supposed new-found power [REDACTED].
    Further, there is no persuasive evidence [REDACTED] included in 
that contract. The Judges will not presume such a [REDACTED] when the 
record does not reflect that this [REDACTED] occurred. Alternatively 
stated, SoundExchange is asserting that the Judges should find 
causation--that the [REDACTED] and vice versa--when the evidence 
[REDACTED]. Here, the absence of testimony from the actual negotiators 
looms large; if there had been evidence of such [REDACTED] (which is 
not in the present record) in first-hand testimony from the 
negotiators, the Judges could have weighed their direct and cross-
examination testimony to assist in

[[Page 59468]]

making a finding as to this issue. But, no such record exists. 
Accordingly, the possibility that [REDACTED] were the consequence of 
Spotify's new market power [REDACTED] is not more plausible than the 
Services' position that the [REDACTED] were included, [REDACTED], to 
[REDACTED], and that Warner's agreement to the [REDACTED] was 
[REDACTED].
    Additionally, the fact that Spotify refused to [REDACTED] Warner 
does not reflect any pricing power possessed by Spotify. Rather, it 
reflects the power of[REDACTED] to [REDACTED], thus undermining price 
competition.
    Finally, the Warner [REDACTED] document on which SoundExchange 
relies is unpersuasive. Not only does it consist of double-hearsay--as 
the Services note, it also fails to identify the speakers and their 
business affiliations [REDACTED] (which also are not provided in 
hearing testimony)--but rather, the email reflects [REDACTED] regarding 
the pending Spotify-Warner 2017 Agreement. In that regard, it contains 
[REDACTED], allegedly voiced by the unidentified participants. As the 
Judges noted supra, corporate documents, including [REDACTED] are often 
likely to fail to shed light on the economic factors relevant to a 
proceeding. See William Inglis & Sons Baking, 688 F.2d at 1028.
    Here, the Warner [REDACTED] document is even more problematic, as 
it merely recites [REDACTED]. The problem with this document--
emblematic of the problem with all of these hearsay documents--was 
highlighted in a fruitless attempt by SoundExchange's counsel to cross-
examine Professor Shapiro regarding the meaning of a double hearsay 
declaration in this Warner [REDACTED] document, Trial Ex. 4025. 
Presented with language in this exhibit stating: ``[REDACTED]'' 
Professor Shapiro responded by stating: ``I'm not sure what this 
[REDACTED] means,'' and adding: ``I don't know what it means 
[REDACTED].'' 8/20/20 Tr. 3076-77 (Shapiro). The witness then asks 
SoundExchange's counsel: ``Could you help me out on that?,'' to which 
SoundExchange's counsel then had no choice but figuratively to throw up 
his hands and lament: ``Well, . . . let's just leave it since we don't 
have the fact witness here.'' 8/20/20 Tr. 3077 (Shapiro) (emphasis 
added). The Judges share that frustration.
iii. The Sony-Spotify Negotiations
    According to Sony, at the outset of negotiations, Spotify sought 
[REDACTED]. 9/2/20 Tr. 5218 (Piibe). However, Sony was [REDACTED] 
particularly because Sony believed the proposed [REDACTED]. Piibe WDT ] 
20; 9/2/20 Tr. 5195-96 (Piibe); Trial Ex. 4018 at 1. The Services find 
this opening salvo--made about a year before the parties ultimately 
executed their 2017 Agreement--to be wholly unremarkable. Professor 
Shapiro characterizes this start to negotiations as merely 
``[REDACTED]'' 8/20/20 Tr. 3082 (Shapiro).
    When [REDACTED] appeared [REDACTED] Sony decided that, 
``[REDACTED],'' \46\ it would offer to [REDACTED]. Trial Ex. 5461 at 7, 
35 (offering increasing [REDACTED]); \47\ see also Trial Ex. 4026 at 1, 
4 (offering a more general framework for [REDACTED]); Piibe WDT ] 22 
(the thinking behind the [REDACTED] was simply that, [REDACTED]).
---------------------------------------------------------------------------

    \46\ The relevancy of Spotify's ``importance'' to Sony and the 
other Majors, in terms of the subscription royalty rate [REDACTED], 
is discussed infra.
    \47\ To put this proposal in context, Sony's market share for 
interactive subscription plays in 2018 was [REDACTED]%. Orszag WDT, 
tbl.2.
---------------------------------------------------------------------------

    The Services' rejoinder to this assertion is consistent with their 
explanation of the problem regarding the [REDACTED]: As long as Spotify 
remained [REDACTED], Spotify was [REDACTED] Services RPFFCL ] 442 (and 
record citations therein).
    Because Sony understood that Spotify had the [REDACTED], Piibe WDT 
] 25, Sony recognized that a consequence of [REDACTED]. As Mr. Piibe 
explained, in [REDACTED]. Piibe WDT ] 26. Moreover, Sony asserted that 
it [REDACTED]--because it believed that Spotify could [REDACTED] Piibe 
WDT ] 26 (emphasis added).
    More particularly, Sony asserts that it was concerned about 
Spotify's [REDACTED]. See Trial Ex. 5451 at 1 (noting that Spotify 
[REDACTED]); Trial Ex. 5461 at 40 (noting that [REDACTED]); Trial Ex. 
5514 at 3 (noting that [REDACTED] and identifying [REDACTED]); Trial 
Ex. 4017 at 4 (noting that [REDACTED]). Sony was concerned because it 
believed its [REDACTED] Trial Ex. 5461 at 40; accord Trial Ex. 5514 at 
3 (asserting that Sony's [REDACTED]). Trial Ex. 5468 at 2.
    The Services aver that these purported [REDACTED] reflect mere 
possibilities, which Sony [REDACTED] in contract negotiations. First, 
regarding [REDACTED], the 2017 Agreement included a [REDACTED] More 
particularly, the Services note the dynamics of the negotiations that 
led to [REDACTED]. In Spotify's initial contract proposal, Trial Ex. 
5461, it sought a [REDACTED] However, in the final 2017 Agreement, 
Trial Ex. 5011, the [REDACTED] was [REDACTED] to Sony.
    Moreover, the Services point to what they consider to be a blatant 
inconsistency between Mr. Piibe's WDT regarding this [REDACTED] and Mr. 
Piibe's deposition testimony in this proceeding, with which he was 
confronted at the hearing, as set forth below:
    [Hearing Question]: [L]et me ask you to take a look at . . . your 
deposition. . . .
    [Deposition Question]:
    [REDACTED]?
* * * * *
    [Deposition Answer]
    [REDACTED].

    [Hearing Question]
    [W]as that answer correct at the time?

    [Hearing Answer]
    Yes.

9/2/20 Tr. 5339-40 (Piibe) (emphasis and bolding added).

    Further, the Services note (as discussed supra) that the [REDACTED] 
in the Sony-Spotify 2017 Agreement contained a [REDACTED] Trial Ex. 
5011 at 36. There is no basis in the record, the Services maintain, to 
conclude that this [REDACTED] would [REDACTED], two areas regarding 
which Sony claimed to be concerned.
    SoundExchange also finds a [REDACTED] in a statement supposedly 
made by Spotify (contained in an internal Sony email), [REDACTED] 
There, Mr. Piibe recounted what he heard from a Sony employee regarding 
a statement allegedly made by a Spotify negotiator, to the effect that, 
[REDACTED]. Trial Ex. 5469 at 1. Mr. Piibe asserts that, in response to 
that and [REDACTED], Sony ``determined that [REDACTED]'' Piibe WDT ]] 
24, 26.
    The Services respond by noting that this [REDACTED]--of 
questionable veracity given the double-hearsay nature of its 
representations--[REDACTED]. Further, the Services contrast what they 
characterize as [REDACTED] with what they indicate to be Mr. Orszag's 
[REDACTED] characterization of the statement in his oral testimony as a 
``[REDACTED]'' in which Spotify said, ``[REDACTED].'' 8/12/20 Tr. 1743 
(Orszag). Ultimately, Sony determined that it was [REDACTED] that, 
according to its testifying witness Mr. Piibe, caused a ``[REDACTED].'' 
Piibe WDT ] 23. According to Mr. Piibe, Sony, in fact, [REDACTED]. 
Piibe WDT ] 36. And, during the hearing, he elaborated, testifying:
    [REDACTED].

9/2/20 Tr. 5228 (Piibe) (emphasis added). Moreover, on behalf of Sony,

[[Page 59469]]

Mr. Piibe speculated that Spotify was [REDACTED]. 9/2/20 Tr. 5228, 5368 
(Piibe). Consequently, Sony negotiators, according to an internal Sony 
email, concluded that [REDACTED]. Trial Ex. 5467 at 1.
    The Judges find, for several reasons, that the evidence proffered 
by SoundExchange regarding the Sony-Spotify negotiations does not 
support the assertion that Spotify's supposed new pricing power was 
[REDACTED]. First, Spotify's [REDACTED] was simply consistent with the 
[REDACTED]. Thus, such [REDACTED] was not [REDACTED].
    Next, SoundExchange's assertion that Sony alternatively sought 
[REDACTED] in order to [REDACTED] was unambiguously refuted by Mr. 
Piibe's deposition testimony. As noted above, in that testimony, he 
admitted that [REDACTED]. His testimony in this regard also neutralizes 
the claim by SoundExchange that [REDACTED].
    Finally, the Judges take note of Mr. Piibe's exaggerated hearing 
testimony regarding Sony's decision [REDACTED]. In that testimony, Mr. 
Piibe indicated that the very [REDACTED] was ``[REDACTED]'' to the 
point that he was ``stuttering'' in an attempt to ``process'' the idea. 
The Judges find this over-the-top testimony not only lacking in 
credibility, but also a fine example of the adage ``the lady doth 
protest too much.'' \48\ Mr. Piibe was a polished witness who spoke 
carefully and with fluidity. The question that he was asked that led to 
his ``stuttering'' response was the following: ``[REDACTED]?'' 9/2/20 
Tr. 5228 (Piibe).
---------------------------------------------------------------------------

    \48\ William Shakespeare, Hamlet act III, sc. 2.
---------------------------------------------------------------------------

    This question was straightforward, simple, and posed to him on 
direct examination, thus unlikely to have caught him by surprise. 
Moreover, the [REDACTED] is the [REDACTED]. The Judges cannot fathom 
that a Major, a sophisticated corporation, would not [REDACTED] when it 
is undisputed in the present record, and supported by the economic 
analysis discussed in this Determination, that [REDACTED]. Indeed, a 
substantial component of SoundExchange's case-in-chief (presented in 
the testimony of Professor Willig) turns on the contributions each 
party makes to the value of a music service and their fallback 
values.\49\ What the Judges find inconceivable is Mr. Piibe's claim 
that [REDACTED]. Thus, the Judges find this exaggerated testimony to 
lack credibility, indicating that there must have been another reason 
for [REDACTED].
---------------------------------------------------------------------------

    \49\ Professor Willig refers to the opportunity cost of a Major 
that is a complementary oligopolist when negotiating with a 
potential licensee as the [REDACTED] opportunity cost. [REDACTED]
---------------------------------------------------------------------------

e. Other Record Evidence and Testimony Contradict SoundExchange's Claim 
That Spotify's Pricing Power Had Neutralized the Majors' Complementary 
Oligopoly Power
    If Spotify, in fact, had become so powerful by virtue of its market 
size, ability to [REDACTED] and ability to [REDACTED], as a Sony 
executive wrote, to [REDACTED]. Trial Ex. 2137. However, the evidence 
indicates that the Majors were [REDACTED]. The Judges find telling the 
following colloquy between the bench and Michael Sherwood, a senior 
Warner executive:
    [THE JUDGES]
    [REDACTED]?

    [MR. SHERWOOD]
    [REDACTED]. . . .

    [THE JUDGES]
    Why [REDACTED]?

    [THE WITNESS]
    [REDACTED].

    [THE JUDGES]
    Okay. Did you have an understanding as to why [REDACTED]?

    [MR. SHERWOOD]
    I [REDACTED].
    [THE JUDGES]
    When you say [REDACTED], you mean [REDACTED], so to speak?
    [MR. SHERWOOD]
    Correct. That was my impression of it.
    [THE JUDGES]
    Okay. And how did you come to that impression?
    [MR. SHERWOOD]
    Through conversations with our business development team at Warner 
Music Group.
    [THE JUDGES]
    Okay. Who, in particular, do you recall, by name?
    [MR. SHERWOOD]
    I don't, unfortunately. That team has had some turnover since that 
time.
    [THE JUDGES]
    I see. Who was the head of the team at the time you came to that 
conclusion?
    [MR. SHERWOOD]
    [REDACTED].
* * * * *
    [THE JUDGES]
    Okay. And at a more general level, separate and apart from this 
particular negotiation and [REDACTED], how would you [REDACTED]?

    [MR. SHERWOOD]
    Well, if that circumstance were to come to light, [REDACTED].

9/9/20 Tr. 5930-32 (Sherwood) (emphasis added).
    The Judges find Mr. Sherwood's testimony, quoted at length above, 
to be highly informative, and the Judges found him to be a highly 
credible witness. He has been a Warner employee for 21 years, and he is 
currently the Senior Vice President of Streaming and Revenue, 
responsible for overseeing all of the revenue-generating commercial 
accounts, which include digital service providers, including Spotify. 
9/9/20 Tr. 5912-13 (Sherwood). Moreover, he was one of the few Major 
employees that SoundExchange chose to testify in this proceeding, out 
of the numerous individuals who had duties related to the streaming 
services or who wrote or received emails regarding the issues raised in 
the present proceeding.
    His testimony indicates that [REDACTED] what the Services have 
argued repeatedly--that Spotify [REDACTED] when it [REDACTED]. Not only 
did Mr. Sherwood agree with that [REDACTED], but he also identified the 
negotiating team within Warner itself as having informed him that 
[REDACTED] This testimony supports the Services' characterization of 
Spotify's weak pricing power and overall bargaining position, further 
confirming the dubiousness of SoundExchange's claim that the Majors did 
not [REDACTED] that [REDACTED] continued into the negotiations over the 
2017 Agreements.
    Perhaps even more importantly, Mr. Sherwood's testimony regarding 
[REDACTED] speaks even more persuasively than his words. Warner was 
[REDACTED], as he testified he would do if a [REDACTED].
    Mr. Sherwood's testimony also underscores the problem created by 
SoundExchange's decision not to call witnesses with first-hand 
experience negotiating with Spotify, such as [REDACTED], who could have 
shed direct light on the Majors' analysis of Spotify's [REDACTED] in 
the 2016-2017 period.\50\
---------------------------------------------------------------------------

    \50\ This portion of Mr. Sherwood's testimony does not contain 
inadmissible hearsay, as it is in the nature of testimony regarding 
an admission and/or declaration against interest by Warner. 
Moreover, no objection was lodged by SoundExchange (which would have 
been awkward, given that he was its own witness and the testimony 
had been elicited by the Judges) and, even if the testimony 
constitutes hearsay, the Judges invoke their discretion to allow 
hearsay testimony pursuant to 37 CFR 351.10(a).
---------------------------------------------------------------------------

    Finally, Mr. Sherwood's testimony [REDACTED] gives real-world 
evidence of the substitutability and cross-elasticity of these various 
downstream services addressed by the Services' economic expert 
witnesses. Likewise, this testimony shows [REDACTED], consistent with 
SoundExchange's direct case criticisms of Pandora's Label Suppression 
Experiments for their failure to address how the industry

[[Page 59470]]

would respond to such a going-dark scenario.
    One of SoundExchange's internal Major documents from an executive 
who actually negotiated with Spotify took a [REDACTED] than 
SoundExchange regarding Spotify's pricing power--[REDACTED] consistent 
with the Judges' findings herein that Spotify had not acquired pricing 
power sufficient to [REDACTED]. The document was an email written by 
[REDACTED] 9/2/20 Tr. 5247 (Piibe). Mr. [REDACTED] wrote the following 
in a December 13, 2016 email--REDACTED] in a response to [REDACTED]:
    [REDACTED]
    [REDACTED]
    [REDACTED]
    [REDACTED].

Trial Ex. 5467 (emphasis and bolding added).
    In the succinct, colloquial, and mildly vulgar statement emphasized 
above, Mr. [REDACTED] concisely summed up [REDACTED] The Judges find 
Mr. [REDACTED] observation consistent with the economic analysis on 
which the Judges have relied in this Determination, supporting the 
finding that Spotify lacked the pricing power to mitigate or offset the 
complementary oligopoly power of the Majors.
    But, as the quoted document--indeed, the quoted sentence--also 
reveals, Mr. [REDACTED] took note of [REDACTED], stating that he 
``[REDACTED]'' Trial Ex. 5467. Thus, Mr. [REDACTED], in one sentence, 
also summed up a conundrum that is at the heart of the question: Why 
did three complementary oligopolists decline to exercise their market 
power [REDACTED]?
    The Judges consider that conundrum below.\51\
---------------------------------------------------------------------------

    \51\ SoundExchange notes that Apple has [REDACTED]. Moreover, it 
notes that Apple [REDACTED] [REDACTED]. 9/3/20 Tr. 5681-82 
(Harrison); Harrison WDT ] 31. Subsequently, Apple also [REDACTED]. 
Piibe WDT ] 46. See generally 8/13/20 Tr. 1899-1900 (Orszag); 8/11/
20 Tr. 1367 (Orszag). According to SoundExchange, these facts 
indicate that Apple, [REDACTED] was able to [REDACTED]. See SX PFFCL 
] 468 (and record citations therein).
    However, the Judges are struck by the fact that the record 
regarding Apple's relationship with the Majors is barren, even in 
comparison to the meager and disjointed proofs SoundExchange 
proffered regarding Spotify's negotiations with the Majors. There 
are no internal documents from the Majors describing their 
relationship with Apple, including [REDACTED], nor is there any 
evidence that Apple [REDACTED]. Accord, Services' Response to SX 
PFFCL ] 466 (noting the [REDACTED] the setting and level of its 
rates). Moreover, as the Services note, Mr. Orszag did not use the 
Apple rate as a benchmark in this proceeding. Id. ] 465. In fact, 
Mr. Orszag did not identify in the materials upon which he relied in 
preparing his WDT any documents memorializing any aspect of Apple's 
negotiations with any of the Majors, and he could not recall with 
any certainty having reviewed such documents prior to preparing that 
written testimony. 8/12/20 Tr. 1646-48 (Orszag).
    The Judges also note that the fact that Apple [REDACTED] is 
consistent with the Judges' understanding of the Majors' [REDACTED]. 
That is, the Majors negotiated [REDACTED], so to speak.
    For these reasons, the Judges find that there is insufficient 
evidence that Apple's [REDACTED] is supportive of SoundExchange's 
argument that an interactive service's mere market share [REDACTED]. 
(The Judges note that this is not the first time the Judges have 
declined to give weight to SoundExchange's underdeveloped record as 
it related to an Apple agreement. See Web IV, 81 FR at 26352 
(declining to rely on ``SoundExchange's analysis and use of [an] 
Apple agreement'' because ``there is insufficient evidence in the 
record'')).
---------------------------------------------------------------------------

2. The Majors' Action to [REDACTED]
a. Introduction
    The record discussed supra reflects an apparent disconnect between 
the facts discussed above and the relevant economic principles. The 
Majors agreed to [REDACTED]. Why did that occur? The upstream benchmark 
agreements at issue were consummated in a market where the licensors, 
the Majors, are complementary oligopolists with ``Must Have'' 
repertoires, and the licensee, Spotify--despite being arguably the 
largest interactive service--lacked long-term bargaining power and 
pricing power sufficient to affect, let alone dictate, the terms of 
trade.\52\
---------------------------------------------------------------------------

    \52\ To better appreciate the Judges' discussion of this 
conundrum, they note here a distinction among different types of 
economic power as used in this analysis.
    The Judges use the phrase ``pricing power'' to reflect the 
ability of a seller or buyer (or licensor or licensee) to influence 
price (royalty rates) because of its own ``market power,'' arising 
from strengths, such as monopoly, monopsony, oligopoly, or 
oligopsony positions, as derived from whatever source. Here, the 
Majors have ``pricing power'' derived from their status as 
complementary oligopolists; Spotify lacked ``pricing power,'' for 
the reasons discussed supra.
    The Judges use the phrase ``countervailing power,'' as discussed 
supra, to reflect a contracting party's power, again from whatever 
source, that offsets, in whole or in part, the pricing power of a 
counterparty. (Thus, it is a power defined in relative terms 
compared to the opposing commercial power.).
    These two types of power collide in the negotiation process, 
allowing each party to exert a measure of ``bargaining power.'' See 
Orszag WDT ] 110 (and citations therein) (``Bargaining power can be 
defined as the advantage one player has over another in establishing 
desired terms [and] can arise from a number of sources, including 
market power, better information (e.g., knowledge of the true value 
of what is being negotiated), and credible threats to retaliate or 
steer business away from the other player. A player with enhanced 
bargaining power tends to extract greater surplus through better 
terms.'').
---------------------------------------------------------------------------

    The further factual record though, when analyzed through the lens 
of economics, provides the answer to this facial conundrum; the Majors 
were intent on surviving as powerful licensors vis-[agrave]-vis their 
licensees.\53\ As discussed below, the Majors were [REDACTED], enabling 
them to [REDACTED].\54\ One way the Majors could attempt to avoid this 
development and survive as economically powerful licensors was to 
[REDACTED] that were rapidly expanding in the interactive market.
---------------------------------------------------------------------------

    \53\ See Manne & Williamson, supra at 620 (``In the end, 
whatever business people think they are maximizing, whatever they do 
or wish to do, survival is ultimately an economic matter.'') 
(emphasis added).
    \54\ Despite their complementary oligopoly power, the [REDACTED] 
is a contemporary example of the literary adage: ``Uneasy lies the 
head that wears a crown.'' William Shakespeare, King Henry IV, act 
III, sc. 1. From the drier economic perspective, the [REDACTED].
---------------------------------------------------------------------------

    Accordingly, as the record (discussed below) reveals, [REDACTED], 
the Majors [REDACTED] in order to [REDACTED].\55\
---------------------------------------------------------------------------

    \55\ An IPO is a process offering shares of a private 
corporation to the public in a new stock issuance that allows the 
corporation to raise capital from public investors. See 
Investopedia.com (search term ``Initial Public Offering'') (last 
accessed May 12, 2021). Ultimately, Spotify decided to forego an IPO 
and instead engaged in a ``Direct Placement'' (a/k/a ``Direct Public 
Offering'' or ``Direct Listing'') by which the corporation does not 
raise new capital, but rather enables its existing shareholders to 
sell their stock to the public. See Spotify's Wall Street Debut is a 
Success, New York Times (Apr. 3, 2018); See generally 
Corporatefinanceinstitute.com (search term ``Direct Placement'') 
(last accessed May 14, 2021).
---------------------------------------------------------------------------

    The Judges' evidence-based analysis in this section is not the 
story that SoundExchange chooses to emphasize. SoundExchange prefers 
the story in which the Majors are the [REDACTED]. It is not immediately 
obvious why SoundExchange prefers that story to the facts that actually 
match economic theory to reality--that the Majors perceived themselves 
as [REDACTED].\56\
---------------------------------------------------------------------------

    \56\ It may be that SoundExchange was reluctant to emphasize a 
countervailing power argument that was not based on a licensee's 
pricing power because pricing power (through steering) was the 
rationale applied in Web IV.
---------------------------------------------------------------------------

    The forgoing analysis is also not the story told by the Services. 
Although they discuss the same record facts as relied upon by the 
Judges (discussed infra), they aver that these facts demonstrate merely 
that the Majors were behaving as complementary oligopolists always 
behave--[REDACTED], without regard for the bargaining power of their 
counterparties. As explained in more detail infra, the Services' 
understanding of the facts is neither supported by the record nor 
relevant to the Judges' task of identifying an effectively competitive 
rate.
b. The Majors' [REDACTED]
    Nested within its assertions of Spotify's pricing power, discussed 
supra, SoundExchange presented witness testimony and advanced

[[Page 59471]]

arguments that the [REDACTED]--in the interactive service market.\57\ 
Some of the most compelling testimony in this regard was provided by 
Aaron Harrison, Universal's Senior Vice President, Business & Legal 
Affairs, responsible for overseeing the teams that negotiate licensing 
agreements with digital music services. Harrison WDT ] 1.
---------------------------------------------------------------------------

    \57\ The rapid rise of the tech firms in the interactive market 
is undisputed. The record reveals that [REDACTED], account for 
[REDACTED] of U.S. interactive subscribers respectively, and 
[REDACTED] has already [REDACTED]. Orszag WDT, tbl.4.

    In his written direct testimony, Mr. Harrison emphasized the 
[REDACTED]:
    [S]ome on-demand services are part of companies that dwarf 
[Universal] and dominate digital markets. Amazon, Apple and Google, 
for example, can rely on their size to absorb any losses from their 
streaming services and [REDACTED].

Id. ] 41 (emphasis added); see also Orszag WDT ] 39 n.56 (relying on a 
2019 trade publication article stating that Amazon Music is reportedly 
growing faster than Spotify and Apple Music).\58\ At the hearing, Mr. 
Harrison elaborated on this [REDACTED]. 9/3/20 Tr. 5752 (Harrison) 
(acknowledging that Universal's [REDACTED]).
---------------------------------------------------------------------------

    \58\ As noted above, SoundExchange does not emphasize this 
argument. In this regard, Mr. Harrison buries this [REDACTED] in a 
section of his WDT entitled, ``[REDACTED],'' Harrison WDT at 12, 
where he notes there are ``several reasons'' why [REDACTED]. But the 
fourth (and final) reason he provides, the one addressed in the 
accompanying text, see id. ] 41, pertains only [REDACTED]. Thus, 
this final reason resides as something of a non sequitur within a 
section explaining why Mr. Harrison believed [REDACTED].
---------------------------------------------------------------------------

    The relevance of the size of the tech firms must be distinguished 
from the market power of a Must Have Major. The latter has what 
Professor Willig aptly describes as ``walk away'' market power, see 
Trial Ex. 5600 ] 14 (CWDT of Robert Willig) (Willig WDT), in that a 
service cannot operate when it lacks a license for the sound recordings 
from each of the three Majors. Therein lies the power of ownership and 
control over essential inputs possessed by complementary oligopolists. 
The tech firms, however, possess a different type of power. Their 
advantage is based on sheer size, affording them the potential to 
dominate a market they decide to enter.\59\ Thus, if they were to 
control the downstream interactive streaming market [REDACTED], they 
would be well-positioned to threaten blacking out one (or more) Majors 
and to follow through on that threat by, as Mr. Harrison testified, 
[REDACTED]. See SX PFFCL ] 336 (``the music business is a rounding 
error for these big-tech services.'').\60\
---------------------------------------------------------------------------

    \59\ This distinction between market power and power derived 
from sheer corporate size is a specific example of a broader 
contemporary issue in competition law, especially with regard to 
these tech firms. Compare Tim Wu, The Curse of Bigness 15, 21 (2018) 
(asserting that the power of ``just a handful of giants . . . 
Amazon, Google and Apple . . . transcend[s] the narrowly economic'') 
with J. Wright et al., Requiem for a Paradox: The Dubious Rise and 
Inevitable Fall of Hipster Antitrust, 51 Az. St. L.J. 293, 362 
(2019) (criticizing the new emphasis on sheer corporate size as 
``call[ing] for nothing less than the complete dismantling of the 
consumer welfare standard and the consensus . . . among antitrust 
practitioners, enforcers and academics . . . about how to promote 
competition.'').
    \60\ The ability of tech firms to dominate markets, including 
music markets, and the implications of that power has been noted by 
economists who have studied the issue. See Alan B. Krueger, 
Rockonomics at 103, 200-201 (2019) (``Superstar firms, including 
Google, Apple and Amazon, have probably benefited from . . . 
deploying the technological innovations that enable them to take 
advantage of enormous economies of scale [b]ut there is also a 
concern that such firms use their dominant position to stifle 
competition. . . . Spotify's long-run existential challenge is 
exacerbated by the fact that [tech firms] can sustain losses . . . 
rais[ing] the question of whether Spotify can be sustainable as a 
stand-alone company.'') (emphasis added).
---------------------------------------------------------------------------

    Accordingly, [REDACTED]. As Mr. Harrison further acknowledged on 
cross-examination, it was his view that ``[REDACTED]'' 9/3/20 Tr. 5721 
(Harrison). Moreover, Mr. Harrison agreed that the economic [REDACTED] 
would not only [REDACTED], but also would ``[REDACTED].'' 9/3/20 Tr. 
5721 (Harrison).
    The Services do not dispute that the Majors [REDACTED]. In fact, 
relying on Mr. Harrison's testimony, the Services argue that the Majors 
[REDACTED]
    [to] [REDACTED] . . . .
    Services PFFCL ] 147.\61\ The Services argue that this testimony 
reveals that ``[t]he unmistakable implication of Mr. Harrison's 
testimony [is that Universal] [REDACTED] Services PFFCL ] 147.
---------------------------------------------------------------------------

    \61\ The idea that [REDACTED]. In Web II, 72 FR 24084 (2007), 
the Judges set rates for all noninteractive services at $0.0008 for 
2006, rising annually to $0.0019 in 2010, after a hearing that 
included the large tech services of that era--Yahoo, Microsoft, and 
AOL. After the passage of the Webcaster Settlement Acts of 2008 and 
2009, SoundExchange negotiated a substantially lower per-play 
royalty rate regime for the pureplay noninteractive services--
beginning at the same $0.0008 for 2006, but then lower in every 
subsequent year until reaching a 2010 rate of $0.00097, only 51% of 
the Web II rate. (The pureplay rate was part of a greater-of 
structure including a 25%- of-revenue prong, but that prong was not 
triggered.). In addition, the pureplay settlement rates continued 
through 2015 and were substantially lower than the Web III rates. 
For example, in the final year of the Web III rate period (2015), 
the pureplay rate was $0.0014, only 61% of the Web III rate of 
$0.0023 (with similar disparities in the prior years of the Web III 
rate period). The Webcaster Settlement Acts prohibited a party from 
using the settlement rates as precedent or evidence in subsequent 
proceedings. See generally Jeffrey A. Eisenach, The Sound Recording 
Performance Right at a Crossroads: Will Market Rates Prevail?, 22 
CommLaw Conspectus 1 (2014).
---------------------------------------------------------------------------

    The Judges find that the Services misconstrue the import of this 
aspect of Mr. Harrison's testimony. His point is [REDACTED]. (In fact, 
[REDACTED] make that apparent. See Orszag WDT tbls.15 & 16.). Rather, 
the point is that the [REDACTED] would [REDACTED] would [REDACTED]. For 
example, [REDACTED]. See generally J. Baker & J. Farrell, Oligopoly 
Coordination, Economic Analysis, and the Prophylactic Role of 
Horizontal Merger Enforcement, 168 U. Pa. L. Rev. 1985 (1986). Thus, 
[REDACTED].\62\
---------------------------------------------------------------------------

    \62\ The Services also construe Mr. Harrison's testimony as 
[REDACTED] at ``market segmentation.'' Services PFFCL ] 147. 
However, market segmentation in the music streaming markets is 
typically undertaken to effectuate price discrimination. There is no 
sufficient evidence that is occurring here. The record does not 
indicate that Apple, Amazon, Google, and Spotify compete among 
themselves by each appealing principally to different segments of 
the listening public based on the varying willingness-to-pay among 
listeners (although each has tiers and products intended to appeal 
to categories of listeners varying based on willingness-to-pay).
---------------------------------------------------------------------------

    Whether [REDACTED] generates an effectively competitive rate in the 
interactive benchmark market is of no consequence in this proceeding 
regarding the noninteractive market.\63\ Rather, the important issue 
for the present benchmarking purposes is whether the royalty rate the 
Majors agree to accept from Spotify is less influenced, on balance, by 
the complementary oligopoly power of the Majors [REDACTED].
---------------------------------------------------------------------------

    \63\ [REDACTED]). See generally David T. Scheffman & Richard S. 
Higgins, Twenty Years of Raising Rivals' Costs: History Assessment, 
and Future, 12 Geo. Mason L. Rev. 371, 375 (2003). An economist who 
specializes in the analysis of music markets has noted that 
licensees and licensors have the power to strategically manipulate 
relative streaming royalty rates. Kristelia A. Garcia, Facilitating 
Competition by Remedial Regulation, 31 Berkeley Tech. L.J. 183, 221 
(2016) (``the owners of popular songs . . . acting alone or in tacit 
collusion with similarly situated entities [can] act 
anticompetitively by . . . offering favorable rates to one service 
over another.'').
---------------------------------------------------------------------------

    Mr. Harrison's testimony clearly shows that [REDACTED]. This is the 
economic reality that spawned Spotify's bargaining power--a reality 
created by Spotify's successful 2011 entry into the U.S. market. That 
is, it is a power that Spotify created, not merely a marketplace factor 
that the Majors, as complementary oligopolists, chose to exploit. 
Further, this particular bargaining power cannot be characterized and 
explained away like SoundExchange's other attempts to explain Spotify's 
bargaining power--

[[Page 59472]]

[REDACTED]. Quite the contrary: [REDACTED] \64\ [REDACTED]
---------------------------------------------------------------------------

    \64\ Tech firm dominance would not necessarily be limited to the 
exertion of their power in vertical negotiations with the Majors. 
The tech firms could integrate upstream and develop their own record 
companies and poach artists from the Majors, Such an event is not 
unlikely, given that (1) Amazon has already integrated upstream to 
create or purchase television and film content through Amazon 
Studios, (2) Apple has already integrated upstream with original 
content television shows, movies and documentaries available via 
Apple TV, and 3) Google has made a similar foray, through YouTube 
Originals. See generally https://www.fastcompany.com/3058507/apple-facebook-google-and-alibaba-take-hollywood (accessed June 2, 2021). 
Further, there is historical precedent for downstream distributors 
integrating upstream to compete with licensors, such as in 1939, 
when the NAB, representing radio station licensees, created 
Broadcast Music, Inc. (BMI) in the mid-20th century to compete with 
ASCAP, the dominant musical works licensor, after the latter sought 
a substantial increase in royalty payments. See, https://www.bmi.com/about/history (accessed June 2, 2021).
---------------------------------------------------------------------------

    Mr. Harrison's testimony as considered above was echoed by Mr. 
Piibe, Sony's principal witness. Relying on Mr. Piibe's written 
testimony, SoundExchange argues as follows:

    If Spotify was out of the market, record companies would have 
faced a material reduction in their relative bargaining power with 
other services. . . . [REDACTED].

SX PFFCL ] 333 (quoting Piibe WDT ] 48) (emphasis added).\65\
---------------------------------------------------------------------------

    \65\ [REDACTED] Mr. Piibe's testimony, repeated by 
SoundExchange, [REDACTED], the Judges do not credit other portions 
of that testimony. Specifically, the Judges do not agree that, in 
the context of vertical negotiations involving complementary 
oligopolists, [REDACTED], complementary oligopolists prefer multiple 
downstream licensees whose competition, inter se, allows the 
complementary oligopolists to avoid ``double marginalization'' 
(oligopolistic profits shared by upstream licensors and downstream 
sellers) and thus to capture for themselves the entirety of the 
supranormal profits generated by their market structure. See Web IV, 
81 FR at 26342 & n.98 (Professor Katz testifying that ``actually, 
the more intense the competition downstream, the greater the 
incentive to charge a high price upstream because you don't have to 
worry about so-called double marginalization) (emphasis added). 
Also, Mr. Piibe oddly omits from his list of benefits arising from a 
better Sony bargaining position its ability to increase its own 
profits--listing only artist income and investment recoupment as the 
benefits of a more advantageous bargaining environment. It is 
curious when a businessman fails to identify his company's own 
ability to increase profits as a worthy goal, as if acknowledging a 
desire to maximize profits is somehow inappropriate, so it is better 
to be disingenuous than disreputable. And, in that vein, Mr. Piibe 
joins in the Orwellian language of several of the Majors' other fact 
witnesses--identifying their streaming service counterparties as 
their ``partners.'' Parties seeking to promote their own interests 
at the expense of their counterparties is a fundament of negotiation 
to be anticipated and welcomed, but the counterparties are hardly 
``partners.'' (Although in the context of [REDACTED] the Judges find 
it appropriate to note that the [REDACTED]).
---------------------------------------------------------------------------

    SoundExchange also makes this bargaining point, in the form of a 
response to Professor Shapiro's argument that the Majors should have 
instead gone on offense, using their complementary oligopoly power 
``[REDACTED].'' 8/20/20 Tr. 3102-04 (Shapiro). In response to this 
argument, SoundExchange convincingly stated:

    Had record companies leveraged their must-have status to walk 
away from Spotify, as Professor Shapiro suggests they were willing 
to do, Spotify's exit would have strengthen[ed] Apple Music 
significantly, and also strengthen[ed] Amazon and Google. 
[REDACTED].

SX PFFCL ] 335 (citing 8/11/20 Tr. 1273-75 (Orszag); Orszag WDT ] 33, 
tbl.4; 9/3/20 Tr. 5733 (Harrison) (emphasis added)).
    To illuminate further how Spotify's role as a bulwark against the 
tech firms influenced the Majors' bargaining position with Spotify, 
SoundExchange states:

    Put simply, leveraging must-have status to put Spotify out of 
business would risk making Apple Music dominant in the market. 
[REDACTED], the result would be a material increase in their 
relative bargaining power. The outcome would put the record 
companies in a precarious position, given that the music business is 
a rounding error for these big-tech services.

SX PFFCL ] 336 (citing 8/11/20 Tr. 1273-75 (Orszag); 9/3/20 5733 
(Harrison) (emphasis added)). See also 8/11/20 Tr. 1274-75 (Orszag) 
(noting that the absence of Spotify would increase the market shares of 
the tech firms).\66\ SoundExchange's point is reasonable. Indeed, given 
that the record makes it clear [REDACTED].
---------------------------------------------------------------------------

    \66\ More precisely, using Mr. Orszag's subscriber data, if 
Spotify left the market and its subscriber share was distributed 
proportionately among its existing competitors, [REDACTED] See 
Orszag WDT, tbl 4. Alternatively, if Spotify were to be acquired by 
another large tech firm (e.g., Facebook) and no longer be 
``independent,'' then adding Spotify's share to the existing tech 
firm shares would place [REDACTED]% of the interactive subscription 
in the hands of the large tech firms.
---------------------------------------------------------------------------

c. The Majors Demonstrated [REDACTED]
    Early in the negotiations, the [REDACTED]. Mr. Harrison's further 
testimony on behalf of SoundExchange and Universal, in colloquy with 
the Judges, made that clear:
    The Judges: [W]as it your understanding that [REDACTED]?
    Mr. Harrison: [REDACTED]

9/3/20 Tr. 5748 (Harrison) (emphasis added).
    The documentary evidence regarding the negotiations between Spotify 
and the Majors, relied on by SoundExchange, is consistent with the 
testimony considered above. More particularly, this evidence also 
reveals that [REDACTED].\67\
---------------------------------------------------------------------------

    \67\ [REDACTED] Spotify with a countervailing power that 
generated a more level bargaining table, in contrast to the one-
sided bargaining where a ``Must Have'' Major could threaten--in 
Professor Willig's terminology--to ``walk away'' from the 
negotiations. This change explains why the [REDACTED] other terms 
resulted in [REDACTED], as discussed infra.
---------------------------------------------------------------------------

    In an email to Stefan Blom, Spotify's then Chief Strategy Officer, 
dated December 7, 2016--approximately one-half year prior to the 
execution of the Spotify-Sony 2017 Agreement--Sony's President, Global 
Digital Business & U.S. Sales, Dennis Kooker, wrote:
    [REDACTED].

Trial Ex. 4026 (emphasis added).\68\ See also SX PFFCL ] 441 
(acknowledging that Trial Ex. 4026 [REDACTED].\69\ And, as testified to 
by Mr. Piibe (who reported to Mr. Kooker), Spotify requested 
[REDACTED]s. 9/3/20 Tr. 5323 (Piibe). Thus, from the [REDACTED] that 
the former [REDACTED] through, inter alia, [REDACTED].
---------------------------------------------------------------------------

    \68\ Mr. Kooker testified in Web IV. SoundExchange did not call 
him as a witness in this Web V proceeding.
    \69\ The Judges understand the Majors' expressed interest in a 
[REDACTED] to be a specific example of how the Majors' could 
[REDACTED]. It is also true, as the Services point out, the record 
reflects that the [REDACTED] (and the ultimate Direct Placement 
[REDACTED]. See https://seekingalpha.com/article/4408328-direct-listing-explained (accessed June 2, 2021). However, there is no 
record evidence regarding the cost (including opportunity cost) 
incurred by the Majors to [REDACTED], so the Judges cannot find 
sufficient evidence that the Majors' [REDACTED] was an independent 
or material motive for [REDACTED]. See also Services PFFCL ] 144 
(the Services acknowledging that Spotify's [REDACTED] (emphasis 
added).
---------------------------------------------------------------------------

    As generally acknowledged by Mr. Harrison's testimony, discussed 
supra, Universal's internal documents [REDACTED]. Eight months before 
the parties concluded negotiations and entered into the April 2017 
Agreement, Johnathan Dworkin, Universal's Senior Vice President of 
Digital Strategy and Business Development, wrote the following in an 
internal email to other Universal executives dated August 27, 2016:
    [REDACTED]Trial Ex. 4023. See also SX PFFCL ] 473 (SoundExchange 
conceding that in Trial Ex. 4023 [REDACTED].'').
    In a subsequent internal email to other Universal executives dated 
September 4, 2016, Jeffrey Harleston, Esq., Universal's General Counsel 
and Executive Vice President of Business & Legal Affairs, wrote the 
following--still seven month prior to the execution of Universal's 2017 
Agreement with Spotify:
    [REDACTED].


[[Page 59473]]


Trial Ex. 5421 (emphasis added).\70\ In this exhibit, Mr. Harleston 
added that the [REDACTED] Trial Ex. 5421. As discussed further infra, 
the Judges find Spotify's [REDACTED] to be consistent with [REDACTED].
---------------------------------------------------------------------------

    \70\ Mr. Harleston, also, testified in Web IV, but SoundExchange 
did not proffer him as a witness in this proceeding.
---------------------------------------------------------------------------

    Rounding out the early documentary evidence, the third Major, 
Warner, in internal notes written by its chief Spotify negotiator, 
Tracey Gardner, dated October 12, 2016--eight months out from the 
eventual Warner-Spotify 2017 Agreement--recorded Spotify's [REDACTED] . 
. . .'' Trial Ex. 4022 (emphasis added). According to these notes, 
Warner conveyed [REDACTED] Trial Ex. 4022 (emphasis added). Thus, 
Warner, [REDACTED], had indicated to Spotify early in the negotiations 
that [REDACTED].\71\
---------------------------------------------------------------------------

    \71\ As the quoted language provides, Warner indicated that 
there was [REDACTED]. Although that point is self-evident and 
economically rational, stating so in negotiations is obviously 
strategically prudent. But the salient point here is that 
[REDACTED]--thus allowing Spotify to negotiate on a more level 
playing field than would otherwise exist when it lacked such 
countervailing power in negotiations with a Must Have Major.
---------------------------------------------------------------------------

    As negotiations proceeded, [REDACTED] remained an important element 
[REDACTED]. Specifically, in a December 13, 2016 internal Universal 
email, Trial Ex. 4052, written [REDACTED] of the Universal-Spotify 2017 
Agreement, Universal's Michael Nash, Executive Vice President of 
Digital Strategy, included a draft \72\ letter to Spotify that stated 
the following:
---------------------------------------------------------------------------

    \72\ Although the letter is identified in the email as a draft, 
SoundExchange does not claim that correspondence containing this or 
substantively similar language was not in fact transmitted to 
Spotify. See SX RPFFCL (to Services) at 83 n.35 (noting the 
correspondence within Trial Ex. 4052 is identified as a draft but 
not denying it was sent to Spotify). Clearly, SoundExchange and 
Universal could have provided documentary evidence and/or testimony 
in an attempt to demonstrate the draft correspondence (or its sum 
and substance) had not been transmitted to Spotify. Because 
SoundExchange did not present such evidence or testimony, the Judges 
find that this correspondence, or a substantively similar version, 
was transmitted by Universal to Spotify.) In any event, this draft 
email demonstrates Mr. Nash's state of mind regarding the importance 
to Universal of [REDACTED].
---------------------------------------------------------------------------

    [REDACTED].

Trial Ex. 4052 (emphasis added). This language not only re-affirms 
Universal's [REDACTED], it also strongly emphasizes the importance to 
Universal of [REDACTED].
    In sum, the Judges find that the negotiation-related documents and 
testimony \73\ show [REDACTED].\74\
---------------------------------------------------------------------------

    \73\ These business documents are probative because they provide 
facts relating to the parties' state of mind during negotiations 
that are [REDACTED]. See Manne & Williamson, supra at 626-627 
(``business documents can be useful in demonstrating `economic 
realities' [that are] relevant . . . [and] it is ``permissible to . 
. . consider evidence of intent, belief, or motivation to 
demonstrate that the act intended did, in fact, happen.).
    \74\ In an attempt to explain away the statements made by the 
Major's executives contained in the documents discussed above--
[REDACTED]--SoundExchange asserts that these statements are 
[REDACTED] For example, [REDACTED] testified that [REDACTED].'' 
[REDACTED] instead [REDACTED] 9/2/20 Tr. 5265 (Piibe); 
SoundExchange's Corrected Replies to the Services' Joint Proposed 
Findings of Fact and Conclusions of Law ] 145 (SX RPFFCL (to 
Services)). See also SX RPFFCL (to Services) at 81 nn.30, 33, 35; SX 
PFFCL at 147 n.17, ] 441 (multiple assertions by hearing witnesses 
that [REDACTED]). This argument highlights the serious defect in 
SoundExchange's failure to call as witnesses the negotiators and 
executives identified in the Majors' documents, who are the 
individuals who could testify as to their own state of mind when 
making those statements. Moreover, if these declarants [REDACTED] 
For these reasons, the Judges afford no weight to any testimony by 
SoundExchange witnesses who offer hearsay or opinion testimony 
regarding the so-called ``true meaning'' of statements made by 
declarants contained in the documentary record.
---------------------------------------------------------------------------

d. The Services' Contrary Explanation of the [REDACTED] as Based Solely 
on the Majors' Complementary Oligopoly Is Unavailing
    The Services do not acknowledge this countervailing power argument. 
Rather, they attempt to explain away Spotify's value and power--
[REDACTED]--by treating that phenomenon as purely the consequence of 
the Majors' complementary oligopoly power.
    In this regard, the Services assert that the [REDACTED] was merely 
the [REDACTED]--telltale behavior of a complementary oligopolist rather 
than a price competitor. They rely on testimony by Messrs. Harrison and 
Orszag that Universal [REDACTED] not to [REDACTED], but rather 
[REDACTED]. Services PFFCL ] 148 (and record citations therein). The 
Services also cite testimony by Professor Shapiro in which he opines 
that when licensors are [REDACTED] 8/19/20 Tr. 2881 (Shapiro) (emphasis 
added). This basic principle, according to the Services, explains why 
``[REDACTED]'' Services PFFCL ] 149 (citing 8/19/20 Tr. 2864, 2870, 
2880 (Shapiro)) (emphasis added).
    SoundExchange asserts there is a serious flaw in this reasoning, 
which undermines the Services' assertion that the Majors' complementary 
oligopoly status explains the sum and substance of the relative 
bargaining power of the Majors and Spotify. Specifically, SoundExchange 
avers that if the Majors were [REDACTED] they would have [REDACTED]. 
However, the record indicates that the Majors only negotiated 
[REDACTED].\75\ In support of this point, SoundExchange refers to 
particular testimony by Professor Shapiro in a colloquy with the 
Judges. When asked by the Judges why the Majors [REDACTED]--given that 
[REDACTED]--Professor Shapiro responded, [REDACTED] 8/19/20 Tr. 2880 
(Shapiro) (emphasis added).
---------------------------------------------------------------------------

    \75\ Apparently, [REDACTED], 9/3/2020 Tr. 5681-82 (Harrison), 
but that is not the same as a Major [REDACTED] as complementary 
oligopolists, in accordance with the Services' theory of the case. 
The Judges address the paucity of the record relating to this 
[REDACTED], supra note 51.
---------------------------------------------------------------------------

    The Judges agree with SoundExchange and find Professor Shapiro's 
response unpersuasive. His theory of complementary oligopoly as the 
single cause of the [REDACTED] is premised on the idea that it was 
[REDACTED]--at monopoly rates rather than complementary oligopoly 
rates. 8/19/20 Tr. 2880-81 (Shapiro). But, if it was [REDACTED], there 
would have been no need [REDACTED]; rather, in their own interest the 
Majors would have [REDACTED]. Moreover, SoundExchange is persuasive in 
its argument that because the Majors [REDACTED], a fact acknowledged by 
Professor Shapiro, see Shapiro WRT at 23, fig. 1; 8/20/20 Tr. 3108-09 
(Shapiro), the [REDACTED].
    Alternatively, Professor Shapiro noted that Spotify may have 
[REDACTED] because it was the ``leader'' among interactive services. 
But the Judges find the record to demonstrate, as discussed above, that 
Spotify's ``leader'' status was important because it was the leader 
among [REDACTED]. Google's economic expert witness, Dr. Peterson, 
though, did acknowledge the importance of [REDACTED], testifying that 
[REDACTED] 8/25/20 Tr. 3723 (Peterson).\76\
---------------------------------------------------------------------------

    \76\ By contrast, it is not clear that Professor Shapiro had 
recognized, acknowledged or recalled the importance of Spotify's 
[REDACTED], until the Judges brought the issue to his attention. 
Compare 8/19/20 Tr. 2882 (Shapiro) (stating in response to the 
Judges' inquiry that he did not recall reviewing correspondence 
indicating that [REDACTED]) with 8/20/20 Tr. 3080 (Shapiro) 
(Professor Shapiro testifying the next hearing day that it was his 
``sense'' that because Spotify was [REDACTED]the Majors 
``[REDACTED].'') and Shapiro WRT at 18 n.58 (Professor Shapiro 
quoting from Sony's December 7, 2016 internal document (later marked 
in evidence as Trial Ex. 4026 and discussed supra) stating that 
[REDACTED] (emphasis added). Additionally, it is noteworthy that 
Professor Shapiro did not specifically address the point in Harrison 
WDT ] 41 where Mr. Harrison identified [REDACTED] because he 
identified the Harrison WDT as a document upon which he relied in 
preparing his rebuttal testimony. Shapiro WRT app. A.

---------------------------------------------------------------------------

[[Page 59474]]

    Indeed, were it not for [REDACTED], its position [REDACTED] would 
make it [REDACTED], because [REDACTED]. That is, the Majors, as 
complementary oligopolists, would prefer to keep downstream competition 
roiling to avoid a downstream extraction of monopoly profits (double 
marginalization) that would reduce the Majors' revenues, as discussed 
in Web IV and noted earlier in this Determination.
    The Judges note that, ultimately, in their post-hearing briefing, 
the Services do appear to acknowledge that the Majors [REDACTED] 
Services RPFFCL ] 477 (emphasis added). The Services assert, though, 
that this reflects only that Spotify has ``[REDACTED], which, they 
contend, would explain why the Majors [REDACTED]. Services RPFFCL ] 477 
(emphasis added). But, the Judges find this assertion to be fully 
consistent with their finding that Spotify's much different 
circumstances explain why it had countervailing power--generated by the 
confluence of (1) [REDACTED] and (2) its own status as the 
[REDACTED].\77\
---------------------------------------------------------------------------

    \77\ As the Judges have explained in other circumstances, 
licensors will also charge different licensees different royalties 
to promote price discrimination and in recognition of a licensee's 
lower willingness-to-pay (often as a function of its lower ability-
to-pay). But, a licensor will not offer a licensee a lower rate if 
that licensee's presence serves to cannibalize the business of 
services paying higher royalties (as Professor Willig explains well 
in this proceeding). Here, after the [REDACTED] [REDACTED]. Thus, 
providing [REDACTED]. There was; and that particular attribute--as 
the record demonstrates--was [REDACTED].
---------------------------------------------------------------------------

    Finally, according to the Services, the Majors' [REDACTED] ``does 
not inform the demonstrated reasons why they [REDACTED] Services RPFFCL 
] 477. The Judges partially agree: the Majors' decision [REDACTED] is 
not informative--standing alone--to explain why they did [REDACTED]. 
However, the Services are simply in error when they say the Majors' 
[REDACTED] was disconnected from [REDACTED]. As the record discussed 
above reveals, the connection is clear: SoundExchange provided ample 
evidence that the Majors [REDACTED]. And, to reiterate, Spotify came to 
possess that power because it had developed a market-leading business 
while [REDACTED].\78\
---------------------------------------------------------------------------

    \78\ Additionally, the Judges reject the Services' argument as 
reductive. That is, the Services treat the complementary oligopoly 
structure of the licensor side of the market as wholly explanatory 
of the [REDACTED]. In other words, they essentially assert that 
because the licensors are complementary oligopolists any [REDACTED] 
must be a matter of pure self-interest. But, that structural 
explanation ignores the dynamic and strategic competitive effects 
revealed by the present record: [REDACTED]; [REDACTED]; and the 
interplay of those two forces that provides Spotify with a 
countervailing power [REDACTED]. The Services' argument also is 
inconsistent with the fundamental economic concept of ``Pareto 
Optimality,'' which posits that any consensual transaction between 
private actors is efficient, in the sense that it benefits each 
party (or else it would not enter into the transaction). To be sure, 
if a party is not a willing buyer or seller, whether because of a 
counterparty's excessive market power or otherwise, this optimality 
is not realized, but here the Majors and Spotify found it in their 
interest, through the exercise of their countervailing power, to 
enter into agreements containing [REDACTED]. Accordingly, it is 
incorrect to state, as the Services do, that the negotiated 
[REDACTED] cannot be in the mutual interest of Spotify and the 
Majors.
---------------------------------------------------------------------------

e. There Is Agreement That Spotify's Subscription Royalty Rate Is 
[REDACTED] Set Through the Exercise of Complementary Oligopoly Power 
Alone
    Notwithstanding the foregoing analytical disputes, Professor 
Shapiro acknowledges that Spotify's subscription royalty rate equates 
with a rate he identifies as set without the anticompetitive effect of 
complementary oligopoly power. As SoundExchange explains--relying on 
Professor Shapiro's own testimony--in the course of developing his 
proposed competition adjustment, he calculates [REDACTED]'s effective 
per-play interactive royalty rate at $[REDACTED]. Ex. 4094 at 40 & 
tbl.10 (SCWDT of Carl Shapiro) (Shapiro WDT). Then, he characterizes 
this $[REDACTED] rate as an effectively competitive rate (as a base for 
comparison with other rates he identifies as not effectively 
competitive). Id. at 40; 8/19/20 Tr. 2850 (Shapiro).\79\
---------------------------------------------------------------------------

    \79\ Professor Shapiro reaches this opinion based on the limited 
repertoire available on [REDACTED], which he understands to 
demonstrate that customers ``do not expect to find all their 
favorite artists and recordings on the service.'' Shapiro WDT at 40. 
Thus, he opines that, for [REDACTED], no record company is a Must 
Have, making the rate effectively competitive. 8/20/20 Tr. 3110-11, 
3117-19 (Shapiro).
---------------------------------------------------------------------------

    SoundExchange notes that, according to Professor Shapiro's own 
calculations, Spotify's effective subscription per-play rate is 
$[REDACTED], Shapiro WDT at 40, tbl.10, [REDACTED] to the [REDACTED] 
rate he characterizes as free of the complementary oligopoly effect. 8/
20/20 Tr. 3112-13 (Shapiro); see also 8/10/20 Tr. 1170 (Orszag). 
SoundExchange further notes that Professor Shapiro acknowledges, as he 
must, that these two rates are [REDACTED] 8/20/20 Tr. 3113 (Shapiro). 
Given this [REDACTED], Mr. Orszag opines that, at most, a competition 
adjustment should measure the difference between the Spotify effective 
rate ($[REDACTED]) and the [REDACTED] effective rate ($[REDACTED]). 
Orszag WDT ] 114. This difference would lead to a [REDACTED]% effective 
competition adjustment.\80\
---------------------------------------------------------------------------

    \80\ [REDACTED]/[REDACTED] = [REDACTED]
     [REDACTED]-[REDACTED] = [REDACTED]%.
---------------------------------------------------------------------------

    After first conceding [REDACTED] the Services attempt to dismiss 
the importance of this equivalency--in a reply, quoted below--that is 
off-point and unconvincing:

    In an attempted ``gotcha,'' Mr. Orszag argues that if 
[REDACTED]'s per-play rate of $[REDACTED] reflects the lack of must-
have power, and if [REDACTED] pay $[REDACTED] per performances (see 
Shapiro WRT at 30 fig. 3), then the record companies must not be 
must-have for those services either--in which case there is no need 
to adjust the Spotify rates any further for effective competition 
(or to make an adjustment of only [REDACTED] \81\ ([REDACTED])). 
Orszag WRT ] 114. . . . Mr. Orszag is resorting to sleight-of-hand. 
Because he artificially excludes all the discounted plans from his 
calculations, the effective per-play rate of Spotify plans on which 
he actually relies for his benchmark is $[REDACTED], not 
$[REDACTED]. Moreover, as explained at length above, he does not use 
the per-play rate at all, but rather alters the Web IV methodology 
by starting from Spotify's percent-of-revenue royalty. . . .
---------------------------------------------------------------------------

    \81\ This [REDACTED]% calculation appears to be a computational 
error, as indicated by the math in the immediately preceding 
footnote.
---------------------------------------------------------------------------

    Were Mr. Orszag actually working from a $[REDACTED] per 
performance benchmark and following the Web IV methodology [by] . . 
. drop[ping] his industry-wide interactive per-play benchmark . . . 
he might have a point--but he does not.

Services PFFCL ] 160.
    This criticism is off-the-mark because it explains why the Services 
believe that Mr. Orszag improperly ignored Spotify's $[REDACTED] 
effective per-play subscription rate. But the point here is not what 
Mr. Orszag did or did not do with this data point, but rather that 
Professor Shapiro identified two [REDACTED] royalty rates as 
simultaneously satisfying and not satisfying the effective competition 
requirement (inconsistent with the principle of transitivity). The 
Services' response fails to address that point.
    The Judges find that the [REDACTED] is generally confirmatory of 
the fact that Spotify's [REDACTED] is not--as the Services maintain--a 
product solely of the Majors' complementary oligopoly power.\82\
---------------------------------------------------------------------------

    \82\ However, the Judges do not find that the [REDACTED] of 
Spotify's effective per play rate with [REDACTED]'s per play rate 
limits the effective competition adjustment to the [REDACTED] in 
those rates. Rather, as discussed elsewhere in this Determination, 
the Judges agree with Dr. Peterson (Google's expert economic 
witness) that the 12% steering adjustment from Web IV remains 
applicable here. But, as also described elsewhere herein, that 12% 
downward adjustment must be offset by use of the [REDACTED]), as 
applied to the segments of the Spotify market for which the 
[REDACTED] applied. See Peterson WDT fig. 5 ([REDACTED]). Further, 
by limiting the application of the [REDACTED]'' adjustment only to 
Spotify market segments to which that rate actually applied, the 
Judges have allayed a final argument by the Services, viz., that the 
evidentiary value of the Spotify and [REDACTED] should not apply 
beyond the subscription tier. See Services PFFCL ] 161.

---------------------------------------------------------------------------

[[Page 59475]]

f. The Majors' [REDACTED] Explains the [REDACTED] of the Ongoing 
Negotiations
    The Majors' [REDACTED] explains the flow of the ongoing 
negotiations between the Majors and Spotify. Unlike a negotiation in 
which the complementary oligopolists' ``Must Have'' status allows them 
to dictate terms, they [REDACTED].
    In this regard the Services describe these negotiations as follows:

    [W]hat is apparent from the evidentiary record is [REDACTED] . . 
. par for the course in a deal negotiation . . . .

Services RPFFCL ]] 426-427 (and record citations therein).

    But, the point of complementary oligopoly power is that a ``Must 
Have'' supplier/licensor [REDACTED] to its buyers/licensees. And yet, 
here the Services acknowledge that the Spotify-Major negotiations were 
marked by a [REDACTED], as happens in any negotiation. Clearly, given 
that the Majors remained ``Must Have'' licensors, something else 
[REDACTED], and, as discussed above, that ``something else'' is 
Spotify's countervailing power flowing from its status as the 
[REDACTED].\83\
---------------------------------------------------------------------------

    \83\ The Services maintain that, as a general rule, 
complementary oligopolists, like monopolists, negotiate with their 
counterparties, but that does not demonstrate the existence of 
effective competition. Shapiro WRT at 1; see also Web IV, 81 FR at 
26344 (monopolists and complementary oligopolists bargain with their 
customers to establish discriminatory prices that increase the 
sellers' profits). That is certainly true, but it is insufficient 
for the Services simply to maintain, ipse dixit, that any ``give-
up'' by a Major in negotiations represents the foregoing elements of 
negotiation rather than a ``give-up'' generated by identifiable 
countervailing power.
---------------------------------------------------------------------------

    The [REDACTED] is clear in the record. Among the provisions that 
the Majors prevailed on (and, thus reciprocally, as to which [REDACTED] 
were four important items: (1) [REDACTED], (2) [REDACTED], (3) 
[REDACTED], and (4) [REDACTED]. Services PFFCL ] ] 146, 157-158 (and 
record citations therein).
    And, on the other side of the ledger, among the provisions as to 
which [REDACTED] in negotiations (and, thus reciprocally, as to which 
[REDACTED]) were the following important items: (1) [REDACTED], (2) 
[REDACTED], (3) [REDACTED] [REDACTED], and (4) [REDACTED] [REDACTED]. 
SX PFFCL ] ] 293, 413, 431-432, 444; SoundExchange's Corrected Replies 
to the Services' Joint Proposed Findings of Fact and Conclusions of Law 
] 158 (and record citations therein) (SX RPFFCL (to Services)). This 
[REDACTED]led the Services to describe that process as typical of an 
ordinary bargaining process when each counterparty has bargaining 
leverage. See Services RPFFCL ]] 413; 424, 426-427 (and record 
citations therein) (it is ``unsurprising'' that ``each party to the 
negotiation [REDACTED]; it is ``inevitable [that] not all [REDACTED] 
will form part of the . . . agreement''; and ``what the [Warner-Spotify 
negotiation] record shows is [REDACTED] (emphasis added). These 
descriptions are not consistent with the one-sided negotiations between 
complementary oligopolists and their relatively powerless 
counterparties, belying the Services' assertion that these negotiations 
reflected the one-sided power of the Majors' complementary oligopoly 
status.\84\
---------------------------------------------------------------------------

    \84\ By contrast, SoundExchange, in its zeal to portray Spotify 
as [REDACTED] in these negotiations, studiously ignores the fact 
that Spotify [REDACTED]. The Judges see this as ``hyperbole-by-
omission.'' The Judges reject any notion that Spotify had acquired 
unilateral power to dictate terms; rather, its [REDACTED] provided 
it with a power to countervail the Majors' Must Have power.
---------------------------------------------------------------------------

    Finally, consistent with the idea that the Majors would continue to 
bargain ([REDACTED]--is the following succinct colloquy (referred to 
supra) between Spotify and Warner negotiators in October 2016, as 
recounted in one of Warner's internal documents:
    [REDACTED]
    [REDACTED]

Trial Ex. 4022 (emphasis added). As noted supra, Warner was making a 
basic economic point: It understood that Spotify, as a [REDACTED]. The 
[REDACTED] realized by the Majors reflect [REDACTED] to incur for this 
benefit, and the Majors' [REDACTED] reflect [REDACTED] to incur.
    In sum, the Judges find that the negotiation documents on which 
SoundExchange relies reflect bargaining that is consistent with: (1) 
The testimony of the Majors' witnesses regarding [REDACTED] and (2) the 
economic principle of countervailing power that, as discussed supra, 
could and did blunt some of the Majors' complementary oligopoly power, 
[REDACTED] toward an effectively competitive rate, even in the absence 
of horizontal price competition.\85\
---------------------------------------------------------------------------

    \85\ The Majors' [REDACTED]. As noted supra, in an internal Sony 
email from a Sony line negotiator, Andre Stapleton, to Mr. Piibe, 
Trial Ex. 5467, discussed supra, the [REDACTED]. By contrast, Mr. 
Sherwood, a Warner witness, [REDACTED], testifying, as noted supra, 
that [REDACTED]. 9/9/20 Tr. 5931 (Sherwood).
---------------------------------------------------------------------------

C. The Price Competition Adjustment Necessary To Set an Effectively 
Competitive Rate

    In the exercise of their statutory duty to ``to decide whether the 
rates proposed adequately provide for an effective level of 
competition,'' SoundExchange, Inc. v. Copyright Royalty. Bd., 401 F.2d 
41, 57 (D.C. Cir. 2018), the Judges find that the 12% effective 
competition adjustment that they set in Web IV remains an appropriate 
measure for an effective competition adjustment (before any necessary 
adjustment to reflect Spotify's countervailing power). To recap, the 
12% effective competition adjustment was based on a factual record that 
included Pandora Steering Experiments, a steering-based agreement 
between Pandora and Merlin,\86\ and a steering-based agreement between 
iHeart and Warner. The Web IV Judges defined steering in the same 
manner as defined by the parties in this proceeding, i.e., as a 
licensee's ``ability to control the mix of music that's played on the 
service in response to differences in royalty rates charged by 
different record companies.'' Web IV, 81 FR at 26356.
---------------------------------------------------------------------------

    \86\ Merlin is referred to in the music industry as ``the fourth 
major.'' See, e.g., https://theindustryobserver.thebrag.com/heres-to-ten-years-of-merlin/ (accessed June 7, 2021).
---------------------------------------------------------------------------

    The Judges in Web IV construed the economics of steering in the 
following manner:

[S]teering in the hypothetical noninteractive market would serve to 
mitigate the effect of complementary oligopoly on the prices paid by 
the noninteractive services and therefore move the market toward 
effective, or workable, competition. Steering is synonymous with 
price competition in this market, and the nature of price 
competition is to cause prices to be lower than in the absence of 
competition, through the ever-present ``threat'' that competing 
sellers will undercut each other in order to sell more goods or 
services.

Web IV, 81 FR at 26366 (emphasis added). Moreover, the Web IV Judges 
noted that the steering evidence was especially probative because it 
consisted of ``a combination of benchmarks, experiments and expert 
economic theorizing using fundamental principles of profit maximization 
and opportunity cost . . . [a] combination of proofs and arguments 
[that] is actually more

[[Page 59476]]

persuasive to the Judges than a mere benchmark standing alone.'' Web 
IV, 81 FR at 26367 n.141. Relying on all the steering evidence 
presented, the Web IV Judges determined that benchmark rates that were 
inflated by the complementary oligopoly effect needed to be adjusted 
downward by 12%, in order to establish an effectively competitive rate. 
Web IV, 81 FR at 26404-05.
    Additionally, crucial evidence that supported the Judges' Web IV 
finding of a 12% adjustment is part of the present record, having been 
designated as such by Pandora. Specifically, Pandora designated as part 
of the Web V record the Web IV Written Direct Testimony and hearing 
testimony of Stephan McBride, Pandora' Senior Scientist responsible for 
the Pandora Steering Experiments on which the Judges relied. See Trial 
Exs. 4104 & 4105; see generally 37 CFR 351.4(b)(2) (permitting a party 
to designate ``past records and testimony'' for inclusion in its 
Written Direct Statement).
    The Judges in Web IV described the Pandora Steering Experiments as 
follows:

    Pandora's . . . steering experiments . . . consist of 
comparisons between randomly selected groups of listeners, one group 
receiving a manipulated experience (the ``treated'' group) and the 
other group receiving the standard Pandora experience (the 
``control'' group). . . . These experiments are randomized, 
controlled, and blind . . . .
    Pandora initiated the steering experiments because . . . it 
recognized that, as a noninteractive service it has the economic 
incentive to ``steer'' its performances toward music owned by a 
particular record company if that music is available at a lower 
royalty rate. . . . Therefore, Pandora decided to determine through 
its steering experiments whether and to what extent it could use 
this technological ability to steer performances without negatively 
affecting listenership.
    . . .
    The Steering Experiments consisted of a group of 12 experiments. 
Each experiment involved a combination of one of three target 
ownership groups (UMG, Sony or WMG) and a target ``deflection'' in 
share of spins (treatment group) as compared to spins that would 
occur according to the standard Pandora music recommendation results 
(control group
    The experiments demonstrated that Pandora was able to steer +15% 
or -15% for all three Majors without causing a statistically 
significant change in listening behavior. McBride WDT  21. 
However, Pandora was unable to steer +30% or -30% for Universal or 
Sony without creating a statistically significant change in 
listening behavior.

Web IV, 81 FR at 26357-58 (emphasis added).
    As noted above, the Judges also relied on provisions in two 
agreements. First, Web IV noted that ``the central piece'' of the 
agreement between Pandora and Merlin was a ``reduced per-play rate in 
exchange for increased plays''--the very essence of steering. Web IV, 
81 FR at 26357. The second agreement the Judges relied on in Web IV was 
the iHeart/Warner agreement which the Web IV Judges described as 
``incorporat[ing] the same economic steering logic as the Pandora/
Merlin Agreement [by] [c]reat[ing] an incentive for iHeart to increase 
Warner's share of performances substantially.'' Web IV, 81 FR at 26375. 
As with the Pandora/Merlin Agreement, the Web IV Judges described this 
``steering aspect'' of the contract as reflective of ``price 
competition--an increase in quantity (more performances) in exchange 
for a lower price (a lower rate).'' Web IV, 81 FR at 26383.
    SoundExchange argues that this evidence of steering is now 
``stale,'' because the experiments are outdated, as are the two cited 
agreements, SX PFFCL ]] 490-91.\87\ But the dates of the experiment and 
those agreements are insufficient to wash away the importance of 
steering as a price competition mechanism applicable to the 
noninteractive market. The Judges note that SoundExchange could have 
called a witness from Merlin in Web V (as it did in Web IV) to present 
testimony that may have shed light on why its [REDACTED] but elected 
not to.\88\ By contrast, Pandora presented testimony from Professor 
Shapiro explaining that Merlin (and the Majors) had refused to agree to 
continue steering. Specifically, Professor Shapiro testified:
---------------------------------------------------------------------------

    \87\ The Pandora/Merlin agreement was executed on June 16, 2014, 
the iHeart/Warner agreement was entered into on October 1, 2013, and 
the Pandora Steering Experiments were conducted between June 4 and 
September 3, 2014. Web IV, 81 FR at 26355, 26357, 26375.
    \88\ The [REDACTED]. See SX PFFCL ] 1168 (and record citations 
therein).

    Following the Web IV Determination, as a condition for obtaining 
the additional rights necessary to offer its non-statutory services, 
[REDACTED]. These provisions appear to be the result of the 
complementary oligopoly power held by certain record companies in 
the market for licensing recorded music to interactive services. 
Given these provisions, Pandora has been unable to offer to steer 
toward other labels in exchange for a discounted royalty rate from 
them, lest it jeopardize the share of other labels in violation of 
their anti-steering provisions. As a result, competition for 
incremental performances on Pandora in the form of steering has been 
---------------------------------------------------------------------------
snuffed out.

Shapiro WDT at 9-10 (emphasis added); see also Trial Ex. 4090 ] 24 (WDT 
of Christopher Phillips) (Phillips WDT) (noting the existence of the 
[REDACTED]).
    In response, SoundExchange asserted that: (1) Pandora had not 
offered any further evidence or testimony beyond the testimony cited 
above; (2) it was not clear that [REDACTED]; (3) Pandora had 
``considerable leverage in negotiations'' because it could default to 
the statutory rate. SoundExchange's Corrected Replies to Pandora and 
Sirius XM's Corrected Proposed Findings of Fact and Conclusions of Law 
] 21 (SX RPFFCL (to Pandora/Sirius XM)).
    The Judges find SoundExchange's arguments unavailing. As already 
noted, SoundExchange could have attempted to rebut Pandora's testimony 
by calling a Merlin representative, as it had in Web IV, yet it 
declined to do so. When a party is in a position to proffer testimony 
or evidence that would elucidate a point, or rebut an adverse point, 
but declines to do so, a finder of fact may determine that the 
testimony would not have been supportive of that party's position. See 
Huthnance v. District of Columbia, 722 F.3d 371, (D.C. Cir. 2013) 
(Under the ``missing evidence rule, when a party has relevant evidence 
[which includes testimonial evidence] within his control which he fails 
to produce, that failure gives rise to an inference that the evidence 
is unfavorable to him . . . .''). The Judges infer that the absence of 
a Merlin witness indicates that the testimony of a Merlin witness would 
not have been favorable to SoundExchange's argument on this steering 
issue. Moreover, there is simply no evidence to contradict the 
testimony of Professor Shapiro in this regard.
    In the present case, the absence of a Merlin witness is 
particularly noteworthy. As Dr. Peterson recounted in his testimony, 
SoundExchange had in the recent past--after Web IV--cautioned Indies 
that entering into direct agreements with services, even though they 
appear advantageous to the Indies, may ultimately be used in rate 
proceeding as evidence to support a lowering of statutory royalty 
rates. 8/25/20 Tr. 3673 (Peterson); Trial Ex. 2113 (SoundExchange's 
2015 notice informing labels they ``should . . . keep in mind that any 
direct deals might be used against artists and record companies as 
evidence,'' and that because ``[d]igital radio services are intensely 
focused on how market evidence will be used in their case, . . . you 
should be as well.''). Although there is no evidence that SoundExchange 
repeated that cautionary communication in the run-up to Web V, there is 
also no evidence that it has ever retracted this warning. Thus, in this 
context, the

[[Page 59477]]

absence of a Merlin witness to explain the [REDACTED] is of even 
greater importance.
    Further, SoundExchange's assertion that steering beneficial to 
Pandora may have remained possible under its agreement with Merlin--and 
yet Pandora nonetheless acted against its self-interest and 
[REDACTED]--is simply bewildering; the Judges do not assume that 
sophisticated commercial entities engage in economically irrational 
conduct. Also, SoundExchange's assertion that Pandora enjoyed 
``considerable leverage in the negotiations'' with Merlin is purely 
speculative (given the absence of record evidence demonstrating such 
leverage) and also runs counter to an essential premise of 
SoundExchange's case-in-chief, presented through Professor Willig, that 
as a matter of bargaining strategy and modeling, the record companies 
would not engage in steering because it would thwart the maximization 
of their ``Must Have'' value. See 8/10/20 Tr. 1077-78 (Willig).
    Additionally, [REDACTED] was one of the very devices SoundExchange 
claimed in Web IV that record companies would use to defeat steering-
based price competition. Web IV, 81 FR at 26364. In response, the 
Judges found such a contract term would constitute an exertion of the 
licensors' complementary oligopoly power, frustrating the setting of an 
effectively competitive rate. Web IV, 81 FR at 26373-74 (``the 
hypothetical use by the majors of anti-steering clauses in response to 
the threat of price competition-via-steering would thwart `effective 
competition.' ''). Here too, it would be anomalous (in the nature of a 
Catch-22) for the Judges to disregard the capacity of price-competitive 
steering to offset a complementary oligopoly effect because a record 
company had used such power to thwart the continuation of such 
steering.
    Further, the Judges' task is to set a rate that equates with an 
effectively competitive rate that would have been agreed to by willing 
buyers and sellers in a hypothetical market. The Pandora/Merlin and 
iHeart/Warner agreements demonstrate that actual steering has occurred 
in the market. A fortiori, steering is clearly an element of the 
hypothetical market (as shown by the Pandora Steering Experiments) that 
the Judges must construct.
    The Judges also note that in the present case, Dr. Leonard, the 
economic expert for the NAB, adopts the 12% steering adjustment applied 
by the Judges in Web IV in order to establish an effectively 
competitive rate. Trial Ex. 2150 ] 115 (CWDT of Gregory Leonard) 
(Leonard WDT). In his oral testimony, Dr. Leonard testified that any 
initial reluctance he may have had to ``reuse'' this 12% adjustment was 
outweighed by the fact that this adjustment: (1) Is based contractual 
agreements; (2) is the product of agreements entered into ``not that 
long ago''; and (3) is ``conservative'' and ``small'' relative to the 
complementary oligopoly effect in the present circumstances. 8/24/10 
Tr. 3410 (Leonard).
    In addition, Google's economic expert, Dr. Peterson, testified in 
favor of utilizing this same economic evidence to support the steering 
adjustment in the present case. Dr. Peterson's testimony in this regard 
is well worth quoting:

    In a hypothetical effectively competitive market, statutory 
streaming services, such as custom radio services, have the 
potential to steer the music they use toward or away from particular 
labels [because] [m]usical recordings are differentiated but 
substitutable products. . . . [T]he service can reduce the number or 
share of plays for a given label's recordings if the license rate is 
too high. This response to rate differences is called steering. . . 
. [I]it is appropriate that the hypothetical negotiation between 
statutory streaming services and licensors reflect some degree of 
competition from steering or the ability of the streaming services 
to substitute one label's recordings for another's relative to the 
rates that the labels charge acting as Cournot oligopolists.
    The evidence available to me in this proceeding does not include 
recent licenses with steering adjustments built into them as was the 
case in the Web IV proceeding. However, I am aware of no evidence 
that a stand-alone statutory webcaster would not be able to steer 
toward or away from labels, which would lead to their competing at 
the margin for additional plays on the service.
    In the absence of new benchmarks, it can be appropriate to use 
previous benchmarks. In the Web IV proceedings, there was ample 
evidence of the ability of statutory streaming services to steer 
toward or away from record labels. Thus, the evidence indicates that 
listener behavior permits statutory webcasters to engage in 
substantial steering without negatively affecting their user base. 
In the hypothetical effectively competitive marketplace for 
licensing statutory webcasters, licensors would not be in the 
position of Cournot oligopolists because their high license fees 
would affect the spins of their works directly.

Trial Ex. 1103 ]] 37, 58-61, 64 (emphasis added) (CWDT of Steven 
Peterson) (Peterson WDT). Relying on this analysis, and also 
considering other evidence, Dr. Peterson opined that a reasonable range 
for the steering-based effective competition adjustment was between 11% 
and 23% (which includes the Judges' 12% adjustment). Peterson WDT ] 65.
    The Judges agree with Dr. Peterson. They emphasize that basic 
economic principles do not change with the mere passage of a few years. 
Although new probative factual evidence or advances in economic theory 
or modeling presented by an expert witness could show either that the 
principle is factually inapplicable or needs to be revisited, no such 
record has been presented in this proceeding. Accordingly, the Judges 
find that the economic experts cited above \89\ have properly relied on 
the evidence supporting the Web IV steering adjustment to establish the 
appropriate steering adjustment in this proceeding.\90\
---------------------------------------------------------------------------

    \89\ Pandora's economic expert, Professor Shapiro, although 
presenting in this proceeding a ``carriage competition'' model 
relying on the Label Suppression Experiments, rather than a 
steering-based adjustment, nonetheless has acknowledged previously 
that ``a streaming service that possesses an ability to ``steer'' 
towards certain recordings, and away from others, will have `much 
more bargaining power and be able to negotiate a lower royalty 
rate,'' reflecting ``price competition at work,'' and the workings 
of an ``effectively competitive market.'' Web IV, 81 FR at 26356-57. 
Thus, experts for all the commercial services are on record as 
supporting the use of a steering adjustment to generate an 
effectively competitive rate.
    \90\ The Judges have also not hesitated to apply evidence from a 
prior proceeding when they have found the prior evidence to be 
superior to the evidence presented in the new proceeding. SDARS II, 
78 FR at 23063 (``The Judges rely [inter alia] . . . on . . . the 
unadjusted upper bound in SDARS-I to guide the determination of what 
the upper bound should be in this proceeding.'').
---------------------------------------------------------------------------

    A final aspect of the Web IV and Web V proceedings adds to the 
ample evidence supporting the use of a steering adjustment to establish 
an effectively competitive rate. In this Web V proceeding, Professor 
Willig, a SoundExchange economic witness, while testifying in support 
of his Shapley Value Model, emphasized repeatedly that Majors were 
``Must Haves'' in the noninteractive market because their repertoires 
included the bulk of sound recording ``hits'' that listeners wanted to 
hear. See, e.g., 8/5/20 Tr. 400 (Willig) (``Must Have'' status is 
``really about the hits''); 8/5/20 Tr. 440 (Willig) (the hits are 
``terribly important'' to the overall value of listening); 8/5/20 Tr. 
448 (Willig) (the Majors' collection of hits is what makes them ``Must 
Haves''); 8/6/20 Tr. 807 (Willig) (the level of spin rates on 
noninteractive services is a function of the plays of current hits); 
Trial Ex. 5601 ] 28 & n.46 (WRT of Robert Willig) (Willig WRT) 
(Universal has a [REDACTED]% share of the streams but accounts for 
[REDACTED]% of the top 100 hits according to 2019 Billboard data relied 
on by Professor Willig).
    Similarly, in Web IV, the Judges took note of the importance of 
hits (``top spins'') to a noninteractive service. Web

[[Page 59478]]

IV, 81 FR at 26373 n.155 (`` `top spin' figures are indicative of the 
`must have' aspect of the Majors' repertoire . . . suggest[ing] to the 
Judges that the popularity of the Majors' spins is the reason why 
steering away from their repertoires cannot be pursued beyond a certain 
level, and why [Professor] Shapiro candidly declined to reject the idea 
that the Majors' repertoires were `must haves' . . . .'').
    Professor Willig's emphasis in this proceeding on the Majors' 
possession of many of the ``hits'' puts a fine point on the steering 
issue. The noninteractive services need to play the ``hits'' (at 
intervals consistent with the sound recording performance complement) 
in order to remain attractive to their listeners and subscribers. That 
necessity renders the Majors ``Must Have'' licensors. However, the 
flip-side of this appropriate emphasis on the ``hits'' is a de-emphasis 
on less popular sound recordings, and therein lies the ability of the 
noninteractive services to engage in price competition by embedding 
steering into their algorithmic or human curation system.
    That is, noninteractive services can (and, in the case of 
[REDACTED], did) steer curated songs that were not necessarily the 
hits/top spins, in a manner that [REDACTED]. See Web IV, 81 FR at 
26368-69 (explaining why substituting a curated song with a [REDACTED] 
did not impact listeners but improved the bottom lines of the services 
and labels that engaged in steering). When the Judges consider this 
point together with Professor Willig's testimony regarding the need of 
noninteractive services to obtain licenses necessary to play all the 
hits, the economic coexistence of the noninteractives' steering ability 
and the Majors' ``Must Have'' status remains clear.
    Finally, the Judges note that none of SoundExchange's arguments 
indicates that the fundamental economics of noninteractive services 
have changed in any manner that would make steering by such services a 
less useful tool for applying an appropriate steering adjustment. 
Rather, as Dr. Peterson testified, ``the ability to steer for a non-
interactive statutory service is pretty much bred right into the nature 
of the service where it's choosing the songs.'' 8/25/20 Tr. 3668 
(Peterson).
    In sum, the Judges find it appropriate --for the reasons discussed 
above--to apply a 12% steering adjustment (prior to the offsets 
discussed below) in order to generate a competitive rate.

D. The Countervailing Power Offset to the Price Competition Adjustment

    As discussed more fully elsewhere in this Determination, the Judges 
find that Spotify, through its success as a market leader among 
interactive services and as the dominant independent pureplay 
interactive service, has acquired a significant measure of bargaining 
power in its licensing negotiations with the Majors. To summarize very 
briefly, the evidence demonstrates that Spotify's [REDACTED]--in the 
interactive market. See supra, section III.B.2.
    Spotify's bargaining power allowed it to bargain for 
[REDACTED].\91\ This reduction is a function of the countervailing 
power discussed supra, which can serve as a means for reducing prices 
(and rates) toward a level indicated by the processes of price 
competition that are the hallmark of traditional neoclassical 
microeconomics.
---------------------------------------------------------------------------

    \91\ [REDACTED]%-[REDACTED]% = [REDACTED]%. [REDACTED]%/
[REDACTED]% = [REDACTED]%.
---------------------------------------------------------------------------

    In this regard, it is noteworthy that one of SoundExchange's 
economic expert witnesses, Mr. Orszag, acknowledges that the 12% 
effective competition adjustment can be applied, if [REDACTED]. 8/25/20 
3837 (Orszag) (``[REDACTED]'').\92\
---------------------------------------------------------------------------

    \92\ The Judges do not agree with Mr. Orszag's levels of 
adjustment to reduce the 12% factor, but his concept is the one the 
Judges are applying in this proceeding.
---------------------------------------------------------------------------

    Here, [REDACTED]. A 12% price competition adjustment is warranted. 
But [REDACTED]. Thus, an appropriate adjustment for rates using this 
benchmark is 12%--[REDACTED], or [REDACTED]%.
    However, as explained infra, that [REDACTED]% adjustment applies 
only to a headline rate that serves as a benchmark in this proceeding 
and that is consistent with [REDACTED] in the effective per-play rate. 
To the extent the [REDACTED]% adjustment does not apply to discounted 
subscriptions, such as student plan subscriptions, or to ad-supported 
plans, then the [REDACTED]% reduction is not applicable. Rather, in 
such instances, the full 12% competition adjustment applies.\93\
---------------------------------------------------------------------------

    \93\ The Judges recognize, as they did in Web IV, that 
estimating a rate that reflects effective competition is not an 
exact science. See Web IV, 81 FR at 26334 (``The very essence of a 
competitive standard is that it suggests a continuum and differences 
in degree rather than in kind.''). However, the quality of the 
steering evidence in Web IV allowed the Judges to identify with some 
precision the ``range of potential steering adjustments, 
notwithstanding the otherwise inherently `fuzzy' nature of the 
`bright line' . . . between effectively competitive and 
noncompetitive rates.'' Web IV, 81 FR at 26344. Here, applying that 
steering evidence together with the offset indicated by the Web V 
record represents another application of specific evidence to put 
into focus the necessary size of the effective competition 
adjustment. Mr. Orszag likewise acknowledges that identifying the 
impact of market developments on the ascertainment of an effective 
competition adjustment cannot be determined with absolute precision. 
8/11/20 Tr.1276 (Orszag) (``[T]hese are areas of gray. . . . 
[M]arkets can be less workably competitive or less effectively 
competitive and more effectively competitive.''). And, to compare 
markets over time to identify the change to the level of an 
effective competition adjustment, Mr. Orszag opines that ``[f]rom an 
economic perspective, what one can do is utilize calibration or 
empirical evidence to understand how markets have changed. 8/12/20 
Tr. 1653 (Orszag). The Judges quite agree, and that is what they 
have undertaken in this Determination--to use the empirical data and 
related evidence to calibrate the extent to which an effective 
competition adjustment is required in the noninteractive 
subscription and ad-supported markets.
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IV. Commercial Webcasting Rates

A. Evaluation of Survey Evidence

1. Zauberman Music-Listening Behavior Survey
a. Description of the Zauberman Survey
    Professor Willig's opportunity cost approach is dependent upon the 
results of the consumer behavior surveys.\94\ The Judges, therefore, 
test the underlying survey data on which he relied to assess their 
reliability or their strength in supporting Professor Willig's 
conclusions.
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    \94\ One input in calculating a record company's opportunity 
cost of licensing its repertoire to a statutory webcaster is a 
diversion ratio, which measures how listening is spread across a 
range of alternative listening sources in the event that listeners 
stop listening to a statutory webcaster because a label's repertoire 
is no longer available.
    The Judges discuss Professor Willig's economic modeling infra, 
section IV.C.1.
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    SoundExchange engaged Professor Gal Zauberman to measure the music-
listening behavior of listeners to streaming radio services.\95\ Trial 
Ex. 5606 ]] 1, 4(WDT of Gal Zauberman) (Zauberman WDT). Professor 
Zauberman conducted an internet-based survey with the assistance of the 
Brattle Group, an economic consulting firm, and Dynata, a marketing 
research company with extensive experience in conducting surveys. 
Zauberman WDT ] 28. Specifically, the survey explored how consumers of 
streaming radio services that are eligible for the webcasting statutory 
license would listen to music if those streaming radio services were 
not available. Zauberman WDT ] 12. The survey respondents were asked 
about their listening behavior in a hypothetical world in which either

[[Page 59479]]

free or paid streaming radio services were no longer available. 
Zauberman WDT ] 13.
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    \95\ Professor Gal Zauberman, is the Joseph F. Cullman 3rd 
Professor of Marketing at the Yale School of Management, who 
specializes in consumer judgment and decision-making, financial 
decision-making, and survey methodology. Zauberman WDT ]] 1, 4.
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    The Zauberman Survey consisted of three key types of questions: 
Respondents were asked about which music-listening options they have 
used in the past 30 days, either a free or paid streaming radio service 
(Q1), which replacement music-listening options they would choose 
instead of the free or paid streaming radio service set forth in their 
assigned hypothetical scenario (Q2), and (in some cases) how they would 
allocate their replacement time music-listening options (Q3, 3A) among 
replacement options. Zauberman WDT ] 51.\96\
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    \96\ A total of 21,335 respondents entered the survey: 6,146 
respondents answered Q1 and 2,151 respondents answered Q2. Of these, 
1,552 qualified respondents completed the survey without being 
excluded for selecting ``Unsure'' for any of the options in Q1 or 
Q2. These 1,552 respondents did not include 88 respondents who were 
excluded for completing the survey in what was judged to be too 
little time or too much time. Zauberman WDT ] 53.
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    Among the 6,146 respondents who were asked which type of music-
listening options they had used in the prior 30 days (Q1), 66 percent 
(4,029 respondents) responded that they had used a free streaming radio 
service in the past 30 days, and 21 percent (1,278 respondents) 
responded that they had used a paid streaming radio service in the past 
30 days. Altogether, 71 percent (4,369 respondents) said they had used 
either free or paid streaming radio (or both), and 15 percent (938 
respondents) said they had used both free and paid streaming radio 
services in the past 30 days. Zauberman WDT ] 68.
    Out of the 1,552 respondents who were not excluded and completed 
the survey, a total of 989 respondents were assigned to the scenario in 
which free streaming radio services are no longer available (Q2). The 
survey assigned 563 respondents to the scenario in which paid streaming 
radio services are no longer available. Zauberman WDT ] 56. After being 
provided with the respective scenario in which free or paid streaming 
radio services were no longer available, respondents were asked a 
series of questions about how they would replace the time they 
currently spent listening to music on their free or paid streaming 
radio services. Respondents were then presented a variety of music-
listening options with the exception of the streaming radio option that 
was no longer available in their given scenario. Zauberman WDT ] 57.
    Out of 989 respondents who completed the survey and were told that 
free streaming radio services were no longer available, the (Q2) 
responses indicated that 33 percent of current listeners of free 
streaming radio services would instead listen to paid streaming radio 
services, 80 percent would instead listen to free On-Demand streaming 
services, 39 percent would instead listen to paid On-Demand streaming 
services, 31 percent would instead listen to Sirius XM satellite radio 
services on a satellite receiver, 85 percent would instead listen to 
AM/FM radio on a traditional radio receiver, 69 percent would instead 
listen to CDs, vinyl records, or MP3 files they currently own or would 
purchase, and 48 percent would instead do something other than listen 
to music.\97\ Zauberman WDT ] 24, 72, fig. 8.
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    \97\ The percentages add up to more than 100% because 
respondents were permitted to select multiple replacement options. 
See Zauberman WDT app. D.
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    Out of 563 respondents who completed the survey and were told that 
paid streaming radio services were no longer available, the (Q2) 
responses indicated that 84 percent of current listeners of paid 
streaming radio services would instead listen to free streaming radio 
services, 83 percent would instead listen to free On-Demand streaming 
services, 71 percent would instead listen to paid On-Demand streaming 
services, 52 percent would instead listen to Sirius XM satellite radio 
services on a satellite receiver, 79 percent would instead listen to 
AM/FM radio on a traditional radio receiver, 67 percent would instead 
listen to CDs, vinyl records, or MP3 files they currently own or would 
purchase, and 50 percent would instead do something other than listen 
to music. Zauberman WDT ] 25, 74, fig. 9.
    The respondents who answered the (Q2), saying that they would 
replace their streaming radio service that is no longer available with 
either (a) a free On-Demand service or (b) a free streaming radio 
service (if their paid streaming radio service were no longer 
available), and who chose at least one other music-listening option (or 
``[d]o something other than listen to music'') as a replacement for 
their streaming radio service that is no longer available, were asked 
(in Q3) if they would expect to listen to their streaming radio service 
one week from the day on which the respondent was taking the survey, if 
it were available.\98\ Zauberman WDT ] 75.
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    \98\ For example, respondents who took the survey on a Wednesday 
would be asked if they would expect to listen to their streaming 
radio service on the following Wednesday.
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    This form of questioning was designed to account for the 
possibility that time spent listening to music may vary from day to day 
for different people and across the respondents' allowed measurement of 
listening time across all days of the week. The day of week question 
format was also designed to be as specific as possible about the 
occasion that they are estimating and to have the estimation day not 
too far into the future. Zauberman WDT ] 61-62.
    The respondents who answered ``Yes'' to Q3 were then asked to 
allocate their time among replacement options they chose in the 
replacement question, Q2. They were asked (in Q3A) to allocate any 
number from 0 through 100 to reflect the percentage of time they would 
listen to each particular option. Respondents were shown all of the 
services they said they would use to replace free or paid streaming 
radio in response to Q2. Zauberman WDT ] 64, 76.\99\
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    \99\ The ``day of week'' variable was designed to function in 
the same manner as in Q3.
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    The responses to Q3A indicated that current listeners of free 
streaming radio services who were asked to allocate their time 
indicated that they would replace 16 percent of the time they would 
have spent listening to their free streaming radio services by 
listening to paid streaming radio services, 32 percent of that time by 
listening to free On-Demand streaming services, 25 percent of that time 
by listening to paid On-Demand streaming services, 19 percent of that 
time by listening to Sirius XM satellite radio services on a satellite 
receiver, 27 percent of that time by listening to AM/FM radio on a 
traditional radio receiver, 18 percent of that time by listening to 
CDs, vinyl records, or MP3 files they currently own or would purchase, 
and 16 percent of that time by doing something other than listen to 
music. Zauberman WDT ] 26, 77, fig. 10.
    The responses to Q3A also indicated that current listeners of paid 
streaming radio services who were asked to allocate their time 
indicated that they would replace 24 percent of the time they would 
have spent listening to their paid streaming radio services by 
listening to free streaming radio services, 20 percent by listening to 
free On-Demand streaming services, 24 percent by listening to paid On-
Demand streaming services, 21 percent by listening to Sirius XM 
satellite radio services on a satellite receiver, 18 percent by 
listening to AM/FM radio on a traditional radio receiver, 14 percent by 
listening to CDs, vinyl records, or MP3 files they currently own or 
would purchase, and 10 percent by doing something other than listen to 
music. Zauberman WDT ] 27, 78, fig. 11.

[[Page 59480]]

b. Services' Criticisms of the Zauberman Survey
    The Services offer a number of critiques of Professor Zauberman's 
surveys, including those noted below. Services PFFCL ]] 288-302.
    The Services assert that the survey erroneously toggles between an 
initial definition of ``free streaming radio service'' and an incorrect 
definition that described ``on-line streams of AM/FM radio stations'' 
as services that ``allow you to listen to customized radio stations 
with advertisements,'' like Pandora. Services PFFCL]] 288-290, Proposed 
Findings of Fact and Conclusions of Law of the National Association of 
Broadcasters ]] 190-191 (NAB PFFCL), 8/27/20 Tr. 4245-51 
(Zauberman).\100\ The Services point out that in his hearing testimony, 
Professor Zauberman conceded that, contrary to the language of his 
erroneous definition, simulcasts are not customizable, and that 
including different definitions for the exact same term in a survey is 
not a best practice in his field. Services PFFCL]] 288-290; 8/27/20 Tr. 
4246-47, 4253.
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    \100\ Q1: ``A free streaming radio service, such as personalized 
radio services like free Pandora and free iHeart Radio, and on-line 
streams of AM/FM radio stations, where you cannot choose a specific 
song, and must listen to advertisements.''
    Q2: ``Free streaming radio services--services, such as 
personalized radio services like free Pandora and free iHeart Radio, 
and on-line streams of AM/FM radio stations, allow you to listen to 
customized radio stations with advertisements, but you cannot choose 
a specific song.''
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    The Services also suggest Professor Zauberman's survey suffers from 
``cheap-talk'' or hypothetical-bias problems. Services PFFCL ]] 291-
294. These concepts are described by Professor Hauser and Dr. Leonard 
as problems arising where respondents are allowed to choose multiple 
options, in which case they are more likely to select paid options that 
they would not in fact pay for in the real world, or otherwise do not 
really consider how much things cost or their budget constraint. 
Services PFFCL ] 291; 8/27/20 Tr. 4346-48 (Hauser); 8/24/20 Tr. 3421-23 
(Leonard). Dr. Leonard also referenced academic literature addressing 
issues with the hypothetical nature of the ``payment'' in surveys, 
which can lead respondents to overstate their true willingness to pay. 
See Leonard WRT ]] 19-21 & n.37 (citing Franziska Voelckner, An 
Empirical Comparison of Methods for Measuring Consumers' Willingness to 
Pay, 17 Marketing Letters 137 (2006); James J. Murphy et al., A Meta-
analysis of Hypothetical Bias in Stated Preference Valuation, 30 Envtl. 
Resource Econ. 313 (2005).). Dr. Leonard's testimony suggests that 
aspects of responses to Q3, the time allocation question, indicate that 
respondents would not actually pay for their survey selections in the 
real world. Services PFFCL ] 291; Leonard WRT ] 21; 8/24/20 Tr. 3447-48 
(Leonard) (addressing instances in which a service option was selected 
but no listening time was allocated to the option, a concept known in 
the economics literature as ``hypothetical bias'').
    The Services, through their expert witness Professor Hauser, 
suggest that the Zauberman Survey's instruction to focus on music-
listening options is biased and could suggest to respondents that the 
researcher was interested only in respondents switching to music-
listening options, which could prompt respondents to favor the music-
listening options rather than the stated option to do something other 
than listen to music. Professor Hauser points out the absence of 
specificity about what ``do something other than listen to music'' 
might entail and offers that respondents may not have immediately 
known, recalled, or considered alternatives that were available to them 
if they were not listening to music, leading them to select music-
listening options instead. Services PFFCL ] 295; 8/27/20 Tr. 4364-65; 
Trial Ex. 2161 ]] 7, 28-30 (WRT of John Hauser) (Hauser WRT).
    The Services point to the Zauberman Survey's inability to 
distinguish between a respondent who did not have an existing paid 
subscription and a respondent who had an existing paid subscription but 
did not use it in the past thirty days. This concern was highlighted by 
the testimony of Dr. Leonard and Mr. Harrison who both address the 
occurrence of consumers having inactive paid subscriptions. Services 
PFFCL ]] 297-298; Leonard WRT ] 18; 9/3/20 Tr. 5732 (Harrison) 
(explaining how users who bill subscriptions through a credit card 
might have a service for months without realizing they were still a 
subscriber). Professor Hauser also criticizes the survey's inability to 
distinguish between a respondent who did not have an existing paid 
subscription and a respondent who had an existing paid subscription but 
did not remember using it in the past thirty days. Services PFFCL ] 
299. Professor Hauser stated that both academic research and his own 
survey pretest indicate that thirty days is too long for respondents to 
remember their own listening behavior accurately. The inability to 
distinguish between respondents who did not have an existing paid 
subscription, or who had one but did not use it or remember using it in 
the past thirty days, likely resulted in an upward bias in estimated 
switching to new, paid subscriptions. Hauser WRT ]] 24-27; see also 8/
27/20 Tr. 4360.
    The Services find fault with the Zauberman Survey's failure to 
allow respondents to distinguish between their listening to CDs, vinyl, 
or digital music files they owned already, and listening to CDs, vinyl, 
or digital files they would purchase. They point to Professor Zauberman 
conceding that a respondent who had a large existing collection of 
downloads or CDs would have no way of indicating that she would listen 
to her existing collection, rather than purchasing new CDs. Services 
PFFCL ] 300; 8/27/20 Tr. 4240. The Services point out that Professor 
Willig described the effect of this on the Zauberman Survey results as 
an ``inaccuracy.'' Services PFFCL ] 300; 8/6/20 Tr. 843-47. The 
Services also note that both the Hauser and Hanssens surveys and 
industry data suggest that far more people would listen to existing 
collections than purchase new CDs or digital music files, suggesting 
that Professor Zauberman's survey likely would have demonstrated the 
same if he had given respondents the opportunity to make this 
distinction. See Hauser WRT ]] 47-48; Trial Ex. 4095 tbls.4, 8 (CWDT of 
Dominique Hanssens) (Hanssens WDT); Leonard WRT ] 19; 8/24/20 Tr. 3448 
(Leonard); Trial Exs. 2037, 2038, 2041 at 6 (showing declining sales 
and use of CDs and digital downloads).
    The Services contend that the Zauberman Survey contained a 
fundamental error of failing to include attention checks to confirm 
respondents were sufficiently engaged in the survey and were providing 
reliable responses. See Hauser WRT ]] 31-34. Professor Hauser explained 
that attention checks represent best practices in survey research, and 
not including them could have exacerbated the asserted flaws in the 
Zauberman Survey. See id. ]] 8, 31-32; 8/27/20 Tr. 4334-35.
    The Services suggest that some respondents in the Zauberman Survey 
who indicated they would listen to physical or digital recordings of 
music may in fact obtain pirated copies of recordings, thus calling 
into question the results. See 8/6/20 Tr. 799 (Willig); 8/10/20 Tr. 
1089-92 (Willig). And, NAB takes issue with the Zauberman Surveys for 
not taking into account properly respondents who listened to zero hours 
of simulcasts. See NAB PFFCL ] 126.
c. Responses to Criticisms of the Zauberman Survey
    In response to criticism of the Zauberman Survey, SoundExchange

[[Page 59481]]

characterizes the altered definitional language as a ``slight 
discrepancy,'' noting that the word ``customized'' appeared only in 
introductory language, and not in any survey response option. 
SoundExchange offers that the Services provide no basis to conclude 
that the difference in definitions had any effect on Professor 
Zauberman's data or that respondents were ever confused or noticed the 
discrepancy. SoundExchange suggests that the word ``customized'' in Q2 
would not signal to respondents that AM/FM streaming was not a free 
streaming radio service because every time the survey describes free 
streaming radio services, it provides examples of services that fall 
into this category, including the example ``on-line streams of AM/FM 
radio stations.'' SoundExchange argues that if respondents had noticed 
and been confused by the variation in language, the survey results 
would have shown an increase of ``unsure'' responses with respect to 
free streaming radio services once alternate language was introduced, 
and that no such evidence of confusion exists. SX RPFFCL (to Services) 
]] 288-290.
    SoundExchange also suggests that Professor Zauberman adequately 
clarified in his testimony that simulcast listeners do have some 
ability to customize their experiences. Professor Zauberman testified 
that ``there are multiple ways in which we customize our experiences or 
select the world around us'' and that, with regard to opportunities to 
personalize on-line streams of AM/FM radio stations, station choice is 
one aspect of customization. 8/27/20 Tr. 4271. SoundExchange then 
offers that other experts in this proceeding have a shared 
understanding of the functionality available through simulcasts. SX 
RPFFCL (to Services) ] 288; 8/26/20 Tr. 4121-25 (Hanssens) (simulcasts 
of AM/FM broadcasts and free streaming radio services like Pandora are 
``very comparable mediums'' that ``share key attributes'' and compete 
with one another).\101\
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    \101\ SoundExchange also references Orszag WRT ] 35 (given that 
users can choose to listen to a particular genre of music for both 
simulcast and custom radio, the user experience is not necessarily 
much different).
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    SoundExchange adds that Professor Zauberman's testimony regarding 
variations in definitional language not constituting a best practice 
was not his ultimate conclusion. SX RPFFCL (to Services) ] 290; 8/27/20 
Tr. 4217 (Zauberman) (the suggested ultimate conclusion being that the 
Zauberman Survey provides the most reliable data of any survey or 
experiment in the proceeding and that its findings are highly 
consistent with the Hanssens and Simonson Surveys).
    SoundExchange offers that Professor Hauser's trial testimony 
regarding ``cheap talk'' is beyond the scope of his written testimony 
and unsupported by the academic literature he mischaracterized at 
trial. SX RPFFCL (to Services) ] 291; SX PFFCL ]] 1259-1261. 
SoundExchange adds that even if the asserted ``cheap talk'' effect did 
exist, the Services have not attempted to quantify it, with regard to 
Professor Zauberman's survey or any other survey in this proceeding. SX 
RPFFCL (to Services) ] 291. SoundExchange also offers that the critique 
of Q3 is misplaced, as a zero time allocation on one specific day in 
the following week is not unreasonable nor does it indicate that 
respondents would not actually pay for their survey selections in the 
real world. SX RPFFCL (to Services) ] 292.
    SoundExchange submits that Professor Zauberman's focus on music 
listening was entirely appropriate in light of the focus and scope of 
this proceeding. It adds that Professor Zauberman's approach struck an 
appropriate balance between providing a comprehensive list of options 
(including ``do something other than listen to music'') and the risk of 
making his survey unwieldy and confusing. SoundExchange points out that 
the Services offer no evidence that survey respondents actually had 
difficulty remembering what non-music options are available to them in 
the world. SX RPFFCL (to Services) ]] 295-296.
    SoundExchange notes that Professor Zauberman's testimony indicates 
why he chose the survey format. With regard to respondents who may have 
had an existing paid subscription but did not use it in the past thirty 
days, Professor Zauberman designed the survey order to avoid ambiguity 
or complicating the survey and creating non-uniformity that risked 
privileging some options over others. SX RPFFCL (to Services) ] 297; 8/
27/20 Tr. 4181-82, 4184-85, 4239 (Zauberman). SoundExchange offers that 
Dr. Leonard's testimony that inactive subscriptions are ``not 
uncommon'' is poorly supported by the record. SoundExchange also 
criticizes, as conflicting, the NAB's argument that thirty days is too 
long for respondents to remember their own listening behavior 
accurately, and that thirty days is not long enough because a 
respondent may not have used his or her subscription service in the 
past 30 days SX RPFFCL (to Services) ]] 297-299. SoundExchange posits 
that the Services' critique regarding new versus existing physical 
copies of recordings flows from an unwarranted assumption: That 
respondents who would go back to their existing CD collections and 
start listening to them again would not also make new purchases in 
order to supplement their collections with new music. SX PFFCL ] 780; 
8/6/20 Tr. 843-47 (Willig). It also points out that the Hanssens and 
Simonson Surveys, which do distinguish between new purchases and 
existing collections, find over twice the amount of diversion to new 
purchases of physical copies as the Zauberman Survey does. SX PFFCL ] 
781, Compare Willig WDT ] 47, fig.6 (14.8% diversion to new CDs, vinyl 
records, and MP3s based on Zauberman Survey), with Trial Ex. 5608 app. 
F at tbl.4B (CWRT of Itamar Simonson) (Simonson WRT) (comparing data 
from the Hanssens Pandora Survey, Simonson's Modified Hanssens Survey, 
and Hanssens Replication, reflecting a range of 27.8% to 29.9% 
diversion to new physical or digital recordings of music).
    SoundExchange offers that all of the survey experts acknowledged 
that tools other than attention checks can be used to ensure that 
respondents are engaged in a survey and that such tools were used in 
the Zauberman Survey. SX PFFCL ]] 766, 716-717. SoundExchange also 
points to Professor Hauser's testimony on attention checks, which 
according to SoundExchange, indicates that attention checks are not 
currently viewed as required under best practices, noting his statement 
that attention checks are now ``becoming widely used.'' SX PFFCL ] 766; 
8/27/20 Tr. 4334-35 (Hauser).
    Addressing criticism of the Zauberman Survey's failure to address 
the possibility that some respondents would in fact pirate sound 
recordings, SoundExchange observes that none of the surveys in the 
proceeding asks respondents whether they might obtain music through 
piracy. 8/10/20 Tr. 1118-19 (Willig). SoundExchange offers that there 
is no reason to think respondents would truthfully answer that they 
would engage in illegal activity. 8/26/20 Tr. 4143-44 (Hanssens). 
Moreover, Professor Hanssens made clear that he would not expect 
respondents to interpret the term ``own'' to encompass theft. Id. at 
4142-43 (Hanssens). He also noted that the survey gave respondents 
options such as diverting listening to ``other'' sources, through which 
respondents could express their intent to steal recordings. Id. at 4143 
(Hanssens).
    SoundExchange suggests that while a number of respondents to the 
Zauberman Survey allocated zero time to a replacement option they had

[[Page 59482]]

previously selected, any attempt to convert this observation into a 
critique misunderstands the structure of Professor Zauberman's time 
allocation questions. It offers that there is no inconsistency in 
respondents indicating that they would replace a noninteractive 
streaming service with a particular music-listening option and also 
indicating that they do not expect to listen to that option on one 
specific day of the following week. SX PFFCL ] 784-785; 8/27/20 Tr. 
4197-98 (Zauberman); 8/6/20 Tr. 848-50 (Willig). SoundExchange goes on 
to offer that the Services cite to no evidence to support the 
insinuation of inconsistency in the survey results. SX PFFCL ] 787.
d. Judges' Conclusions on the Zauberman Survey
    Upon consideration of the entirety of the record, including the 
facts and arguments indicated above, on balance, the Judges find the 
Zauberman Survey to be reasonably reliable evidence. There is some 
validity to the criticisms regarding definitional inconsistency and 
diversion related to existing/owned physical recordings. However, 
viewed in light of the results of the other surveys, these criticisms 
of the Zauberman Survey seems to have had a minimal effect. At most, 
the criticisms go to the weight assigned to the Zauberman Survey 
results.
2. Share of Ear Report
    Professor Willig used data from Edison Research's quarterly ``Share 
of Ear'' study as a secondary data source as a basis for fallback 
values inputted into his theoretical models, and as a sensitivity check 
to the Zauberman Survey. The Services assert that the Share of Ear data 
contain troublesome ambiguities. Services PFFCL ]] 265-268; Leonard WRT 
]] 23-29.
    SoundExchange responds to the criticism of the Share of Ear data by 
pointing out that such concerns have essentially been mooted. Professor 
Willig acknowledged at trial that, for purposes of computing diversion 
ratios and calculating opportunity cost, Share of Ear is ``is not 
nearly as well founded . . . as making use of the Hanssens Survey or 
the modified Hanssens Survey or the Zauberman Survey.'' SX RPFFCL (to 
Services) ] 265.
3. Hanssens Pandora Survey and Sirius XM Survey
a. Description of the Hanssens Surveys
i. Purpose and Design
    Several experts relied, in part, on the results of the Hanssens 
Surveys. See, e.g., Shapiro WDT at 16; 20-21, tbl.2; 28, tbl.5; Willig 
WRT ]] 30-35. The Judges, therefore, test the underlying survey data on 
which he relied to assess their reliability or their strength in 
supporting various modeling conclusions.
    Sirius XM and Pandora retained Professor Dominique Hanssens to 
conduct two consumer surveys--the ``Pandora Survey'' and the ``Sirius 
XM Survey. The Hanssens Surveys measured how consumers would respond if 
their noninteractive streaming services changed by the loss of access 
to any given record company's repertoire, including what alternative 
sources of music, if any, listeners of free internet radio services 
music on Sirius XM over the internet would change their listening to as 
a result of hypothetical loss of music options. Hanssens WDT ]] 13, 33, 
39-40 & app. 6. The Pandora Survey addressed listeners of free internet 
radio and his Sirius XM Survey addressed listeners of Sirius XM's 
subscription webcasting service. Id. ] 20. The two surveys pose 
comparable hypotheticals and proceed in parallel. Id. ]] 33, 66 & Apps. 
6 & 12.
    Professor Hanssens sought to answer the following questions: (a) 
Whether listeners would change their listening if they were 
dissatisfied because music selection across the category was 
``degraded'' as described in the hypothetical given to 
respondents,\102\ (b) whether listeners would change their listening to 
alternative sources of music (as opposed to non-music) in that 
instance, (c) which alternative sources of music they would increase 
listening to, if any, and (d) how listeners would allocate increased 
listening, if any, across the alternative music sources they 
identified).\103\ Id. ]] 21-22.
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    \102\ The study considered the hypothetical that services were 
limited by the loss of access to any given record company's 
repertoire, which was addressed in the survey by asking respondents 
what they would do in the event that they noticed all relevant 
services stopped streaming songs by some popular artists and some 
newly released music. Hanssens WDT ]] 13, 21-22. This approach was 
intended for the focus to be on cases where that change in music 
availability is noticed and therefore generates responses to that 
specific scenario, as opposed to the more general scenario of simple 
label suppression. 8/26/20 Tr. 4091 (Hanssens).
    \103\ The Hanssens survey thus posits a degradation of a 
listening option (i.e., loss of repertoire), as distinguished from 
the Zauberman survey, which posited the unavailability of a 
listening option.
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    The Pandora Survey indicated that 60.1 percent of the sample of 
listeners of free internet radio services would decrease listening to 
free internet radio services in the event that the music selection 
across all free internet radio services were degraded. Of the 
respondents who indicated that they would decrease listening to free 
internet radio services or listen to free internet radio about the same 
amount, 63.5 percent would increase listening to alternative sources of 
music under this scenario. When forced to make a tradeoff between 
multiple options of alternative sources of music, the sample of 
listeners indicated that they would increase their watching or 
listening to music in videos on YouTube or social media the most (11.6 
points on average), followed by listening to live radio broadcasts of 
music through a radio (9.8 points on average), and then followed by 
listening to music on a new free On-Demand music streaming service (7.7 
points on average). Hanssens WDT ] 18.\104\
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    \104\ Respondents were asked to allocate 100 points across the 
alternative music sources they previously selected based on how much 
they would listen to these different sources. Hanssens WDT app. 12.
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    The Sirius XM Survey indicated that 36 percent of the sample of 
listeners of music on Sirius XM over the internet would decrease their 
listening to that service in the event that the music selection 
available on that service were degraded. Of the respondents who 
indicated that they would decrease listening to music on Sirius XM over 
the internet or listen to about the same amount of music on that 
service, 58.9 percent would increase listening to alternative sources 
of music under this scenario. When forced to make a tradeoff between 
multiple options of alternative sources of music, by an allocation of 
points on average, the sample of listeners indicated that most of their 
increased listening would be on an existing Sirius XM satellite radio 
subscription. Hanssens WDT ] 19.
    Professor Hanssens's surveys were conducted by respondents on a 
traditional desktop computer, laptop notebook computer, or tablet 
computer. The surveys included several screening questions. Qualified 
respondents had to pass several standard attention check questions and 
satisfy certain demographic quotas to ensure the survey respondents 
were not statistically different from the typical demographics of 
Pandora or Sirius XM on the internet users, depending on the particular 
survey. The survey response rate, completion rate, and incidence rate 
were all within the typical range for internet surveys, and the sample 
size was large enough to draw conclusions regarding the key questions 
posed in the survey. Additionally, the survey was extensively 
pretested. Id. ]] 26-29, 36-37, 56-59, 65-67.

[[Page 59483]]

    Professor Hanssens applied other quality assurance measures 
designed to ensure that respondents provided informed and reliable 
responses. In the Pandora Survey, prior to the first substantive 
question (P20), Professor Hanssens provided respondents with 
descriptions and well-known examples of free internet radio, On-Demand 
Music Streaming, and Paid internet Radio categories. Id. ] 32. 
Additional preliminary questions helped identify the target population 
for the Pandora Survey and were designed to provide respondents with an 
accurate set of alternative music options in the main questionnaire, in 
which they were asked to identify services they would listen to more if 
the music selection on free internet radio services were degraded. Id. 
] 30.
ii. Pandora Survey Results
    In order to assess which alternative sources of music respondents 
would choose in the event that a webcaster lost access to a particular 
record company's repertoire, Professor Hanssens instructed respondents, 
``Imagine you were not satisfied with [a free internet radio service 
the respondent indicated listening to in a typical week] because you 
noticed that it had stopped streaming songs by some of your favorite 
artists and some newly released music. Imagine that all other free 
internet radio services stopped streaming those same songs as well.'' 
Hanssens WDT ] 33; 8/26/20 Tr. 4091 (Hanssens) (explaining that this 
language is intended for the focus to be on cases where that change in 
music availability is noticed and therefore generates responses to that 
specific scenario, as opposed to the more general scenario of simple 
label suppression).
    The Hanssens Pandora survey then proceeded as follows.
    Respondents were asked (in question P20), ``Which of the following 
actions, if any, would you consider taking in the event that you were 
not satisfied with free internet radio services because their selection 
of songs changed in this way?'' The survey offered the following answer 
choices: ``I would use free internet radio services less; I would use 
free internet radio services about the same amount; I would use free 
internet radio services more; Don't know/unsure.'' Id. ]] 34, 39; 
Appendix 7 at 120; 8/26/20 Tr. 4097 (Hanssens).
    Among the 506 respondents to question P20, 60.1 percent responded 
that they would use free internet radio services less, 35.8 percent 
responded that they would use free internet radio services about the 
same, and 4.2 percent responded that they did not know or were unsure 
about how their listening habits would change. Hanssens WDT ] 40.\105\ 
Those who indicated that they did not know or were unsure about how 
their listening habits would change were not included in subsequent 
calculations as it is not possible to know what they would do if the 
music selection across all free internet radio services were degraded. 
Hanssens WDT ] 40 n.46.
---------------------------------------------------------------------------

    \105\ The results of P20 are reported in Table 1.
---------------------------------------------------------------------------

    Respondents who indicated that they would listen to free internet 
radio services less or about the same amount were asked question P30: 
``Which other actions from the following, if any, would you consider 
taking in the event that you were not satisfied with free internet 
radio services because their selection of songs changed in this way?'' 
Those respondents were provided the following two categories: ``Consume 
non-music entertainment content'' and ``Listen to music using ways 
other than free internet radio'' and, for each, were asked whether they 
would ``increase doing this, make no changes to how much I do this, 
decrease doing this, don't know/unsure.'' Id. ]] 34, 42, Appendix 7 at 
121.
    In hearing testimony Professor Hanssens noted that, while the non-
music options (and descriptive examples) were presented ``for 
completeness reasons,'' the results were not used as they are ``not the 
focus of [the] work.'' 8/26/20 4097-98 (Hanssens).
    The results of P30 are reported in Table 2, below.
BILLING CODE 1410-72-P
[GRAPHIC] [TIFF OMITTED] TR27OC21.000


[[Page 59484]]


Id. ] 42.

    In the analyses that followed question P30, the 53 respondents who 
indicated in that they would listen to alternative sources of music 
less (35) or who did not know or were unsure about whether they would 
change their music consumption (15) were excluded. Hanssens WDT ] 43 
n.50.
    Respondents who indicated that they would increase listening to 
alternative sources of music were asked question P40: ``In which of the 
following ways, if any, would you increase listening to music in place 
of free internet radio in a typical week?'' Respondents were then 
provided specific alternative music sources to which they would 
consider increasing their listening, including the types of services 
the respondents had previously responded they were already using in 
their responses to the screening questions. Hanssens WDT ]] 34. 46-48, 
Appendix 7 at 122; 8/26/20 Tr. 4098 (Hanssens).
    The results of P40 are reported in Table 3, below.
    [GRAPHIC] [TIFF OMITTED] TR27OC21.001
    
Hanssens WDT ] 49.

    The final substantive question, P50, presented respondents who had 
responded to question P40 that they would increase listening to 
multiple alternative music sources with the alternative music sources 
they selected in P40 and instructed them to ``Please divide 100 points 
across the different ways of listening to music based on how much you 
think you would use each alternative in a typical week.'' Id. ]] 34, 
52, Appendix at 123. This question was designed to allow the individual 
listener to rank the relative importance of answer options. 8/26/20 Tr. 
4098 (Hanssens). Professor Hanssens explained that he asked this 
question in terms of point allocations rather than in absolute time or 
percentages of time in order to avoid the cognitively difficult 
``quantification of time,'' and to better assess relative importance, 
which may be obscured by absolute expressions of time. 8/26/20 Tr. 4099 
(Hanssens).
    The results of P50 are reported in Table 4, below.

[[Page 59485]]

[GRAPHIC] [TIFF OMITTED] TR27OC21.002

Hanssens WDT ] 53.
4. Simonson's Replicated and Modified Hanssens Surveys
a. Description of the Simonson Surveys
    SoundExchange also engaged Professor Simonson to assess the 
testimony of several witnesses, including Professor Hanssens. As part 
of that task, Professor Simonson ran a replication of the Hanssens 
Pandora Survey (Hanssens Replication survey), as well as a modified 
version of that survey (Modified Hanssens survey). Simonson WRT ] 12.
    Professor Simonson adopted the same methodology and screening 
criteria that Professor Hanssens used in the Hanssens Pandora Survey. 
Id. ]] 88; 8/27/20 Tr. 4282-83 (Simonson). The Modified Hanssens survey 
retained all aspects of the original Pandora survey, except it omitted 
any mention of user dissatisfaction. The Modified Hanssens survey 
modified the instructions given to respondents, which Professor 
Hanssens had intended to focus on cases where listeners noticed the 
change in music availability. Professor Simonson made the change out of 
concern that one may assume that the Hanssens Surveys' results apply 
only to those listeners who would have been dissatisfied by the change 
in repertoire, perhaps relying on the Reiley Label Suppression 
Experiments to support assumptions that very few users would in fact be 
dissatisfied and change their listening. Therefore, the scenario 
changed from:

    Imagine that you were not satisfied with this service because 
you noticed that it had stopped streaming songs by some of your 
favorite artists and some newly released music. Imagine that all 
other free internet radio services stopped streaming those same 
songs as well.

to

    Imagine that this service stopped streaming songs by some of 
your favorite artists and some newly released music. Imagine that 
all other free internet radio services stopped streaming those same 
songs as well.

Simonson WRT ]] 94-95. The Modified Hanssens survey also removed the 
instruction that ``you were not satisfied'' in other places throughout 
the survey. Id. ]] 94-96.
    Additionally, in the Modified Hanssens survey, for those 
respondents who indicated that they ``would use free internet radio 
services less'' in the hypothetical scenario, respondents were asked an 
additional question, intended to allow analysis of the magnitude of 
these respondents' likely change in listening:

    You indicated that you would use free internet radio services 
less in the event that all free internet radio services had stopped 
streaming songs by some of your favorite artists and some newly 
released music. In that case, how much less time would you spend 
listening to free internet radio services in a typical week?
    Select one only.

    1. 1-9% less
    2. 10-24% less
    3. 25-49% less
    4. 50-74% less
    5. 75-99% less
    6. 100% less
    7. Don't know/unsure

Simonson WRT ] 89.

    Professor Simonson indicated at trial that the results of the 
Replication survey and Modified Hanssens survey indicate that the 
Hanssens Pandora Survey is reliable because it can be replicated with a 
different panel and at a different time of year. 8/27/20 Tr. 4283 
(Simonson). Additionally, Professor Simonson stated that ``removing the 
`you are unsatisfied' instruction from the Modified Hanssens Survey did 
not generally result in large alterations to the data, relative to 
either the original Pandora Survey or the Replication Survey. This 
similarity indicates that the survey data largely applies to all 
relevant listeners, not only to the subgroup who would be dissatisfied 
with a change in repertoire.'' Simonson WRT ] 99 (footnote omitted).
    The results of the respective surveys regarding the actions 
respondents would take if free internet radio services were degraded 
(Hanssens question P20) are reflected below.\106\
---------------------------------------------------------------------------

    \106\ Professor Simonson's analysis of the Hanssens survey data 
only included the respondents who were not excluded by reason of 
their responses to the screening questions and P20 and P30, as 
described above, the number of such respondents totaling 432. The 
total number of qualifying respondents in the Replication survey was 
424. The total number of qualifying respondents in the Modified 
Hanssens survey was 372.

---------------------------------------------------------------------------

[[Page 59486]]

[GRAPHIC] [TIFF OMITTED] TR27OC21.003

Simonson WRT ] 98.

    The results of the respective surveys regarding other actions, if 
any, respondents would consider taking in the event that free internet 
radio services were degraded (original Hanssens question P30) are 
reported below. Simonson WRT 244.

[[Page 59487]]

[GRAPHIC] [TIFF OMITTED] TR27OC21.004

    The results of the respective surveys regarding which of the 
following ways, if any, respondents would increase listening to music 
in place of free internet radio in a typical week (original Hanssens 
question P40) are reflected below.

[[Page 59488]]

[GRAPHIC] [TIFF OMITTED] TR27OC21.005

Simonson WRT ] 98.

    The Modified Hanssens survey results for regarding the magnitude of 
respondents' likely change in listening (Q225) are reflected below.

[[Page 59489]]

[GRAPHIC] [TIFF OMITTED] TR27OC21.006

BILLING CODE 1410-72-C
Simonson WRT 243.
b. Criticisms of the Hanssens Surveys
    SoundExchange engaged Professor Itamar Simonson to examine whether 
the Hanssens surveys were likely to produce unbiased, reasonably 
accurate estimates regarding the impact of a loss of access to any 
given record company's repertoire on listening to the free internet 
radio services at issue and on switching to alternative sources of 
music. Simonson WRT ] 66. While Professor Simonson found the Hanssens 
surveys relatively reliable, he asserted the surveys contained several 
flaws. Simonson WRT ]] 64-65. SoundExchange also engaged Professor 
Zauberman to examine the Hanssens Surveys calculation. Trial Ex. 5607 
]] 1-2 (WRT of Gal Zauberman) (Zauberman WRT).
    Professor Simonson criticized the Hanssens survey questions for 
mixing music with unrelated categories, such as videogames and movies, 
leading to a ``diversification bias,'' which allegedly encouraged 
respondents to select to non-music switching options and an 
underestimation of switching from one music service to another. He 
pointed to research, demonstrating that the mere fact that respondents 
are presented simultaneously with multiple options causes them to 
spread their choices among the options instead of choosing only the 
option they like most. He indicated that a survey designer can decrease 
the percentage of respondents who indicate they will switch from one 
music service to another by presenting respondents with options from a 
wide range of options and that the Hanssens Surveys do just that by 
leading respondents to consider a wide set of switching options, 
including options that are unrelated to music. Simonson WRT ]] 67-74 
(citing Itamar Simonson, The Effect of Purchase Quantity and Timing on 
Variety Seeking Behavior, 27 J. Marketing Research 150 (1990); Daniel 
Read & George Loewenstein, Diversification Bias: Explaining the 
Discrepancy in Variety Seeking Between Combined and Separated Choices, 
1 J. Experimental Psychol.: Applied 34 (1995); and Schlomo Benartzi & 
Richard H. Thaler, Naive Diversification Strategies in Defined 
Contribution Saving Plans, 91 Am. Econ. Rev. 79 (2001); and Craig R. 
Fox, David Bardolet & Daniel Lieb, How Subjective Grouping of Options 
Influences Choice and Allocation: Diversification Bias and the 
Phenomenon of Partition Dependence, 134 J. Experimental Psychology: 
Gen. 538 (2005); Craig R. Fox, David Bardolet & Daniel Lieb, Partition 
Dependence in Decision Analysis, Resource Allocation, and Consumer 
Choice, 3 Experimental Bus. Research 229 (2005)).
    Professor Simonson also took issue with the sequence of Hanssens 
survey questions. He criticized the surveys for asking about the 
various options the respondents may consider before asking them to 
select among those options. In Professor Simonson's opinion, informed 
by published research, asking respondents to consider a long list of 
options biases the respondents' subsequent responses. He opined that 
while offering such ``consideration set'' options may be appropriate in 
scenarios involving costly and often relatively irreversible decisions, 
it is not appropriate in the context of selecting a music service, 
which involves low cost, low risk, and easily changed purchase 
decisions. Relatedly, Professor Simonson suggested that research 
suggests that an unrealistic consideration set can also create bias in 
follow-up questions such that the list of considered options is likely 
to influence subsequent choices made by respondents. Simonson WRT ]] 
75-81 (citing Barbara E. Kahn & Donald R. Lehmann, Modeling Choice 
Among Assortments, 67 J. Retailing 274 (1991); Itamar Simonson, The 
Effect of Product Assortment on Consumer Preferences, 75 J. Retailing 
347 (1999); Armin Falk & Florian Zimmermann, A Taste for Consistency 
and Survey Response Behavior, 59 CESifo Econ. Studies, no.1, 181 
(2012); and Itamar Simonson, The Effect of Buying Decisions on 
Consumers' Assessments of Their Tastes, 2 Marketing Letters 5 (1991)).
    Professor Simonson indicated that the Hanssens Surveys ignored the 
impact that a change in repertoire would have on services' ability to 
attract new users. He noted that while Hanssens Surveys attempted to 
measure whether existing service users might change their listening 
behavior, the surveys did not examine or attempt to quantify the impact 
of offering a more limited music

[[Page 59490]]

repertoire on a services' ability to attract new users. Professor 
Simonson posited that ignoring the impact on potential users, Professor 
Hanssens understated the impact that the loss of a label's content 
would have on the relevant services. Simonson WRT ]] 82-84. 
SoundExchange also notes that this focus on existing customers 
indicates that the surveys at most measure only part of the impact that 
losing a record label would have on these services. SX PFFCL ] 788.
    Professor Zauberman faulted the Hanssens surveys for not allowing 
respondents to respond on their smartphones, despite the fact that a 
large proportion of users stream music via smartphone. Zauberman WRT ]] 
82-88. He noted that other relevant surveys could be completed on 
smartphones and suggested that those surveys tended to have younger 
participants who are likely to listen to more music, and to replace 
Free Streaming Radio with Paid streaming services at higher rates than 
those who took the survey on other devices. Zauberman WRT ]] 86-88. 
SoundExchange alleges that this may cause any calculation of diversion 
ratios based on the Hanssens surveys to be conservative. SX PFFCL ] 
758.
    Professor Zauberman asserted that the Hanssens surveys were 
confusing for respondents, offering that survey practices dictate that 
hypotheticals should be posed simply, not as instructions about how 
respondents should feel. He added that the surveys contained too many 
response options that are overly wordy, making it difficult for a 
respondent to keep track of all relevant information. Professor 
Zauberman alleged that respondents were presented with too many 
response options that were zero-royalty options causing the responses 
to be biased towards such zero-royalty options. He also faulted the 
surveys for use of the typical week as a timeframe for respondents as 
being contrary to best survey design practices, and suggested that a 
time frame described as ``a typical week'' may be ambiguous to some 
respondents. Zauberman WRT ]] 88-95.
c. Responses to Criticisms of the Hanssens Surveys
    In response to criticism of the Hanssens surveys, Pandora/Sirius XM 
offers, in part, that Professor Simonson demonstrated convincingly that 
the Hanssens surveys were reliable by replicating them using an 
entirely new sample, and obtaining very similar results. Pandora and 
Sirius XM's Corrected Proposed Findings of Fact and Conclusions of Law 
] 111 (Pandora/Sirius XM PFFCL). Pandora/Sirius XM offers that the 
Hanssens surveys actually overestimate diversion, in that his scenario 
contemplates the loss of consumers' favorite artists, which does not 
necessarily simulate real-world conditions given that the loss of a 
label may not be coincident with the loss of all of the works of an 
artist and may not be coincident with the loss of a favorite artist. 
Pandora/Sirius XM PFFCL ] 112; 8/26/20 Tr. 4091-96, 4099-4101 
(Hanssens). Pandora/Sirius XM adds that the Hanssens surveys reflect 
only the subset of Pandora users who would actually be affected by the 
degradation in the sense that they noticed it and were dissatisfied as 
a result, not simply any Pandora user subject to the suppression. 8/26/
20 Tr. 4093, 4101, 4154-56.
    Pandora/Sirius XM notes that Professor Hanssens did not actually 
use the non-music data but, rather, included it merely for completeness 
reasons. Pandora/Sirius XM PFFCL ] 115. Pandora/Sirius XM also states 
that no empirical analysis of alleged diversification bias was offered. 
Instead, they indicate, Professor Simonson only offered citations to 
academic articles discussing the phenomenon. Pandora/Sirius XM PFFCL ] 
114. Similarly, Pandora/Sirius XM indicates that Professor Simonson did 
not offer any empirical evidence to support his critique that the 
sequence of Professor Hanssens's questions, requiring respondents to 
consider options before choosing them, could have biased his results. 
Pandora/Sirius XM PFFCL ] 116. Pandora/Sirius XM adds that the survey 
was designed to minimize any confusion, including instructing 
respondents to take their time reviewing the questions and providing a 
link to the descriptions and examples in every subsequent question. 
Pandora/Sirius XM PFFCL ] 110. Additionally, Pandora/Sirius XM 
clarifies that the intent of the Hanssens survey was to evaluate the 
behavior of listeners, not potential listeners. Pandora/Sirius XM PFFCL 
] 117. The Services also observe a lack of empirical evidence that a 
failure to conduct the surveys on smartphones had any effect on the 
results. Services RPFFCL ] 760.
d. Criticism of Professor Simonson's Modified Hanssens Surveys
    Pandora Sirius XM offers that Professor Simonson conceded that his 
modified surveys, designed to test the impact of including language of 
explicit dissatisfaction, did not, generally, result in large 
alterations to the data relative to either the original Pandora Survey 
or the Replication Survey. Pandora/Sirius XM PFFCL ] 118; Simonson WRT 
] 99; 8/27/20 Tr. 4285 (Simonson); id. at 4315-16; 8/26/20 Tr. 4094 
(Hanssens) (noting same). Pandora Sirius XM points out that both 
Professor Simonson and Professor Hanssens agreed that this lack of 
impact on Professor Hanssens's survey is likely due to the fact that 
dissatisfaction is implicit in a hypothetical referencing the loss of 
some of respondents' favorite artists and some newly released music. 
Pandora/Sirius XM PFFCL ] 119.
    Pandora Sirius XM indicates that Professor Simonson's question 225, 
intended to allow analysis of the magnitude of respondents' likely 
change in listening, is flawed and unreliable. Pandora/Sirius XM PFFCL 
] 122. Professor Hanssens posited that the question does not accurately 
measure the likely change in listening. He asserts that the loss of a 
particular label fundamentally differs from the loss of favored artists 
or newly released music because artists are presented on more than one 
label, and many people do not know which labels represent which 
artists. 8/26/20 Tr. 4092-96 (Hanssens). He adds that the question is 
limited to people who actually notice the change and are negatively 
affected by it, which he notes is not coincident with all Pandora 
listeners. And, he offers that, without a proper basis for a 
respondent's volume of listening, it is not possible for a respondent 
to generate a reliable response on the amount that would be lost. 8/26/
20 Tr. 4096 (Hanssens). Finally, Professor Hanssens criticizes the 
answer ranges offered in Question 225, asserting that they are so wide 
and unequal that they are imprecise, biased, and unreliable. 8/26/20 
4096 (Hanssens).
e. Responses to Criticisms of Professor Simonson's Modified Hanssens 
Surveys
    SoundExchange counters that the criticism of the language of 
explicit dissatisfaction is essentially an acknowledgment that there is 
no need to instruct respondents to imagine they are dissatisfied by 
label blackout because dissatisfaction follows naturally from the loss 
of content. SX RPFFCL (to Pandora/Sirius XM) ] 119.
    SoundExchange indicates that any notion that the loss of a label 
differs fundamentally from loss of favored artists or newly released 
music is unsupported by the evidence and contrary to Professor 
Hanssens's own testimony, including his describing the loss of access 
to any given record company's repertoire. SX RPFFCL (to Pandora/Sirius 
XM) ] 122, 112. SoundExchange rejects the notion that

[[Page 59491]]

the survey is limited to a subset of users, instead asserting that it 
addresses aggregate consumer reaction in the event consumers are aware 
of label blackout, as they would be in any real world circumstance. SX 
PFFCL (to Pandora/Sirius XM) ] 122. Finally, SoundExchange offers that 
the suggestion that respondents should have been asked to report their 
current listening time is undermined by the fact that allocations of 
absolute time are notoriously difficult for respondents to answer. SX 
RPFFCL (to Pandora/Sirius XM) ] 122.
f. Judges' Conclusions Regarding the Hanssens and Simonson Surveys
    Upon consideration of the entirety of the record, including the 
facts and arguments indicated above, on balance, the Judges find the 
Hanssens Pandora Survey as well as the Simonson's Replicated and 
Modified Hanssens Surveys to be probative as to diversion behaviors of 
listeners of noninteractive streaming services regarding a loss of 
content and on switching to alternative sources of music. 
Notwithstanding the criticisms of the surveys, the Judges find the 
overall conduct of the surveys to have been rigorous and generally 
faithful to applicable best practices. Further, the replication and 
modification of the surveys, with generally consistent results, 
reinforce the Judges' finding that the collective results are probative 
in this proceeding. The Judges find that Professor Simonson's 
modifications (removing indications of dissatisfaction) ultimately had 
little impact on the results. Additionally, the Judges are persuaded 
that the issues raised regarding question 225 in the modified Hanssens 
survey, especially the criticism of the response ranges and 
interpretation of them, while not completely discounting of the 
results, do have merit. Therefore, the Judges rely more heavily on the 
results of the two consistent and replicated surveys.
    The overall structure of the Sirius XM survey was the same as the 
structure of the Pandora survey, and Professor Hanssens simply 
substituted ``Sirius XM over the Internet'' for ``free Internet radio 
services'' where necessary. Hanssens WDT ] 59. It included 150 
respondents, with only 131 non-excluded respondents. Hanssens WDT ] 70 
n.93. SoundExchange alleges that the sample size of Professor 
Hanssens's Sirius XM Survey was very small, making the results 
imprecise. Zauberman WRT ] 96. Professor Zauberman's analysis of 
Professor Hanssens's Sirius XM Survey indicated confidence intervals 
that are extremely wide. Professor Zauberman testified that the level 
of imprecision is problematic, especially when the estimates are then 
used for subsequent analyses. Id., citing Table 6. Pandora/Sirius XM 
asserts that the sample size of the Sirius XM survey was sufficient to 
draw statistically valid conclusions. Pandora/Sirius XM PFFCL ] 109. 
The Judges agree with the critique of the sample size of the 
unreplicated survey. Therefore, the Judges do not find sufficient basis 
to rely on the Sirius XM Survey.

B. Evaluation of Benchmark Evidence

1. The Subscription Benchmark/Ratio-Equivalency Models
    A SoundExchange economic expert witness, Mr. Orszag, presents a 
benchmark analysis to estimate the statutory royalty rate to be paid by 
noninteractive subscription services. Orszag WDT ]] 76-86. On behalf of 
Pandora, Professor Shapiro presents his benchmark analysis for this 
subscription royalty rate. Shapiro WDT at 39-40; see also id. at 30-38 
(Professor Shapiro's ad-supported benchmark analysis containing 
elements also applicable to his subscription benchmark analysis).
    Mr. Orszag and Professor Shapiro each claims that his benchmarking 
model faithfully applies the Judges' ``ratio equivalency'' benchmarking 
model applied in Web IV. Unsurprisingly, therefore, each of them 
criticizes the other's model as failing to follow that Web IV model. 
The Judges first set forth the essential elements of Mr. Orszag's 
adaptation of the Web IV ``ratio equivalency'' model and the criticisms 
of that approach. The Judges then engage in the same approach with 
regard to Professor Shapiro's model--identifying its essential 
elements--followed by Mr. Orszag's critiques. The Judges then proceed 
to a more granular analysis of the dueling positions of these 
economists and set forth factual findings in these regards. Finally, 
the Judges set forth the benchmark rates that follow from their 
analysis and findings regarding the models proffered by these two 
experts.
a. Mr. Orszag's Ratio-Equivalency Model
    As noted above, Mr. Orszag engages in a benchmark analysis to 
estimate an appropriate statutory royalty to be paid to record 
companies by noninteractive services for subscription services. Orszag 
WDT ] 9. Mr. Orszag concludes that rates set in the interactive 
subscription service market are reasonable and appropriate benchmark 
rates, subject only to a downward adjustment to reflect the added value 
of interactivity in that proposed benchmark market. Id. ]] 9, 11. By 
his approach, Mr. Orszag estimates a $0.0033 per-play royalty rate for 
performances on subscription services. Orszag WDT ]] 9, 86 & tbls.6,7. 
He proposes that the Judges adjust the rates to reflect annual changes 
in the Consumer Price Index, in a manner similar to the approach 
adopted in Web IV. Orszag WDT ] 8.
    Mr. Orszag finds the subscription interactive market to be an 
appropriate benchmark for the target noninteractive subscription market 
because (1) the sellers/licensors (record companies) are identical; (2) 
the buyers/licensees, although not identical, are sufficiently similar; 
and (3) the right being sold/licensed is identical in both markets, 
i.e., the right to play a sound recording. Id. ]] 54-56.
    In his benchmark comparison, Mr. Orszag avers that he is following 
the ``ratio equivalency'' approach undertaken by the Judges in Web IV. 
Orszag WDT ] 74. In Web IV, the Judges set forth the ``ratio 
equivalency'' formula as follows:

A/B = C/D

    In this Web IV ratio equivalency approach:

[A] = Avg. Retail Interactive Subscription Price
[B] = Interactive Subscriber Royalty Rate
[C] = Avg. Retail Noninteractive Subscription Price
[D] = Noninteractive Subscriber Royalty Rate

Web IV, 81 FR at 26337-38.\107\
---------------------------------------------------------------------------

    \107\ The ``ratio equivalency'' adopted by the Judges had been 
proffered by SoundExchange's economic expert witness, Professor 
Daniel Rubinfeld. Web IV, 81 FR at 26337. The Judges' reliance on 
Professor Rubinfeld's rationale for the use of the ratio equivalency 
approach is relevant in the present proceeding, as discussed infra.
---------------------------------------------------------------------------

    However, Mr. Orszag does not define inputs [A], [B], and [C] as 
they had been identified in Web IV. Instead, he defines these four 
inputs as follows:

[A] = Total Benchmark Subscription Revenue
[B] = Total Benchmark Subscription Royalty Payments
[C] = Total Noninteractive Subscription Revenue
[D] = Noninteractive Subscriber Royalty Rate

8/11/20 Tr. 1224-1226 (Orszag).\108\
---------------------------------------------------------------------------

    \108\ Input [C] is identified above as revenue from 
``noninteractive'' services. However, Mr. Orszag used three mid-tier 
services with limited interactivity--Pandora, iHeart and Napster 
(Rhapsody)--as his proxies for statutory noninteractive services. 
Mr. Orszag's use of these proxy services creates a dispute separate 
from the overarching modeling dispute considered here, and that 
dispute is addressed infra when the Judges examine the more granular 
issues relating to these two benchmarking models. Also, note that 
item [D] in the Web IV formula and Mr. Orszag's model are identical 
because [D] is not a modeling input but rather the output generated 
by the formula (i.e., the proposed statutory royalty rate).

---------------------------------------------------------------------------

[[Page 59492]]

    Mr. Orszag testifies that he departs from the Judges' Web IV 
definitions of inputs [A], [B], and [C] for two reasons, neither of 
which, he asserts, contradicts the Judges' rationale for using the 
``ratio equivalency'' approach in Web IV. Quite the contrary, he 
testifies that these departures were required, in order to make the Web 
IV approach meaningful in the present proceeding. First, Mr. Orszag 
notes that in Web IV, the Judges used per play rates as input [B] 
because ``none of the percentage-of-revenue prongs in the greater-of 
agreements in the record has been triggered, which may suggest that the 
parties to those agreements viewed the per-play rate as the rate term 
that would most likely apply for the length of the agreement.'' Web IV, 
81 FR at 26325. In other words, in Web IV the per-play rates were the 
effective rates.
    Second, Mr. Orszag testifies that this Web IV factual basis for 
using a stated per-play rate is no longer applicable because royalty 
payments under current interactive agreements are predominantly made 
pursuant to ``percentage of revenue'' prongs'' rather than per-play 
prongs, which are included ``only occasionally'' in current interactive 
agreements. Instead, according to Mr. Orszag, most current interactive 
agreements in the market instead contain a ``greater of'' rate 
formulation that includes a ``per-subscriber'' prong together with the 
``percent-of-revenue'' prong. Orszag WDT ] 77.
    As the value for his conception of [A], Mr. Orszag uses the gross 
revenues generated by Spotify from the performance of sound recordings 
from the three Majors and the Merlin-affiliated Indies over the most 
recent twelve-month period, April 2018-March 2019. Orszag WDT ]] 76, 
83-84, 86, tbl.7.\109\
---------------------------------------------------------------------------

    \109\ Mr. Orszag also analyzes data from Apple Music, Pandora, 
Amazon Music Unlimited, iHeart, Google, and Rhapsody, in addition to 
Spotify. He also obtains revenue data for the calendar year 2018. 
Orszag WDT tbls.6-7. However, he only uses the Spotify revenue data 
for the more recent of the two periods. Mr. Orszag also relies 
solely on Spotify royalty data from the same time period. Relying on 
the Spotify data for the most recent period ultimately yields 
[REDACTED] royalty rates in terms of percent-of-revenue and per-play 
rates [REDACTED] interactive services across each time period, id., 
which is [REDACTED] for the noninteractive services within Mr. 
Orszag's data set.
    Mr. Orszag states that he utilizes this lower royalty rate 
because he believes that [REDACTED]--a factor that weighs against 
any downward adjustment for the Majors' complementary oligopoly 
market power. Orszag WDT ] 86. This market power issue is discussed 
at length elsewhere in this Determination.
---------------------------------------------------------------------------

    For his version of [B], Mr. Orszag uses the royalties paid by 
Spotify to the Majors and the Indies. Again, he selected Spotify data 
over the same period, April 2018-March 2019, out of the seven total 
interactive services he considered. See supra note 109.
    To identify a percent-of-revenue rate from inputs [A] and [B], Mr. 
Orszag calculates the reciprocal of ([A])/([B]), which is the percent 
of revenue paid as royalties (i.e., ([B])/([A])). The A/B ratio of 
these data for Spotify over the relevant period is set forth below:

Revenues [A] = $[REDACTED]
Royalties [B] = $[REDACTED]

    The ([A])/([B]) ratio of the above figures equals [REDACTED]:1. 
Expressing this ratio factor as a reciprocal ([B])/([A])--thus 
expressing a percent of revenue royalty--results in a royalty rate 
calculation of [REDACTED]% (rounded). Orszag WDT ]] 84-85 & tbl.7.\110\
---------------------------------------------------------------------------

    \110\ In calculating the benchmark revenue and royalty totals 
(i.e., [A] and [B]) Mr. Orszag excludes all plans which Spotify 
offered at discounts off full retail prices, e.g., Spotify's family, 
student, employee, and trial plans, as well as its promotional 
offerings. Orszag WDT ] 85 tbl.7. Pandora criticizes his decision to 
omit from his analysis the revenues, royalties and play counts 
generated by these discount plans, as discussed infra.
---------------------------------------------------------------------------

    In order to obtain a value for [C] in his model, Mr. Orszag selects 
Pandora, iHeart, and Rhapsody as his mid-tier proxies for the 
noninteractive service sector. Orszag WDT tbl.6. He testifies that he 
chose these three services because they had entered into direct 
licenses with record companies, thereby allowing him access to royalty 
statements containing reliable and necessary information. Orszag WDT ] 
85 & tbl.7.
    Having obtained values for [A], [B], and [C], Mr. Orszag can 
calculate a value for [D], his proposed statutory royalty rate for 
subscription services. He begins by multiplying the percent-of-revenue 
rate he derives from the left side of his model ([REDACTED]%) by the 
total revenues ([C]), $[REDACTED], for his three noninteractive 
proxies. Orszag WDT ] 85 & tbl.7.
    Despite computing a percent-of-revenue rate in the benchmark market 
SoundExchange does not propose a percent-of-revenue statutory royalty 
rate; rather, it proposes a per-play rate. According to Mr. Orszag, a 
per-play rate is preferable in order to avoid difficulties arising out 
of (1) defining revenue across business models; (2) separating out the 
sound recording revenue royalty base when music is bundled downstream 
with the sale of other items; and (3) accounting for a service's 
potential business practice of strategically lowering downstream 
prices. Orszag WDT ] 82. Accordingly, Mr. Orszag needs to apply his 
[REDACTED]% royalty percentage--derived from the left-hand/interactive 
benchmark market--so as to calculate a per play royalty rate for the 
right-hand/noninteractive target market.
    To effect this conversion to a per play metric, Mr. Orszag divides 
the foregoing revenue figure by the number of plays on Pandora, iHeart, 
and Rhapsody over the relevant period (May 2018-April 2019), which is 
[REDACTED] plays. The quotient of that division equals $0.0033 per 
play, which is the value for [D] in Mr. Orszag's model and therefore 
his recommended per play rate for noninteractive subscription services. 
Orszag WDT ]] 85-86 & tbl.7.\111\
---------------------------------------------------------------------------

    \111\ Determining this per-play rate from the same Figure 7 data 
in another manner, Mr. Orszag notes that his three proxies for 
noninteractive subscription services had a combined average revenue 
per play of $[REDACTED] ($[REDACTED] [REDACTED] divided by 
[REDACTED] billion plays) in the May 2018-April 2019 period. 
Multiplying this average revenue per play by the [REDACTED]% royalty 
rate for interactive subscription services results in the per-play 
royalty of $0.0033. Orszag WDT ] 85 & tbl.7.
---------------------------------------------------------------------------

b. Pandora's Criticisms of Mr. Orszag's Application of the ``Ratio 
Equivalency'' Model
    The Services claim that the ``first and foremost error'' in Mr. 
Orszag's subscription benchmark analysis is his failure to correctly 
apply the Web IV ``ratio equivalency model.'' Shapiro WRT at 24-27. 
This alleged error supposedly begins with Mr. Orszag's insertion of 
different inputs into that Web IV model.
    More specifically, the Services point out that Mr. Orszag's 
benchmark royalty input [B] is not a contractual per-performance 
royalty rate as in Web IV but rather the total royalties paid by his 
benchmark service, Spotify. 8/19/20 Tr. 2892-93 (Shapiro). Similarly, 
the Services note that Mr. Orszag did not use in the two numerators of 
his ``ratio equivalency'' formula (i.e., [A] and [C]), respectively) 
the ``average monthly retail subscription prices'' that were used in 
the Web IV formulation of the model. Rather, Mr. Orszag substituted for 
[A] Spotify's total subscription revenue and for [C] the total 
subscription revenue earned by Pandora, iHeart, and Rhapsody, his 
``mid-tier'' (i.e., limited interactive) proxies for a noninteractive 
subscription services. See Services PFFCL ] 163 (and record citations 
therein).
    The Services take issue with Mr. Orszag's method of solving for 
[D], total

[[Page 59493]]

royalties to be paid. Again, Mr. Orszag multiplies his calculated 
[REDACTED]% interactive (benchmark) royalty rate by the total 
noninteractive revenue and (in the final step of his analysis) divides 
the total target [noninteractive] royalties [D] by the total plays on 
the three mid-tier services. See Services PFFCL ] 163 (citing Orszag 
WDT ] 85, tbls.6-7.)
    According to the Services, the effect of Mr. Orszag's foregoing 
``ratio equivalency'' approach is as follows:

[R]ather than charging the target statutory services the same per-
play rate as the benchmark services [before any adjustments], as in 
Web IV, his model is set up to compute a rate where the target 
market services . . . based on their prior revenues and play counts 
. . . instead pay the same percentage of revenue as the benchmark 
services.

Services PFFCL ] 164 (citing Shapiro WRT at 25); 8/19/20 Tr. 2897 
(Shapiro).
    The Services criticize the foregoing approach by Mr. Orszag on 
several grounds. First, the Services find his modeling to be 
irreconcilable with the Web IV Determination in which, they claim, the 
Judges affirmatively rejected a percentage-of-revenue royalty metric 
for the statutory license. Services PFFCL ] 24 (citing Web IV, 81 FR at 
26325-26).\112\
---------------------------------------------------------------------------

    \112\ To be clear, in Web IV, the Judges did not reject the use 
of ``percent-of-revenue'' royalties because they were legally or 
economically inappropriate. Rather, the Judges there expressly 
rejected SoundExchange's proposed ``greater-of'' rate proposal and 
chose to utilize only the per play rates within such benchmarks 
because the evidence demonstrated that ``none of the percentage-of-
revenue prongs in the greater-of agreements in the record has been 
triggered.'' Web IV, 81 FR at 26325. Thus, the Judges did not reject 
the concept of using a percent-of-revenue based royalty rate as a 
benchmark for noninteractive services for legal or economic reasons 
but rather for factual reasons particular to the Web IV record. Cf. 
SDARS III, 83 FR at 65221-22, 65229, and Phonorecords III, 84 FR at 
1934 (both adopting percent-of-revenue royalty rates).
---------------------------------------------------------------------------

    Second, the Services find Mr. Orszag's approach to be 
``unjustified'' (as well as ``roundabout'' and ``unnecessary'') because 
SoundExchange is not actually advocating for a percent-of-revenue 
royalty but rather for a per-play rate. 8/19/20 Tr. 2893 (Shapiro); 
Shapiro WRT at 27-28. Alternately stated, the Services claim that 
because the royalty being set is a per-play royalty and not a 
percentage-of-revenue rate, the appropriate starting point for the 
benchmarking exercise is a per-play rate derived in the benchmark 
market and then subjected to any adjustments necessary to correct for 
potential differences between the benchmark and target markets. Shapiro 
WRT at 24-25; Peterson WDT ]] 13, 15.
    As stated supra, before the Judges analyze Mr. Orszag's benchmark 
ratio equivalency approach and the objections thereto, they find it 
beneficial to next consider Professor Shapiro's benchmark ratio 
equivalency model and Mr. Orszag's objections thereto. Thereafter, the 
Judges can better compare and contrast these two benchmark models. The 
Judges proceed in that manner below.
c. Professor Shapiro's Subscription Model
    Professor Shapiro also uses the interactive market as his 
benchmark, relying on direct licenses between eleven interactive 
services \113\ and the three Majors (Sony, Universal, and Warner). 
Shapiro WDT at 41; 8/19/20 Tr. 2826 (Shapiro). He compares the 
interactive benchmark market to the noninteractive target market by 
purporting to use the Web IV framework. More particularly, Professor 
Shapiro asserts that he is using the same definitions as used in Web IV 
for inputs [A], [B], and [C] in his ``ratio'' equivalency model in 
order to generate output [D] as a per-play rate.
---------------------------------------------------------------------------

    \113\ The eleven interactive services are Amazon Prime, Amazon 
Unlimited, Apple, Deezer, Google Music, Napster, Pandora, Slacker, 
SoundCloud, Spotify, and Tidal. Shapiro WDT at 40 tbl.10.
---------------------------------------------------------------------------

    By his approach, Professor Shapiro proposes that the statutory rate 
for subscription services fall within a range between $[REDACTED] and 
$[REDACTED] per play. He also proposes that the range should be indexed 
to for inflation, using 2019 as the base year (i.e., the same year from 
which he obtained data), over the 2021-2025 rate period. Shapiro WDT at 
2.
    To compute a value for [A] in his ratio equivalency model, 
Professor Shapiro utilizes the same category of values as used by 
Professor Rubinfeld in Web IV--the monthly retail price for 
undiscounted subscription plans--which is $9.99 per month. 8/19/20 Tr. 
2828 (Shapiro) (``I'm following very closely what was done in Web IV by 
Professor Rubinfeld, actually, and then adopted by the Judges . . . 
based on the . . . retail prices for these plans, and that's [$]9.99 . 
. . .'').
    To calculate input [B], Professor Shapiro analyzes the most recent 
12-month period for which data was available, May 2018 through April 
2019. He calculates the average ``effective'' per-performance royalty 
rates paid by ten of the eleven services (weighted by each service's 
percentage of total performances).\114\ The plays by the largest 
interactive services, [REDACTED] and [REDACTED], account for 
[REDACTED]% and [REDACTED]% of total plays, respectively, thus 
dominating the weighted average. Shapiro WDT at 40 tbl.10. Professor 
Shapiro then divides (i) the total royalties paid by the ten 
interactive services in his model\115\ by (ii) the number of 
interactive plays, to obtain a value for [B], $[REDACTED], his 
effective per-play rate in the interactive benchmark market. Id.\116\
---------------------------------------------------------------------------

    \114\ Professor Shapiro excludes [REDACTED] from the calculation 
``due to insufficient data,'' but the exclusion has de minimis 
impact, he asserts, because [REDACTED] accounted for only 
[REDACTED]% of the 358.7 billion plays in Professor Shapiro's 
benchmark grouping. Shapiro WDT at 40.
    \115\ Unlike Mr. Orszag, Professor Shapiro calculates [B] 
(effective per-play rate) by utilizing the revenue and royalties 
generated by all interactive plans, including discounted interactive 
plans such as student, family and military plans, in addition to the 
revenue from undiscounted plans. And (because he is calculating an 
effective per-play rate in the benchmark interactive market), 
Professor Shapiro also incorporates into his calculation of [B] the 
number of interactive plays. 8/19/20 Tr. 2827 (Shapiro). By 
contrast, when calculating his value for [A], Professor Shapiro 
instead uses only the full (undiscounted) retail price of an 
interactive service rather than including in the value of [A] the 
retail price of discounted interactive plans. These issues are 
addressed in connection with the discussion of the more granular 
benchmark model issues, infra.
    \116\ The total interactive royalties and interactive plays thus 
are inputs used to calculate the value of [B] in Professor Shapiro's 
model rather than stated inputs in the ratio.
---------------------------------------------------------------------------

    Professor Shapiro avers that his only departure from the Web IV 
approach is in his calculation of input [B], a departure born of 
necessity. Specifically, he notes that he could not use a per-play rate 
in the interactive benchmark market because (as Mr. Orszag also 
acknowledges) the majority of contracts between the Majors and the 
interactive services no longer contains a stated (headline) per-play 
prong. Thus, he had no alternative but to substitute an ``effective'' 
per-play rate as input [B]. Shapiro WDT at 41.
    Of particular note here is a distinction between Professor 
Shapiro's approach and that taken by Mr. Orszag because the latter does 
not calculate a per-performance ``effective'' rate in the interactive 
benchmark market. Rather, as discussed supra, Mr. Orszag calculates the 
``effective'' percent-of-revenue paid as royalties in the benchmark 
interactive market ([REDACTED]%).
    Claiming to continue to follow Web IV, Professor Shapiro next 
identifies the weighted average retail subscription price for the 
noninteractive proxies on the right-hand side of his ratio, $4.99/
month, as the value for [C], the numerator in the right-hand side of 
the ``ratio equivalency'' formula. Shapiro WDT tbl.9; 8/19/20 Tr. 2828 
(Shapiro). Thus, having identified values for inputs [A], [B], and [C], 
his model solves

[[Page 59494]]

for [D], including an implicit interactivity adjustment \117\ that is a 
function of the ratio equivalency formula. This value (before any 
further adjustments) is $[REDACTED] per play.\118\
---------------------------------------------------------------------------

    \117\ Note that Professor Shapiro also proposes an additional 
``second interactivity adjustment,'' which the Judges address infra 
in their analysis of the details of Professor Shapiro's ratio 
equivalency benchmarking model.
    \118\ Professor Shapiro's $[REDACTED] per play (prior to 
adjustments other than an initial interactivity adjustment which is 
implicit in the model) is calculated as follows:
    (1) $[REDACTED] divided by $[REDACTED] equals $[REDACTED] 
divided by [D]
    (2) cross-multiplying: $[REDACTED] multiplied by [D] equals 
$[REDACTED] multiplied by $[REDACTED]
    (3) calculating the above step: $[REDACTED] multiplied by [D] 
equals [REDACTED]
    (4) dividing both sides by $[REDACTED] solves for [D] equals 
$[REDACTED] (rounded)
---------------------------------------------------------------------------

d. SoundExchange's Criticisms of Professor Shapiro's Benchmark Model
    As an initial matter, SoundExchange does not categorically reject 
Professor Shapiro's benchmarking approach. Rather, it asserts that 
identifying the effective per performance rate paid by the interactive 
services is not the ``necessary'' starting point for such an analysis. 
SX RPFFCL (to Pandora/Sirius XM) at 67 (emphasis added). In a similar 
vein, SoundExchange asserts that ``there is simply no reason why one 
must base the analysis on effective per-play rates in the benchmark 
market . . . .'' SX PFFCL ] 111 (emphasis added).
    Nonetheless, SoundExchange finds Professor Shapiro's application of 
the Web IV approach wanting. As an initial matter, SoundExchange 
disagrees with Professor Shapiro's understanding that the Web IV model 
should be applied so as to generate a per-play rate in the benchmark 
(interactive) market. Rather, SoundExchange argues that in Web IV the 
Judges required that the denominators [B] and [D] should reflect the 
effective royalty rate--in whatever manner that royalty rate was 
established in the benchmark market--so that the ratios [A]/[B] and 
[C]/[D] would be equivalent. And, the present record reflects that most 
of the interactive (benchmark) rates are set, as a matter of contract 
(that is to say, in the market), as a percent of revenue. (This is in 
contrast to the record in Web IV which revealed that, pursuant to 
marketplace contracts, the royalty rate was set on a stated per-play 
basis).\119\ Given this change in market reality, SoundExchange asserts 
that--for the ratios to be equivalent in the benchmark and target 
market--the ratio [B]/[A] is the effective benchmark royalty rate. SX 
PFFCL ] 105 (citing 8/11/20 Tr. 1226 (Orszag) (``[B] over [A] 
representing the effective percentage of revenue royalty rate paid by 
the benchmark service'')).
---------------------------------------------------------------------------

    \119\ SoundExchange also relies on statements in Web IV 
indicating that the Judges there were intending to set a per-play 
rate that effectively provided record companies with the same 
percentage of revenue in the target (noninteractive) market as in 
the benchmark (interactive) market. See SX RPFFCL (to Pandora/Sirius 
XM) ] 189 (citing Web IV, 81 FR at 26326, 26338). The Judges discuss 
infra how those Web IV statements bear on the ratio equivalency 
issues raised in the present proceeding.
---------------------------------------------------------------------------

    According to SoundExchange, it is for the foregoing reason that 
Professor Shapiro should not have taken his intermediate step of 
deriving an effective per-play rate in the benchmark (interactive) 
market. Rather, according to SoundExchange, he should have solved for 
[D] (the statutory rate, by (1) applying the benchmark (interactive) 
percentage derived from the ratio [B]/[A], (2) multiplying that 
percentage by [C], and (3) dividing that product by the number of 
noninteractive plays. Simply put, SoundExchange (unsurprisingly) 
asserts that, in order to follow the Web IV approach, Professor Shapiro 
needed to utilize Mr. Orszag's approach.\120\
---------------------------------------------------------------------------

    \120\ As noted supra, this criticism relates solely to the 
modeling aspects of Professor Shapiro's benchmark model. 
SoundExchange levels other criticisms at Professor Shapiro's 
application of his benchmark model, which are discussed infra.
---------------------------------------------------------------------------

e. The Judges' Analysis and Findings Regarding the ``Ratio 
Equivalency'' and Benchmarking Issues
    SoundExchange and Pandora accuse each other of misapplying the 
Judges' ratio equivalency approach adopted in Web IV. However, the 
broadsides by each side miss the mark, as explained below. The parties' 
attacks are off-target because, in Web IV, the effective rates upon 
which the Judges relied were also the stated per-play rates in the 
benchmark (interactive) agreements.
    Thus, Pandora is incorrect in arguing that Mr. Orszag misapplies 
Web IV. Rather, consistent with Web IV, he relies on and applies the 
royalty terms in the benchmark agreements which are based on a percent-
of-revenue royalty prong within their greater-of rate formulae. 
Therefore, it is incorrect to say that Mr. Orszag acted in a manner 
inconsistent with Web IV by (1) using benchmark (interactive) total 
revenue as the metric for [A]; (2) using benchmark (interactive) total 
royalties for [B]; (3) calculating the reciprocal, [B]/[A], as the 
effective benchmark (interactive) percent-of-revenue royalty rate; and 
(4) applying that percent ([REDACTED]%) to the total revenue in the 
target (noninteractive) market.
    But, neither has Professor Shapiro run afoul of Web IV. Consistent 
with Web IV, Professor Shapiro calculates an effective per play rate in 
the benchmark (interactive) market by applying the actual prong 
utilized in that market--the percent-of-revenue prong--and then 
identifies an [A]/[B] ratio to apply to the target (noninteractive) 
market. In Web IV, the Judges also explicitly identified a per-play 
rate as the appropriate rate to use for [B] and, as undertaken by 
Professor Shapiro, utilized the retail price for the benchmark 
(interactive) subscription as the value for [A].\121\
---------------------------------------------------------------------------

    \121\ Moreover, as noted supra, SoundExchange does not reject 
Professor Shapiro's approach but rather asserts only that his 
starting point of identifying the effective performance rate paid by 
the interactive services is neither necessary nor mandatory. That is 
a far cry from an outright rejection. Further, the fact that such an 
approach might not be necessary or mandatory does not mean that it 
is inappropriate or without significant value.
---------------------------------------------------------------------------

    But, then a puzzle presents: How can both approaches be both 
correct and thus incorrect? Are we faced with a paradox analogous to 
that of ``Schr[ouml]dinger's Cat''? \122\ The resolution of the paradox 
lies in two points: (1) When the Judges in Web IV extracted the ratio 
equivalency methodology out of the record evidence, they intentionally 
eliminated the linkage between per-play rates and percent-of-revenue 
rates in the ``greater-of'' rate formulae present in the benchmark 
interactive market agreements; and (2) in the present proceeding, 
benchmark (interactive) royalties are paid predominantly as a 
``percent-of-revenue,'' whereas in Web IV they were paid on a per-play 
basis.\123\ The Judges analyze below the impact of these two factors on 
the application of the benchmark models in the present proceeding.
---------------------------------------------------------------------------

    \122\ ``Schr[ouml]dinger's Cat'' refers to a thought experiment 
regarding a theory of quantum mechanics involving a cat--sealed in a 
box with a flask of poison and a radioactive source--that, under the 
theory, conceptually may simultaneously be alive and dead. 
``Schr[ouml]dinger's Cat'' has been extended in popular culture as a 
way to identify something as a paradox, unfeasible, or working 
against itself. See https://www.dictionary.com/e/tech-science/schrodingers-cat/?itm_source=parsely-api (last visited May 25, 
2021).
    \123\ In fact, the record reflects that [REDACTED] and that 
[REDACTED]. 8/11/20 Tr. 1207-08 (Orszag); 8/20/20 Tr. 3000 
(Shapiro). See SX PFFCL ] 112 (and record citations therein).
    Although the Services do not acknowledge such a sweeping 
abandonment of stated per-play rates, Professor Shapiro recognizes 
that ``[REDACTED].'' Shapiro WDT at 39.
---------------------------------------------------------------------------

i. De-Coupling of Contractual Per-Play and Percent-of Revenue Rates in 
Web IV
    The contrasting attempts by Mr. Orszag and Professor Shapiro to 
follow the Web IV ``ratio equivalency'' faithfully derive from the 
particular

[[Page 59495]]

factual and economic circumstances in Web IV. In that proceeding, 
SoundExchange had not proposed a stand-alone per-play rate. Rather, it 
had proposed that the Judges adopt a ``greater-of'' rate structure, in 
which the statutory subscription royalty rate would be the greater of 
(1) $0.0025 per play and (2) 55% of service revenue. Web IV, 81 FR at 
26335. In support of that structure, SoundExchange, through its 
economic expert, Professor Daniel Rubinfeld, asserted, inter alia, that 
(1) ``the per-play prong provides a guaranteed revenue stream'' and (2) 
``the percentage-of-revenue prong allows record companies to share in 
any substantial returns generated by a Service.'' Web IV, 81 FR at 
26324. Thus, SoundExchange proposed the per-play rate--not as a stand-
alone value, but rather as a partial metric--one that it believed 
served as a ``guarantee''--a floor on the percent-of-revenue 
effectively paid as royalties.\124\
---------------------------------------------------------------------------

    \124\ Professor Rubinfeld apparently relied on per-play 
royalties as input [B] in his ``ratio equivalency'' approach because 
the per-play prongs were the ones triggered in the market and his 
intention was to faithfully utilize actual market data.
---------------------------------------------------------------------------

    As noted supra, in Web IV the Judges rejected the ``greater-of'' 
structure and adopted a per-play rate structure. But, their decision 
was not unrelated to the valuation of the royalty payments as a 
function of revenue. Rather, the Judges adopted the per-play rate 
approach in reliance upon Professor Rubinfeld's testimony that his 
``ratio equivalency'' methodology resulted in a per-play royalty 
payment ($0.0025) that approximated 55% of service revenue, which, as 
noted above, was SoundExchange's percent-of-revenue royalty proposal. 
Web IV, 81 FR at 26324 n.44, 26326. Thus, in Web IV the Judges 
understood that the per-play rate was not proposed as a purely 
independent measure of the value of an individual play, but rather as a 
metric that was also designed to approximate a minimum royalty rate of 
55% of revenue.
    Importantly, when the Judges in Web IV de-coupled the percent-of-
revenue and per-play rates, rejecting the former approach and adopting 
the latter, the Judges also eliminated the capacity of the per-play 
rate to serve its limited function as a form of ``guarantee.'' Thus, 
the royalty rate paid by noninteractive subscription services during 
the Web IV 2016-2020 rate period--as adjusted (for other reasons) by 
the Judges from $0.0025 to $0.0022 for 2016--did not correspond with 
any particular percent-of revenue floor. Rather, the effective percent-
of-revenue paid as a royalty would vary with the level of 
noninteractive service revenue and quantity of plays.\125\
---------------------------------------------------------------------------

    \125\ By contrast, if the Judges had adopted only a percent-of-
revenue structure, the royalty paid by a noninteractive service 
obviously would have remained at that fixed percentage.
---------------------------------------------------------------------------

    With Web IV having severed the link between percent-of-revenue and 
per-play rates, the attempts in this proceeding by Mr. Orszag and 
Professor Shapiro to adopt the Web IV ratio equivalency approach--in 
order to set a per-play rate derived from a percent-of-revenue rates--
are problematic because, as in Web IV, the per-play rate is untethered 
to a percent-of revenue rate. Indeed, despite their best efforts, 
neither Mr. Orszag nor Professor Shapiro could synthesize what Web IV 
had (for good reason) torn asunder.
ii. In the Benchmark (Interactive) Market, Per-Play Rates Were Paid in 
the Web IV Era; but in the Web V Era Percent-of Revenue Rates Are Now 
Paid
    Whereas in Web IV the actual rate in the benchmark (interactive) 
market and the proposed target statutory rate were both per-play rates, 
in this Web V proceeding the actual benchmark rate is now most often a 
percent-of-revenue rate. Despite this important change in the benchmark 
(interactive) market, the parties agree that the statutory rate should 
remain a per-play rate.
    Accordingly, the parties' criticisms not only miss the mark, they 
fail to illuminate the issue at hand. The Judges need to revisit the 
economic principles identified in Web IV that undergird the ratio 
equivalency approach in order to apply that formula to the present 
record.
    The concept of ratio equivalency is based on the principle that 
record companies, as licensors, in a hypothetical unregulated world 
``would want to make sure that the marginal return that they could get 
in each sector [interactive and noninteractive] would be equal, because 
if the marginal return was greater in the interactive space than the 
noninteractive . . . you would want to continue to pour resources, 
recordings in this case, into the [interactive] space until that 
marginal return was equivalent to the return in the noninteractive 
space.'' Web IV 81 FR at 26344. This is an example of ``a fundamental 
economic process of profit maximization,'' id., one that ``pervades 
much of [e]conomics: A rational seller or licensor will ``[a]llocate 
resources among alternative uses so as to keep the marginal returns 
equal, or as near equal as possible [because] if marginal products 
aren't equal, there's a gain to be had by reallocating some resources 
from the use with the lower marginal product and assigning them where 
the marginal product is higher.'' Armen A. Alchian & William R. Allen, 
Universal Economics at 102 (2018) (summarizing this principle as ``the 
equalization of marginals at the maximum aggregate return''). In the 
present case, this economic logic implies that rational profit-
maximizing record companies will seek to earn the same return for each 
relevant ``unit'' of value across both the interactive and 
noninteractive markets.
    In Web IV, the metric for the royalty rate was per play, i.e., each 
individual performance of a copy of a sound recording. However, 
downstream revenue is not generated on a per-play basis. Rather, in the 
case of streaming subscriptions, marginal revenue can be generated by 
incremental increases in the number of subscriptions.\126\ A record 
company would seek to avoid a scenario where it loses marginal royalty 
revenue on each subscription dollar if listeners who would otherwise 
have chosen to become interactive subscribers instead decide to become 
noninteractive subscribers. By equalizing the percent of revenue paid 
as royalties per subscription dollar, the rational record company is 
indifferent regarding to which of these two forms of music services a 
consumer decides to subscribe.\127\ (And, it should also be noted, on 
the cost (supply) side, a particular feature of copies of sound 
recordings is that their transmission does not generate a marginal 
physical production cost. See Phonorecords III Dissent, 84 FR at 1976 
(and citations therein)).\128\
---------------------------------------------------------------------------

    \126\ Services could also hypothetically increase marginal 
revenue simply by raising subscription prices. There is no evidence 
in the record, though, indicating that services have the market 
power to increase subscription prices charged within various 
segments of the retail market.
    \127\ Of course, concern for substitution is appropriate only if 
the two services are indeed substitutes among consumers. This 
important point is considered infra.
    \128\ The Phonorecords III majority Determination does not 
conflict with this economic point.
---------------------------------------------------------------------------

    This is the precise point on which Professor Rubinfeld relied and 
as to which the Judges in Web IV agreed. Thus, the actual economic 
concern in Web IV was setting rates based on a per-play rate that was a 
marketplace proxy for a minimum percent-of-revenue earned by an assumed 
substitute service, i.e., interactive services (approximately 55%), 
which generates marginal opportunity costs.\129\
---------------------------------------------------------------------------

    \129\ To be clear, that concern is not the end of the story. 
Potential adjustments also need to be considered to reflect 
effective competition, differences in WTP for substitutes (for 
example, because of interactivity differences), and inconsistent 
definitions of a ``play'' between service types (the ``skips'' 
issue).

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[[Page 59496]]

    In the present case, SoundExchange makes this point repeatedly, 
citing to language in the Web IV Determination. See, e.g., id. at 26338 
(``[G]iven Dr. Rubinfeld's assumption that the ratios should be equal 
in both markets, the per-play royalty rate for noninteractive services 
[D] (i.e., the statutory rate) would also have to provide record 
companies with the same minimum percentage of revenue out of [C] (the 
average monthly retail noninteractive subscription price).'') (emphasis 
added); id. at 26344 (``Dr. Rubinfeld acknowledged that his `ratio 
equivalency' was intended to create a rate whereby every marginal 
increase in subscription revenue would result in the same increase in 
royalty revenue, whether that marginal increase in subscription 
occurred in the interactive market or the noninteractive market.'') 
(emphasis added); id. at 26324 n.44 (noting that Dr. Rubinfeld's ratio 
equivalency per-play methodology resulted in an interactive royalty 
payment generally ranging from 50% to 60% of subscription revenues, 
with most falling between 55% and 60%); id. at 26338 (the per-play 
rates relied upon by Dr. Rubinfeld implied these same express percent-
of-revenue rates as set forth in the ``greater-of'' formulae in the 
interactive direct licenses). To buttress this point, SoundExchange 
notes that the Judges' restatement in SDARS III of the ``ratio 
equivalency'' model is consistent with the understanding that this 
approach is intended to equalize royalties as a percent of revenue. SX 
PFFCL 119 (citing SDARS III, 83 FR at 65243 n.137).
    The Judges agree with SoundExchange's assertion in this regard. 
Accordingly, the Judges find that the Web IV ``ratio equivalency'' 
approach was properly intended to approximate and equalize percent-of-
revenue royalties for interactive and noninteractive subscriptions--on 
the assumption that interactive and noninteractive subscriptions were 
1:1 substitute products for consumers downstream. If and when such 
substitution exists, Mr. Orszag's ``ratio equivalency'' approach is the 
more appropriate methodology.
    Nonetheless, based on the record in this proceeding, the Judges do 
not find good reason to apply Mr. Orszag's benchmark rate other than in 
a partial manner. That is, because the ``ratio equivalency'' approach 
is economically premised on a presumed high substitutability (cross-
elasticity in economic parlance) between interactive and noninteractive 
subscriptions, this equivalency cannot be economically pertinent where, 
as here, the record presents the Judges with facts in conflict with 
that presumption.
    Again, recall that in Web IV, the Judges stated: ``Dr. Rubinfeld's 
`ratio equivalency' assumes a 1:1 `opportunity cost' for record 
companies, whereby, on the margin, a dollar of revenue spent on a 
subscription to a noninteractive service is a lost opportunity for 
royalties from a dollar to be spent on a subscription to an interactive 
service.'' Web IV, 81 FR at 26344-45 (emphasis added). To make clear 
that the Web IV Judges found this 1:1 substitutability to be a 
presumption (and certainly not an axiom), they rejected SoundExchange's 
attempt to extend this 1:1 substitution argument to the ad-supported 
market in order to equalize royalties as a percent of revenues in that 
market with the percent applicable in the subscription interactive 
market. In rejecting this attempted extension of the 1:1 
substitutability presumption, the Judges took note of a sharp dichotomy 
in the willingness to pay (WTP) of listeners in each market. Web IV, 81 
FR at 26345-46, 26353.
    However, the Judges did apply a 1:1 substitutability of 
subscription interactive services for subscription noninteractive 
services in Web IV and noted its limited application:
    Dr. Rubinfeld's interactive benchmark is only applicable when, 
inter alia:

    Revenues in both markets are derived from subscription revenues 
and are thus reflective of buyers with a positive WTP for streamed 
music; [and] functional convergence and downstream competition for 
potential listeners indicate a sufficiently high cross-elasticity of 
demand as between interactive and noninteractive services, provided 
the noninteractive subscription rate is reduced to reflect the 
absence of the added value of interactivity . . . .

Web IV, 81 FR at 26353 (emphasis added). Applying these principles, Web 
IV held:

    When the segment of the market at issue consists of willing 
buyers/licensees who are providing access through subscription-based 
listening to listeners who have a WTP for either interactive or 
noninteractive services that are close substitutes, then Dr. 
Rubinfeld's ``ratio equivalency'' is reasonably based on revenues.

Web IV, 81 FR at 26348 (emphasis added).
    These quoted portions of Web IV show that the Judges dichotomized 
between Dr. Rubinfeld's use of the ``ratio equivalency'' model by 
rejecting it for the ad-supported noninteractive services but applying 
it to subscription noninteractive services. But these quoted portions 
also demonstrate that the Judges applied a ``ratio equivalency'' across 
the benchmark and target subscription markets by presuming that 
subscribers' revealed positive WTP for both interactive and 
noninteractive services was sufficient to show the necessary cross-
elasticity and, relatedly, that each product was a close substitute for 
the other (after making an adjustment for interactivity.\130\
---------------------------------------------------------------------------

    \130\ Such an assumption was not unreasonable as there were no 
``opportunity cost'' surveys such as in the present case indicating 
the extent of cross-elasticity or substitutability of interactive 
and noninteractive subscriptions. As discussed, infra, that 
evidentiary absence does not exist in the present proceeding. Also, 
in Web IV, the $0.0025 benchmark (adjusted to $0.0022) that presumed 
this 1:1 substitutability was consistent with Pandora's own proposed 
benchmark derived from its noninteractive market agreement with 
[REDACTED]. Web IV, 81 FR at 26405.
---------------------------------------------------------------------------

    In the present proceeding, a consumer survey in evidence, 
commissioned by SoundExchange--the Zauberman Survey--provides relevant 
information regarding the question of whether and to what extent 
subscription interactive services are substitutes for subscription 
noninteractive services. As analyzed and applied by one of 
SoundExchange's other economic expert witnesses, Professor Willig, the 
Zauberman Survey indicates that only 11.5% of subscribers to 
noninteractive services would divert to listening to subscription 
interactive services if their noninteractive subscription service were 
no long available. See Willig WDT ] 47 fig.6.\131\ These survey results 
indicate there is far less than the 1:1 substitution ratio between 
subscription interactive services and subscription noninteractive 
services that was presumed in Web IV. This SoundExchange-proffered 
evidence indicates that Mr. Orszag's per-play rate--derived from his 
ratio equivalency approach--has only limited applicability.
---------------------------------------------------------------------------

    \131\ The Hanssens Survey indicates, according to Professor 
Shapiro, that this diversion to new interactive subscriptions would 
be even smaller, measuring [REDACTED]%. Shapiro WDT at 28 tbl.5. 
This lower figure would not alter the weights assigned to the 
benchmarking and ratio-equivalency models.
---------------------------------------------------------------------------

    Moreover, in Web IV and also in SDARS III, the Judges laid out this 
precise critique of a ratio equivalency approach proffered by Mr. 
Orszag, with the Judges also relying on survey evidence to make the 
point:

    The survey results highlight a . . . criticism . . . of Mr. 
Orszag's ratio equivalency approaches. . . . [T]he economic 
rationale support[ing] a ratio equivalency approach requires 
`significant competition, or a high cross-elasticity of demand, 
between

[[Page 59497]]

[the target market] and [the benchmark market] . . . . [A] limited 
degree of head-to-head competition . . . will not suffice. . . .' 
Web IV, 81 FR at 26353 . . . .
    In Web IV, the Judges stated that the ratio equivalency approach 
might be appropriate if the record reflected . . . a sufficiently 
high cross-elasticity of demand as between interactive and 
noninteractive services, provided the noninteractive subscription 
rate is reduced to reflect the absence of the added value of 
interactivity. . . . 81 FR at 26353.
    In the present case, Mr. Orszag did not provide either 
qualitative or quantitative evidence of a sufficiently high cross-
elasticity. . . . [T]he survey results reported by SoundExchange's 
own survey witnesses . . . indicated that there is no such high 
substitutability between subscribership to interactive services and 
[the target market.] These survey conclusions negate any complete or 
overwhelming ratio equivalency Mr. Orszag has posited.

SDARS III, 83 FR at 65247 (emphasis added).\132\
---------------------------------------------------------------------------

    \132\ The Judges are perplexed by SoundExchange's decision to 
propose a per-play rate as opposed to a percent-of-revenue rate. Mr. 
Orszag could have more simply applied his [REDACTED]% percent-of-
revenue rate as the applicable benchmark rate (subject to any 
warranted adjustments). Further, the Judges note that the Majors and 
the services revealed their [REDACTED] in the interactive market--a 
market that is unregulated and [REDACTED] to the record companies 
than the noninteractive market. Compare Orszag WDT tbl.4 (2018 U.S. 
interactive subscription revenue was $[REDACTED]) with id. tbl.6 
(2018 U.S. subscription revenue for Mr. Orszag's noninteractive 
proxies (including Pandora) was $[REDACTED], [REDACTED]% of the 
interactive revenue). There is no reason provided in the record to 
explain why SoundExchange and Mr. Orszag would find practical issues 
relating to revenue definition--which were insufficient to reject a 
percent-of-revenue rate in the far larger and unregulated 
interactive market--to be so vexing in the noninteractive market as 
to necessitate the conversion of the benchmark percent-of-royalty 
rate into a statutory per-play rate.
---------------------------------------------------------------------------

iii. The Judges' Application of Mr. Orszag's and Professor Shapiro's 
Models
    In sum, Professor Shapiro's model is more of a traditional 
benchmarking model. He identifies the interactive market as similar in 
terms of licensors, licensees, and licensed works, and he proposes 
adjustments (discussed infra) that allegedly correct for differences 
between the otherwise analogous benchmark and target markets. On the 
other hand, Mr. Orszag's approach is essentially an ``opportunity 
cost'' model more than it is a traditional ``benchmark model.'' Because 
SoundExchange's survey evidence, as applied by Professor Willig, 
reveals the limited applicability of the opportunity cost approach, the 
model cannot be extended to the entire market.
    Therefore, the Judges find it necessary to apportion the 
applications of Professor Shapiro's benchmark result and Mr. Orszag's 
benchmark result. The Judges find it reasonable to apportion 11.5% of 
Mr. Orszag's proposed benchmark rate toward the subscription benchmark 
rate.\133\ The Judges apply the remaining and greater weight, 88.5% 
(i.e., 1-.115), to the more traditional benchmark approach undertaken 
by Professor Shapiro that relies on the broad similarities in terms of 
rights, licensors, and licensees, without adding assumptions regarding 
substitution patterns between the target noninteractive subscription 
market and the benchmark interactive subscription market.
---------------------------------------------------------------------------

    \133\ The Judges prefer Mr. Orszag's approach over Professor 
Shapiro's approach for the portion of the market in which the 
relevant cross-elasticity/substitutability is high. As the Judges 
noted in SDARS III, if and when the opportunity cost approach is 
appropriate, it can be superior to a benchmark approach in 
estimating the statutory rate. SDARS III, 81 FR at 65231 (``When 
properly weighted, the opportunity cost approach is tantamount to a 
useful benchmark, because the weightings are quite analogous to (and 
more precise than) the `adjustments' the Judges consistently make to 
proposed benchmarks.'') (emphasis added).
---------------------------------------------------------------------------

    The Judges will apply these apportionments to each expert's 
proposed rate after the Judges consider the more granular criticisms of 
each expert's approach and the proposed adjustments to those rates.
iv. The Parties' Granular Criticisms of Their Adversary's Subscription 
Benchmarking
    Having resolved the differences between Mr. Orszag and Professor 
Shapiro regarding the overarching issue of how to apply ratio 
equivalency and benchmarking principles, the Judges now turn to the 
detailed critiques of each approach.
(A) SoundExchange's Granular Criticisms of Professor Shapiro's 
Benchmarking and the Judges' Analysis and Findings Regarding Those 
Criticisms
(1) Professor Shapiro's Inclusion of Discount Plan Royalties and Play 
Counts in Calculating a Value for [B], the Effective Per-Play Royalty 
in the Benchmark (Interactive) Market
    SoundExchange criticizes Professor Shapiro for including the 
royalties and play counts associated with interactive services' 
discount plans in order to calculate the value of [B] in his 
benchmarking model. More precisely, Professor Shapiro calculates an 
effective interactive (benchmark) per-play royalty rate [B] by 
including in his numerator the total royalties paid and, in his 
denominator, the play counts--not only for the interactive services' 
full-price ($9.99) subscription plans but also for discount plans, such 
as student, family, and military plans. 8/19/20 Tr. 2931 (Shapiro); 
Shapiro WDT, app. D.1.B n.7.
    According to Mr. Orszag, this has the effect of lowering the 
effective per-play rates in the benchmark market and therefore the 
proposed rates for the target market. To make this point, he compares 
his calculation of the weighted average subscription per-play rate 
excluding discount plans--$[REDACTED] per play--with Professor 
Shapiro's effective per-play rate for the same services including 
discount plans--$[REDACTED] per play. Trial Ex. 5603 ] 88 (WRT of Jon 
Orszag) (Orszag WRT).
    In response, Professor Shapiro asserts that it would be 
inappropriate to hand-pick a subset of the market (i.e., just the full-
price plans) in order to generate the per-play rate because the 
statutory rate will apply to royalties generated by all subscribers 
regardless of whether they subscribe to a full-price or discounted 
plan. 8/19/20 Tr. 2852-53, 2898-99 (Shapiro).
    The Judges agree with Professor Shapiro that the identification of 
a per-play benchmark rate in his model for subscription services should 
be based on the royalties and play counts of all plans. There is no 
valid reason to cherry-pick among the plans when calculating this 
benchmark input because all noninteractive services offering 
subscription plans will pay the calculated per-play royalty across all 
plans, whether full price or discounted.\134\
---------------------------------------------------------------------------

    \134\ Mr. Orszag claims that interactive discount plans should 
be ignored because [REDACTED] engages in much less discounting. He 
claims that this difference requires the Judges to look only at 
full-price plans in order to make an ``apple-to-apples'' comparison. 
SX RPFFCL (to Pandora/Sirius XM) ] 186 (citing 8/11/20 Tr. 1215 
(Orszag)). But, Pandora analogizes to another food group 
(characterizing this point as a ``red herring''), namely one that is 
unresponsive to the need to consider that all noninteractive 
subscription services will pay the statutory per play rate, 
regardless of whether they engage in discounting. Pandora/Sirius XM 
PFFCL ] 186 (citing 8/19/20 Tr. 2852-53 (Shapiro)). The Judges 
disagree with SoundExchange's reliance on the different degrees of 
discounting. Discount plans are forms of price discrimination, 
designed to increase overall revenue. There is no reason why the 
manner in which different services generate revenue should affect 
the calculation of per play rates in this benchmarking exercise, 
unless the Judges were asked by the parties to consider setting 
different royalty rates for full-price and discount subscription 
plans (which no party has requested).
---------------------------------------------------------------------------

(2) Professor Shapiro's Use of Full Subscription Prices Rather Than 
Average Revenue per User (ARPU) for the Values of [A] and [C]
    SoundExchange also criticizes Professor Shapiro's inputs for the 
values for [A] and [C] in his benchmarking model, which represent the 
monthly

[[Page 59498]]

downstream retail price of the interactive benchmark subscriptions and 
the proxies for the noninteractive services, respectively. 8/19/20 Tr. 
2936-37 (Shapiro). SoundExchange asserts that Professor Shapiro should 
have used the Average Revenue per User (ARPU) for these values (which 
would have incorporated any lower discounted retail prices) rather than 
the full retail subscription prices for [A] and [C], which were $9.99 
and $4.99, respectively. For the first time in this proceeding, at the 
hearing, SoundExchange, through Mr. Orszag, sought to raise a concern 
that Professor Shapiro's use of retail prices rather than ARPU for [A] 
and [C] is improper. He maintained that because Professor Shapiro used 
all plans, including discounted plans, to calculate the effective per-
play rate ([B]), as described above, while neglecting the discount 
plans' ARPU when providing values for [A] and [C], Professor Shapiro's 
model ``[REDACTED].'' 8/11/20 Tr. 1387-88 (Orszag).\135\ In Mr. 
Orszag's opinion, because Professor Shapiro calculates effective per-
play royalty rates in a manner that includes all plans (including 
discount plans), he likewise should have based the interactivity 
adjustment on the effective payment for all plans, including discount 
plans. 8/10/20 Tr. 1164-67 (Orszag).
---------------------------------------------------------------------------

    \135\ As noted supra, the first of Professor Shapiro's proposed 
two-part interactivity adjustment is implicit in the ratio 
equivalency approach and, for presentation purposes, is more 
naturally considered as an element of the modeling rather than as a 
stand-alone adjustment.
---------------------------------------------------------------------------

    Further to this argument, SoundExchange notes that Professor 
Shapiro acknowledges that identifying what customers actually pay on a 
per-subscriber basis is preferable to relying on an undiscounted price 
that is paid by many, but not all, of the subscribers. SX PFFCL ] 136 
(citing 8/19/20 Tr. 2939 (Shapiro)). In addition, SoundExchange 
explains that, although the use of discount plans is a form of price 
discrimination, Professor Shapiro concededly did not build this price 
[REDACTED] only on the full prices for subscriptions as his values for 
[A] and [C]. SX PFFCL ] 137 (citing 8/19/20 Tr. 2958-59 (Shapiro)).
    SoundExchange then uses its post-hearing PFFCL submissions to set 
forth its proposed new analysis, in which it suggests several different 
potential ARPU levels that could be used to substitute for [A], the 
retail price paid in the benchmark interactive market. See SX PFFCL ]] 
139-140 (and references cited therein).
    However, the Services emphasize that none of SoundExchange's 
witnesses raised an objection in their written rebuttal testimonies to 
Professor Shapiro's use of retail prices as the metric for [A] and [C] 
in any of the witnesses. The Services further aver that no witness at 
the hearing proffered alternative ARPU calculations for use as values 
for [A] and [C]. See Pandora/Sirius XM PFFCL ] 191. Moreover, the 
Services note that this issue has already been resolved at the hearing, 
when a proffer by SoundExchange of testimony from Mr. Orszag was met 
with a motion by the Services to bar such testimony. At the hearing, 
after extended argument and colloquy, 8/25/20 Tr. 3821-28 (argument and 
colloquy), the Judges sustained the Services' objections to the 
presentation by Mr. Orszag of his belated attempt to raise this issue 
and attempt to utilize ARPU data for the first time from the witness 
stand in an attempt to support that new analysis because such 11th-hour 
testimony and data review would constitute delinquent and thus improper 
``new analysis.'' 8/25/20 Tr. 3821-28 (Chief Judge Feder) (``[T]his is 
a new analysis. The objection is sustained.'').
    Moreover, the Services note that contrary rebuttal arguments were 
certainly available for them to raise, if SoundExchange had advanced 
this assertion in a timely fashion. First, they take note that there is 
no established manner by which the industry calculates ARPU for 
discount plans. As Professor Shapiro and Mr. Orszag both testify, there 
is no uniform method employed by the various services for making that 
calculation, and SoundExchange has provided no evidence to the 
contrary. 8/19/20 Tr. 2943-44 (Shapiro); 8/11/20 Tr. 1199-1200 (Orszag) 
(conceding that ``there are some differences between how [the Majors]'' 
account for family plans in their ARPU calculations). Second, they note 
that the several discount-based ARPU ratios [A]:[C] suggested by 
SoundExchange as supporting Mr. Orszag's unadmitted ``new analysis'' 
are themselves contradicted by the ARPU-based ratio for Pandora's own 
interactive ``Premium'' service and its Pandora Plus service. 8/19/20 
Tr. 2853-54, 2855-56 (Shapiro).
    Additionally, Professor Shapiro opines that his reliance on the 
ratios of full price retail subscriptions to effective per-play rates 
is a cleaner method to isolate the value of interactivity, and an 
inclusion of discount plans would inject confounding issues relating to 
the bundling of use by family plan members. 8/26/20 Tr. 3932 (Shapiro) 
(distinguishing (1) his use of royalties and plays from all plans as 
identifying an effective per-play rate to cover all plays from all 
plans from (2) the attempt to measure the ``value of interactivity, 
that's $9.99 versus $4.99, nicely isolated for particular individual 
undiscounted plans''); see also Pandora/Sirius XM PFFCL ] 190.
    The Judges find that SoundExchange cannot resurrect this belated 
argument in its post-hearing submissions, through counsel, after the 
Judges had already ruled that the issue had been delinquent when 
presented for the first time at the hearing. Moreover, SoundExchange 
has not presented any argument in its post-hearing submissions to 
suggest that the Judges should revisit their decision. Indeed, the 
dispositive effect of SoundExchange's delinquency in making this 
argument remains manifest; having had no timely and proper notice of 
this argument, the Services and their witnesses had no ability to 
prepare a contrary argument.
    Additionally, as the Judges note supra, the Services have 
identified specific rejoinders to Mr. Orszag's ``new analysis,'' which 
could not be explored thoroughly because SoundExchange did not raise 
this issue in a timely manner. Further, the Judges note that Professor 
Shapiro's reliance on the use of undiscounted retail prices as his 
values for [A] and [C] was consistent with the Judges' formulation of 
the ratio equivalency approach in Web IV.
    For these reasons, the Judges do not give any weight to 
SoundExchange's arguments in this regard.\136\
---------------------------------------------------------------------------

    \136\ To be clear, the Judges are not making any substantive 
finding regarding how they would rule if a timely argument were to 
be made in a subsequent proceeding regarding the merits of using 
ARPU values for numerators [A] and/or [C].
---------------------------------------------------------------------------

(3) Professor Shapiro's Generation of a Per-Play Rate in the Benchmark 
Market
    SoundExchange also asserts that Professor Shapiro's generation of 
an effective per-play rate in the benchmark interactive market ``is 
inconsistent with market reality.'' SX PFFCL ] 112. This is an odd 
critique, in that Mr. Orszag and SoundExchange are themselves proposing 
a per-play rate structure, the very approach it claims to be at odds 
with ``market reality.'' See Services RPFFCL ] 112 (``If the . . . 
shift from interactive services paying under per-play metric to a 
percentage-of-revenue metric really had . . . market-wide relevance . . 
. one would have expected [Mr. Orszag] to propose a percentage-of-
revenue rate for statutory purposes.''). Further, because both 
SoundExchange and Pandora propose a per-play rate generated from a non-
per-play benchmark, a conversion to a per-play rate must occur at some 
point in the analysis, and SoundExchange does not

[[Page 59499]]

adequately explain why making this conversion in the benchmark market 
(early in the analysis) is any more in accord with ``market reality'' 
than engaging in the conversion in the target noninteractive market as 
a final step. Indeed, as noted at the outset of the Judges' 
presentation of SoundExchange's critique of Professor Shapiro's 
benchmark, they explicitly assert only that his setting of a per-play 
rate in the benchmark market is neither necessary nor mandatory--not 
that it was improper. See supra, section IV.B.1.d.
(B) The Services' Criticisms of Mr. Orszag's Benchmarking and the 
Judges' Analysis and Findings Regarding Those Criticisms
(1) SoundExchange's Reliance on Pandora's Data
    The Services criticize Mr. Orszag for relying only on Pandora's 
revenue and play counts in his ratio equivalency approach. Services 
PFFCL ] 29 (and record citations therein). However, SoundExchange 
responds by noting that Pandora Plus has an [REDACTED]%+ market share, 
making it a highly suitable data source. Further to this point, 
SoundExchange notes that, when appropriate, the Judges have relied in 
past proceedings on facts and data attributable to entities with 
significant market share. SX RPFFCL (to Services) ] 29.
    The Judges find the Services' criticism to be without merit. Mr. 
Orszag acted reasonably and in a manner consistent with the Judges' 
past reliance upon data from a significant industry participant. 
Moreover, as the Judges have said on several other occasions, the 
statutory rate-setting process does not instruct the Judges to protect 
any particular business model. Thus, Mr. Orszag's decision to rely on 
data from the largest noninteractive service with arguably the most 
successful business model (in terms of market share) can hardly be 
considered improper.
(2) Mr. Orszag's Model Will Not Generate a Royalty Equal to [REDACTED]% 
of Revenue Across Noninteractive Services
    The Services also object to Mr. Orszag's approach because his 
model's per-play royalty rate will not equate with [REDACTED]% of any 
noninteractive service's revenue (including Pandora) unless, by 
coincidence, it has revenues and a play count that generate that 
effective percentage royalty level. Accordingly, the Services maintain 
that Mr. Orszag's approach cannot even generate its ``foundational 
premise'' of ``ratio equivalency,'' whereby noninteractive services pay 
the same percentage of revenue rate as paid by interactive services in 
the benchmark market. Shapiro WRT at 28; 8/19/20 Tr. 2893-95 (Shapiro). 
Relatedly, the Services claim that Mr. Orszag fails to identify revenue 
and play counts for any existing statutory service, and for this reason 
as well he thus had not analyzed whether any such service would in fact 
pay [REDACTED]% of its revenues in royalties if it paid $0.0033 per 
performance. Services PFFCL ] 174.
    The first criticism is correct but uninformative. It is but a 
specific example of a more general criticism: Any rate or rate 
structure set by the Judges can (and likely will) affect different 
regulated entities somewhat differently and also be rendered inaccurate 
or obsolete during the five-year rate term by changes in the 
marketplace. This is closely analogous to the well-known concept of 
``regulatory lag'' in public utility regulation. See Alfred E. Kahn, 1 
The Economics of Regulation 54 (1970) (``regulatory lag'' results from 
the fixing of a rate for a period of time and the inability of 
regulated companies to maintain rates of return that were deemed 
satisfactory at the inception of the rate period'').
    The second criticism is also off-target. As SoundExchange states by 
way of response, Pandora's subscription service indeed would pay 
essentially [REDACTED]% of its revenue as royalties pursuant to Mr. 
Orszag's proposed per-play rate (because [REDACTED]), and Mr. Orszag 
multiplied his proxy revenues by his [REDACTED]% benchmark royalty rate 
and then divided by the number of noninteractive proxy plays) SX RPFFCL 
(to Services) ] 174. While it is true that Pandora Plus is not a 
statutory service, the parties (including Pandora) have used it as a 
proxy for such services in this proceeding, subject to adjustments for, 
inter alia, differences in interactivity, if appropriate.\137\ Thus, 
the appropriate response by the Services is not to urge the Judges to 
reject outright this proxy-based analysis, but rather to: (1) Propose 
proper adjustments that would purportedly align the benchmark proxies 
to the statutory market; and/or (2) propose alternative benchmarks 
(which the Services have done).
---------------------------------------------------------------------------

    \137\ Further, if the Services wanted to avoid a per play rate 
that would generate different effective percent-of-revenue royalty 
rates for different entities, it could have proposed a percent-of-
revenue rate, either in its direct case or as a rebuttal to Mr. 
Orszag's benchmark per play rate proposal. Instead, the Services, 
like SoundExchange, propose only a per-play rate, that will also 
necessarily generate different effective percent-of-revenue royalty 
rates for different noninteractive services, depending upon their 
revenues and play counts. Also, as discussed infra with regard to 
Professor Shapiro's proposed additional (second) interactivity 
adjustment, the record evidence does not demonstrate that the 
Pandora Plus mid-tier service, priced at $4.99, is more valuable 
downstream than a statutorily-compliant noninteractive service, 
making Mr. Orszag's use of mid-tier services, Pandora Plus, iHeart 
and Napster (Rhapsody), as proxies for revenue and play count-
purposes a reasonable modeling choice. See Orszag WDT ]] 176-179.
---------------------------------------------------------------------------

(3) Mr. Orszag Fails To Identify a Per-Play Rate That Adequately 
Captures the Value of Individual Plays
    Next, the Services assert that Mr. Orszag's reliance on a percent-
of-revenue centric benchmarking approach fails to adequately capture a 
value attributable to each play of the sound recording, which is the 
metric he proposes. Shapiro WDT ] 47. The Judges reject this criticism. 
A fundamental rationale for Mr. Orszag's modeling approach, as the 
Judges discussed above, is that the value to be generated in this 
market for ``second copies'' of sound recordings lies not in the 
recordings of songs whose marginal (non-opportunity) cost is zero and 
whose marginal revenue is non-existent (because listeners do not pay 
per song as with a juke box), but rather in the revenue derived from 
subscribers (and advertisers in the ad-supported market). Thus, there 
is no economic ``value'' inherent in the ``second copies'' of the sound 
recordings from a marginalist perspective. Of course, there is 
tremendous value in the sound recordings themselves, in terms of the 
costs of artist discovery, development, recording and promotion, and--
not to be deemphasized--the entrepreneurial profit generated by 
creating value through the assembly of such inputs. The record 
companies recoup those costs, avoid opportunity costs and generate 
profits by percent-of-revenue royalty pricing.
    Thus, the Services' criticism of the fact that Mr. Orszag's 
approach does not capture some hypothetical inherent value of a sound 
recording is a red herring. Cf. Phonorecords III, 84 FR at 1931 n.64, 
1946 n.110 (explaining why the existence of different pricing regimes 
for the same music demonstrates the absence of an ``inherent value'' in 
copies of musical works, notwithstanding the significant ``first copy'' 
value of musical works).
(4) Mr. Orszag's Rate Is Far Above the Present Statutory Rate
    The Services note that Mr. Orszag's $0.0033 proposed benchmark rate 
is

[[Page 59500]]

almost 50% above the statutory rate the Judges set in Web IV 
(originally $0.0022, now $0.0023 as adjusted for inflation)--using the 
same benchmarking approach Mr. Orszag claims to be following now. This 
substantial divergence is anomalous, according to the Services, and 
serves as a ``red flag'' that Mr. Orszag's methodology departs 
significantly from Web IV. See 8/19/20 Tr. 2896-97 (Shapiro).
    The Judges find this criticism wholly unpersuasive. Each rate case 
is a de novo proceeding, based upon the contemporaneous circumstances 
in the relevant markets (benchmark and target) as demonstrated by the 
record evidence. Cf. Phonorecords III, 84 FR at 1944 (``The statute is 
plain in its requirement that the rates be established de novo each 
rate period''). There is no a priori reason why the rate in Web V 
should bear any particular relationship to the rate in Web IV. 
Moreover, this assertion appears self-serving because, as SoundExchange 
notes, Professor Shapiro advocates for a subscription royalty rate 
between $0.0005 and $0.0016, far below the current Web IV rate. Shapiro 
WDT at 2.
(5) Mr. Orszag's Proposed $0.0033 Per-Play Rate [REDACTED] Than the 
Effective Rate Paid by His Mid-Tier Proxies
    Next, the Services assert that Mr. Orszag's use of the three mid-
tier proxies to generate his $[REDACTED] per-play rate [REDACTED] than 
the $[REDACTED] effective per-play rate actually paid by mid-tier 
services under the applicable percent-of-revenue rate. Shapiro WDT at 
37-39 & tbl.9; 8/12/20 Tr. 1564-65 (Orszag); Orszag WDT ]] 84-85; 8/13/
20 Tr. 1958-59 (Orszag).
    The Judges find this argument unpersuasive. For the Judges to make 
a meaningful comparison of Mr. Orszag's proposed rate and the effective 
rates paid by mid-tier services, they would need evidence that sheds 
light on how those effective rates had been calculated from the actual 
percent-of-revenue rates (or other rate tiers) applicable to those mid-
tier services. The Judges find that the record does not provide a basis 
to make such an examination.
(6) Mr. Orszag's Benchmark Interactive Rates [REDACTED] but He Proposes 
an Increase in the Statutory Noninteractive Rate
    The Services criticize Mr. Orszag for--on the one hand--noting that 
benchmark interactive rates [REDACTED] while--on the other hand--
calling for a significant increase in the noninteractive subscription 
royalty rate. But the Judges find that this reveals no ipso facto 
inconsistency. Factors particular to the noninteractive market could 
cause the rate in that market to increase and converge with the 
subscription interactive rate, which could be falling. Additionally, 
SoundExchange notes that the operative marketplace metric in the 
benchmark interactive market changed from the per-play metric to the 
percent-of-revenue measure from the Web IV to the Web V period.\138\ 
Thus, Mr. Orszag (who was not a witness in Web IV) has relied on new, 
contemporaneous material to generate his opinion regarding changes in 
the market. The Judges find that the deviation between his proposed 
rate arising from his expert analysis, and the prior rate, does not 
raise a concern.
---------------------------------------------------------------------------

    \138\ The Judges discuss the significance of that change supra, 
section IV.B.1.e.ii.
---------------------------------------------------------------------------

(7) Mr. Orszag's Exclusion of Revenues and Royalties From Discount 
Plans in His Calculation of Inputs [A] and [B] in His Ratio Equivalency 
Model
    The Services assert that Mr. Orszag errs in excluding discount 
plans from his ratio equivalency model. SoundExchange responds by 
noting that the interactive services--Spotify in particular--engage in 
[REDACTED] discounting/price discrimination than the noninteractive 
services (or [REDACTED] in the model), such that including discount 
plans would fail to generate an apples-to-apples comparison. Orszag WRT 
]] 83, 87; 8/11/20 Tr. 1215 (Orszag).
    This is essentially the reciprocal of SoundExchange's criticism of 
Professor Shapiro's inclusion of discount plans in calculating [B], his 
percent-of-revenue rate in the benchmark market (en route to a per-play 
rate in that market). Here, the Judges find no sufficient reason for 
Mr. Orszag's exclusion of discount plan royalty and revenue data from 
his calculation of [A] (his total revenue input) and [B] (his total 
royalty input (en route to his percent-of-revenue rate in the benchmark 
market). As the Judges explained in connection with the reciprocal 
argument pertaining to Professor Shapiro's inclusion of such data, 
because the statutory rate will apply to all plays across all plans the 
per-play rate should be derived from data across all plans.
    But SoundExchange makes a point that at first blush is anomalous: 
It notes that, had Mr. Orszag included discounted plans in his 
analysis, the [REDACTED]% percent-of-revenue rate he calculates would 
have increased to [REDACTED]%, Orszag WRT ] 89 n.198.\139\ This has the 
effect, Mr. Orszag notes, of increasing the royalty rate in his 
benchmark interactive market from $0.0033 to $0.0035. Orszag WRT ] 89 & 
n.198; see also SX PFFCL ]] 95-96. Moreover, the Services expressly do 
not dispute that their criticism in this regard causes Mr. Orszag's 
benchmark rate to increase. See Services RPFFCL ]] 95-96.
---------------------------------------------------------------------------

    \139\ Because the percent-of-revenue rate is [REDACTED]%, the 
[REDACTED]% rate which is inclusive of discount plans necessarily 
includes royalties that were paid on other prongs in the [REDACTED] 
in Spotify's license agreement. In fact, Mr. Orszag's calculation of 
a [REDACTED]% ``undiscounted plan'' royalty rate (rather than 
exactly [REDACTED]%) likewise suggests that Spotify paid [REDACTED].
---------------------------------------------------------------------------

    So, why did SoundExchange decline to include the discounted plans 
in its analysis? As noted above, Mr. Orszag claims that he ignored 
discount plan data because the target mid-tier [REDACTED] service has 
far fewer discount subscribers, and he wants to make an apples-to-
apples comparison. But the clear appropriateness of including discount 
plan data, together with the fact that including such data would have 
been significantly in SoundExchange's interest, makes its decision to 
exclude discount plan data something of a mystery, to say the least.
    To wrap this mystery in an enigma, the Services continue their own 
apparent self-destructive argument, asserting that (1) the 
noninteractive market indeed offers a wide array of subscription plan 
discounts, including in particular SiriusXM's internet service, and (2) 
in any event, no economic principle supports Mr. Orszag's requirement 
of this particular apples-to-apples approach. See Services RPFFCL ]] 
93-94. Perplexingly (at least initially), SoundExchange still declines 
to forego this argument and declare victory, and simply accept the 
higher [REDACTED]% rate arising from the Services' criticism.\140\ 
Likewise, the Services refuse to ``let sleeping dogs lie'' and stop 
arguing against themselves for an analysis that generates a rate of 
[REDACTED]%--which is [REDACTED]% above [REDACTED]%.
---------------------------------------------------------------------------

    \140\ The difference between these rates is certainly not de 
minimis. SoundExchange argues, for example, that the [REDACTED] paid 
by Spotify to the Majors in their most recent contracts, from 
[REDACTED]% to [REDACTED]%, reflects [REDACTED] in the competitive 
nature of the upstream interactive market.
---------------------------------------------------------------------------

    One may reasonably inquire: What is going on here? \141\ Why the 
facial

[[Page 59501]]

anomaly of SoundExchange advocating for the lower [REDACTED]% of 
revenue rate and the Services arguing for the higher [REDACTED]%? The 
answer appears to lie in the fact that, under Professor Shapiro's 
approach, the higher royalty total in the benchmark market must be 
divided by the number of plays by subscribers. When Spotify's discount 
plans are included, the percentage increase in the total number of 
plays (the denominator) [REDACTED] than the percentage increase in 
royalties (the numerator). It appears to the Judges that Mr. Orszag and 
SoundExchange were willing to sacrifice applying the [REDACTED]% of 
revenue percentage that would have increased their proposed per-play 
rate to $0.0035, in order to avoid relying on discount plans whose 
inclusion would bolster Professor Shapiro's model that includes 
discount plan play counts which thus decreases the per-play rate in the 
benchmark market. Conversely, Professor Shapiro and the Services were 
willing to acknowledge that if Mr. Orszag had included discount plans 
in his model, and the Judges fully applied his approach, they risked a 
higher statutory rate of $0.0035 per play. But the Services were 
apparently willing to take that risk, in order to bolster their general 
position that discount plan data be included, a position that, if 
adopted by the Judges, would add evidentiary weight to Professor 
Shapiro's model. In sum, it seems to the Judges that a good dose of 
game theory motivated the litigation strategy of the parties.
---------------------------------------------------------------------------

    \141\ See John Kay & Mervyn King, Radical Uncertainty at 10 
(2020) (Two prominent economists, John Kay and Mervyn King, note: 
``The question `What is going on here?' sounds banal, but it is not. 
. . . [R]epeatedly . . . people immersed in technicalities . . . 
have failed to stand back and ask, `What is going on here?''')
---------------------------------------------------------------------------

    As discussed supra in connection with Professor Shapiro's 
benchmark, the Judges find that all revenues, royalties and plays, 
regardless of whether they are generated via discounted or undiscounted 
plans, must be included in the benchmarking analyses. That means Mr. 
Orszag's benchmark of $0.0033 in fact should be increased to $0.0035 
when all discounted revenues, royalties and plays are included.\142\ 
Likewise, that means that Professor Shapiro's benchmark (interactive) 
effective per-play rate likewise properly considers all revenues, 
royalties and plays in that market. See Pandora/Sirius XM PFFCL ] 186 
n.19 (``The effective per-play rate for all plans, as calculated by 
Professor Shapiro ($[REDACTED]), is [REDACTED] than the per-play rate 
for solely full-priced plans ($[REDACTED]).'').\143\
---------------------------------------------------------------------------

    \142\ The Judges could leave Mr. Orszag's proposed rate at 
$0.0033 per play, because he never revised his opinion to propose 
such a rate. However, the Judges take note that (as stated supra) 
the Services do not dispute the fact that including discount plans 
raise the per-play rate in Mr. Orszag's modeling to $0.0035. 
Further, because the Judges are including discounted plan data in 
Professor Shapiro's modeling in that it makes economic sense to do 
so, the Judges find it is their obligation under the section 114 
rate setting standard to utilize consistent economic analysis when 
evaluating Mr. Orszag's proposed rate model and resultant rates, 
when, as here, there is an evidentiary record to support such 
consistency.
    \143\ These per-play differences indicate the monetary impact of 
SoundExchange's exclusion of discount plans, even though they 
increased Mr. Orszag's proposed statutory rate from $0.0033 to 
$0.0035. That is an increase of 6.1%. However, if discount plans 
were likewise excluded from Professor Shapiro's analysis, his 
effective per-play rate would be reduced from $[REDACTED] to 
$[REDACTED], a decrease of [REDACTED]%. These per-play differences 
likewise explain why the Services wanted to include discount plans, 
because that inclusion (compared to full price plans only) reduced 
Professor Shapiro's benchmark rate [REDACTED] Mr. Orszag's benchmark 
rate. Assuming quite reasonably that neither SoundExchange nor the 
Services could predict with any certainty which of the two benchmark 
approaches the Judges were more likely to adopt (if either), or in 
what proportions, it made rational sense for them to make their best 
prediction of the outcome and then choose the approach to the 
discount plan inclusion/exclusion issue based on which position 
maximized their litigation return. If that is not what they did, 
then the Judges are left with the absurdity of both parties arguing 
against their interests, even after the issue had been joined in the 
proceeding.
---------------------------------------------------------------------------

v. Explicit Adjustments to the Subscription Benchmarks of Professor 
Shapiro and Mr. Orszag
    Having considered the structures of the benchmarking and ratio 
equivalency models of Mr. Orszag and Professor Shapiro, and having 
considered the granular criticism of their respective applications of 
their models, the Judges now turn their attention to the choices made 
by these experts regarding whether to apply any additional, explicit 
adjustments to the subscription rates they derive from their models. 
And, if the Judges find that any additional adjustments are warranted, 
they determine the size of any such adjustment.
(A) Professor Shapiro's Proposed Second Interactivity Adjustment
    Professor Shapiro's first interactivity adjustment is discussed 
supra, as it is part and parcel of his ratio equivalency model. But 
Professor Shapiro also proposes a second additional (i.e., cumulative) 
interactivity adjustment, to be added on to his first interactivity 
adjustment.
    According to Professor Shapiro, his first interactivity adjustment, 
while necessary, is not sufficient. The insufficiency arises, he 
asserts, because the mid-tier services that he utilizes to identify a 
retail price ([C] in his model) are not statutory noninteractive 
services. Rather, as mid-tier subscription services, they offer limited 
interactivity, at a full retail price of $4.99 per month. Shapiro WDT 
at 37-38, tbl.9; 8/19/20 Tr. 2828 (Shapiro). Thus, Professor Shapiro 
proposes an additional second ``interactivity adjustment, which he 
avers is necessary to fully adjust for the difference between the value 
of a fully interactive service ([A] in his model) and a statutorily-
compliant noninteractive service.
    In support of this further adjustment, Pandora asserts that the 
general purpose for making an ``interactivity adjustment'' is to 
reflect the incremental downstream market value generated by 
interactive functionality. Pandora/Sirius XM PFFCL ] 188 (citing 
Shapiro WDT at 38-39, 42; 8/12/20 Tr. 1505-10 (Orszag). Professor 
Shapiro claims that his first interactivity adjustment follows the Web 
IV approach by identifying the ratio of: (1) Subscription retail prices 
for his selected interactive services (identified above) to (2) 
subscription retail prices for his selected target market, the mid-tier 
services (also identified above). Shapiro WDT at 37-38 & tbl.9; 8/19/20 
Tr. 2828 (Shapiro); see also Web IV, 81 FR at 26348. The average 
monthly full subscription price of the interactive services he reviewed 
was $9.99. The average monthly subscription price of the mid-tier 
services he reviewed was $4.99. Thus, the ratio of [A]:[C] is 2:1. 
Shapiro WDT at 37-39; 8/19/20 Tr. 2828 (Shapiro).
    But because that first (implicit) interactivity adjustment 
measures--at the retail level ([A]/[C])--the difference in the value of 
interactivity to consumers between a fully interactive service and a 
partially interactive (mid-tier) service, Professor Shapiro asserts 
that a second interactivity adjustment is necessary--to measure the 
value of the further difference between mid-tier level interactivity 
and a noninteractive (statutory) service. Shapiro WDT at 38-39; 8/19/20 
Tr. 2830-33 (Shapiro).
    However, unlike with his first interactivity adjustment, Professor 
Shapiro does not measure the difference in value by identifying a 
difference in the downstream market between the (unregulated) retail 
values of: (1) The mid-tier limited interactive subscription services 
and (2) a measure of statutorily-compliant noninteractive subscription 
services. Instead, Professor Shapiro examines the upstream market, 
comparing: (1) The effective per-performance royalty paid by consumers 
for his selected mid-tier subscription services, $[REDACTED]; to (2) 
the 2019 statutory royalty for noninteractive services, $0.0023, which 
was the most recent inflation-adjusted rate established by Web IV. 
Shapiro WDT at 37-39 & tbl.9. According to Professor Shapiro, using 
this upstream royalty

[[Page 59502]]

differential is actually more direct than using the downstream retail 
price differential as a proxy for upstream value, because the purpose 
of the analysis is to determine the value of interactivity within the 
licensed rights in the upstream market. 8/19/20 Tr. 2830-32 (Shapiro). 
Thus, Professor Shapiro's additional interactivity analysis results in 
a further adjustment, reducing his proposed statutory royalty (before 
any additional adjustments) by an additional [REDACTED]%. Shapiro WDT 
at 39.\144\
---------------------------------------------------------------------------

    \144\ $[REDACTED]-$[REDACTED] = [REDACTED]. This royalty 
difference, in percentage terms, is [REDACTED]% (rounded), i.e., 
$[REDACTED]/$[REDACTED]. Professor Shapiro expresses this royalty 
difference, equivalently, as the ratio of $[REDACTED] / $[REDACTED] 
= [REDACTED]:1 ([REDACTED] / [REDACTED] = [REDACTED] (rounded), and 
[REDACTED]-[REDACTED] = [REDACTED], or [REDACTED]%).
---------------------------------------------------------------------------

    Professor Shapiro further asserts that this second interactivity 
adjustment is consistent with the express language in Web IV. There, 
the Judges relied on the ``ratio equivalency'' argument proffered by 
SoundExchange's economic expert, Professor Rubinfeld. As with Professor 
Shapiro's approach, Professor Rubinfeld first compared ratios of 
interactive services to limited interactive services. The Judges 
utilized the implicit first adjustment discussed above. But 
additionally, as Professor Shapiro notes, the Judges found that 
Professor Rubinfeld should have made this second adjustment, if 
sufficient data was in evidence, to account for the different value of 
interactivity in the limited interactive market and the statutorily-
compliant noninteractive market. Shapiro 8/19/20 Tr. 2832-33 (Shapiro).
    Relying on the foregoing point from Web IV, Professor Shapiro then 
combines his 2:1 initial interactivity adjustment--reducing the 
effective royalty rate he had derived from the interactive market, 
$[REDACTED] by 50%, down to $[REDACTED]--and then further reducing that 
rate by an additional [REDACTED]% pursuant to his second interactivity 
adjustment, down to $[REDACTED]).\145\
---------------------------------------------------------------------------

    \145\ $[REDACTED] x [REDACTED] = $[REDACTED] (rounded up from 
$[REDACTED]).
---------------------------------------------------------------------------

    SoundExchange does not disagree with Professor Shapiro's assertion 
that a benchmark model consistent with Web IV requires an interactivity 
adjustment. However, SoundExchange avers that Mr. Orszag's model, which 
it contends is more faithful to the Web IV approach, properly adjusts 
implicitly for the value of interactivity (as discussed infra). SX 
PFFCL ] 100.
    SoundExchange argues that Professor Shapiro's second interactivity 
adjustment is improper.\146\ SoundExchange bases this argument on two 
assertions. First, SoundExchange notes that the additional 
functionality of the Pandora Plus mid-tier service (compared to the 
previous Pandora One statutory subscription service) [REDACTED], 
precluding reliance on a royalty rate nominally attached to a 
particular tier of service within that bundle. SX PFFCL ] 155 (and 
record citations therein). SoundExchange asserts that the [REDACTED] is 
confirmed by a Pandora executive, who testified that the purpose of 
this increased functionality in the mid-tier subscription service 
(compared with the noninteractive functionality of the former statutory 
subscription service) was to ``creat[e] additional opportunities to 
upsell subscribers over time to Pandora Premium.'' Phillips WDT ] 22. 
Accordingly, SoundExchange avers that Pandora's WTP $[REDACTED] for 
mid-tier functionality does not represent an unambiguous measure of the 
marginal value to Pandora of such functionality, but rather reflects, 
or certainly includes, the value of the mid-tier service as a marketing 
tool. Also, SoundExchange--relying on testimony from Professor 
Shapiro--speculates that [REDACTED]. SX RPFFCL (to Pandora/Sirius XM) ] 
197 (citing 8/19/20 Tr. 2962 (Shapiro)).
---------------------------------------------------------------------------

    \146\ SoundExchange also contends that Professor Shapiro's first 
interactivity adjustment, implicit in his model, is improperly 
inflated because Professor Shapiro (consistent with Web IV) utilizes 
only full retail value for [A] and [C] to identify his 2:1 
interactivity ratio (as had been calculated in Web IV). Instead, 
SoundExchange avers that Professor Shapiro should have used the 
overall ARPU attributable to all retail plans, including the 
discount plans, which would have been lower than the average retail 
prices, especially in the interactive benchmark market (input [A] in 
the model). The Judges have discussed this issue in detail supra, 
section IV.B.1.d, in connection with SoundExchange's criticism of 
Professor Shapiro's selection of values for [A] and [C]. As 
explained there, the Judges ruled at the hearing that SoundExchange 
had failed to timely raise this issue, as required, in its written 
rebuttal statement and included rebuttal testimonies, and that it 
therefore constituted delinquent and improper ``new analysis.'' 
Further, the Judges noted that the evidence in the hearing was 
inconclusive as to how ARPU is measured in the industry, and that 
the several ARPU values mentioned in other contexts were not 
sufficient to support the ``new analysis'' the Judges declined to 
admit into the record at the hearing.
---------------------------------------------------------------------------

    SoundExchange also emphasizes that the retail monthly subscription 
price for the Pandora Plus mid-tier service is $4.99--the same price as 
Pandora charged for its predecessor Pandora One statutory service. 
Phillips WDT ]] 18, 20; Orszag WDT ] 179; 8/19/20 Tr. 2960 (Shapiro). 
SoundExchange relies further on Professor Shapiro's testimony to assert 
that the absence of an increase in this subscription price demonstrates 
the absence of a marginal increase in market value from the additional 
mid-tier functionality, given that, under Web IV, the upstream demand 
for licensed interactivity is a ``derived demand,'' i.e., it is a 
function of downstream retail demand. 8/19/20 Tr. 2959-2960 (Shapiro) 
(``[T] this is derived demand. Since we're talking about the 
subscription side, it would be based on the customers who were paying, 
the subscribers.'').
    Pandora has a different explanation of how the concept of ``derived 
demand'' affects this second interactivity issue. Pandora asserts that 
it had anticipated, ex ante the Pandora Plus offering, that an increase 
in the downstream value of that service would be reflected in an 
increase in the quantity of Pandora Plus (mid-tier) subscriptions 
compared with the quantity of Pandora One (noninteractive) 
subscriptions, as Pandora maintained the $4.99 monthly subscription 
price. SoundExchange discounts the economic value of this argument, 
asserting that only an increase in revenue per play unit--not a 
potential increase in total revenue--is probative of an increase in the 
value of the increase in licensed functionality. Orszag WDT ] 179 
(``[T]here is no reason to think that the difference in functionality 
between Pandora One and Pandora Plus changed the amount of revenue per 
play . . . .''); 8/12/20 Tr. 1574 (Orszag) (``[T]he right question then 
to ask is: Was there a change in revenue per-play?'').
    The Judges find Professor Shapiro's attempt to make a second 
interactivity adjustment inappropriate. They find compelling the fact 
that the mid-tier retail $4.99 monthly subscription price was unchanged 
from the monthly price for Pandora's prior statutorily-compliant 
service (Pandora One). Also, the Judges find unwarranted Professor 
Shapiro's reliance on the difference between the effective per-play 
upstream royalty rate Pandora agreed to pay ($[REDACTED]) for its mid-
tier Pandora Plus service and the statutory royalty rate of 
$[REDACTED]. The interactivity adjustment as described in Web IV 
reflects differences in retail prices ([A] and [C]) in the ratio 
equivalency model), not upstream royalty rates. As SoundExchange 
correctly notes, those upstream rates can be affected by the fact that 
they are set in a contract that [REDACTED]. Further, as Professor 
Shapiro conceded in a colloquy with the Judges during the hearing, the 
$[REDACTED] effective per-play rate--by Professor Shapiro's own 
conception

[[Page 59503]]

of the Majors' complementary power--could also embody a premium for 
that market power. 8/19/20 Tr. 2838-39 (Shapiro) (``it's true that we 
might be getting a measure that is somewhat inflated [in] comparison 
[with] if there were more competition to offer those rights . . . . 
[Y]ou might want to give [the second interactivity adjustment] a 
haircut if you thought it was infected by complementary oligopoly power 
. . . .''); see also 8/25/20 Tr. 3644-46 (Peterson) (witness unable to 
preclude that the upstream royalty premium includes a market power 
effect that he treats as an interactivity value). However, Professor 
Shapiro did not parse the $[REDACTED] rate to separate out this 
additional factor. In similar fashion, Professor Shapiro does not 
consider the extent to which the mid-tier services allow subscribers 
unlimited skips (plays of less than thirty seconds) for which no 
royalty is owed, unlike statutory noninteractive services (as discussed 
infra). Because the Judges are making separate adjustments for 
effective competition (to curtail the effect of the Majors' 
complementary oligopoly power) and for skips, Professor Shapiro's 
second interactivity adjustment could double-count those adjustments, 
as Professor Shapiro acknowledged in his colloquy with the Judges, 
quoted above.\147\
---------------------------------------------------------------------------

    \147\ Although it might be possible to adjust the $[REDACTED] 
royalty rate to parse the effective competition and skips values 
therein, Professor Shapiro did not do so at the hearing, and, in 
fairness to SoundExchange, the Judges find in the exercise of their 
discretion that it would be unreasonable for the Services or the 
Judges, sua sponte, to attempt to make these adjustments, post-
hearing, in this Determination. See Johnson v. Copyright Board, 969 
F.3d 363, (2020) (parties must be provided adequate notice of issues 
to be considered and resolved at the hearing, to ``ensure[] that 
agencies provide a fair process in which each party is able `to 
present its case or defense . . ., to submit rebuttal evidence, and 
to conduct such cross-examination as may be required for a full and 
true disclosure of the facts' that bear on the agency's decision and 
choices.'') (internal citation omitted).
---------------------------------------------------------------------------

    Further, the second interactivity adjustment mentioned in Web IV, 
on which Professor Shapiro relies, did not provide for an adjustment 
based on an increase in the number of subscriptions sold and the 
increased revenue that may have resulted from those additional 
subscriptions. And, whether Pandora believed ex ante that it might 
generate additional revenue, or whether ex post some additional revenue 
may have been generated, there is no support for incorporating these 
revenue metrics into a model predicated on downstream retail 
prices.\148\
---------------------------------------------------------------------------

    \148\ Professor Shapiro's attempt to rely on increases in 
revenues to support his second interactivity adjustment to his ratio 
equivalency adjustment appears to be inconsistent with his criticism 
of Mr. Orszag's reliance on a revenue-based application of the ratio 
equivalency model. Additionally, there is nothing in the record 
sufficient to indicate how any estimated increase in subscriptions 
(and thus revenues) generated by the mid-tier Pandora Plus service 
would impact the value of [C], given the inadequacy (discussed 
above) of simply applying the difference in upstream effective per-
play royalty rates.
---------------------------------------------------------------------------

    Accordingly, the Judges shall not make this second interactivity 
adjustment.\149\
---------------------------------------------------------------------------

    \149\ Because the Judges reject Pandora's proposed second 
interactivity adjustment on other grounds, they do not address 
SoundExchange's argument that, because the mid-tier rate [REDACTED], 
the mid-tier rate cannot be examined in isolation.
---------------------------------------------------------------------------

(B) Professor Shapiro's Proposed Skips Adjustment
    Professor Shapiro also proposes to apply a skips adjustment to his 
benchmark subscription rate. The skips adjustment, he avers, is 
necessary to account for the fact that [REDACTED], by contrast, 
noninteractive services do not have the right to avoid paying royalties 
for plays under thirty seconds under the Copyright Act. Shapiro WDT at 
39. This difference in what constitutes a royalty-bearing play results 
in a [REDACTED] calculated per-play rate for on-demand services (who 
pay on a [REDACTED]) than for statutory services (who must pay for all 
plays). Peterson WDT ] 67.
    In Web IV, as Professor Shapiro notes, the Judges applied a skips 
adjustment to correct for this disparity. Web IV, 81 FR at 26350-51, 
26639; 8/19/20 Tr. 2847 (Shapiro). Moreover, the need to account for 
the play count differential in the benchmark and target markets is not 
disputed in this proceeding. 8/11/20 Tr. 1191 (Orszag); 8/25/20 Tr. 
3632 (Peterson).
    Applying the most current data for Pandora, Professor Shapiro 
determines that performances of less than 30 seconds constitute about 
[REDACTED]% of total performances. Shapiro WDT at 39. Accordingly, 
given Professor Shapiro's royalty rate of $[REDACTED], which includes 
the first interactivity adjustment (but not the second interactivity 
adjustment rejected by the Judges supra), this skips adjustment would 
reduce that rate by [REDACTED]%.
    SoundExchange questions the data on which Professor Shapiro relies 
in making his skips adjustment. Specifically, it notes that the data he 
uses to calculate this [REDACTED]% skips adjustment applies to 
noninteractive plays that were available on all three tiers of 
Pandora's service--ad-supported, mid-tier and fully interactive. See 8/
20/20 Tr. 3028-29 (Shapiro). According to Mr. Orszag, this multi-tier 
sourcing of the skips data indicates that the Pandora skips rate is 
probably overstated. He bases this conclusion on the fact that the 
subscription tiers (Plus and Premium), unlike statutory services, 
provide their subscribers with unlimited skips, likely resulting in 
subscribers to those tiers skipping more songs. Orszag WRT ] 120. 
SoundExchange notes that Professor Shapiro agrees. See 8/20/20 Tr. 
3030-32 (Shapiro).
    In rebuttal, Professor Shapiro characterizes this issue as 
overblown, because [REDACTED]. Specifically, Pandora Plus and Pandora 
Premium have [REDACTED] and [REDACTED] subscribers, respectively, out 
of a total of [REDACTED] Pandora listeners. The remaining [REDACTED] 
listeners access Pandora Free. 8/20/20 Tr. 3031-32 (Shapiro); Phillips 
WDT ]] 5, 20-21. Accordingly, Professor Shapiro characterizes the 
number of noninteractive skips occurring on the subscription tiers is 
[REDACTED].
    SoundExchange counters this point by noting that, although the 
impact of [REDACTED], Professor Shapiro nonetheless fails to measure 
this effect and reduce his skips adjustment accordingly. Conversely, 
the Services attack SoundExchange's criticism as being speculative and 
devoid of empirical support. The Judges find that, although there is no 
dispute that [REDACTED], SoundExchange does not bear the burden of 
quantifying, or at least estimating, the impact of the fact that 
listeners on the subscriber tiers would generate some of the reported 
skips. That is, because the adjustment is proffered by the Services, 
there is no apparent reason why SoundExchange should be required to 
assume the burden of proving the extent of the adjustment.
    At a minimum, it is certainly reasonable, based on the record of 
the number of users and subscribers across Pandora tiers, as set forth 
above, that the percentage of skips would approximate the percent of 
Pandora customers who comprise the subscription tiers. That percent is 
[REDACTED]% ([REDACTED] / [REDACTED]).\150\ Applying this [REDACTED]% 
reduction in the [REDACTED]% the skips adjustment

[[Page 59504]]

proffered by Professor Shapiro reduces that skips adjustment to 
[REDACTED]% (i.e., [REDACTED] x ([REDACTED]-[REDACTED]) = [REDACTED] 
(rounded to [REDACTED]%). Thus, Professor Shapiro's proposed royalty 
rate, incorporating his first interactivity adjustment (but rejecting 
the second), of $[REDACTED], needs to be reduced by [REDACTED]% to 
$[REDACTED] (i.e., $[REDACTED] x (1-[REDACTED]), which rounds to 
$[REDACTED] per play.
---------------------------------------------------------------------------

    \150\ The percentage of noninteractive skips attributable to 
subscribers might be higher than this percent, because subscribers 
have unlimited skips, but that percentage might also be lower, 
because subscribers have revealed a preference (by paying to 
subscribe) for utilizing on-demand features rather than 
noninteractive features. Thus, utilizing the relative percentages of 
subscribers is a reasonable middle ground for this small difference, 
and is certainly preferable to disregarding the skips adjustment in 
its entirety, when it is undisputed that such an adjustment is 
necessary.
---------------------------------------------------------------------------

    This $[REDACTED] per-play rate does not include an adjustment to 
generate a rate that offsets the Majors' complementary oligopoly power, 
in order to reflect a market that is effectively competitive. The 
Judges turn next to that adjustment.
(C) Professor Shapiro's Proposed Effective Competition Adjustment
    Before considering Professor Shapiro's proposed ``effective 
competition'' adjustment, it is instructive to recall the Judges' 
separate detailed analysis \151\ of the effective competition issue and 
the associated necessary adjustments. To summarize, the Judges offset 
the 12% effective competition adjustment by an appropriate portion of 
the [REDACTED] in the effective royalty rate (from [REDACTED]% to 
[REDACTED]%) that [REDACTED] \152\ [REDACTED] for any analysis in which 
Spotify is the benchmark or ratio equivalency comparator. If the 
benchmark is the interactive market as a whole, then the Judges apply 
the 12% effective competition adjustment, minus ([REDACTED]% x the 
market revenue share attributable to [REDACTED] x the share of their 
royalties paid at or about the [REDACTED]%-of-revenue level).
---------------------------------------------------------------------------

    \151\ See supra, section III.
    \152\ SoundExchange asserts that [REDACTED]% of revenue after 
Spotify obtained that [REDACTED]. However, there is insufficient 
detail in the record relating to [REDACTED]'s negotiations with the 
Majors, the overall structure of its rates and which tiers of 
service pay which rates. (In fact, there is evidence that [REDACTED] 
continues to pay royalties at a rate of [REDACTED] percent-of-
revenue. Peterson WRT, tbl.5). Thus, the Judges do not lump the 
Apple royalty rate together with the Spotify rate, but they do 
include [REDACTED]'s data in connection with Professor Shapiro's 
overall industry data.
---------------------------------------------------------------------------

    But Professor Shapiro proposes a different effective competition 
adjustment for his subscription benchmark.\153\ As his ``alternative 
market-power adjustment,'' Professor Shapiro compares the royalty rate 
paid by [REDACTED] for its [REDACTED]. He relies on this comparison 
because of what he understands to be an important difference between 
the [REDACTED]: Whereas most interactive subscription services have a 
repertoire of approximately [REDACTED] songs they make available to 
subscribers, [REDACTED] subscribers have access to [REDACTED] songs. 
Given this disparity, Professor Shapiro opines that for [REDACTED] 
listeners the full repertoires of each Major are not ``Must Haves,'' 
because customers do not expect to find all their favorite artists and 
recordings on [REDACTED] as they would with a standalone interactive 
subscription service. Shapiro WDT at 37-40.
---------------------------------------------------------------------------

    \153\ Professor Shapiro proffers an identical effective 
competition adjustment for his subscription benchmark rate and his 
ad-supported rate. Because he presents his ad-supported first in his 
WDT, he essentially incorporates by reference his ad-supported 
effective competition adjustment. The text immediately following 
this footnote, is based on Professor Shapiro's substantively 
identical effective competition adjustment to his ad supported 
benchmark rate.
---------------------------------------------------------------------------

    Professor Shapiro then takes note that the per-performance royalty 
rate paid by [REDACTED] for its [REDACTED] service is significantly 
below the general effective rate for interactive services. 
Specifically, he relies on the fact that the effective rate for 
[REDACTED] is $[REDACTED] cents per play, compared with the $[REDACTED] 
per-play effective rate for other interactive services. Relying on this 
difference, Professor Shapiro computes the ratio of the two rates--
$[REDACTED]/$[REDACTED], which yields his proposed adjustment factor of 
[REDACTED]1, implying an effective competition adjustment of 
[REDACTED]%.\154\Id.
---------------------------------------------------------------------------

    \154\ The [REDACTED]:1 factor implies a percentage difference in 
the two rates of [REDACTED]%. The rate differential is thus 1-
[REDACTED] = [REDACTED]. Thus, Professor Shapiro's proposed 
effective competition adjustment is [REDACTED]% (rounded).
---------------------------------------------------------------------------

    SoundExchange asserts that Professor Shapiro's subscription 
benchmark should not be reduced by an effective competition adjustment. 
It notes Professor Shapiro's characterization of [REDACTED]'s effective 
per-play rate of $[REDACTED] as an effectively competitive rate. 
SoundExchange finds this assertion particularly important because that 
rate is essentially identical to Spotify's effective per-play rate on 
its subscription service of $[REDACTED] per play.\155\ See SX PFFCL ]] 
483-489 (and record citations therein). Moreover, SoundExchange 
emphasizes that Professor Shapiro himself concedes that the effective 
rate for Spotify's subscription service, in his opinion, is ``the upper 
bound for a competitive rate.'' 8/20/20 Tr. 3116-17 (Shapiro).
---------------------------------------------------------------------------

    \155\ Spotify avers that, at most, a downward effective 
competition adjustment of approximately [REDACTED]% would be 
warranted for Professor Shapiro's benchmark, reflecting the 
difference between the $[REDACTED] ([REDACTED]) and $[REDACTED] 
([REDACTED]) rates. SX PFFCL ] 487.
---------------------------------------------------------------------------

    Separate and apart from the foregoing issue, SoundExchange asserts 
that the [REDACTED] royalty rate is an inappropriate input for 
computing an effective competition adjustment. Specifically, 
SoundExchange argues that [REDACTED]'s royalty rate is [REDACTED] 
because: (1) [REDACTED] offers listeners only a limited number of new 
releases,\156\ (2) [REDACTED], and (3) [REDACTED]. Orszag WRT ] 112; 
Trial Ex. 5610 ]] 6-7, 9 (WRT of Aaron Harrison).
---------------------------------------------------------------------------

    \156\ SoundExchange notes that Professor Shapiro concedes it 
would be reasonable to reduce his [REDACTED]-based effective 
competition adjustment to reflect [REDACTED]'s possibly [REDACTED] 
have access. 8/20/20 Tr. 3120 (Shapiro).
---------------------------------------------------------------------------

    In response, Pandora concedes that the use of [REDACTED] for this 
comparative analysis is not ``perfect,'' but asserts that benchmarking 
exercises are fraught with inherent complexities, and thus rarely meet 
that standard. Pandora also seeks to dismiss the defects in this aspect 
of its benchmarking exercise by noting that Mr. Orszag failed to 
identify the need for an effective competition adjustment. Pandora/
Sirius XM PFFCL ] 219. These arguments are meritless. Although the 
Judges disagree with Mr. Orszag regarding the need for this adjustment, 
his opinion in no way serves to support Pandora's reliance on 
[REDACTED]'s rate to propose a [REDACTED]% effective competition 
adjustment, which must succeed or fail on its own merits. And the 
acknowledgement by Pandora that this benchmarking exercise is less than 
perfect simply begs the question of whether it is so imperfect as to be 
given no weight in the Judges' benchmarking analysis.
    With regard to the substantive merits of Professor Shapiro's 
proposed adjustment, Pandora does not deny that he acknowledges that 
his adjustment could reasonably be [REDACTED], particularly the 
[REDACTED]. However, Pandora chastises Mr. Orszag for failing to 
quantify the effect of the limited catalog. The Judges find Pandora's 
response unavailing. Because it is Professor Shapiro who proffers 
[REDACTED] as a comparator for effective competition purposes, Pandora 
and he bear the burden of producing evidence that this limited service 
serves the purpose for which Professor Shapiro intends.
    Pandora also asserts that [REDACTED]'s commercial presence--

[[Page 59505]]

despite its limited repertoire--confirms that the catalogs of all 
Majors are not ``Must Haves,'' which is why its effective per-play rate 
is [REDACTED] $[REDACTED]. 8/20/20 Tr. 3119 (Shapiro). The Judges 
disagree. [REDACTED]'s limited repertoire is more suggestive to the 
Judges of a significantly differentiated service compared to other 
interactive services and to noninteractive services. Because [REDACTED] 
is offered for [REDACTED], and does not accept advertising, it is 
relatively unique.\157\ There is no sufficient evidence in the record 
indicating that a subscription or ad-supported music service 
(interactive or noninteractive) could survive commercially if it 
operated with [REDACTED]'s limited repertoire.
---------------------------------------------------------------------------

    \157\ In fact, [REDACTED]'s availability to all [REDACTED] 
suggests it is offered as a sort of ``loss-leader,'' rather than as 
a stand-alone downstream source for direct monetization.
---------------------------------------------------------------------------

    Additionally, the Services make no response to SoundExchange's 
contention that [REDACTED] receives a lower rate because it serves as a 
funnel, converting [REDACTED] listeners to [REDACTED] subscribers. The 
absence of a Services' response is especially relevant because, as 
discussed infra, Professor Shapiro agreed that the funneling/conversion 
capacities of another interactive service, Spotify, need to be taken 
into account when using Spotify's royalty rates (in the ad-supported 
market) as a benchmarking input.\158\
---------------------------------------------------------------------------

    \158\ The Judges agree with the Services that SoundExchange's 
claim that Amazon had relatively greater bargaining leverage (as the 
record companies' primary physical product distributor) is belied by 
the [REDACTED] $[REDACTED] per-play royalty rate for [REDACTED]. See 
Shapiro WDT at 42 tbl.10. But the other issues discussed above, are 
sufficient bases to doubt the usefulness of the [REDACTED] royalty 
rate as a benchmark.
---------------------------------------------------------------------------

    The Judges now turn from the question of whether the [REDACTED] 
royalty rate is substantively an appropriate benchmarking input, to 
SoundExchange's other argument--that if the $[REDACTED] per-play 
[REDACTED] rate is an effectively competitive rate, then so too is 
Spotify's effective $[REDACTED] per-play royalty rate. The Judges find 
that SoundExchange's assertion in this regard is of little practical 
importance as an opposition to Professor Shapiro's subscription 
benchmark model.
    If the Judges were to treat Professor Shapiro's characterization of 
the [REDACTED] $[REDACTED] per-play rate as essentially an admission 
that the Spotify effective per-play rate of $[REDACTED] is also 
effectively competitive, the setting of a benchmark rate by the Judges 
would be little changed. Applying Professor Shapiro's proffered 
[REDACTED]% effective competition adjustment on his $[REDACTED] 
interactive benchmark generates an effectively competitive rate of 
$[REDACTED], (which would then be subject other potential adjustments). 
But the [REDACTED] rate of $[REDACTED] that Professor Shapiro opines to 
be ``effectively competitive'' is virtually identical (and it too would 
then be subject to the same potential additional adjustments). Thus, 
substituting the [REDACTED] effective royalty rate for Professor 
Shapiro's effective competition adjustment would be inconsequential.
(D) Professor Shapiro's Subscription Benchmark Rate as Adjusted by the 
Judges
    In sum, the Judges find as follows with regard to Professor 
Shapiro's proposed subscription benchmark rate:
    1. The effective interactive industrywide interactive benchmark 
rate of $[REDACTED] per play is reasonable.
    2. The first interactivity adjustment of 2:1 is appropriate, 
properly reducing his interim calculation to $[REDACTED] per play 
(rounded).
    3. The second (cumulative) interactivity adjustment is rejected.
    4. The skips adjustment is reduced to [REDACTED]%, properly 
reducing the interim calculation to $[REDACTED] (rounded).
    5. The [REDACTED]% effective competition adjustment proposed by 
Professor Shapiro is rejected.
    6. The Judges apply the lower effective competition adjustment 
supported by their overall ``effective competition'' analysis:

a. -[REDACTED]%
b. [REDACTED] \159\ x [REDACTED] \160\
---------------------------------------------------------------------------

    \159\ See Orszag WDT tbl.4.
    \160\ See Peterson WRT fig.5; see also 8/25/20 Tr. 3706 
(Peterson) [REDACTED]; 8/11/20 Tr. 1209 (Orszag) (As between the 
[REDACTED]
---------------------------------------------------------------------------

c. = [REDACTED]%
d. $[REDACTED] x (1-[REDACTED]) = $[REDACTED] x [REDACTED] = 0.0025 
(rounded).
(E) Interactivity ``Adjustment'' to Mr. Orszag's Benchmark
    Mr. Orszag avers that his benchmark model directly and implicitly 
accounts for the difference in interactivity between the benchmark and 
target markets, and that any further such adjustment would be 
unnecessary and improper. In particular, he states that it is his use 
of the effective percentage of revenue rate paid by interactive 
subscription services that allows his model to account for the impact 
of interactivity. More specifically, he testifies that, when he 
multiplies that benchmark percent-of-revenue rate by the lower revenues 
in the target market (relative to the benchmark market), the product 
equals a lower royalty. This lower royalty, he concludes, reflects the 
lower value consumers place on a service that lacks on-demand 
functionality. Orszag WDT ] 79. Alternately stated in terms of the 
ratio-equivalency model, the interactivity difference is implicitly 
modeled because the revenue figure in the target market--the right-hand 
numerator [C]--is substantially less than the revenue figure in the 
benchmark (interactive) market numerator [A]--given that the benchmark 
subscription service price is substantially higher than the 
subscription price in the benchmark market and the number of 
subscriptions in the benchmark market is substantially greater.
    The Services do not make any specific challenge to Mr. Orszag's 
claim that his model implicitly includes an interactivity adjustment. 
To be sure, the Services vigorously challenge the appropriateness of 
his model, including its failure, in their opinion, to properly apply 
the ratio equivalency benchmarking model in Web IV.\161\ But, assuming 
arguendo that Mr. Orszag's subscription benchmarking model is otherwise 
appropriate, the Services offer no new or specific criticism regarding 
its implicit interactivity adjustment, as explained by Mr. Orszag.\162\
---------------------------------------------------------------------------

    \161\ See discussion supra, section IV.B.1.e.
    \162\ The Services do criticize Mr. Orszag for not making a 
``second'' interactivity adjustment to reflect the greater 
interactivity of the mid-tier services that constitute Mr. Orszag's 
target market, relative to the noninteractivity of statutory 
services. However, as explained supra, section IV.B.1.e.v(A), in 
connection with Professor Shapiro's proposed further interactivity 
adjustment, the Judges find no sufficient evidence in the record or 
basis in the Web IV approach to support a finding that there is 
greater market value in these mid-tier services compared with 
statutory services.
---------------------------------------------------------------------------

(F) Skips Adjustment to Mr. Orszag's Benchmark
    According to Mr. Orszag, his benchmarking model also directly and 
implicitly accounts for the skips differential from the benchmark 
market to the target market, despite the fact that his benchmark data 
is weighted very heavily toward Pandora, which, under its direct 
license agreements with the record companies, pays royalties for skips 
(unlike the benchmark services). This difference does not affect Mr. 
Orszag's proffered per-play royalty rate because in his model he 
divides the target market's total royalties due by the

[[Page 59506]]

number of target market plays--including skips--yielding a per-play 
rate that accounts for skips. That per-play rate accounts for skips 
because (1) the royalties generated by the skips are included in the 
numerator and (2) the number of skips are included in the denominator, 
in the same manner as full plays, thus canceling each other out and not 
changing the per play royalty calculation. 8/11/20 Tr. 1191-92, 1249-50 
(Orszag).\163\
---------------------------------------------------------------------------

    \163\ For example, assume all plays (including skips) generate 
$240,000 in royalties (the numerator), and the total number of plays 
(including skips) totals 120,000,000 plays. The per-play royalty 
(including skips) is $0.0020 ($240,000 / 120,000,000 plays = 
$0.0020). Now also assume 20,000,000 of these plays were skips. If 
in Mr. Orszag's model skips were explicitly eliminated, there would 
be only 100,000,000 plays in the denominator (120,000,000 plays-
20,000,000 plays = 100,000,000 plays), and only $200,000 in 
royalties in the numerator ($240,000-(20,000,000 plays $0.0020 in 
royalties) = $240,000-$40,000 = $200,000. Now, with skips 
eliminated, Royalties / Plays = $200,000 / 100,000,000 = $0.0020--
the same per-play royalty rate with or without skips.
---------------------------------------------------------------------------

    In his WRT, Professor Shapiro asserts that Mr. Orszag had 
improperly failed to make an explicit skips adjustment. Shapiro WRT at 
33. At the hearing, however, Professor Shapiro acknowledges that Mr. 
Orszag's approach indeed does not require a separate skips adjustment. 
8/20/20 Tr. 3025-26 (Shapiro).
    The Judges agree that Mr. Orszag's ratio equivalency benchmarking 
model, to the extent it is otherwise useful and appropriate, does not 
require a skips adjustment.\164\
---------------------------------------------------------------------------

    \164\ Mr. Orszag acknowledges though that the two services other 
than Pandora included in his model's target market (iHeart and 
Rhapsody) do not report or pay for skips, which would require a 
skips adjustment. However, according to Mr. Orszag, those two 
services constitute a de minimis portion of the total plays in his 
target market. See 8/11/20 Tr. 1230 (Orszag). The Services agree 
that: (1) Mr. Orszag's ratio equivalency approach is [REDACTED]'s 
revenue-per-play; (2) Pandora pays for skips; and (3) the net effect 
of (1) and (2) is to minimize the impact of Mr. Orszag's failure to 
include a skips adjustment for iHeart and Rhapsody. Nonetheless, the 
Services aver that the absence of a skips adjustment for the iHeart 
and Rhapsody plays has an ``unquantified effect'' on Mr. Orszag's 
benchmark subscription royalty rate. Services RPFFCL ] 240. Although 
a benchmark proponent should quantify or estimate a benchmark input 
that would be significant, here the Judges find that the Services 
have essentially acknowledged the correctness of Mr. Orszag's skips 
analysis, and that the ``unquantified effect'' would be of little 
consequence.
---------------------------------------------------------------------------

(G) Effective Competition Adjustment to Mr. Orszag's Benchmark
    As explained in the separate section of this Determination 
analyzing the effective competition issue, SoundExchange maintains that 
the enhanced power of its benchmark interactive service, Spotify, has 
allowed it to exert countervailing power in its negotiations with the 
Majors that fully offsets their complementary oligopoly power. See SX 
PFFCL ]] 259-493 (asserting that no competition adjustment is required 
because the benchmark agreements on which Mr. Orszag's analysis is 
based reflect effectively competitive rates). For this reason, Mr. 
Orszag makes no effective competition adjustment to his proposed 
subscription benchmark rate.
    However, as the Judges stated supra in their analysis and findings 
regarding the effective competition adjustment, it is appropriate to 
adjust downward Mr. Orszag's Spotify-based ratio equivalency rate as 
follows:
    (1) Apply the 12% downward adjustment;
    (2) [REDACTED] that adjustment by [REDACTED] percentage points to 
reflect Spotify's [REDACTED]; and
    (3) multiply the rate from step (2) by [REDACTED]%, the percent of 
revenue paid by Spotify at the [REDACTED]% level).\165\
---------------------------------------------------------------------------

    \165\ Unlike their adjustments to Professor Shapiro's approach, 
the Judges do not reduce Spotify's impact by multiplying by 
Spotify's market share, because Mr. Orszag uses only Spotify data in 
his benchmark market analysis, whereas Professor Shapiro uses a 
weighted average of multiple interactive services in his benchmark 
market analysis.
---------------------------------------------------------------------------

(H) Mr. Orszag's Subscription Benchmark Rate as Adjusted by the Judges
    The Judges do not make any adjustments to Mr. Orszag's proffered 
benchmark other than the foregoing effective competition adjustment. 
Based upon the analysis in the Judges' discussion of effective 
competition, supra, they calculate their effective competition 
adjustment to Mr. Orszag's $0.0033 benchmark per-play rate as follows:
    1. The Judges adjust Mr. Orszag's proffered benchmark rate to 
reflect both the complementary oligopoly power of the Majors (12%) and, 
in partial mitigation, the extent to which Spotify paid the [REDACTED] 
percent-of-revenue royalty rate instead of the [REDACTED]% rate 
(reflecting Spotify's bargaining power).
    2. The [REDACTED] of this royalty rate from [REDACTED]% to 
[REDACTED]% reflects a [REDACTED]% [REDACTED] royalties.
    3. To determine the extent to which Spotify paid (approximately) 
the [REDACTED] percent-of-revenue rate, the Judges note that 
[REDACTED]% of its royalties were paid on that basis. Peterson WRT, 
fig.5.
    4. [REDACTED]% x [REDACTED] = [REDACTED]% (rounded).
    5. The complementary oligopoly adjustment is [REDACTED]%-
[REDACTED]%, which equals [REDACTED]%.
    6. Mr. Orszag's adjusted rate is calculated as $[REDACTED] x (1-
[REDACTED]), which equals $0.0032 (rounded).
f. The Judges' Synthesis of the Adjusted Rates of Professor Shapiro and 
Mr. Orszag
    As explained supra, Professor Shapiro's benchmark approach has a 
weight of 88.5%, and Mr. Orszag's has a weight of 11.5%, in the Judges 
synthesized rate based on the benchmark/ratio equivalency approach. The 
synthesis of their two models, as adjusted by the Judges, is set forth 
below:

                The Shapiro Subscription Benchmark Rate:
                       $0.0025 x 0.885 = $0.00221
                                    +
                 The Orszag Subscription Benchmark Rate:
                       $0.0032 x 0.115 = $0.00037
                                    =
                       $0.00258 rounded to $0.0026
 

    Accordingly, the Judges find that the benchmark-derived rate for 
noninteractive subscription services is $0.0026 per play.
2. The Ad-Supported Benchmark Models \166\
---------------------------------------------------------------------------

    \166\ The Judges use the phrase ``ad-supported services'' to 
refer to nonsubscription services throughout this Determination.
---------------------------------------------------------------------------

a. SoundExchange's Ad-Supported Benchmark Model
    On behalf of SoundExchange, Mr. Orszag uses a benchmarking analysis 
quite similar to his subscription benchmark model considered supra. 
First, although he is modeling the ad-supported market, his approach 
again looks to the subscription interactive market as the benchmark, 
using Spotify as the proxy. Next, he calculates an effective percent-
of-revenue royalty paid by Spotify in the subscription interactive 
market, and then converts that benchmark percent-of-revenue rate into 
an ad-supported per-play rate by dividing royalties by the number of 
noninteractive plays. Orszag WDT ] 96.
    Mr. Orszag acknowledges that in Web IV the Judges rejected this 
approach, i.e., the use of subscription interactive services as a 
benchmark for ad-supported noninteractive services. See Web IV, 81 FR 
at 26344-46 (significant divergence in WTP between downstream 
subscription and ad-supported consumers negates a finding of 
substantial cross-substitution from subscribership to ``free to the 
listener'' use, thus rendering inapplicable

[[Page 59507]]

Professor Rubinfeld's attempted extension of the ratio equivalency 
approach to the ad-supported calculation of ad-supported royalties). 
Notwithstanding this Web IV finding, Mr. Orszag opines that his 
particular model, and new market developments, combine to distinguish 
his approach from that rejected in Web IV.
    First, in his WDT, Mr. Orszag asserts that the present record 
evidence demonstrates there is sufficiently greater substitution 
between the benchmark and target markets than was shown in Web IV, 
justifying his use of interactive services as a benchmark for ad-
supported services. Orszag WDT ] 88. Moreover, Mr. Orszag takes issue 
with the Judges' finding in Web IV that the ad-supported listeners did 
not reveal a positive WTP. He asserts that, from an economic 
perspective, listeners reveal a positive WTP, in that they subject 
themselves to listening to advertising, which, he argues, is itself a 
form of payment in time rather than in money.
    However, Mr. Orszag does not attempt to measure the dollar value of 
that time to these listeners. Rather, he notes that the noninteractive 
services earn revenue from the advertising revenue they receive for 
making advertising time available on those services, a portion of which 
the noninteractive services can pay as royalties to the record 
companies. Mr. Orszag avers that, if it were really true that listeners 
to ad-supported service have a zero willingness to pay, then ad-
supported services themselves should also have zero willingness to pay, 
which plainly is not the case. Orszag WDT ] 90; 8/11/20 Tr. 1240-41 
(Orszag). Mr. Orszag also points to record evidence, including Pandora 
documents, indicating that [REDACTED]. Trial Ex. 5056 at 26. Another 
Pandora document on which Mr. Orszag relies states that ``[REDACTED]'' 
Trial Ex. 5061 at 2; Orszag WDT ] 93.
    Nonetheless, although Mr. Orszag acknowledges that the sound 
recording and streaming industry perceives ad-supported listeners as 
having a ``low'' WTP, Orszag WRT ] 75, SoundExchange points out that a 
Services' witness, T. Jay Fowler, Director of Product Management for 
Music Products at YouTube (a division of Google), speculates that this 
``may be only a temporary or transitory phenomenon,'' because consumers 
need time to understand the value of streamed music and thus make the 
switch from an ad-supported to a subscription service. Trial Ex. 1100 ] 
17 (WDT of T. Jay Fowler); SX PFFCL ] 164. In furtherance of this 
argument, Mr. Orszag also relies on evidence from Professor Willig's 
application of data from the Zauberman Survey, which Mr. Orszag 
characterizes as showing a high cross-elasticity of demand for 
noninteractive ad-supported listening and interactive ad-supported 
subscribership. That survey evidence, as applied by Professor Willig, 
indicates that 9.1% of respondents would switch from ad-supported 
noninteractive services to a new on-demand subscription, if their ad-
supported noninteractive service was not available. Willig WDT ] 47, 
fig.6 (panel A).\167\
---------------------------------------------------------------------------

    \167\ The Hanssens Survey indicates, according to Professor 
Shapiro, that this diversion to new interactive subscriptions would 
be [REDACTED], measuring [REDACTED]%. Shapiro WDT at 21, tbl.2. This 
lower figure would not alter the weights assigned to the 
benchmarking and ratio-equivalency models. The Judges note, though, 
that despite finding the Zauberman Survey less reliable in other 
respects than the surveys by Professors Hanssens and Simonson (the 
latter replicating Professor Hanssens's survey work) only the 
Zauberman Survey asks respondents directly to identify the source of 
music to which they would divert if noninteractive subscription 
services were not available (The Hanssens and Simonson surveys ask 
more ambiguously what respondents would do if they noticed all 
relevant services had stopped streaming songs by some popular 
artists and some newly released music. Hanssens WDT ]] 13, 21-22.)
---------------------------------------------------------------------------

    Based on the foregoing rationale, Mr. Orszag utilizes the same 
``ratio equivalency'' model as he used for the subscription tier. 
SoundExchange summarizes his application of this approach to the ad-
supported model as follows:

    [A] and [B] remain the total revenue earned by and total royalty 
paid by Spotify for its subscription interactive service. As before 
and for the same reasons provided in Mr. Orszag's benchmark analysis 
for noninteractive subscription services . . . the analysis 
conservatively uses the effective [percent of royalty] rates paid by 
Spotify as the basis for the proposed per-play rate for statutory 
ad-supported noninteractive services. . . . And as before, Mr. 
Orszag excluded family, student, military, employee, and trial and 
promotional products in calculating the effective rates because 
these products are unlikely to be relevant to an ad-supported 
service. . . . [C] is now the revenue earned by the [noninteractive] 
ad-supported service.

SX PFFCL ]] 168-169 (and record citations therein).\168\
---------------------------------------------------------------------------

    \168\ As with his subscription model, Mr. Orszag excluded 
family, student, military, employee, and trial and promotional 
products in calculating the effective rates, claiming that these 
products would not likely be relevant to an ad-supported service. 
Orszag WDT ] 97. And, as noted in the above quote, for the revenue 
of noninteractive services ([C] in his model) Mr. Orszag uses 
revenue earned by Pandora and iHeart. 8/11/20 Tr. 1248 (Orszag); 
Orszag WDT ] 98.
---------------------------------------------------------------------------

    The effective percent-of-revenue rate in Mr. Orszag's benchmark 
market, [B]/[A], of course remains at [REDACTED]% (because he uses the 
same benchmark market). Mr. Orszag multiplies that [REDACTED]% 
effective rate by the noninteractive ad-supported gross revenue for 
Pandora and iHeart, and then divides by the corresponding number of 
plays in the target noninteractive ad-supported market. Id. ] 98.\169\ 
His computations and results are set forth in the table below 
(excerpted from Orszag WDT tbl.9):
---------------------------------------------------------------------------

    \169\ Calculated from a different perspective, Pandora and 
iHeart's combined average revenue per play was $[REDACTED] 
[REDACTED] for the twelve-month period ending April 2019. This 
average revenue per play, when multiplied by the percentage-of-
revenue royalty rate for interactive subscription services, results 
in the per-play royalty rates for noninteractive ad-supported 
services. Id. ] 98.
---------------------------------------------------------------------------

Table 9--Noninteractive Ad-Supported Benchmark, May 2018-April 2019 
[RESTRICTED]

[REDACTED]

    The resulting proposed royalty rate for noninteractive ad-supported 
services is $0.0025 per play, as presented in the right-hand column of 
the table above. Id. ] 99.\170\
---------------------------------------------------------------------------

    \170\ With regard to potential adjustments to his proposed rate, 
Mr. Orszag opines first that, as with his subscription benchmark 
model, his ad-supported mode contains an implicit interactivity 
adjustment, because it relies on the lower revenue of the ad-
supported noninteractive market as the value of [C] (compared to the 
higher revenue of the benchmark interactive subscription market. 
Next, Mr. Orszag finds no reason to make either a skips or an 
effective competition adjustment, for the same reasons discussed 
supra in connection with his subscription benchmark model.
---------------------------------------------------------------------------

b. The Services' Criticism of Mr. Orszag's Benchmark Ad-Supported Model 
in His WDT
    As an initial matter, the Services criticize the fundamentals of 
Mr. Orszag's ratio equivalency model in this ad-supported context for 
the same reasons they criticize his use of this model formulation in 
his subscription market analysis. Again, they criticize what they 
construe as Mr. Orszag's improper re-characterization of the Web IV 
ratio equivalency approach because he: (1) Defines [A]and [C] as 
revenue inputs; (2) fails to identify a per-play rate [B] in the 
benchmark market; (3) applies the percent-of-revenue paid in the 
benchmark market to the target market; and (4) uses play counts in the 
target market instead of the benchmark market to generate per-play 
rates.
    Additionally, the Services criticize Mr. Orszag's decision to input 
the percentage-of-revenue royalty rate applicable to subscription 
interactive services as an appropriate data point for calculating the 
ad-supported noninteractive royalty, given the clear rejection of that 
approach in Web IV. Further, the Services aver that Mr.

[[Page 59508]]

Orszag's ad-supported modeling: (1) Fails to address the difference in 
the ways the two services generate revenue (advertising versus consumer 
subscription payments); (2) fails to demonstrate (or even calculate) 
comparable demand elasticities between the two categories of services 
as required by Web IV; (3) fails to demonstrate comparable WTP as the 
between the ad-supported and subscription services; (4) fails to 
demonstrate an opportunity cost even close to approximating the 1:1 
opportunity cost (cross-elasticity) between the two categories of 
service; and (5) fails to apply Spotify's own ad-supported rates into 
the analysis. Services RPFFCL ] 158 (and record citations therein).
    Among these criticisms, the Services highlight what they assert are 
the two principal problems in Mr. Orszag's model. First, they point to 
his decision to duplicate his subscription ``ratio equivalency'' model 
by simply substituting noninteractive ad revenue for subscription 
revenue. They note that the identity and motivations of the different 
classes of payors--advertisers who pay for listeners' attention, on the 
one hand, and subscribers who pay for uninterrupted access to music, on 
the other--renders misguided any attempt to apply the ratio equivalency 
model in this manner.
    Further, the Services emphasize that Mr. Orszag fails to 
demonstrate how users' willingness to listen to ads can be converted 
into a dollar value. What the market evidence does reveal, the Services 
state, is directional in nature--that the amount such users would pay 
(if any) must be less than the subscription price of an on-demand 
service. See Leonard WRT ] 54 (noting that, by revealed preference, 
consumers have demonstrated that their WTP to avoid ads is less than 
that of subscribers to paid services); see also Peterson WRT ]] 38, 40.
    Relatedly, the Services maintain that Mr. Orszag does not provide a 
reason for his assumption--incorporated into his model--that the amount 
advertisers pay to transmit ads to noninteractive listeners is actually 
a proxy for the WTP for music of noninteractive listeners. See Peterson 
WRT ] 38 (advertiser WTP for listener attention may be completely 
unrelated to listeners' WTP for music, and therefore is not a basis to 
assert that ad-supported services, whose listeners are clearly price 
sensitive, have an elasticity of demand comparable to that of 
subscription services); see also 8/25/20 Tr. 3702-03 (Peterson) (same). 
In fact, the Services argue that advertising revenue generated by an 
ad-supported service is materially determined by that service's own 
investment and skill in building an advertising platform that will 
attract advertiser dollars. 8/20/20 Tr. 3248 (Shapiro). And, in 
particular, Pandora has invested significantly to create its 
advertising platform, allowing it to receive substantially higher 
advertising rates and more advertising revenue than other ``free-to-the 
listener'' noninteractive streaming services.
    Specifically, the Services, and Pandora in particular, emphasize 
Pandora's unique ability to attract and monetize advertisers--a return 
on its investment of billions of dollars. They note that this revenue 
generation is unconnected to the level of functionality it offers. 8/
20/20 Tr. 3218-20 (Shapiro) (testifying that Pandora's investment in 
``systems [on] which . . . advertisers compete for . . . space'' 
increases the per-play revenue Pandora receives in a way that has 
``nothing to do with the rights they have licensed, but, rather, with 
their own capabilities.''); Herring WDT (Web IV) ] 11 (``Pandora 
derives more than 80% of its revenue from the sale of advertising. . . 
.'').
    Further in this regard, the Services maintain there is no evidence 
that advertiser payments are correlated with the particular level of 
interactivity offered by a service, a correlation, they assert, is 
implicitly assumed by Mr. Orszag's adoption of a ratio equivalence 
relationship between subscriber payments in the interactive space and 
advertisers' payments in the noninteractive space. See Services PFFCL 
]] 26-27 (and citations therein). As Dr. Leonard testifies, advertisers 
``have no reason to prefer advertising on a service with greater 
interactivity. . . .'' Leonard WRT ] 54.\171\
---------------------------------------------------------------------------

    \171\ The irony of this criticism by the Services is not lost on 
the Judges. On the one hand, the Services argue that interactivity 
is irrelevant on the ad-supported tier, because the payors (the 
advertisers) are uninterested in the functionality of the system. 
Yet, as discussed infra, the Services propose that the Judges make 
two interactivity adjustments to the ad-supported rate.
---------------------------------------------------------------------------

    Even if listeners' tolerance for advertisements could be construed 
as a form of ``payment'' for noninteractive listening, the Services 
maintain that this would still be insufficient to justify Mr. Orszag's 
adoption of a ratio equivalence between the two broad categories of 
services. See Shapiro WRT at 38-40 (citing Web IV, 81 FR at 26349); 
Peterson WRT ]] 36-40 (citing Web IV, 81 FR at 26353). More 
specifically, the Services maintain that Mr. Orszag's model cannot 
address the Judges' point in Web IV that ``[t]he ratio equivalency 
approach assumes that listeners who willingly pay for a subscription to 
a service have a WTP equal to the WTP of those who use ad-supported 
(free-to-the-listener) services.'' Web IV, 81 FR at 26345. (emphasis 
added). Moreover, the Services point out that Mr. Orszag himself 
concedes that consumers of advertising-supported and subscription 
services have a different WTP. 8/12/20 Tr. 1548 (Orszag). This 
underscores the relevance of the Services' claim that Mr. Orszag did 
not provide, or even attempt to provide, the demonstration of 
comparable demand elasticities that the Judges previously required. See 
Web IV, 81 FR at 26349. And the Services point to Dr. Peterson's 
testimony, in which he notes that the low WTP of ad-supported listeners 
indicates that their demand is far more elastic than the demand of 
interactive subscribers. 8/25/20 Tr. 3702 (Peterson); Peterson WRT ] 
37.
    Turning to the particular issue of cross-elasticity, the Services 
note the Zauberman Survey, as applied by Professor Willig, reveals that 
about 90% of ad-supported noninteractive listeners are unwilling to pay 
for a subscription interactive service. Services RPFFCL ] 165. This 
point, the Services claim, underscores the importance of their 
criticism that neither Mr. Orszag nor the survey evidence demonstrates 
the existence of a sufficiently high cross-elasticity of demand between 
ad-supported noninteractive listening and subscription interactive (on 
demand) listening to support the application of Mr. Orszag's ratio 
equivalency. In this vein, the Services emphasize that Mr. Orszag does 
not deny that he has not demonstrated the 1:1 opportunity cost required 
by the Web IV ``ratio equivalency'' approach, i.e., that, in this 
context, a dollar spent by an advertiser on an ad-supported 
noninteractive service would otherwise be spent on a subscription to an 
interactive service, or, alternatively, that if users discontinued 
listening to an ad-supported noninteractive service, the resulting 
reduction in advertising revenue would otherwise create a commensurate 
increase in subscription revenue for an interactive service. See 8/13/
20 Tr. 1948 (Orszag).
    The Services further claim that SoundExchange's reliance on 
Pandora's internal documents, Trial. Exs. 5056 and 5061, is misplaced. 
They point out that neither of these documents actually shows how many 
[REDACTED]. Services RPFFCL ] 163 (and record citations therein). 
Similarly, the Services maintain that SoundExchange has the relevant 
direction of the evidence wrongly reversed with regard to its analysis 
of Spotify's customer

[[Page 59509]]

behavior. That is, the fact that [REDACTED] % of Spotify's subscribers 
had originally used Spotify's ad-supported service provides no useful 
information regarding the appropriate metric: How many Spotify ad-
supported users in fact have a WTP for a Spotify subscription. Indeed, 
the Services note, SoundExchange's argument in this regard is belied by 
Mr. Orszag, who acknowledges that only [REDACTED]% of Spotify's ad-
supported listeners convert to Spotify's subscription tier within the 
first two years using Spotify's ad-supported service. Services RPFFCL ] 
164 (citing Orszag WRT ] 75 n.167).
c. The Judges' Analysis and Findings Regarding Mr. Orszag's Ad-
Supported Benchmark Model From His WDT
    The Judges reject the ad-supported model Mr. Orszag presents in his 
WDT.\172\ At an obvious level, his approach deviates from the Judges' 
finding in Web IV, in which they rejected the use of a ratio 
equivalency formula that utilized subscription inputs on the left-hand 
benchmark side of the model. Moreover, Mr. Orszag's rationale for his 
departure from Web IV is unavailing. There is simply no evidence to 
support his assertion that there is anything approaching a 1:1 
substitutability (cross-elasticity) from interactive services to 
noninteractive services.
---------------------------------------------------------------------------

    \172\ Alternatively, in his WRT and hearing testimony, in 
response to the models proffered by Professor Shapiro and Dr. 
Peterson, Mr. Orszag acknowledges that it is also reasonable to rely 
on Spotify's effective ad-supported percent-of-revenue paid as the 
benchmark rate, rather than the subscription percent-of-revenue it 
pays (as he proposes in the benchmark model) in his WDT. The Judges 
analyze Mr. Orszag's alternative approach infra, after considering 
the models proposed by Professor Shapiro and Dr. Peterson, that also 
use Spotify's ad-supported service as a benchmark.
---------------------------------------------------------------------------

    Perhaps in recognition of the fact that the 9.1% substitution 
figure he cites from the Zauberman Survey does not reflect significant 
cross-elasticity, Mr. Orszag adds in a footnote, that ``no particular 
level of cross-elasticity is necessary for one market to serve as an 
appropriate benchmark for another market.'' To support this point, he 
presents as an example, quoted in part supra, the hypothetical that the 
subscription price for a cable television service in Chicago may be 
``an ideal benchmark'' to use in order to set an appropriate 
subscription price for a cable television service in Philadelphia, 
``even though there is zero cross-elasticity for cable services between 
the two cities, because residents of Philadelphia cannot access the 
Chicago service and vice versa.'' Orszag WDT ] 95 n.132. But this 
example only underscores the narrow relevancy of a ratio equivalency 
approach and its implicit assumption of a substitutability of (or 
proximate to) 1:1, to constitute effective cross-substitutability.\173\
---------------------------------------------------------------------------

    \173\ The Judges incorporate by reference here their citations 
to Web IV and SDARS III, supra, in their consideration of Mr. 
Orszag's subscription model, pertaining to the import of the absence 
of sufficient cross-elasticity. See discussion supra, section 
IV.B.1.e.ii.
---------------------------------------------------------------------------

    In this regard, Mr. Orszag's ``inter-city'' analogy reflects a 
subtle but important shift in his reasoning: He is dispensing with the 
Web IV/Professor Rubinfeld underpinning of the ratio equivalency 
model--high cross-substitutability (assumed or actual)--and asserting 
that his approach is consistent with the more traditional pure 
benchmarking approach, which relies on the similarity--not the cross-
elasticity or substitutability--between sellers/licensors, buyers/
licensees, and the rights being transferred between the benchmark and 
target products. The Judges' discern from Mr. Orszag's distinction a 
confirmation of their rationale for relying substantially on Professor 
Shapiro's benchmarking approach, because the cross-elasticity/
substitutability revealed by the record is relatively low, whether in 
the subscription market (as discussed supra) or in the ad-supported 
market (as discussed here).\174\
---------------------------------------------------------------------------

    \174\ The Judges also agree with the Services that Mr. Orszag's 
failure to estimate the own-elasticities of demand for his benchmark 
and target services compromises his attempt to apply the Web IV 
benchmark approach. ``Own-elasticities'' of demand reflect the 
responsiveness of quantity demanded to increases or decreases in the 
price of a product--typically a negative (inverse) relationship, as 
represented in the downward-sloping demand curve. Cross-elasticity 
measures the responsiveness of demand for product A in response to a 
change in the price of product B--a positive relationship for 
substitute products. See generally Robert S. Pindyck & Daniel L. 
Rubinfeld, Microeconomics at 33-36 (8th ed. 2013). As the Judges 
have noted in both SDARS III and Web IV, a significant level of 
cross-elasticity (proven or reasonably presumed) is necessary for 
the ratio-equivalency model to be broadly applicable, or else, as 
here, its application is limited by the extent of cross-elasticity 
demonstrated between the benchmark and target markets. Own 
elasticities can also be relevant because they indicate the relative 
pricing power of each tier of service (a low elasticity (i.e., high 
inelasticity) indicates relatively greater pricing power, and vice 
versa, pursuant to the Lerner Equation discussed in Web IV). If own-
elasticities are roughly equal, then the services have a roughly 
equal concern over the impact on quantity (and thus revenue) of a 
change in retail prices, making the ratio equivalency model more 
appropriate, ceteris paribus. Further, high own-elasticity can be 
suggestive of significant cross-elasticity with regard to clearly 
substitutable products. A relatively high own-elasticity suggests 
that a given percentage increase in price will engender a larger 
percentage decrease in quantity, that is likely to result in 
substitution of a product sufficiently similar in price and 
characteristics, even in the absence a more specific measuring of 
cross-elasticity, such as through the use of consumer surveys.
---------------------------------------------------------------------------

    The Judges also place no weight on Mr. Orszag's assertion that the 
willingness of ad-supported listeners to subject themselves to 
advertisements indicates a positive WTP. Although there is certainly 
disutility in listening to advertising that is annoying, uninformative 
or irrelevant, other advertising can be pleasant or amusing (or at 
least neutral), informative or relevant. Also, advertising 
interruptions allow a user to take advantage of the break to attend to 
other personal necessities. Moreover, ad-supported listeners are made 
aware of the presence of advertising, so they are already a self-
selected cohort of consumers who have a tolerance for advertising. In 
any event, measurement of the cost of any disutility would be 
difficult, and Mr. Orszag certainly did not attempt to do so. 
Additionally, by choosing an ad-supported service, as Dr. Leonard 
notes, listeners have revealed a preference (given their budget 
constraints and utility preferences \175\) for that bundle of music + 
advertising over pure music priced at $4.99 per month or more. And of 
course, an immediate problem with Mr. Orszag's assertion is that the 
payments of advertising revenues reflect the WTP of advertisers--not 
the WTP of listeners. (Again, Mr. Orszag does not attempt to convert 
listener time into a direct monetary measure.)
---------------------------------------------------------------------------

    \175\ Economic jargon often obscures reality. ``Budget 
constraints'' refer to consumers' limited incomes; for example, poor 
people will not have extra cash to spend on music, even if they 
would prefer the ``utility'' of an ad-free service, because they 
cannot transfer spending from necessities to the luxury of a 
subscription to a music service.
---------------------------------------------------------------------------

    Further, advertising, like music, is an ``experience'' good. One 
does not know that certain advertising will be useful or not until it 
is heard. And in this context, it is important to appreciate that 
technological advancements in targeted advertising make it much more 
likely that advertising will be more useful to listeners than the 
former more blunderbuss approach.\176\
---------------------------------------------------------------------------

    \176\ The Judges do not endorse in full Pandora's criticism that 
the record companies should not receive royalties based on 
advertising revenues generated by Pandora's arguably superior 
advertising platform. As SoundExchange notes, noninteractive 
services, including Pandora, also benefit from the superior 
identification, development and promotion of sound recordings and 
artists. Moreover, the advertising revenue is derived from the 
presence of listeners, who are attracted to Pandora in large measure 
because of the music produced by the record companies. Therefore, 
the advertisers' demand, and Pandora's investments in better 
monetization of that advertiser demand, are derived in part from the 
attributes of, and investments in, the underlying sound recordings. 
It is more accurate to state that Pandora's advertising revenues are 
jointly produced as a consequence of what economist call a ``joint 
production function,'' consisting of the quality of: (i) The record 
companies' music; (ii) Pandora's curation of the music; and (iii) 
Pandora's advertising platform. See 8/20/20 Tr. 3248 (Shapiro) 
(``the revenue earned [by Pandora's ad-supported service] is a 
combination of the music . . . creating the experience, the person . 
. . listening more, and then how much money can be collected per-
play will depend also in an important way on value brought by the 
service [including] [Pandora's skill at monetization.''). 
Additionally, the purpose of a rate setting process, whether by 
negotiating counterparties in an unregulated market or by the 
Judges, is to apply economic analysis to determine how the overall 
value of these inputs will be allocated as between licensors and 
licensees. Although each side of the licensing market can accurately 
claim that its investments are responsible for generating value, and 
that the other side is wrongly appropriating that value for itself, 
such self-serving claims do nothing to assist in the allocation of 
value and, hence, the setting of royalty rates. See generally 
Richard Watt, Revenue Sharing as Compensation for Copyright Holders, 
8 Rev. Econ. Res. Copyright Issues 51, 56 & n.8 (2011) (economically 
a royalty rate derived from a percent-of-revenue approach is 
analogous to an ad valorem tax on the service).

---------------------------------------------------------------------------

[[Page 59510]]

    All of these advertising-related concerns were not addressed in the 
record, and their absence makes Mr. Orszag's speculation regarding 
listeners' revelation of a positive WTP unpersuasive.
    In order to distill value from advertising revenues, the Judges 
agree with Dr. Leonard that Mr. Orszag would have been better served if 
he had analyzed the ad-supported tier as a ``multi-sided platform, 
where listeners, record companies and advertisers converge to create 
economic value for all participants. See Leonard WRT ] 54; 8/24/20 Tr. 
3561 (Leonard) (describing advertising-supported services as ``two-
sided platform[s]'' connecting users to advertisers and distinguishing 
them from subscription services for which there is no ``other side of 
the market that you need to be worried about''); see generally David S. 
Evans & Richard Schmalensee, Matchmakers: The New Economics of 
Multisided Platforms (2016); Ruth Towse, Dealing with Digital: The 
Economic Organisation of Streamed Music, 42 Media Culture & Society, 
no. 7-8, 1461 (2020).\177\
---------------------------------------------------------------------------

    \177\ Dr. Evans and Professor Schmalensee define a ``multi-sided 
platform'' as:
    A business that operates in a physical or virtual place (a 
platform) to help two or more different groups find each other and 
interact. The different groups are called `sides.' For example, 
Facebook operates a virtual place where friends can send and receive 
messages, where advertisers can reach users, and where people can 
use apps and app developers can provide those apps.
    Evans & Schmalensee, supra, at 210. Professor Towse notes the 
particular application of multi-sided platform economics to the 
analysis of ad-supported music services. Towse, 42 Media Culture & 
Society, at 1465 (``In the streaming market, the upstream price is 
negotiated by the [Digital Service Provider] for the rights to 
stream the music . . . for ad-based services, [it is] the price 
charged to the advertiser. It is an obvious application of platform 
economics.'') (emphasis added).
    The Judges note that Mr. Orszag essentially endorses a platform-
based approach in his WRT and hearing testimony, by acknowledging 
the appropriateness (in his model) of using revenue from the ad-
supported service rather than subscription revenue. His testimony in 
that regard is discussed infra.
---------------------------------------------------------------------------

    Additionally, the Judges find that the documents indicating that 
many Spotify subscribers originated as ad-supported listeners is 
uninformative. The Judges agree that the relevant measure is the extent 
to which ad-supported listeners convert to subscribers. Interestingly, 
that figure, [REDACTED]%, (as noted supra) is [REDACTED] to the 9.1% 
substitution figure from the Zauberman Survey (cited supra), which 
tends to confirm the low cross-elasticity between ad-supported and 
subscription tiers. Similarly, the internal Pandora documents on which 
SoundExchange relies do not [REDACTED], but rather purportedly 
estimate, [REDACTED].
    In sum, the Judges find no sufficient basis to apply the 
benchmarking approach for the ad-supported noninteractive market that 
Mr. Orszag proffers in his WDT.\178\
---------------------------------------------------------------------------

    \178\ The Judges' rejection of Mr. Orszag's ad-supported 
benchmark model moots any issues regarding his ad-supported 
benchmark adjustments.
---------------------------------------------------------------------------

d. Professor Shapiro's Ad-Supported Benchmark Model
    Professor Shapiro's ad-supported benchmark comes from the 
interactive ad-supported market. According to Professor Shapiro, this 
is an appropriate and direct benchmark, consistent with Web IV, in 
which the Judges likewise used ad-supported benchmarks to develop the 
ad-supported statutory rate.\179\
---------------------------------------------------------------------------

    \179\ More particularly, in Web IV, the Judges relied on 
noninteractive ad-supported benchmarks: the Pandora/Merlin and 
iHeart/Warner agreements.
---------------------------------------------------------------------------

    To apply this benchmark, Professor Shapiro begins by calculating 
weighted average effective per-play royalty rates. Specifically, he 
begins by analyzing the effective per-play rates paid by Spotify and 
SoundCloud \180\ to the Majors for performances on their ad-supported 
interactive tiers from May 2018 through April 2019--which he calculates 
as $[REDACTED] per play. Shapiro WDT at 33, 36 & tbl.8; 8/19/20 Tr. 
2900 (Shapiro). As discussed supra, although he includes SoundCloud 
data, essentially, the $[REDACTED]. Shapiro WDT at 36 & tbl.8; 8/19/20 
Tr. 2900 (Shapiro). Professor Shapiro further testifies that, to his 
knowledge, $[REDACTED] was the [REDACTED] at that time. 8/19/20 Tr. 
2900 (Shapiro).
---------------------------------------------------------------------------

    \180\ It is undisputed that SoundCloud is not comparable to the 
target market services primarily because it has a high level of 
user-generated content and lacks access to the full catalogs of the 
record companies. 8/11/20 1408-09 (Orszag). Further, unlike other 
services, SoundCloud has always been mainly a platform where 
unsigned artists can post their music for downstream discovery. 
Harrison WDT ] 12; Trial Ex. 5289 at 7. The Services maintain that 
the issue regarding SoundCloud's suitability as a benchmark is 
``much ado about nothing,'' because [REDACTED], Services RPFFCL ] 
206, and Professor Shapiro notes that [REDACTED] 8/19/20 Tr. 2100 
(Shapiro). Accordingly, the Judges do not rely on SoundCloud as an 
appropriate benchmark.
---------------------------------------------------------------------------

    More particularly, Professor Shapiro divides: (1) The total royalty 
fees paid by Spotify and SoundCloud to each Major between May 2018 and 
April 2019; by (2) the play counts on their ad-supported interactive 
tiers during the same period. Shapiro WDT at 36 & tbl.8, 63 (Appx. D).
    Professor Shapiro includes in his (pre-adjustment) $[REDACTED] per-
play rate a previously omitted [REDACTED]. Shapiro WDT at 31 & Appx. D 
at 1. This [REDACTED] was needed because, pursuant to its contract with 
[REDACTED].\181\
---------------------------------------------------------------------------

    \181\ However, Professor Shapiro declines to include a similar 
[REDACTED] payment by Spotify to Warner, asserting that the payment 
data he had been provided reflected a global true-up payment rather 
than a U.S. payment, without information to enable a break-out of 
the U.S. portion of the ``true-up.'' Shapiro WDT, app. D at 1 n.3; 
8/19/20 Tr. 2911-12 (Shapiro). The Judges discuss the [REDACTED] 
issue infra.
---------------------------------------------------------------------------

    In addition, Professor Shapiro includes in his (pre-adjustment) 
$[REDACTED] per-play proposed rate a value for [REDACTED]. Professor 
Shapiro calculates this further value at $[REDACTED] per play. Shapiro 
WDT at 33 n.47; Appx. D at 1-2 & n.4; see also Trial Ex. 4044 at 14, 
43; Trial Ex. 5037 at 58-63 ([REDACTED]).
    Before considering potential adjustments to his $[REDACTED] 
benchmark rate that may be required to account for differences between 
the benchmark and target markets, Professor Shapiro characterizes this 
$[REDACTED] per-play interactive market derived rate as exceeding an 
``upper bound for the zone of reasonableness'' for ad-supported 
services. He reaches this opinion because he finds it would be 
``unreasonable for [noninteractive services] to pay more per-
performance for streams of sound recordings than the rate . . . for . . 
. interactive performances,'' which, because of its greater 
functionality, he characterizes as ``far more valuable'' than 
noninteractive performances). Shapiro WDT at 37.\182\
---------------------------------------------------------------------------

    \182\ To be clear, this benchmarking approach is not the ratio 
equivalency method. Because Professor Shapiro is applying effective 
noninteractive rates as his benchmarks, his model does not require 
an assumption of a particular level of substitution (cross-
elasticity) between the benchmark and target markets that would 
affect the per-play rate in the target market.

---------------------------------------------------------------------------

[[Page 59511]]

i. Professor Shapiro's Adjustments
    Professor Shapiro proposes the same three adjustments to his 
benchmark rate for ad-supported webcasters as he did for his 
subscription benchmark rate: (1) An interactivity adjustment; (2) a 
skips adjustment; and (3) an effective competition adjustment. Shapiro 
WDT at 37-40. He supports the application of all three adjustments on 
the same general bases he advocates for making these adjustments to his 
subscription benchmark, as discussed supra.
(A) Professor Shapiro's Proposed Interactivity Adjustment
    Professor Shapiro proposes to make the same two-step adjustment he 
applies to the subscription benchmark. He relies on the principle he 
applies in the subscription market, viz., that ``the rights conferred 
to play music interactively . . . are much more valuable than the 
rights conferred for statutory services. . . .'' Shapiro WDT at 33-34. 
To make this adjustment--and even though Professor Shapiro eschews 
reliance on the ratio equivalency approach for this ad-supported 
benchmark--he proposes that his unadjusted $[REDACTED] benchmark be 
reduced by 50% by applying the same 2:1 ``ratio equivalency'' ratio 
that the Judges have only applied in connection with subscription 
services. Shapiro WDT at 38-39. To apply this ratio adjustment in the 
ad-supported context, Professor Shapiro relies on the relative retail 
prices charged by ten leading subscription interactive services, $9.99 
per service, and three mid-tier services (offering limited 
interactivity), $4.99 per service.\183\ This adjustment reduces 
Professor Shapiro's benchmark rate from $[REDACTED] to $[REDACTED]. 
Shapiro WDT at 38-39.
---------------------------------------------------------------------------

    \183\ The services on which Professor Shapiro relies are the 
same as those he relied on to make this adjustment in the 
subscription market (Pandora Plus, Slacker LiveXLive Plus, and 
Napster unRadio).
---------------------------------------------------------------------------

    Professor Shapiro testifies that he found further support for his 
2:1 interactivity adjustment and the concomitant rate reduction to 
$[REDACTED] by comparing: (1) The rate Pandora pays Warner for limited 
Premium Access on-demand intervals on Pandora Free: $[REDACTED]; with 
(2) the noninteractive rate Pandora pays Warner: $[REDACTED] for 
noninteractive plays on its noninteractive tier. Trial. Exs. 5126, 
4031; Shapiro WRT at 34. Similarly, Professor Shapiro notes that 
Pandora's contract with Sony contains a per-play royalty rate of 
$[REDACTED] for noninteractive performances on its ad-supported 
noninteractive service, Trial. Exs. 5012 at 10; 5024 at 3, compared 
with a $[REDACTED] rate for interactive plays on that same ad-supported 
noninteractive tier. Shapiro WRT at 34 n.93.
    As he asserts regarding his proposed subscription benchmark 
interactivity adjustment, Professor Shapiro claims the above 2:1 
adjustment remains insufficient because it compares the retail 
subscription price from the benchmark market to mid-tier services with 
limited interactive features--not to statutory noninteractive services. 
Shapiro WDT at 38. To complete the interactivity adjustment to account 
for this point, Professor Shapiro proposes (again, as with his 
subscription benchmark) to make an adjustment that reflects the 
percentage difference between: (1) The effective per-play mid-tier 
royalty rate for subscription services, $[REDACTED]; and (2) the 
statutory rate paid by subscription noninteractive services: $0.0023. 
Shapiro WDT at 30 & tbl.5, 38-39. This percentage difference is 
[REDACTED]%, based on a [REDACTED]:1 ratio of $[REDACTED]:$[REDACTED]. 
Id. Applying this [REDACTED]% adjustment on top of the 2:1 adjustment 
reduces Professor Shapiro's interim rate (before any other adjustments) 
from $[REDACTED] to $[REDACTED].
    However, in an acknowledgement that Spotify's ad-supported mobile 
tier (a part of his benchmark service) is less than fully interactive, 
with functionality more like that of a mid-tier limited interactive 
service, Professor Shapiro testifies that it would be reasonable for 
the Judges to apply only his second interactivity adjustment--i.e., the 
[REDACTED]:1 that he asserts adjusts for the difference between the 
value of (1) mid-tier services; and (2) statutorily-compliant 
functionality. 8/19/20 Tr. 2905. Applying only this second 
interactivity adjustment, Professor Shapiro lowers his $[REDACTED] per-
play rate (described above) to $[REDACTED] (subject to the additional 
adjustments detailed below).
(B) Professor Shapiro's Proposed Skips Adjustment
    Professor Shapiro next proposes to make a skips adjustment, which 
he asserts is required because noninteractive licensees are required by 
statute to pay for plays under thirty seconds, but the benchmark 
interactive services do not pay for such truncated plays. Shapiro WDT 
at 39. Applying the same analysis as in his subscription benchmark 
model, and noting that recent Pandora data shows less-than-thirty 
second performances account for about [REDACTED]% of total radio 
performances, he derives a [REDACTED]:1 ratio for his skips adjustment. 
Shapiro WDT at 39. This adjustment lowers Professor Shapiro's benchmark 
rate for ad-supported services from $[REDACTED] to $[REDACTED] 
(applying both of his interactivity adjustments), or from $[REDACTED] 
to $[REDACTED] (applying only his second interactivity adjustment).
(C) Professor Shapiro's Proposed Effective Competition Adjustment
    Professor Shapiro proposes the same effective competition 
adjustment here, as he did for his subscription benchmark. That is, he 
calculates the difference between the effective per-performance rates 
paid to the Majors by [REDACTED] interactive service ($[REDACTED]) and 
the weighted average of the effective per-performance rates paid by ten 
other major on-demand streaming services ($[REDACTED]). Shapiro WDT at 
39-40, 42 & tbl.10. This results in a [REDACTED]:1 adjustment factor. 
This adjustment lowers Professor Shapiro's benchmark rate for 
advertising supported webcasters from $[REDACTED] to $[REDACTED] (if 
both interactivity adjustments are applied) or from $[REDACTED] to 
$[REDACTED] (if only the second interactivity adjustment is made). 8/
19/20 Tr. 2906-2907 (Shapiro).\184\
---------------------------------------------------------------------------

    \184\ The Judges consider Professor Shapiro's proposed effective 
competition adjustment in light of (1) their finding that the 12% 
steering adjustment remains appropriate; and (2) SoundExchange's 
criticism, discussed infra.
---------------------------------------------------------------------------

    As discussed in detail supra,\185\ the Judges found that the 12% 
effective competition adjustment derived in Web IV--based on the pro-
competitive effects of steering--remains the best measure, ceteris 
paribus, for transforming rates inflated by the Majors' complementary 
oligopoly market power into effectively competitive rates. But, as also 
noted above, all other things were not equal (comparing the Web IV and 
Web V evidence) in the subscription benchmarking exercise, whereas 
here, the [REDACTED].\186\
---------------------------------------------------------------------------

    \185\ See supra, section III.C
    \186\ See supra, section III.D
---------------------------------------------------------------------------

e. SoundExchange's Criticisms of Professor Shapiro's Ad-Supported 
Benchmark Model
i. Professor Shapiro's Decision Not To Include the [REDACTED] Value
    Professor Shapiro declines to apply a [REDACTED].\187\ He explained 
in his

[[Page 59512]]

WDT that, although he applies a [REDACTED], he declines to apply a 
Warner ``true-up'' because it is his understanding that, although 
``[REDACTED].'' Shapiro WDT at 63; Appx. D at 1 n.3 (emphasis added); 
see also 8/19/20 Tr. 2911-12 (Shapiro).\188\
---------------------------------------------------------------------------

    \187\ A ``true-up'' in this context is an increase in total 
royalties paid at the end of the year. The additional royalties are 
due because, although [REDACTED]'' See 9/3/20 Tr. 5668 (Harrison); 
Shapiro WDT at 31 n.47.
    \188\ The omission of this [REDACTED] is significant. When this 
royalty payment is included, Professor Shapiro's (unadjusted) 
benchmark rate increases from approximately $[REDACTED] to 
approximately $[REDACTED]. Compare Orszag WRT tbl.8 with 8/19/20 Tr. 
2912 (Shapiro) (describing the impact of applying or not applying 
the [REDACTED]).
---------------------------------------------------------------------------

    However, Mr. Orszag, in his WRT, asserts that Professor Shapiro 
should have made the [REDACTED]. Moreover, Mr. Orszag identified the 
document upon which he relies as supportive of this testimony. Orszag 
WRT ] 80 n.178 (identifying the royalty statement document as 
``SOUNDEX_W5_NATIVE_PROD_000751_RESTRICTED.xlsx.'' (henceforth the 
``000751'' document)).\189\ SoundExchange had produced the ``000751'' 
document to the Services in discovery, and Professor Shapiro 
specifically identified it as one of the documents he reviewed in 
preparing his written testimony. Shapiro WDT, Appx. C; see also id. 
app. D at 1 & n.1 (identifying the documents on which Professor Shapiro 
relies to calculate ad-supported royalty payments as 
SOUNDEX_W5_NATIVE_PROD_000001-001558, a sequence that includes 
``000751,'' the document identified by Mr. Orszag).
---------------------------------------------------------------------------

    \189\ This document was not proffered as evidence at the hearing 
and, accordingly, is not part of the hearing record.
---------------------------------------------------------------------------

    Professor Shapiro had an opportunity at the hearing to contest Mr. 
Orszag's written rebuttal testimony in this regard, and, if he had 
contested that testimony, to explain why the aforementioned document 
was insufficient. Professor Shapiro did continue to claim at the 
hearing that [REDACTED]'' but he did not address Mr. Orszag's assertion 
that the document the latter cited, the ``00751'' document, in fact 
[REDACTED]. 8/19/20 Tr. 2911-12 (Shapiro) (Professor Shapiro asserting 
that he ``[REDACTED]).
    The Judges find Professor Shapiro's failure to offer a substantive 
rebuttal relating to this document to be especially problematic 
because, as noted above, Professor Shapiro had already reviewed that 
document, had possession of it (or access to it) and presumably was 
familiar with its contents. Further, in its post-hearing proposed 
findings, the Services continue to ignore the ``07751'' document, 
asserting that ``Mr. Orszag did not calculate the value of the true-up 
himself or provide the data required to do so.'' Pandora/Sirius XM 
PFFCL ] 225. But, as noted above, Mr. Orszag did identify a document 
that he said contained the necessary data, and that specific testimony 
remained unchallenged.
    It is also noteworthy that Google's expert economic witness, Dr. 
Peterson, having access to the same data, decided to apply the 
[REDACTED] in toto. 8/25/20 Tr. 3780 (Peterson) [REDACTED]''); see also 
8/10/20 Tr. 1172-73 (Orszag) (``Dr. Peterson and I have similarly found 
the same result . . . .'').
    Professor Shapiro's failure to challenge the sufficiency of the 
document identified by Mr. Orszag, combined with Dr. Peterson' 
application of a [REDACTED] convinces the Judges that Professor 
Shapiro's failure to apply a [REDACTED] was incorrect. Applying this 
[REDACTED] increases Professor Shapiro's ad-supported benchmark rate, 
before any adjustments, from $[REDACTED] to $[REDACTED] (rounded). 
Orszag WRT tbls.7 & 8.\190\
---------------------------------------------------------------------------

    \190\ Mr. Orszag, like Professor Shapiro, includes in his 
calculation of the Spotify effective rate the value of marketing 
considerations (alternatively valued at the functionally equivalent 
rate $[REDACTED] per-play) in the agreements between Spotify and 
major record companies. Compare Shapiro WDT at 31 n.47 & app. D at 2 
with Orszag WRT tbls. 7 & 8.
---------------------------------------------------------------------------

ii. Professor Shapiro's Failure To Account for the Funneling 
(Conversion) Value of Spotify's Ad-Supported Service
    Mr. Orszag claims that a fundamental problem with Professor 
Shapiro's use of the Spotify ad-supported tier as a benchmark is that 
he fails to account for the fact that this benchmark also incorporates 
a successful and thus valuable feature: The ability to convert users to 
Spotify's more lucrative subscription tier. Orszag WRT ] 72.
    SoundExchange notes that, at the hearing, Professor Shapiro 
acknowledges this point. First, as a general matter, he agreed that the 
more promotional a music service is of other revenue streams (net of 
substitution for other revenue streams, the lower the royalty rate the 
service should be able to negotiate. Then, specifically, Professor 
Shapiro admitted that, if [REDACTED], then [REDACTED] 8/19/20 Tr. 2967 
(Shapiro).
    Mr. Orszag further explains that the importance of funneling ad-
supported users into paid subscriptions is thus a [REDACTED] component 
of the bargain between the record companies and Spotify. That value is 
manifested in the parties' negotiations by the record companies' 
[REDACTED]. Orszag WRT ] 73.
    Another SoundExchange economic witness, Professor Tucker, places 
Spotify's funneling/conversion value in the broader contemporary 
economic context of ``freemium'' pricing models. More particularly, she 
notes the need for sellers to experiment constantly with different ways 
of ``nudging people to upgrade'' and reminding them of the potential 
benefits of the premium paid product, '' so as to overcome the risk 
that customers will become ``anchored to a zero price.'' 8/17/20 Tr. 
2116 (Tucker). Professor Tucker opined that the record companies' 
[REDACTED] was a striking application of the commercial necessity to 
funnel and convert to a premium service. Id. at 2120-21. (Tucker).
    The Services contend that SoundExchange has failed to demonstrate 
adequately the [REDACTED]. Also, they contend record company witnesses 
have indicated that, notwithstanding any discounts/penalties based on 
listener tenure, the record companies have [REDACTED] Services RPFFCL 
]] 179-183 (and record citations therein).
    Notwithstanding these rejoinders, the Services propose that, if the 
Judges find Spotify's ad-supported tier rates to include [REDACTED], 
rather than reject the ad-supported rates as benchmarks, the Judges 
should adjust the Spotify ad-supported benchmark rate upwards in an 
attempt to isolate and remove the [REDACTED] in that rate tier. See 8/
19/20 Tr. 2912 (Shapiro). In that regard, Professor Shapiro agreed that 
other potential evidence exists to calculate this adjustment: The 
express terms in [REDACTED] 8/19/20 Tr. 2912-13, 2914 (Shapiro) 
(agreeing with Judge Strickler's suggestion that the [REDACTED]); see 
generally Services PFFCL ] 146; Pandora/Sirius XM PFFCL ]] 242-243 (and 
record citations therein).
    The Judges find that, despite the various incentives and market 
power that may have led to the [REDACTED],\191\ the [REDACTED], serve 
as a useful basis by which to isolate the [REDACTED]. Indeed, as 
discussed at length infra, the parties have adopted a basis by which to 
apply these [REDACTED].
---------------------------------------------------------------------------

    \191\ Any potential impact from differences in market or 
bargaining power, such as from the licensors' complementary 
oligopoly market structure, Spotify's unique position as a pureplay 
service, interactivity differences or play counts, is addressed by 
the Judges elsewhere in this Determination, both generally and with 
specific regard to the experts' rate proposals.
---------------------------------------------------------------------------

    Having considered SoundExchange's criticisms of Professor Shapiro's 
establishment of a benchmark, the

[[Page 59513]]

Judges next proceed to a consideration of SoundExchange's criticisms of 
the potential adjustments proffered by Professor Shapiro.
iii. Criticism of Professor Shapiro's Interactivity Adjustment
    Taking on Professor Shapiro's first interactivity adjustment, 
SoundExchange challenges the correctness of applying a supposed value 
for interactivity derived from the subscription market in the ad-
supported market. More particularly, SoundExchange asserts, relying on 
Professor Shapiro's own testimony, that the added value, if any, of 
interactive functionality depends on its value to consumers in the 
downstream market. In a subscription market, SoundExchange avers the 
service's demand for interactive functionality is a derived demand, 
arising from its downstream customers' WTP for interactive 
functionality. SX RPFFCL (to Pandora/Sirius XM) ] 229 (citing 8/19/20 
Tr. 2975-76 (Shapiro)).
    In contrast to a subscription market, SoundExchange maintains, an 
ad-supported service's demand for interactive functionality would be 
irrelevant to the calculation of advertisers' WTP for advertisements, 
and the users' willingness to listen to them. Id. (citing 8/19/20 Tr. 
2977-80 (Shapiro)). Thus, SoundExchange maintains that Professor 
Shapiro errs in using an interactivity adjustment derived from the 
subscription market to adjust his ad-supported rates. In further 
support of this argument, SoundExchange relies on the testimony of two 
of the Services' economists, testifying for the NAB and Google, 
respectively, in this proceeding. Id. (citing Leonard WRT ] 54 (``[T]he 
relationship between revenue generation and interactivity is 
substantially different for ad-supported than for subscription 
services.''); and 8/25/20 Tr. 3702-03 (Peterson) (``[I]t's really the 
willingness to pay of advertisers and the ability of the service to 
attract advertisers that is going to affect the revenue on the service. 
It's not listeners that are providing that revenue.'')).
    Turning to Professor Shapiro's second interactivity adjustment 
based on mid-tier subscription services, SoundExchange offers the same 
criticism as it asserts immediately above because this adjustment is 
also derived from the subscription market. SX RPFFCL (to Pandora/Sirius 
XM) ] 230. SoundExchange also raises the criticism of this second 
interactivity adjustment it makes in connection with Professor 
Shapiro's subscription benchmark adjustments. That is, SoundExchange 
re-asserts that Professor Shapiro: (1) Entirely ignores consumer WTP to 
pay in the downstream market by relying on upstream royalty 
differentials; (2) cannot cite to evidence any positive WTP of 
consumers in the downstream market for the additional functionality 
that Pandora obtained for its mid-tier Pandora Plus service; (3) 
wrongly dismisses the fact that the subscription price for Pandora's 
prior noninteractive service was the same ($4.99) as its subsequent 
mid-tier Pandora Plus service; (4) merely speculates that the 
additional functionality of Pandora Plus may have increased consumer 
demand compared to demand for its prior noninteractive service; (5) 
ignores the fact that any increase in subscribership that may have 
occurred simply adds more plays and more revenue, without necessarily 
changing revenue per play; (6) fails to address the fact that 
[REDACTED] and (7) wrongly uses a statutory rate (the $0.0023 rate) as 
his base against which to compute the percentage value added by 
Pandora's mid-tier service. See SX PFFCL ]] 143-156 (and record 
citations therein).
    SoundExchange also takes issue with the implicit premise that 
Spotify's ad-supported service has the full functionality necessary to 
justify the interactivity adjustments Professor Shapiro proposes. It 
notes that (as Professor Shapiro himself acknowledges), although 
Spotify's ad-supported service is fully interactive when used on a 
desktop, its mobile service is not fully interactive, but rather 
provides a ``shuffle'' feature that lets listeners select an artist or 
playlist and hear a somewhat randomized stream of tracks by that artist 
or from that playlist. See 8/19/20 Tr. 2985 (Shapiro).\192\ However, 
SoundExchange notes that Professor Shapiro does not reduce his proposed 
interactivity adjustment to reflect the lower functionality of the 
mobile service, 8/19/20 Tr. 2986 (Shapiro), even though he acknowledges 
that ``[REDACTED]'' and its [REDACTED] 8/19/20 Tr. 2986-87 
(Shapiro).\193\
---------------------------------------------------------------------------

    \192\ Spotify's mobile shuffle service also allows up to 6 songs 
from an album within a 60 minute period, compared to the statutory 
sound recording performance complement which allows only 3 songs 
from an album within a 3 hour period. See Peterson WDT ] 45 n.33.
    \193\ It was for this reason that Professor Shapiro proposes the 
alternative interactivity adjustment approach, as discussed supra, 
whereby only the difference between the mid-tier royalty rate and 
the statutory rate (his ``second'' interactivity adjustment) would 
be applied. However, SoundExchange characterizes this approach as a 
``tactical retreat'' without economic meaning, because Professor 
Shapiro offers no explanation for why an interactivity adjustment 
for a mid-tier subscription service-with the same functionality 
available on both desktop and mobile devices-is applicable to 
Spotify's ad-supported service (with functionality that differs 
depending on whether the music is delivered via a mobile or a 
desktop method). SX RPFFCL (to Pandora/Sirius XM) ] 233.
---------------------------------------------------------------------------

    SoundExchange also takes issue with Professor Shapiro's reliance on 
the per-play rates of $[REDACTED] for Premium Access plays on Pandora's 
noninteractive service. It notes that, for example, Sony's contract 
with [REDACTED]'' Trial Ex. 5097 at 1. Accordingly, SoundExchange 
maintains that these per-play rates embody a promotional value, and 
thus do not reflect the stand-alone value of on-demand functionality on 
Pandora's ad-supported service.
iv. Criticism of Professor Shapiro's ``Skips'' Adjustment
    SoundExchange questions the probative value of the data upon which 
Professor Shapiro relies for his [REDACTED]% skips adjustment on the 
same basis as it challenges his application of this data to his skips 
adjustment in the subscription market. To recap the criticism, 
SoundExchange notes that Professor Shapiro acknowledges that this data 
came from noninteractive plays available on all three tiers of 
Pandora's service--ad-supported, mid-tier and fully interactive. 8/20/
20 Tr. 3028-29 (Shapiro). As a consequence, Mr. Orszag asserts, the 
[REDACTED]% ``skips'' rate is likely overstated because subscribers to 
Pandora's two interactive tiers have unlimited skips, making them more 
likely to skip when accessing noninteractive plays on those two tiers. 
Orszag WRT ] 120. SoundExchange notes that Professor Shapiro agrees but 
testifies that any such upward bias would have had a de minimis impact, 
so he did not measure the effect. 8/20/20 Tr. 3030-32 (Shapiro).
v. Criticisms of Professor Shapiro's Effective Competition Adjustment
    SoundExchange asserts that no effective competition adjustment is 
warranted. Because Professor Shapiro proffers the same [REDACTED]% 
effective competition adjustment to the ad-supported rate as he does to 
the subscription rate, for the same reasons, SoundExchange sets forth 
the same substantive opposition. See SX PFFCL ]] 487-489. Accordingly, 
the Judges' recitation of that argument supra is incorporated by 
reference here.\194\
---------------------------------------------------------------------------

    \194\ See supra, section IV.B.1.e.v(C).
---------------------------------------------------------------------------

    SoundExchange also repeats its argument regarding the virtual 
equivalency of the $[REDACTED]

[[Page 59514]]

effective per-play rate for [REDACTED] and the $[REDACTED] effective 
per-play rate for Spotify. Again, SoundExchange notes that Professor 
Shapiro characterizes this [REDACTED] rate as effectively competitive, 
whereas he asserts that [REDACTED] reflects the Majors' complementary 
oligopoly power. See SX PFFCL ]] 483-486 (and record citations 
therein).
f. The Judges' Analysis and Findings Regarding Professor Shapiro's 
Proposed Adjustments
i. Professor Shapiro's Proposed First and Second Interactivity 
Adjustments
    The Judges reject Professor Shapiro's proposed interactivity 
adjustments to his proposed ad-supported rate. In reaching this 
finding, the Judges agree with SoundExchange that the concept of added 
economic value for interactivity is not a suitable basis to adjust 
downward a proposed benchmark rate. Advertisers, not listeners, pay the 
royalties. And there is insufficient evidence to establish that 
advertisers' payments to noninteractive ad-supported services are a 
function of the level of interactivity of that service.\195\ Moreover, 
Professor Shapiro's attempt to apply the 2:1 interactivity adjustment 
derived from the subscription market is not only unsupported, it is 
ironic, because Professor Shapiro has rightfully chastised Mr. Orszag 
for applying subscription market data to divine an ad-supported rate, 
as discussed supra.
---------------------------------------------------------------------------

    \195\ To be sure, listeners to ad-supported services may well 
prefer interactive functionality to noninteractive functionality, 
because the former provides greater utility. The problem is that 
such a preference is not revealed in this multi-sided platform 
context because the listeners do not make purchasing decisions.
---------------------------------------------------------------------------

    The Judges also decline to endorse Professor Shapiro's alternative 
proposal to apply only his second interactivity adjustment. As the 
Judges explained supra regarding Professor Shapiro's proffer of this 
[REDACTED]% adjustment in the subscription market, there is no 
sufficient evidentiary basis to use the entirety of the upstream 
royalty differences to generate downstream differences in interactivity 
value, nor is there sufficient evidence that any of the royalty 
difference ($[REDACTED]) reflected actual value differences, given the 
$4.99/month price for both Pandora's prior Pandora One statutory 
subscription service and its subsequent Pandora Plus mid-tier 
subscription service. Moreover, because this royalty differential 
relates to the subscription market, the Judges find it (like professor 
Shapiro's proffered first interactivity adjustment) to be uninformative 
with regard to the ad-supported market.
ii. Professor Shapiro's Proposed Skips Adjustment
    SoundExchange does not add any other criticisms of Professor 
Shapiro's skips adjustment to its discussion of his ad-supported 
adjustment to his subscription skips adjustment. Accordingly, the 
Judges adopt (and incorporate by reference here) the same analysis and 
the same finding of a [REDACTED]% skips adjustment as they found for 
the subscription market.
iii. Professor Shapiro's Proposed Effective Competition Adjustment
    Because Professor Shapiro's proffered ad-supported effective 
competition adjustment, and SoundExchange's criticism thereof, are 
identical to their positions regarding this potential adjustment in the 
subscription market, the Judges incorporate by reference here their 
rejection of that adjustment, and the reasons for that rejection.\196\
---------------------------------------------------------------------------

    \196\ See supra, section IV.B.1.e.v(C). The Judges add, though, 
that Professor Shapiro's ad-supported methodology appears to shed 
light on Pandora's decision (discussed supra) to propose an 
effective competition adjustment ([REDACTED]%) based on the 
difference between the interactive average royalty rate 
($[REDACTED]) and the [REDACTED] royalty rate ($[REDACTED]), rather 
than the difference between the $[REDACTED] average rate and 
[REDACTED]s $[REDACTED] effective per-play rate. Because Pandora 
uses the Spotify ad-supported rate as its benchmark, if it 
identified Spotify's effective per-play rate (based on a [REDACTED]) 
as effectively competitive, it could not then rely on that rate to 
generate a downward effective competition adjustment, as exposed by 
SoundExchange. That would have significantly increased Pandora's 
proposed benchmark rate.
---------------------------------------------------------------------------

    The Judges' rejection of Professor Shapiro's proposed effective 
competition adjustment does not mean that no such adjustment is 
warranted. Rather, the Judges apply the same analysis to the ad-
supported sector as they have in the subscription context. However, the 
Judges' application of that approach here in the ad-supported sector 
differs from their analysis in the subscription sector. To recap, in 
the subscription sector, [REDACTED].\197\ Thus, when applying the 
[REDACTED]% effective competition adjustment based on the price-
competitive impact of steering, the Judges offset the percentage 
difference between the [REDACTED]% and [REDACTED]% rates--[REDACTED]%--
to set an effective competition adjustment of [REDACTED]% (i.e., 
[REDACTED]%-[REDACTED]%).
---------------------------------------------------------------------------

    \197\ Under the 2017 Agreements, [REDACTED]. Shapiro WDT at 40, 
tbl.10; see also Orszag WDT ] 153 & tbl.15 ([REDACTED]).
---------------------------------------------------------------------------

    However, in the ad-supported sector, [REDACTED]. Indeed, the Majors 
[REDACTED]. Ultimately, the Majors and Spotify [REDACTED]. Trial Ex. 
4040 (Universal/Spotify 2017Agreement); Trial Ex. 5038 (Warner/Spotify 
Agreement).
    With regard to the headline per-play rates, the 2017 Universal-
Spotify Agreement [REDACTED]. Compare Trial Ex. 2062, Fees Annex, p. 3 
(2013 Agreement) with Trial Ex. 4040, Fees Annex, p.1 of 3; see also 
Harrison WDT ] 24 (noting [REDACTED]); Shapiro WRT at 19 n.60 
([REDACTED]. Similarly, [REDACTED]. Compare Trial Ex. 5020 ex. I (Rate 
Card) (2013 Agreement) with Trial Ex. 5038 app. 1 (Rate Card) (2017 
Agreement).\198\
---------------------------------------------------------------------------

    \198\ The Sony/Spotify 2013 and 2017 Agreements [REDACTED]. See 
Trial Exs. 5074 (2013 Agreement) and 5011 (2017 Agreement); see also 
Orszag WDT, fig.6..
---------------------------------------------------------------------------

    In the other tier of its 2017 Agreements with [REDACTED], Spotify 
[REDACTED]. Spotify has been paying royalties [REDACTED] 2017 
Agreements because that [REDACTED]. 8/20/20 Tr. 3085-86 (Shapiro); 8/
11/20 Tr. 1233 (Orszag). But, as Mr. Harrison of Universal 
acknowledged, [REDACTED]. 9/3/2020 Tr. 5710-11 (Harrison); SX PFFCL ] 
291 (acknowledging the [REDACTED]). Further, there is no evidence to 
indicate that the effective per-play rate on the ad-supported tier 
[REDACTED] under Spotify's 2017 Agreements with the other two Majors, 
i.e., Warner or Sony.
    Mr. Harrison asserts that the reason Spotify's [REDACTED] was 
because Spotify was [REDACTED]. But the ability of a licensor to 
extract value from a licensee's [REDACTED] is precisely the sort of 
``heads-I-win, tails-you-lose'' advantage that the Judges noted in 
SDARS III is part-and-parcel of a licensor's complementary oligopoly 
power. SDARS III, 83 FR at 65228. Accordingly, the 2017 Agreement 
between Universal and Spotify, with regard to the ad-supported rates 
(and unlike with regard to the subscription rates), is consistent with 
an undiminished exercise of complementary oligopoly power.\199\
---------------------------------------------------------------------------

    \199\ The Judges discussed this phenomenon elsewhere in this 
Determination, regarding the Majors' obtaining a share of the value 
of Pandora's investment in the monetization of its advertising 
platform. In that context and in the present context, the extent to 
which the Majors can share in the increase in advertising revenue is 
a function of their complementary oligopoly power (as is every 
aspect of the rate-setting process). This particular aspect of the 
Majors' complementary oligopoly power is mitigated by the Judges' 
general inclusion of the [REDACTED]% effective competition 
adjustment, which is broadly intended to offset all aspects of the 
Majors' complementary oligopoly power (that is not otherwise offset 
by Spotify's countervailing power in the subscription benchmark 
market).
---------------------------------------------------------------------------

    Additionally, by obtaining [REDACTED] in the 2017 Agreements, 
Universal and Warner [REDACTED],

[[Page 59515]]

relative to their 2013 Agreements, [REDACTED]. Thus, [REDACTED] of the 
2017 Agreements, these Majors had [REDACTED]--which, as noted above, 
[REDACTED], according to Mr. Harrison.
    The Judges find these facts to belie any assertion that [REDACTED]. 
Thus, the effective competition adjustment on the ad-supported tier 
remains at [REDACTED]%, as it pertains to Professor Shapiro's benchmark 
rate.
g. Applying the Skips and Effective Competition Adjustments
    Because the Judges do not apply any interactivity adjustment to 
Professor Shapiro's ad-supported benchmark rate, they adjust the 
$[REDACTED] per-play ad-supported rate by first applying the 
[REDACTED]% adjustment for skips, which reduces the rate to 
$[REDACTED]. The Judges then apply the effective competition adjustment 
of [REDACTED]. The resulting rate is $[REDACTED] ($[REDACTED]) 
rounded).
3. Supplementation by Mr. Orszag and Professor Shapiro to Their 
Original Ad-Supported Benchmarking Approaches
    Both Mr. Orszag and Professor Shapiro supplement their ad-supported 
benchmarking models in manners that narrow the differences between 
their proposed rates. Each expert's supplemental position is examined 
seriatim below.
a. Professor Shapiro Acknowledges the Propriety of Adjusting His 
Proposed Spotify Ad-Supported Benchmark Rate Higher To Account for 
Spotify's Ability To Funnel Ad-Supported Users Into Its Higher Royalty-
Bearing Subscription Tier
    Professor Shapiro takes notice of SoundExchange's criticism that 
his ad-supported benchmark model fails to account for Spotify's added 
value as a funneling tool, converting ad-supported listeners into 
subscribers who pay a higher retail price and generate higher 
royalties. 8/19/20 Tr. 2912 (Shapiro) (``[[REDACTED]''); see also 
Orszag WRT ] 72. Further, for benchmarking purposes in this proceeding, 
Pandora assumes that [REDACTED]a value to the Majors that [REDACTED]. 
Pandora/Sirius XM PFFCL ] 241.\200\
---------------------------------------------------------------------------

    \200\ Consistent with this assumption, the Judges have described 
supra the ad-supported rate structure in Spotify's agreements with 
Universal and Warner, respectively, that provide Spotify [REDACTED].
---------------------------------------------------------------------------

    Having adopted this assumption, Professor Shapiro testifies that 
the appropriate response is not to disregard Spotify's ad-supported 
tier rates. Rather, the correct approach is to address Spotify's ad-
supported rate structure by [REDACTED]. 8/19/20 Tr. 2912 (Shapiro); 
Shapiro WRT at 42.
    Taking note of the aforementioned Spotify agreements with Warner 
and Universal, Professor Shapiro focuses on the per-play royalty rates 
Spotify pays [REDACTED]): $[REDACTED].\201\ Each of these rates, 
Professor Shapiro notes, represents a [REDACTED]% [REDACTED] the base 
per-play minimum specified in the agreements. Shapiro WRT at 43; 
Harrison WDT ] 67 (regarding the Universal agreement); Adadevoh WDT ] 
21 (regarding the Warner Agreement).
---------------------------------------------------------------------------

    \201\ There is no evidence of a comparable [REDACTED] rate in 
its agreement with Sony.
---------------------------------------------------------------------------

    According to Professor Shapiro, it would be appropriate to use the 
[REDACTED]users, as the basis for an upward adjustment to his benchmark 
rate, in order to [REDACTED]. In other words, [REDACTED]. 8/19/20 Tr. 
2912-14 (Shapiro).
    Professor Shapiro at first intended to adjust his benchmark rate 
higher to reflect the full [REDACTED]% [REDACTED]. However, Mr. Orszag 
pointed to a fact that indicated Professor Shapiro would actually 
overstate his benchmark if he applied [REDACTED]. Specifically, Mr. 
Orszag testified:

    You just can't take the rate and [REDACTED]. That would be 
inappropriate. One would want to weight by the number of subscribers 
who have been--have been [REDACTED] [REDACTED].

    8/11/20 Tr. 1382 (Orszag). Mr. Orszag used this data to determine 
that, to adjust the proposed royalty rate derived by Professor Shapiro 
(and by Dr. Peterson), as well as the proposed royalty rates he 
derived--to eliminate the funneling/conversion value in the rate 
structure--required a [REDACTED] adjustment (a [REDACTED]) in their 
respective rates. 8/11/20 Tr. 1382, 1405-06 (Orszag); 8/25/20 Tr. 3816 
(Orszag).\202\
---------------------------------------------------------------------------

    \202\ Mr. Orszag calculated this [REDACTED] adjustment from a 
worksheet he utilized in this proceeding that had been produced by 
SoundExchange to the Services in discovery, Bates #W5 00492-00502). 
8/11/20 Tr. 1408 (Orszag) (promising to identify the underlying 
worksheet the next hearing day); 8/12/20 Tr. 1486 (identification of 
the worksheet the next hearing day by David Handzo, Esq, counsel for 
SoundExchange, without objection).
---------------------------------------------------------------------------

    Professor Shapiro analyzed this background worksheet and came to 
the same conclusion as Mr. Orszag, quantifying the smaller upward 
adjustment of [REDACTED]% to the proposed rate, rather than 
[REDACTED]%. Compare 8/25/20 Tr. 3816 (Orszag) (``Professor Shapiro in 
his testimony has introduced a new adjustment. He proposed a [REDACTED] 
x adjustment to the Spotify Free rate . . . that works to correct the 
[REDACTED] that are associated with the Spotify Free benchmark. And 
with that, I am more comfortable with that benchmark. '') with 8/19/20 
Tr. 2913, 2921, 2970 (Shapiro) (``I have calculated, for the same 
calculation he did . . . that the proper adjustment would be a 
[REDACTED] adjustment factor. . . . [W]e did the same calculation and 
we both got to this same number.. . . And that ratio is also 
[REDACTED]. So we're doing the same thing.. . . I [had] said something 
like the [REDACTED], but Mr. Orszag corrected me and pointed out it 
should be [REDACTED].'').
    Applying this [REDACTED] factor to the Judges' calculation 
(conducted supra) of Professor Shapiro's benchmark effective rate for 
ad-supported noninteractive services, $[REDACTED], results in a final 
effective rate of $[REDACTED] (i.e., $[REDACTED] x [REDACTED]), or 
$0.0023 (rounded).
b. Mr. Orszag Acknowledges the Propriety of Using Spotify's Ad-
Supported Service as a Benchmark for the Statutory Benchmark Service
    Although SoundExchange and Mr. Orszag continue to advocate for the 
latter's subscription benchmark-based rate of $0.0025 as the statutory 
ad-supported rate,\203\ Mr. Orszag subsequently testified that he had 
become ``comfortable'' as well with applying Spotify's ad-supported 
rate as the benchmark in his own ratio equivalency model. He came to 
this conclusion after discerning that ``[t]he percentage of revenue for 
the Spotify subscription tier is virtually the same as the percentage 
of revenue for the Spotify Free tier.'' 8/25/20 Tr. 3809 (Orszag).
---------------------------------------------------------------------------

    \203\ ``I continue to believe that license agreements for 
subscription on-demand services can be useful benchmarks for 
statutory ad-supported services.'' Orszag WRT ] 75.
---------------------------------------------------------------------------

    More particularly, he notes that the effective percent-of-revenue 
rate paid by [REDACTED] (i.e., as a percent of advertising revenue) is 
[REDACTED]%. Peterson WDT, ] 51. By comparison, the royalty rate on 
which Mr. Orszag relies in his WDT is based on a very similar 
[REDACTED]% subscription market effective rate paid by [REDACTED]. 
Orszag WDT, tbls.7, 9.
    Mr. Orszag notes, though, that his percent of revenue calculation 
differs from the calculations of Dr. Peterson and Professor Shapiro. 
Dr. Peterson bases his royalty percentage on net revenue, which is 
lower than gross revenue. By contrast, Mr. Orszag makes

[[Page 59516]]

his percent-of-revenue calculation off Spotify's gross revenues. The 
revenue figure (whether gross or net) is the denominator in the 
calculation of effective percent-of-revenue royalties. (The royalties 
paid comprise the numerator.). Thus, Dr. Peterson's [REDACTED]% figure, 
Mr. Orszag acknowledges, must be restated using gross revenues, to make 
an apples-to-apples comparison with Mr. Orszag's benchmarking approach. 
Mr. Orszag performs this restatement and re-calculates Spotify's 
effective percent-of-revenue royalty payments, on a gross revenue 
basis, as [REDACTED]%. Orszag WRT ] 71 n.155. Mr. Orszag also notes 
that the effective percent-of-revenue rate (apparently on gross 
revenues) determined through Professor Shapiro's data is similar, at 
[REDACTED]% (after correcting for (1) Professor Shapiro's acknowledged 
double-counting in connection with the [REDACTED]) and (2) his decision 
not to provide [REDACTED].). Orszag WRT ] 71 nn.155-156.
    Mr. Orszag explains that, when establishing percent-of revenue 
rates using net advertising revenues, his own ratio equivalency 
approach (not the benchmarking approach of either Dr. Peterson or 
Professor Shapiro) per-play rates decrease by [REDACTED]%, from 
$[REDACTED] to $[REDACTED] (a $[REDACTED] reduction). Id.\204\ 
Specifically, when Mr. Orszag applies Dr. Peterson's [REDACTED]% of 
revenue figure, Mr. Orszag calculates a per-play royalty of $[REDACTED] 
($[REDACTED] rounded). Similarly, when Mr. Orszag applies Professor 
Shapiro's [REDACTED]% rate, Mr. Orszag calculates an effective per-play 
rate of $[REDACTED] (which also rounds to $[REDACTED]). Orszag WRT ] 71 
n.156.
---------------------------------------------------------------------------

    \204\ To be clear, Mr. Orszag is here plugging in calculations 
of percent-of-revenue rates in the benchmark market by using Dr. 
Peterson's and Professor Shapiro's own percent-of-revenue 
calculations in order to generate a percent-of-revenue rate in the 
benchmark market that Mr. Orszag, using his ratio equivalency model, 
then applies to the target market; Mr. Orszag is not applying his 
percent-of-revenue calculations, as derived from these other two 
experts, in their benchmarking models. See Services PFFCL ]] 48-56 
(and record citations therein).
---------------------------------------------------------------------------

    In his WRT, Mr. Orszag continues to cast doubt, though, on 
Spotify's ad-supported rate as a useful benchmark. He emphasizes that 
Spotify's ad-supported tier is ``wholly different'' from, inter alia, 
statutory noninteractive ad-supported services because of the former's 
separate attribute as a [REDACTED] funneling tool, inducing ad-
supported listeners to convert to subscribership and its concomitant 
higher royalty payments. Orszag WRT ]] 72-75. However, as noted supra, 
when the [REDACTED] adjustment was made to control for the separate 
value of funneling/conversion,\205\ Mr. Orszag became, if not a full-
fledged convert, ``more comfortable'' with the ``Spotify Free 
benchmark.'' 8/25/20 Tr. 3816 (Orszag).\206\
---------------------------------------------------------------------------

    \205\ Mr. Orszag also contends that the [REDACTED] rate is still 
too low because: (1) Some Spotify ad-supported listeners ultimately 
convert to the subscription tier [REDACTED]; and (2) Spotify's 
contract with the Majors require it to [REDACTED]. Orszag WRT ]] 73, 
75 n.167. However, the Services convincingly note that: (1) 
[REDACTED]; and (2) there is no evidence that [REDACTED], resulting 
in a loss of revenue. Services RPFFCL ]] 195, 204; see also 8/19/20 
Tr. 2971 (Shapiro) (noting that an adjustment based on additional 
revenue arising from an [REDACTED].'').
    \206\ The Services nonetheless do not agree with the methodology 
utilized by Mr. Orszag, as it does not reflect the need to make any 
appropriate adjustments. Id.; Pandora/Sirius XM PFFCL ] 244 n.33. 
However, the Judges examine the relative merits of the Services' 
proposed adjustments separately, in their analysis of each expert's 
model. The salient point here though is that Professor Shapiro's 
approach (and Dr. Peterson's approach) yield effective per-play 
royalty rates on the ad-supported tiers that are quite proximate, 
prior to the consideration of particular adjustments.
---------------------------------------------------------------------------

    When Mr. Orszag applies the [REDACTED] adjustment to reflect the 
number of Spotify listeners [REDACTED], his proposed rate--derived from 
his ratio equivalency model but using Spotify's ad-supported data--
increases from $[REDACTED] to $[REDACTED] See 8/11/20 Tr. 1406 
(Orszag).
    The final step in this analysis would be to apply an appropriate 
adjustment for effective competition. For the reasons discussed, supra, 
regarding the effective competition adjustment necessary for Professor 
Shapiro's ad-supported benchmark rate, the Judges apply the same 12% 
effective competition adjustment.
    Applying the 12% effective competition adjustment to Mr. Orszag's 
$[REDACTED] rate reduces his ad-supported rate, to $[REDACTED] ($0.0024 
rounded).
    As in the subscription market analysis, the Judges need to weight 
the relative impacts of: (1) The benchmark approach of Professor 
Shapiro (joined in the ad-supported analysis by the identical rate 
identified by the Judges from Dr. Peterson's analysis) and (2) Mr. 
Orszag's (de facto) ratio equivalency approach. The Judges use the same 
approach here as they did supra for the subscription rate. That is, 
they look to the Zauberman Survey,\207\ as applied by Professor Willig, 
for SoundExchange's' estimate of the diversion ratio from ad-supported 
noninteractive listeners to a new ad-supported interactive service, 
which is [REDACTED]%.\208\
---------------------------------------------------------------------------

    \207\ As the Judges noted regarding their use of the Zauberman 
Survey in their subscription rate calculation, although they find 
the Zauberman Survey less reliable in other respects than other 
surveys in the record, only the Zauberman Survey asks respondents 
directly the necessary diversion question, here, to identify the 
source of music to which they would divert if noninteractive ad-
supported services were not available, not if they were merely 
downgraded.
    \208\ Professor Willig estimated the number of monthly plays on 
Pandora to be [REDACTED]. Willig WDT ] 45. The diversion of monthly 
plays to interactive ad-supported services (i.e., to a service such 
as Spotify's) is [REDACTED], according to Professor Willig's 
application of the Zauberman Survey. Willig WDT, fig.6 (panel A). 
[REDACTED]=[REDACTED]% (rounded).
---------------------------------------------------------------------------

    Thus, Mr. Orszag's $0.0024 rate has a weight of [REDACTED]% in the 
calculation of the overall benchmark rate in the ad-supported market. 
Professor Shapiro's $0.0023 rate has a weight of [REDACTED]% (i.e., 1-
[REDACTED]). The resulting rate is $0.0023 (rounded).\209\
---------------------------------------------------------------------------

    \209\ [REDACTED].
---------------------------------------------------------------------------

4. Dr. Peterson's Ad-Supported Benchmark Model
a. Dr. Peterson's Interactive Benchmark
    Dr. Peterson, testifying on behalf of Google, derived his ad-
supported benchmark analysis from the interactive ad-supported market. 
According to Dr. Peterson, this is an appropriate benchmark, consistent 
with Web IV, in which the Judges used ad-supported benchmarks to 
develop the ad-supported statutory rate. 8/25/20 Tr. 3631 (Peterson); 
Peterson WDT ]] 10, 12. Google and Dr. Peterson posit that Spotify's 
ad-supported service is the closest benchmark available for statutory 
ad-supported services. Google LLC's Amended Proposed Findings of Fact 
and Conclusion of Law ] 24 (Google PFFCL); 8/25/20 Tr. 3633-34 
(Peterson). Google further suggests that the Judges have indicated a 
preference toward benchmark analysis and that prior determinations have 
tended to eschew non-benchmark-based approaches. Google PFFCL ] 13-18; 
Web IV, 81 FR at 26320, 26327; Distribution of Cable Royalty Funds, 
Final Allocation Determination, 84 FR 3352, 3602 (Feb. 12, 2019) (2010-
13 Cable Allocation Determination).
    To apply his benchmark, Dr. Peterson began by calculating effective 
per-play royalty rates, derived from the royalties paid by Spotify to 
Warner, UMG, Sony, Merlin and Ingrooves on a percent-of-revenue 
[REDACTED], in which the other [REDACTED]. Peterson WDT ]] 10, 48-51; 
8/25/20 Tr. 3634 (Peterson) (explaining that he divided the total 
royalties paid or to be paid by the reported royalty-bearing plays for

[[Page 59517]]

each label); Peterson WDT ]] 13, 48.\210\ Dr. Peterson used the 
payments due under the [REDACTED]. 8/25/20 Tr. 3636-3637 (Peterson) 
([REDACTED]). Under the Spotify licenses, Dr. Peterson found that the 
effective per-play rates [REDACTED]. Peterson WDT ]] 10, 48-51.
---------------------------------------------------------------------------

    \210\ Dr. Peterson also analyzed SoundCloud Limited's 
(SoundCloud) licenses with UMG and Warner for the SoundCloud ad-
supported tier to corroborate his findings based on the five Spotify 
licenses. The SoundCloud licenses were offered as confirmatory 
benchmarks rather than primary benchmarks because the SoundCloud ad-
supported tier includes comparatively less than a full catalog of 
content and significant user-generated content. Peterson WDT ] 11. 
As previously indicated, the Judges find that SoundCloud is not 
comparable to the target market services primarily because it has a 
high level of user-generated content and lacks access to the full 
catalogs of the record companies. 8/11/20 1408-09 (Orszag). Further, 
unlike other services, SoundCloud has always been mainly a platform 
where unsigned artists can post their music for downstream 
discovery. Harrison WDT ] 12; Trial Ex. 5289 at 7.
---------------------------------------------------------------------------

    On behalf of SoundExchange, Mr. Orszag, as noted supra, proposed 
that an upward adjustment was necessary to address the funneling/
conversion value [REDACTED], namely a [REDACTED] adjustment (a 
[REDACTED]% increase) in the respective rates. 8/11/20 Tr. 1382, 1405-
06 (Orszag); 8/25/20 Tr. 3816 (Orszag).\211\ Dr. Peterson set forth 
that any adjustment to Spotify ad-supported rates to account for value 
attributable to funneling or conversion of users from ad-supported to 
paid subscription tiers that may occur should not look toward funneling 
occurring from the Spotify ad-supported tier to the Spotify 
subscription tier, but instead should seek to assess the difference in 
the upselling capabilities of the Spotify ad-supported benchmark 
compared to statutory services. Dr. Peterson noted that Mr. Orszag did 
not attempt such an analysis, despite evidence that statutory services 
are funneling consumers into subscription offerings. Therefore, he 
suggested, the Judges should reject Mr. Orszag's incomplete attempt to 
support a [REDACTED]x upward adjustment without comparing the upsell 
potential of Spotify against statutory services such as Google, 
Pandora, and iHeart. Peterson WDT ]] 60-61.
---------------------------------------------------------------------------

    \211\ Pandora and Sirius XM's expert witness Professor Shapiro 
also accepted a similar [REDACTED] upward adjustment. See, e.g., 8/
19/20 Tr. 2913, 2921, 2970 (Shapiro) (``I have calculated, for the 
same calculation he did . . . that the proper adjustment would be a 
[REDACTED] adjustment factor. . . . [W]e did the same calculation 
and we both got to this same number. . . . And that ratio is also 
[REDACTED]. So we're doing the same thing. . . . I [had] said 
something like the [REDACTED], but Mr. Orszag corrected me and 
pointed out it should be [REDACTED].'').
---------------------------------------------------------------------------

    Dr. Peterson further countered Mr. Orszag's suggested adjustment by 
offering that the premise for applying an upsell adjustment is 
unfounded. He argued that the evidence does not support the notion that 
[REDACTED] that accounts for the conversion of users to subscription 
tiers. Instead, he contended that the labels [REDACTED]. Google notes 
testimony from executives at Warner Music and UMG regarding both 
[REDACTED]. Dr. Peterson suggested that Mr. Orszag's analysis was 
erroneous because he arrived upon a ratio using headline per-play rates 
([REDACTED]) to form a proposed adjustment to apply to Dr. Peterson's 
analysis, which is based on effective rates [REDACTED]. Peterson WDT ]] 
62-65.
    Relatedly, in the hearing Dr. Peterson offered an alternative 
adjustment to account for funneling or conversion from ad-supported to 
paid subscription, whereby the starting point for his analysis (to 
which his proposed adjustments would be applied) would be the 
[REDACTED] for ad-supported customers who used the ad-supported service 
[REDACTED], as opposed to the payments due under the [REDACTED]. He 
reasoned this starting point may be appropriate if the Judges feel they 
need additional adjustment for funneling value, because any funneling 
value, [REDACTED], would have been exhausted or otherwise be de 
minimis. And, he offered, that was the amount [REDACTED] was willing to 
accept under the agreement. 8/26/20 Tr. 3955, 3960, 3961-63 (Peterson).
b. Dr. Peterson's Adjustments
    Dr. Peterson and Google proposed four adjustments to the benchmark 
rates for ad-supported webcasters: (1) An interactivity adjustment, (2) 
a skips adjustment, (3) an effective competition adjustment, and (4) a 
marketing adjustment. Peterson WDT ]] 15.\212\
---------------------------------------------------------------------------

    \212\ Dr. Peterson's testimony also suggested that the decrease 
in length of the average hit song indicates that per-play rates 
should decrease. Peterson WDT ]] 78-79 (suggesting that a hit-driven 
station would have to play more songs per hour such that any 
decrease in the statutory rate is likely to be offset, at least 
partially, by an increase in the number of royalty-bearing plays). 
Google did not argue for such an adjustment but instead suggested 
the issue as a reason to view its rate proposal as a modest one. 
Google PFFCL ] 79.
---------------------------------------------------------------------------

    i. Dr. Peterson's Proposed Interactivity Adjustment
    Dr. Peterson proposed a downward interactivity adjustment because 
the benchmark agreements he used are from an interactive market, 
whereas the target, statutory market is for non-interactive. 8/25/20 
Tr. 3632, 3638 (Peterson). His testimony noted that interactive 
services receive a greater grant of rights (including the ability to 
let listeners hear on-demand whatever songs they want whenever they 
wish) and that licensors expect higher rates from interactive licenses 
than non-interactive licenses. Peterson WDT ] 52; 8/25/20 Tr. 3648 
(Peterson).
    Dr. Peterson proposed a downward interactivity adjustment of 
[REDACTED]%. 8/25/20 Tr. 3632 (Peterson); Peterson WDT ]] 15(a), 55. 
His proposal came from his comparison of [REDACTED] [REDACTED] service 
to the statutory rate. 8/25/20 Tr. 3642 (Peterson); Peterson WDT ]] 53-
55. Peterson explained that [REDACTED] service, while meeting most of 
the statutory criteria, is not eligible for the statutory license 
because it [REDACTED], and that [REDACTED]. 8/25/20 Tr. 3641-43 
(Peterson); Peterson WDT ]] 53, 54. Dr. Peterson offered that the 
incremental amount [REDACTED] agreed to pay above the statutory rate is 
a useful measure of how a willing buyer and willing seller value the 
additional interactive functionality. Peterson WDT ] 54; see also 8/25/
20 Tr. 3649, 3678-79 (Peterson). He set forth that the [REDACTED]% 
difference represents an incremental premium [REDACTED] paid for non-
statutory functionality and that the difference is not meaningfully 
influenced by the statutory rate, but rather, that the comparison with 
the statutory rate allows for calculation of the delta between the 
respective rates. 8/25/20 Tr. 3632; 3646 (Peterson).
ii. Dr. Peterson's Proposed Skips Adjustment
    Dr. Peterson also proposed to make a skips adjustment, which he 
asserts is required because the noninteractive licensees are required 
by statute to pay for plays under thirty seconds, but the benchmark 
interactive services do not pay for such brief plays. Peterson WDT ] 
67. Dr. Peterson set out that the effective per-play rate he calculated 
(total royalties paid/reported streams) has a denominator (streams 30 
seconds or longer) that excludes plays for which a statutory service 
would pay, thus leading to a higher per-play rate for interactive 
services. Peterson WDT ] 67. Based on information from Spotify on the 
number of total plays and plays of less than 30 seconds on its ad-
supported interactive service, Dr. Peterson calculated that a downward 
adjustment of [REDACTED]%, applied to Spotify's effective per-play rate 
results in what Spotify would have paid on a dollar-per-stream basis. 
See 8/25/20 Tr. 3680-81 (Peterson); Peterson WDT ]] 15(c), 68. He 
proposed an alternative skips adjustment by calculating the adjustment 
to the statutory rate that would be required for statutory payments to 
remain unchanged if

[[Page 59518]]

statutory services were to pay only on performances of 30 seconds or 
longer. He offered that relevant information provided from Pandora 
showed that on its ad-supported radio service [REDACTED]% of total 
performances are less than 30 seconds, thus leading him to arrive at an 
alternative [REDACTED]% reduction in the benchmark rate to account for 
skips. Id.
iii. Dr. Peterson's Proposed Effective Competition Adjustment
    As with other participants and experts, Google and Dr. Peterson 
propose that a competition adjustment is necessary because labels have 
complementary oligopoly power in the benchmark market for licensing of 
music services, which means those rates do not reflect effective 
competition, but rather they result in royalty rates set at 
supracompetitive levels even higher than a single monopolist would 
charge. 8/25/20 Tr. 3652-53 (Peterson); see also Peterson WDT ]] 19, 
21-22, 34-35. Dr. Peterson offered that the consumer expectation that 
all interactive services will have the full catalog of each significant 
record label means that the labels' catalogs do not substitute for one 
another and are instead ``must haves'' for interactive services, which 
thus creates a licensing market where the major labels have 
complementary oligopoly power. 8/25/20 Tr. 3653 (Peterson); Peterson 
WDT ]] 33, 57.
    Dr. Peterson also set out that statutory streaming services have a 
greater ability to steer listeners' experience than interactive 
services, using techniques such as designing playlists to meet 
listeners' tastes that omit recordings from certain labels or reducing 
the number of plays for a given label's recordings if the license rate 
is too high. Dr. Peterson opines that this ability to steer is a marker 
of effective competition. Peterson WDT ] 58-59. He sought to replicate 
such effective competition through his competition adjustment, which 
reflects a statutory licensee's ability to avoid high license rates by 
substituting or steering away from high royalties. Peterson WDT ]] 65-
66; see also 8/25/20 Tr. 3662 (Peterson). Dr. Peterson offered an 
analysis that chiefly used a Pandora-Merlin agreement that was in 
effect at the time of Web IV, which required Pandora to increase (i.e., 
steer toward) Merlin spins by at least 12.5% and allowed Pandora to 
effectively engage in significant steering without negative reaction, 
to arrive at a proposed lower bound for his downward competition 
adjustment of 11.1%-12.5/(100+12.5) = 11.1%. Peterson WDT ]] 62, 65. 
Dr. Peterson also looked to an agreement between iHeart and Warner, in 
effect at the time of Web IV, with a different [REDACTED] structure 
which required iHeart to pay royalties to Warner [REDACTED] at the time 
the deal was struck, which Dr. Peterson found indicative of an 
intention to steer of more than 50%. Peterson WDT ] 63. In his 
analysis, he set out that evidence of the ability to steer ranges from 
[REDACTED]% in the case of the Pandora/Merlin agreement to more than 
50% in the case of iHeart/Warner. Dr. Peterson also looked at Pandora's 
steering experiments, cited in the Web IV determination, finding some 
consumer resistance to steering at a rate of 30%, thus arriving at a 
proposed upper bound for the downward competition adjustment of 
[REDACTED]% [REDACTED]. Peterson WDT ]] 62, 65.
    Dr. Peterson asserted that his competition adjustment is 
conservative because it is calculated based only on a reasonable 
ability to steer, which does not fully address or compensate for 
complementary oligopoly power. 8/25/20 Tr. 3662-63, 3664-65 (Peterson). 
He added that other market data supports that even higher levels of 
steering are possible in the target noninteractive market, again noting 
evidence that Pandora engaged in steering toward Merlin by [REDACTED]% 
(instead of [REDACTED]%), without negative feedback. Peterson WDT ] 62.
iv. Dr. Peterson's Proposed Marketing Adjustment
    Dr. Peterson offered that a marketing adjustment to the Spotify 
benchmark licenses may not be appropriate. While he recognized that the 
agreements [REDACTED], he concluded that the value of [REDACTED] may be 
zero. The provisions, he indicated, [REDACTED]. Peterson WDT ] 69. Dr. 
Peterson offered that the marketing value stated in the Spotify 
benchmark licenses likely does not reflect [REDACTED]. Peterson WDT ]] 
69-70. Dr. Peterson calculated a potential valuation by allocating the 
total advertising value across active countries and dividing the value 
of advertising attributable to the United States by the number of 
performances. Dr. Peterson determined this additional unadjusted value 
at $[REDACTED] per play. To address any uncertainty of the actual value 
of such negotiated advertising in the current record, Dr. Peterson 
calculated the adjusted Spotify benchmark range with and without the 
advertising adjustment. Peterson WDT ]] 71, 75. Google argues that no 
advertising adjustment is justified, given the acknowledged 
uncertainties in assigning specific valuation and admitted inability to 
value such benefits on a dollar-for-dollar basis with the value stated 
in the agreements. Google PFFCL ]] 66-69.
v. Dr. Peterson's Application of His Proposed Adjustments
    The range of Dr. Peterson's proposed adjustments are reflected 
below, in Dr. Peterson's Figure 2. Peterson WDT ] 74.
    The top section of each panel shows the unadjusted benchmark rates 
and the adjusted rates based on three adjustments (Interactivity, 
Competition and Skips adjustments). In order to determine the benchmark 
rate reflecting these adjustments the unadjusted rate is multiplied by 
one minus the adjustment for each rate. Thus, the adjusted rates are 
equal to:

Adjusted Rate = (1-Interactivity Adj) x (1-Competition Adj) x (1-Skips 
Adj) x Unadjusted Rate.

Peterson WDT ] 74.
    The top panel of Figure 2 uses the [REDACTED]% Skips adjustments 
and the bottom panel uses the [REDACTED]% skip rate. The adjustment 
range of [REDACTED]% to [REDACTED]% using the Pandora free tier skips 
data is arrived at by applying, to the Unadjusted Rate, Dr. Peterson's 
proposed interactivity adjustment of [REDACTED]%, Skips adjustment of 
[REDACTED]% (Pandora free tier), and competition adjustment of 
[REDACTED]%. The adjustment range of [REDACTED]% to [REDACTED]% using 
the Spotify free tier skips data is arrived at by applying Dr. 
Peterson's proposed interactivity adjustment of [REDACTED]%, skips 
adjustment of [REDACTED]% (Spotify free tier), and competition 
adjustment of [REDACTED]%. The range of adjusted rates before 
accounting for the potential value of marketing support is $[REDACTED] 
to $[REDACTED] per play. Dr. Peterson offered the midpoint of this 
range as being a reasonable estimate of a rate, when treating 
advertising allowances as having no value. That midpoint is equal to 
$[REDACTED] per play. Peterson WDT ] 74; Figure 2.
    Both the top and bottom panels of Figure 2 show the calculation of 
the adjusted value of advertising in the benchmark agreements. The top 
row of the middle section reflects the unadjusted value of advertising 
per play in the United States. The value is calculated by allocating 
the total advertising value across active countries and dividing the 
value of advertising attributable to the United States by the number of 
performances. The adjusted advertising ranges are calculated in the

[[Page 59519]]

same way as the adjusted rates indicated above, where the adjusted rate 
= (1-Interactivity Adj) x (1-Competition Adj) x (1-Skips Adj) x 
Unadjusted Rate. The range of adjusted benchmark rates including the 
stated value of advertising allowances is $[REDACTED] to $[REDACTED] 
per play. Dr. Peterson offered the midpoint of this range as being a 
reasonable estimate of a rate, when advertising allowances are 
included. The midpoint is equal to $[REDACTED] per play. Peterson WDT 
]] 75-76.

Figure 2--The Adjusted Benchmarks [RESTRICTED]

[REDACTED]
c. SoundExchange's Criticisms of Dr. Peterson's Ad-Supported Benchmark 
Model
    SoundExchange acknowledges that the Judges have found benchmark-
based approaches useful in the past. However, SoundExchange disputes 
that the Judges have expressed a preference of benchmarking over other 
approaches, such as modeling. Instead, it offers that the Judges have 
assessed each type of analysis on the merits, as established by the 
record in each case. SoundExchange's Corrected Replies to Google's 
Amended Proposed Findings of Fact and Conclusions of Law ]] 14-17 (SX 
RPFFCL (to Google)).
    SoundExchange also initially disputed that the benchmarks proposed 
by Google are appropriate. SoundExchange argues that Dr. Peterson 
improperly used Spotify's ad-supported rates as a benchmark, suggesting 
that subscription interactive services are a better starting point than 
ad-supported interactive services. SoundExchange also urged that 
Spotify's ad-supported service should not be used as a benchmark 
without an upward adjustment to account for its [REDACTED] ability to 
promote sales of subscriptions. SX RPFFCL (to Google) ]] 22-26. 
However, in the hearing Mr. Orszag testified that he had become 
``comfortable'' with applying Spotify's ad-supported rate as the 
benchmark in his own ratio equivalency model. He came to this 
conclusion after discerning that [REDACTED].'' 8/25/20 Tr. 3809 
(Orszag). When a [REDACTED] adjustment was made to control for the 
separate value of funneling/conversion, Mr. Orszag became, if not a 
full-fledged convert, ``more comfortable'' with the ``Spotify Free 
benchmark.'' 8/25/20 Tr. 3816 (Orszag).
i. SoundExchange's Criticisms of Dr. Peterson's Proposed Interactivity 
Adjustment
    SoundExchange faults Dr. Peterson's interactivity adjustment 
because, in its view, the adjustment is not based sufficiently on the 
incremental value placed on the interactive functionality by consumers 
in the downstream market. It notes that in past cases the Judges have 
accepted interactivity adjustments based on downstream market value, 
evidenced by consumers' willingness to pay for the functionality. It 
offers that there is little evidence from Google that consumers 
actually value the additional functionality that [REDACTED] obtained 
under its direct licenses and that, in fact, the additional 
functionality on [REDACTED]'s ad-supported service was minimal. SX 
PFFCL ] 228-231; Web IV, 81 FR at 26345, 26348; see also Web II, 72 FR 
at 24902 (accepting SoundExchange's interactivity adjustment, based on 
average consumer subscription price and the average per-subscriber 
royalty rate for on-demand services). SoundExchange adds that Dr. 
Peterson was unable to indicate whether increased functionality 
generated more revenue per play on the ad-supported tier. SX PFFCL ] 
232; 8/11/20 Tr. 1401 (Orszag). It adds that, per [REDACTED] (Trial Ex. 
5321), [REDACTED]. SX PFFCL ] 232. SoundExchange suggests that the true 
motivation for [REDACTED] to license the increased functionality was to 
offer customers a sample of the full interactive function as a way to 
promote and upsell its subscription interactive service. SX PFFCL ]] 
235-236; 8/31/20 Tr. 4646 (Phillips).
    SoundExchange asserts that Dr. Peterson's interactivity 
adjustment--being based on a comparison of [REDACTED]'s effective per-
play rate for its ad-supported [REDACTED] service to the statutory 
rate--is based in part on the statutory rate, which violates 
requirements that benchmark rates be free from the influence of 
regulation. Sound Exchange raises further issues with regard to the 
relationship between the negotiated and statutory rates, with Mr. 
Orszag testifying that if the statutory rate that Dr. Peterson relied 
on in his adjustment is too low (as SoundExchange argues it is) then 
Dr. Peterson's interactivity adjustment will be too large. SX PFFCL ]] 
237-239; Orszag WRT ] 95.
ii. SoundExchange's Criticisms of Dr. Peterson's ``Skips'' Adjustment
    SoundExchange questions the probative value of the data upon which 
Dr. Peterson relies for his [REDACTED]% skips adjustment on the same 
basis as it challenges his application of this data to Professor 
Shapiro skips adjustment. SoundExchange notes that Dr. Peterson's data 
came from noninteractive plays available on all three tiers of 
Pandora's service, ad-supported, mid-tier, and fully interactive. 8/20/
20 Tr. 3028-29 (Shapiro). As a consequence, Mr. Orszag asserts, the 
[REDACTED]% ``skips'' rate is likely overstated, because subscribers to 
Pandora's two interactive tiers have unlimited skips, making them more 
likely to skip when accessing noninteractive plays on those two tiers. 
Orszag WRT ] 120. SoundExchange notes that Professor Shapiro agrees 
with the concern in principle but testified that any such upward bias 
[REDACTED], so he did not measure the effect. 8/20/20 Tr. 3030-32 
(Shapiro).
    SoundExchange also takes issue with Dr. Peterson's alternative 
skips adjustment and its reliance on the Spotify ad-supported service's 
skip rate [REDACTED]%), alleging Dr. Peterson's analysis is faulty for 
only considering the benchmark market's skip rate and ignoring the 
target market's skip rate. It argues that Spotify pays for its ad-
supported service on a percentage of revenue basis and, therefore, 
whether Spotify's skip rate is [REDACTED]% has no impact on what 
Spotify pays the record companies on the percentage of revenue basis. 
It notes Mr. Orszag's view that the benchmark market's skip rate may 
only be used if there is a basis to assume that the benchmark market 
and the target market have the same skip rate and that there is no 
evidentiary basis for such a conclusion. SX PFFCL ]] 244-247.
iii. SoundExchange's Criticisms of Dr. Peterson's Effective Competition 
Adjustment
    SoundExchange criticizes Dr. Peterson's analysis asserting that it 
relied on stale evidence, from the time of Web IV, namely a 2014 
agreement between Merlin and Pandora, a 2013 agreement between iHeart 
and WMG, and a 2014 litigation experiment conducted by Pandora. 
SoundExchange argues that the market for subscription interactive 
services has changed since Web IV, and that the increased competition 
would require a downward shift of the competition adjustment used in 
Web IV. It adds that the application of the evidence from Web IV would 
need to account for the differing market evidence used in that 
proceeding, involving many services and not just the

[[Page 59520]]

service with the [REDACTED]. SX PFFCL ]] 490-493.
iv. SoundExchange's Reaction to Dr. Peterson's Proposed Marketing 
Adjustment
    SoundExchange reiterates that value is derived by the record 
companies in the relevant agreements through provisions for the 
streaming services to provide marketing support in the form of 
uncompensated advertisements to the record labels. SX PFFCL ]] 490-493. 
It points out that Dr. Peterson calculated proposed adjustments based 
on advertising benefits and that Google should not be able to walk away 
from the adjustments. SX RPFFCL (to Google) ] 69.
d. The Judges' Analysis and Findings Regarding Dr. Peterson's Ad-
Supported Benchmark Model
    As an initial matter, the Judges clarify that they do not strictly 
adhere to any preference toward any particular method of analysis, 
benchmark or otherwise, but instead assess all reasoned analyses on 
their merits and on the record of each case.
    Taking into account the entirety of the record, the Judges 
determine that it is appropriate to utilize the proposed benchmarks 
from the interactive ad-supported market, provided that an appropriate 
conversion adjustment is applied.\213\ The Judges apply the 
aforementioned [REDACTED] adjustment to the rates for [REDACTED]). 
Where negotiated provisions place a value on funneling in the benchmark 
agreements, the Judges find an adjustment is appropriate. While Dr. 
Peterson started his analysis with the higher-end per-play rate under 
the [REDACTED] for customers who [REDACTED], the Judges note that this 
is not necessarily the [REDACTED]. The Judges find that Mr. Orszag's 
proposal is a superior mode to account for the value of funneling. 
However, as there is insufficient evidence and analysis of analogous 
funneling value in the [REDACTED], the Judges make no such adjustment 
to those benchmark rates.
---------------------------------------------------------------------------

    \213\ The Judges find insufficient basis to find that any shift 
in song length is not adequately accounted for in the benchmark 
markets.
---------------------------------------------------------------------------

    Applying this [REDACTED] factor to Dr. Peterson's calculated per-
play rates for [REDACTED], results in a final effective rate of 
$[REDACTED] (i.e., $[REDACTED] x [REDACTED]) or $[REDACTED] (rounded) 
[REDACTED]; and $[REDACTED] (i.e., $[REDACTED] x [REDACTED]) or 
$[REDACTED] (rounded) for [REDACTED]. The starting point benchmark per-
play rates calculated by Dr. Peterson for [REDACTED] remain.
i. The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed 
Adjustments
(A) The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed 
Interactivity Adjustments
    Based on the entirety of the record, the Judges decline to apply 
Dr. Peterson's--proposed interactivity adjustments. The Judges agree 
with SoundExchange that the record does not clearly demonstrate added 
economic value for interactivity as a suitable basis to adjust the 
proposed benchmark rates downward. Advertisers, not listeners, pay the 
royalties. And there is insufficient evidence to establish that 
advertisers make payments to noninteractive ad-supported services based 
upon the level of interactivity of that service.
    While we do not foreclose the possibility of a record that may 
allow measuring interactivity value by looking toward how the service 
and the labels (as opposed to downstream users) value that 
interactivity in an ad-supported context, on this record the Judges 
will not apply an interactivity analysis which fails to appropriately 
consider oligopoly power in a direct deal such as the proposed 
[REDACTED] benchmark. The Judges' decline to apply the proposed 
interactivity adjustment in part because the record, [REDACTED], 
indicates that major labels exert oligopoly power in similar direct 
deals. When Judge Strickler asked Dr. Peterson whether any of the 
proposed [REDACTED]% adjustment for interactivity constitutes a 
complementary oligopoly premium, he conceded that he could not preclude 
that oligopoly power could be a cause of the higher rate. 8/25/20 Tr. 
3645 (Peterson). Absent accurate consideration of oligopoly power, 
which is persuasively established elsewhere, we find it inappropriate 
to apply the proposed interactivity adjustment.
(B) The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed 
Skips Adjustment
    As indicated previously, the Judges are in agreement with 
SoundExchange's criticisms of both Professor Shapiro's and Dr. 
Peterson's skips adjustment for ad-supported services. Additionally the 
Judges agree that the reliance on the Spotify ad-supported service's 
skip rate ([REDACTED]%) as a basis for adjustment is in error. The 
Judges agree that there is insufficient basis to conclude that the 
benchmark market and the target market have the same skip rate, and 
that absent reliable evidence to that effect a direct adjustment as 
proposed would be incorrect. Accordingly, and based on the entire 
record, the Judges adopt (and incorporate by reference here) the same 
analysis and the same finding of a [REDACTED]% skips adjustment as they 
found for the subscription market.
(C) The Judges' Analysis and Findings Regarding Dr. Peterson's Proposed 
Competition Adjustment
    Taking into account the entirety of the record, the Judges are 
persuaded of the necessity to apply an effective competition 
adjustment. For the reasons discussed with regard to the effective 
competition adjustment to Professor Shapiro's ad-supported benchmark, 
the Judges apply a 12% effective competition adjustment to Dr. 
Peterson's ad-supported rate. The Judges' Analysis and Findings 
regarding Dr. Peterson's Proposed Marketing Adjustment.
    Based on the entirety of the record, the Judges find that it is 
appropriate to apply the marketing adjustment, as offered by Dr. 
Peterson. While we note that Google and Dr. Peterson offer rationales 
that an adjustment may not be appropriate, Dr. Peterson also found a 
basis to place a value on this factor. Additionally, while Dr. Peterson 
offers calculations performed with and without the marketing 
adjustment, his ultimate analytical step, finding a midpoint within the 
range of rates he calculated, was done based on calculations that 
included the marketing adjustment. Finally, we are in agreement with 
SoundExchange that Google has not offered a sufficient basis to 
distance itself or the Judges from applying a factor offered by 
Google's own expert analysis.
ii. Dr. Peterson's Benchmark Rate as Adjusted by the Judges
    In sum, the Judges find as follows with regard to Dr. Peterson's 
proposed ad-supported benchmark rate:
    1. The effective ad-supported benchmark per-play rates of 
$[REDACTED] for [REDACTED], $[REDACTED] for [REDACTED], $[REDACTED] for 
[REDACTED], $[REDACTED] for [REDACTED], and $[REDACTED] for [REDACTED] 
are in the range of a reasonable starting point.
    2. Applying the [REDACTED] factor to account for funneling/
conversion to Dr. Peterson's calculated per-play rates for [REDACTED], 
results in a final effective rate of $[REDACTED] (i.e., $[REDACTED] x 
[REDACTED]) or $[REDACTED] (rounded) for

[[Page 59521]]

[REDACTED]; and $[REDACTED] (i.e., $[REDACTED] x [REDACTED]) or 
$[REDACTED] (rounded) for [REDACTED] The starting point benchmark per-
play rates calculated by Dr. Peterson's for [REDACTED] remain 
respectively as $[REDACTED], $[REDACTED], and $[REDACTED].
    3. The interactivity adjustment is rejected.
    4. The skips adjustment is reduced to [REDACTED]%, properly 
reducing the interim calculation to $[REDACTED] (rounded) for 
[REDACTED], $[REDACTED] (rounded) for [REDACTED], $[REDACTED] (rounded) 
for [REDACTED], $[REDACTED] (rounded) for [REDACTED], and $[REDACTED] 
(rounded) for [REDACTED].
    5. The 24% effective competition adjustment proposed by Dr. 
Peterson is rejected.
    6. The Judges apply the 12% effective competition adjustment. This 
effective competition adjustment properly reduces the interim 
calculation to $[REDACTED] (rounded) for [REDACTED], $[REDACTED] 
(rounded) for [REDACTED], $[REDACTED] (rounded) for [REDACTED], 
$[REDACTED] (rounded) for [REDACTED], and $[REDACTED] (rounded) for 
[REDACTED].
    7. Applying the Marketing adjustments set forth by Dr. Peterson, 
increasing the per-play rates as follows of $[REDACTED] [$[REDACTED] + 
$[REDACTED]] for [REDACTED], $[REDACTED] [$[REDACTED] + $[REDACTED]] 
for [REDACTED], $[REDACTED] [$[REDACTED] + $[REDACTED]] for [REDACTED], 
$[REDACTED] [$[REDACTED] + $[REDACTED]] for [REDACTED], and $[REDACTED] 
[$[REDACTED] + $[REDACTED]] for [REDACTED].
    8. The range of adjusted rates is $0.00197 and $0.00228 per play, 
and the midpoint of $0.002125, when rounded (or, more precisely, 
rounded further) is $0.0021, which is a reasonable estimate of the rate 
applying the Judges' modifications to Dr. Peterson's model.
5. Separate Rate for Nonportable Services
a. Google's Proposal
    Google seeks a separate rate for certain nonportable uses, citing 
the statutory directive that the Judges ``shall distinguish among the 
different types of services then in operation.'' 17 U.S.C. 
114(f)(1)(B). Google argues that the rise of nonportable smart speaker 
devices, and streaming services tailored to those devices, has created 
such a different type of service. Google PFFCL ]] 91-92. It offers that 
separate rates for nonportable uses have been adopted by the Board in 
other regulations and that the Judges should set a separate rate for 
nonportable, nonsubscription services that is 50% of whatever headline 
rate the Judges set for portable nonsubscription services. Google PFFCL 
]] 93-94. Specifically, Google seeks a per-performance rate for the new 
type of service that it refers to as ``Nonsubscription Nonportable 
Webcasting Services'' which Google proposes to define as ``a service 
offered by a Licensee that makes an Eligible Transmission available 
solely over a nonportable device, such as a smart speaker, a smart home 
appliance, or a personal computer.'' Google Proposed Rates and Terms at 
3.
    Google offers proposed benchmark licenses between major labels 
([REDACTED]) with Google as evidence in support of its proposal, which 
include [REDACTED]. Google PFFCL ] 102. It [REDACTED]. Google PFFCL ] 
103. Google asserts that the [REDACTED] reflect an understanding that 
consumers are willing to pay an incremental amount for the ability to 
take music with them on phones and portable devices. Google PFFCL ] 
104. Google also points toward lower rate structures for certain 
nonportable services in the context of the mechanical compulsory 
license under 17 U.S.C. 115. Google PFFCL ] 105.
b. SoundExchange's Criticism of Google's Proposal for a Separate Rate 
for Nonportable Services
    SoundExchange asserts that Google has not established that 
streaming services that are available only on nonportable devices are a 
different type of service warranting a different rate, and that there 
is no evidence that a willing buyer and willing seller would agree to 
lower rates for such a service. SX RPFFCL (to Google) ] 94. It contends 
that Google confuses nonportable devices with nonportable services in 
its attempts to highlight ``Nonsubscription Nonportable Webcasting 
Services'' as an allegedly different type of service. SoundExchange 
argues that the dichotomy that Google proposes is undermined by the 
fact that portable services can also be consumed on nonportable 
devices. SX RPFFCL (to Google) ] 96. SoundExchange challenges the 
notion that any growing popularity of smart speakers supports the 
notion that streaming services that can only be operated on a smart 
speaker are growing in popularity or exist as a different type of 
service. SX RPFFCL (to Google) ] 97. It argues that Google ``bears the 
burden of demonstrating not only that'' nonportable services ``differ[] 
from other forms of commercial webcasting, but also that [they differ] 
in ways that would cause willing buyers and willing sellers to agree to 
a lower royalty rate in the hypothetical market.'' SX RPFFCL (to 
Google) ] 100 (citing Web IV, 81 FR at 26320 (applying that principle 
to simulcasters)).
    SoundExchange contends that the proposed benchmark agreements do 
not match up with Google's rate proposal. It notes that the [REDACTED]. 
Through Mr. Orszag, SoundExchange posits that [REDACTED] and does not 
support the notion that the rate should be half of the per-performance 
rate for a service available on a broader range of devices. SX RPFFCL 
(to Google) ] 94; Orszag WRT ]] 139-140.
    SoundExchange further addresses concerns that the proposed 
benchmarks do not provide useful information about the per-performance 
rate for a service tier accessible on multiple nonportable devices to 
which a willing buyer and a willing seller would agree. SX RPFFCL (to 
Google) ] 101. It notes that even if the offered [REDACTED] were 
relevant, it would be inappropriate to attribute all of the difference 
in [REDACTED] to nonportability because the rates are also driven by 
the fact that they are for single-device services, which excluded 
classes of devices that would be eligible under Google's proposed rates 
and terms, e.g., a personal computer. SoundExchange suggests these 
distinctions discount the notion that [REDACTED]. SX RPFFCL (to Google) 
]] 102-104, 110. SoundExchange also challenges the notion that the 
cited rates for certain nonportable mechanical licensing royalties are 
not appropriate support for Google's proposal because they address 
different rights to different works with different sellers. SX RPFFCL 
(to Google) ]] 104-106.
c. The Judges' Analysis and Findings Regarding Google's Proposal for a 
Separate Rate for Nonportable Services
    Based on the entirety of the record the Judges are not persuaded 
that Google has established the basis for a separate rate for 
Nonsubscription Nonportable Webcasting Services. While the Judges have 
concerns about the extent to which the [REDACTED] and the appropriate 
use of mechanical rates within the context of the section 115 
compulsory regime as persuasive evidence for the purpose of sustaining 
a separate rate, those are relatively minor concerns. The Judges find 
the case for a separate rate is most profoundly undermined because the 
requested rates would extend far beyond the bounds of the proposed 
benchmark agreements.

[[Page 59522]]

    The benchmark agreements are tied to [REDACTED] and to very 
specific device characteristics,\214\ whereas the requested rate (and 
defined bounds) are not tied or specifically limited to the same 
specific types of devices, nor are they limited to [REDACTED]. This 
makes them poor benchmarks and makes for a poor case for the existence 
of the requested distinct different type of service. Furthermore, 
Google did not adequately acknowledge or offer appropriate adjustments 
to account for the fairly profound distinctions between its request and 
the limitations represented in its proposed benchmarks. While the 
Judges may amend a request to comport with the offered evidence, on 
this record we find an inadequate basis to do so. Additionally, in a 
case such as this where the request diverts so profoundly from the 
offered benchmark evidence, prudence compels the Judges not to engage 
in such refining of the requested rates or terms.
---------------------------------------------------------------------------

    \214\ [REDACTED], Trial Ex. 5090 at 37 ([REDACTED] [REDACTED]); 
[REDACTED], Trial Ex. 1006 at 50 [REDACTED]); [REDACTED], Trial Ex. 
1010 at 65-66 ([REDACTED]).
---------------------------------------------------------------------------

C. Evaluation of Game Theoretic Modelling Evidence

1. Professor Willig's Shapley Value Model
    Professor Willig describes his Shapley Value Model as a ``multi-
party bargaining approach.'' Willig WDT ] 9. He explains that his 
Shapley Value Model is a form of economic game theory that assumes a 
``cooperative'' relationship among the bargaining parties, id. ] 12, 
providing a ``generalized solution to the problem of how to apportion 
among the members of a multi-party bargaining group the surplus created 
by their productive cooperation with each other.'' Id. ] 14.\215\
---------------------------------------------------------------------------

    \215\ A ``cooperative'' game assumes that the participants' 
``joint action agreements are enforceable,'' and are distinguished 
from ``non-cooperative games,'' ``in which such enforcement is not 
possible, and individual participants must be allowed to act in 
their own interests.'' Avinash Dixit et al., Games of Strategy 26 
(3d ed. 2009).
---------------------------------------------------------------------------

    Professor Willig's Shapley Value Model indicates a royalty rate for 
ad-supported noninteractive services of $0.0028 per play in 2021, and, 
for subscription noninteractive services, a per-play royalty rate of 
$0.0030 in 2021. Willig WDT ] 55. He derives these 2021 royalty rates 
from the average royalty rates over the entire five-year (2021-2025) 
rate period generated by his Shapley modeling, which are $0.0030 and 
$0.0031 for the ad-supported and subscription services, 
respectively.\216\
---------------------------------------------------------------------------

    \216\ More particularly, Professor Willig derives his proposed 
2021 rates from his five-year average by discounting back from the 
mid-point of the rate period to the start of the period, using the 
Federal Reserve Open Market Committee's inflation forecast. Id.
---------------------------------------------------------------------------

    According to Professor Willig, the Shapley Value Model has 
properties that make it well suited for establishing royalties in this 
proceeding. He explains that this modeling, when combined with relevant 
data, identifies the following values and properties:
    1. The ``fallback value'' which any party (record company or 
streaming service in the present case) could create on its own without 
an agreement among one or more of the other parties. Willig WDT ] 13.
    2. The extra value--the Shapley ``surplus''--that the parties 
collectively could generate in ``notional'' \217\ agreements with the 
other parties, above their fallback values. Id.
---------------------------------------------------------------------------

    \217\ The Judges use ``notional'' to identify the negotiations 
assumed in Shapley Value modeling, and to distinguish those ersatz 
negotiations from the ``hypothetical'' negotiations the Judges must 
construct to establish the statutory royalty rates. More precisely, 
the ``notional'' Shapley Value negotiations generate ``notional'' 
royalty rates that may: (1) Constitute a ``hypothetical'' rate that 
would constitute an effectively competitive rate; (2) fail to 
reflect a ``hypothetical'' effectively competitive rate; or (3) 
serve as a building block that, with adjustments or offsets, is an 
input into a ``hypothetical'' effectively competitive rate.
---------------------------------------------------------------------------

    3. The ordering of ``every possible combination of unilateral, 
bilateral and multilateral deals that may be struck by the different 
parties.'' Id. ] 14.\218\
---------------------------------------------------------------------------

    \218\ As Professor Willig explains: ``In Shapley Value analysis 
there are always N! (i.e., N factorial) different arrival orderings, 
where N is the number of negotiating parties. For example, with 
three negotiating parties, there are 3! (i.e., 3 x 2 x 1) = 6 
different arrival orderings. Id. ] 20 n.13.
---------------------------------------------------------------------------

    4. The portions of the surplus--the ``incremental contribution''--
that each party adds to the total amount of value created, is 
``assessed as increments to every possible combination of unilateral, 
bilateral, and multilateral deals that may be struck by the different 
parties . . . .'' Id.
    5. Each party's ``incremental contribution'' is then averaged 
across all such combinations.'' Id.
    Each party's average incremental contribution is its Shapley Value. 
Id. ] 16 (``The Shapley Value accorded to a party rests on the value 
that it brings to the group's cooperation, taking into account all the 
subsets of the group to which it can join.'').
    To further explain the Shapley Value concept, Professor Willig 
provides the following example: \219\
---------------------------------------------------------------------------

    \219\ In this proceeding, the economic experts appropriately 
proffer potentially illuminating examples (as in the accompanying 
text) in an attempt to state clearly the principles and methods 
underlying their work. The Judges find their use of such examples to 
be consistent with the evidentiary principles set forth in 37 CFR 
351.10(e).

    The concept of a Shapley Value is best understood by reference 
to a simple analogy. Imagine that parties A, B, and C are 
negotiating a deal in person. Party C can be the first, the second, 
or the third to arrive in the room. The value it brings to the 
bargaining table may be contingent on the order in which it arrives. 
For example, if Party C is last to the negotiation it may have more 
bargaining power as a result of its ability to hold up or frustrate 
consummation of a deal to which Parties A and B are otherwise 
amenable. When C is first to the negotiation, it has no bargaining 
power over the others. Shapley analysis takes into account all such 
possible differences in Party C's bargaining power that are 
contingent on its order of arrival to the negotiation. It does so by 
taking the average of each ``incremental value'' created by Party C 
in each possible sequence of arrivals. As such, Party C's Shapley 
Value will only be high relative to the other parties' Shapley 
Values if, on average, it brings a relatively high incremental value 
---------------------------------------------------------------------------
to all possible orderings and sub-orderings of Parties A, B, and C.

Id. ] 15.
    The value of a sub-set--i.e., a Shapley coalition--prior to joinder 
by other parties to the notional negotiation, is denominated as its 
``Characteristic Function.'' The calculation of its Characteristic 
Function is ``necessary to assess and delineate the value that can 
result from the cooperation of any subset of the overall cooperating 
group.'' Id. ] 17. The value of each coalition's Characteristic 
Function is based on the fundamental economic principle that a 
coalition of willing sellers (like any individual seller) ``is assumed 
to act in the manner that maximizes the collective surplus of the 
coalition.''. Willig WDT app. C at C-4 (] 6 therein); see also id. app. 
F at F-4 (] 7 therein) (same). After specifying these coalitions and 
calculating the maximum values of their characteristic functions, the 
modeler can derive Shapley Values for each party to the notional 
Shapley ``negotiation.'' Id. ] 33.
    Professor Willig contends that Shapley Value modeling is related to 
the royalties that are to be determined in the present proceeding, with 
the record companies and the noninteractive streaming services 
constituting the ``arriving'' participants. The record companies must: 
(1) Recover their opportunity costs,\220\ identified as their fallback 
values in Professor Willig's model; and (2) receive their Shapley 
Values, i.e., their average share of the surplus they contribute across 
all arrivals. Thus, unless royalty payouts are high enough to at least 
allow the

[[Page 59523]]

record companies to receive their fallback values (i.e., their 
opportunity costs) plus their Shapley Values, they would not license 
their repertoires to the noninteractive services. In similar fashion, 
the noninteractive services will receive their average share across all 
arrival orderings, corresponding to their Shapley Values (also 
calculated across all arrivals, of Shapley-derived Surplus). See Willig 
WDT ] 24 (describing this application of Shapley Value modeling).
---------------------------------------------------------------------------

    \220\ ``The opportunity cost'' of anything of value is what you 
must give up to get it,'' and thus ``is inseparably bound up with 
choice.'' John Quiggin, Economics in Two Lessons: Why Markets Work 
So Well, and Why They Can Fail So Badly 15 (2019).
---------------------------------------------------------------------------

    According to Professor Willig, in this proceeding, a record 
company's ``opportunity costs'' include any marginally higher royalties 
it might have earned by licensing to other distribution methods (such 
as, e.g., interactive services), rather than licensing its sound 
recordings to noninteractive services.\221\ Thus, he claims that 
Shapley Value modeling is ``an appropriate approach for assessing rates 
that would be negotiated in the hypothetical marketplace for 
noninteractive webcasting [because it] fit[s]within the requirements of 
the relevant legal statute.'' Id.
---------------------------------------------------------------------------

    \221\ Note that his application of the opportunity cost concept 
does not include the value of additional royalties that a record 
company would have earned by licensing its sound recordings to 
noninteractive services--such as royalties earned because some 
listeners to terrestrial radio, (which does not pay sound recording 
royalties) might have converted to noninteractive listening (as 
indicated by the surveys presented in this case, discussed infra, 
section IV.A). These negative opportunity costs (opportunity 
benefits) would need to be offset against the opportunity costs 
described by Professor Willig in the accompanying text, to determine 
the net value of all opportunities foregone. See Paul J. Ferraro and 
Laura O. Taylor, Do Economists Recognize an Opportunity Cost When 
They See One? A Dismal Performance from the Dismal Science, 4 J. 
Econ. Analysis & Pol'y 1, 7 (2005) (``An avoided benefit is a cost, 
and an avoided cost is a benefit. Thus, the opportunity cost . . . 
is . . . the net benefit forgone.'') (emphasis added).
---------------------------------------------------------------------------

a. The Specifications in Professor Willig's Shapley Value Model
    A necessary initial step for an economist constructing a Shapley 
Value model is the delineation and enumeration of the parties to the 
notional negotiations, i.e., the types and the number of sellers and 
buyers (licensors and licensees in this proceeding). Id. ] 25. 
According to Professor Willig, this process should ``strike[] a balance 
between offering a granular and realistic description of the 
hypothetical market [while] maintaining enough simplicity around the 
number of entities being modeled such that the model can be readily 
solved and necessary data inputs can be estimated.'' Id. ] 26.
    In the notional negotiations of his Shapley modeling, Professor 
Willig assumes a market with four upstream record companies and two 
downstream noninteractive webcasting distributors. Willig WDT ] 25. 
Three of these four record companies represent each of the major record 
companies (Sony, Warner and Universal) (collectively the Majors), and 
the fourth represents a ``combination'' of all independent record 
companies (Indies). Id. Thus, these four entities comprise the entirety 
of the record company licensors in his market model. The two 
noninteractive services represent, respectively, a combination of all 
ad-supported noninteractive distributors, and a combination of all 
subscription noninteractive distributors, thus comprising the entirety 
of the noninteractive licensees. Id. According to Professor Willig, 
these assumptions strike the required balance between granular realism 
and model tractability. Id.
    Professor Willig claims that the assumptions he makes regarding 
these specifications are necessary and prudent because they allow the 
model to generate the following economic information:
    1. The effects of the ``potentially different negotiating 
positions'' of the Majors vis-[agrave]-vis the Indies.
    2. The difference, if any, in royalty rates, between ad-supported 
noninteractive services, on the one hand, and subscription 
noninteractive services, on the other.
    3. The effects of ``competition between the collective ad-supported 
noninteractive distributor and the collective subscription 
noninteractive distributor.''

Willig WDT ] 26. Professor Willig adds that his model will generate 
royalty rates that are lower than would exist in the actual market 
because the model's ``grouping'' of services ``simplifies away rivalry 
among the various extant ad-supported noninteractive distributors and 
among the various extant subscription noninteractive distributors, 
[which] eliminate[es] consideration of competition within these groups 
of distributors,'' artificially elevating ``their respective market 
power. Id.\222\
---------------------------------------------------------------------------

    \222\ This specification may not be a simplification so much as 
an approximation of reality. As noted infra, Professor Willig finds 
that in the noninteractive market Pandora has a market share of more 
than [REDACTED]% in the ad supported and subscription sectors, 
respectively, making the ``one noninteractive service'' 
specification fairly realistic.
---------------------------------------------------------------------------

    Next, Professor Willig calculates the value of the ``characteristic 
functions'' created by each possible cooperative grouping 
(``coalition'') of these six parties to the notional negotiation (i.e., 
the four record companies and two noninteractive distributors). To make 
these ``characteristic function'' calculations, he first determines the 
value that each party or set of parties contributes upon arriving to 
the coalition. Id. ] 27.
    Starting with the record companies, Professor Willig defines the 
value each brings to these coalitions as ``a function of both the costs 
it incurs and the revenue it could generate by licensing its sound 
recordings to distributors other than interactive services.'' Id. ] 28. 
Professor Willig characterizes this value as a record company's 
``fallback value''--i.e., a value it would retain in the absence of 
agreements with the noninteractive distributors. Id.\223\
---------------------------------------------------------------------------

    \223\ Professor Willig acknowledged that the ``fallback value'' 
in his model doesn't specify whether that fallback value is 
generated from markets that are perfectly competitive, 
monopolistically competitive, oligopolistic or monopolistic. 8/5/20 
Tr. 378-79 (Willig).
---------------------------------------------------------------------------

    According to Professor Willig, in order to determine this fallback 
value the model must ``evaluat[e] what would happen if each 
noninteractive [service] did not have access to that record company's 
music.'' Id. ] 29. In that regard, he testifies that the model must 
explain--assuming the absence of noninteractive services from the 
market--``how much of each noninteractive [service's] audience would 
divert to other music listening options (including to the other 
noninteractive distributor).'' Id.\224\
---------------------------------------------------------------------------

    \224\ As noted supra, his model does not net out the positive 
royalties record companies would earn by listeners who would listen 
to a noninteractive service rather than to terrestrial radio (or, 
any other non-royalty bearing substitute, such as listening to 
existing music sources or listening to less music, for that matter).
---------------------------------------------------------------------------

    Because of the importance to his Shapley Value Model of the value 
of this diversion, Professor Willig begins the model-building aspect of 
his testimony by describing the type of data necessary to calculate the 
diversionary impact of noninteractive services. Specifically, he 
explains that his model requires the following inputs:
    1. The size of the audience of each noninteractive distributor;
    2. The diversion parameters that represent the proportion of these 
audiences that would divert to each alternative mode of distribution; 
and
    3. The respective share of noninteractive plays for each record 
company specified in the model.

Id.
    Professor Willig explains that the value the noninteractive 
services bring to the notional Shapley negotiation is based on the 
profits they can generate, i.e., from the revenues they receive from 
subscribers and advertisers, less

[[Page 59524]]

``various costs''--including the copyright royalties noninteractive 
services pay to music publishers for musical works. Id. ] 30. These 
costs of course do not include the sound recording royalties, as these 
are the ``unknowns'' for which the Shapley Value model is intended to 
solve. See id. ] 30.
    Professor Willig's Shapley Value Model treats licenses from all 
three Majors as essential to the viability of a noninteractive service, 
in each Shapley subset of negotiating parties. As Professor Willig 
notes, incorporating this ``must have'' input into the Shapley Value 
model means that ``without access to the sound recordings of all three 
of the major record companies, a noninteractive distributor does not 
operate and contributes zero profits to the rest of the subset of the 
bargaining parties.'' Willig WDT ] 31.\225\
---------------------------------------------------------------------------

    \225\ By contrast, Professor Willig's model does not assume that 
the repertoires of the specified aggregate of Indies are ``must 
have'' inputs for a noninteractive service. Rather, his model 
assumes that a noninteractive service without access to all of the 
Indies' sound recordings would not suffer a complete loss of profits 
attributable to the Indies, but would instead would see a decline in 
profits commensurate with listeners' preferences for content carried 
by [I]ndies.'' Id.
---------------------------------------------------------------------------

    To support his treatment of each Major as a ``Must Have,'' 
Professor Willig relies on an abundance of record facts and prior 
statements by the Judges, as enumerated below.
    First, Professor Willig notes that, in Web IV, the Judges stated 
that ``[t]here appears to be a consensus that the repertoire of each of 
the three Majors is a `must have' in order for a noninteractive service 
to be viable.'' Web IV, 81 FR at 26373 (emphasis added). This statement 
by the Judges was supported by testimony in Web IV. In that proceeding, 
Professor Michael Katz, the NAB's economic expert witness, and 
Professor Shapiro, testifying for Pandora, both declined to conclude 
that the Majors were not ``Must Haves'' for noninteractive services. 
Web IV, 81 FR at 26364. Additionally, in Web IV the Judges found that 
the ``Must Have'' status of noninteractive services was demonstrated by 
Pandora's own data showing the high percentage of total plays on 
Pandora that were comprised of the most popular songs (hits), i.e., 
from the top 5%, 10%, and 20% of ``weekly spins,'' a percentage greater 
than the total percent of overall plays of Majors' recordings on 
Pandora. As the Judges stated, ``[t]hese `top spin' figures are 
indicative of the `must have' aspect of the Majors' repertoire,'' and 
explain ``why steering away from [the Majors'] repertoires cannot be 
pursued beyond a certain level, and why [Professor] Shapiro candidly 
declined to reject the idea that the Majors' repertoires were `must 
haves' even though noninteractive services could steer away from them 
to an extent.'' Id. at 26373 n.155.
    In this proceeding, SoundExchange notes that an even earlier 
proceeding took note of the importance to a noninteractive service of 
accessing all the ``hits.'' SX PFFCL ] 595 (citing SDARS II, 78 FR at 
23064 (quoting a Sirius XM witness who testified that ``Sirius XM is 
very hits driven, and they want to have the most successful service 
they can, so they're going to use what's popular.'')). Further, 
SoundExchange identifies the body of evidence in the present record 
that belies a view that a noninteractive streaming service could simply 
eliminate a Major's entire repertoire:

    Numerous documents produced by Pandora explain that [REDACTED]. 
Tr. Ex. 5153 at 35-56; see 8/5/20 Tr. 467:17-468:5 (Willig); 8/10/20 
Tr. 960:3-961:1 (Willig); see, e.g., Ex. 5156 at 17 [REDACTED] Ex. 
5157 at 22 [REDACTED]); Ex. 5154 at 18 ([REDACTED]); Ex. 5155 at 31 
([REDACTED]''); Ex. 5158 at 13 [REDACTED]).

SX PFFCL ] 596.\226\
---------------------------------------------------------------------------

    \226\ SoundExchange also relies on evidence regarding the ``Must 
Have'' status of the Majors' individual repertoires to interactive 
services. The Judges do not find that evidence germane to the 
question of whether the Majors are ``Must Haves'' for noninteractive 
services.
---------------------------------------------------------------------------

    The only new evidence that the Services proffer that would 
potentially support their claim that noninteractive services can move 
beyond steering and forego the entire repertoire of a Major are the 
results from Pandora' Label Suppression Experiments. However, as 
explained in the Judges' consideration of Professor Shapiro's game 
theoretic modeling they find that evidence to be deficient and accord 
it no weight.
    For the foregoing reasons, the Judges find Professor Willig's 
decision to treat each of the three Majors as a ``Must Have'' to be 
reasonable and proper.
    Having specified the ``characteristic functions'' in his model, 
Professor Willig derives the algebraic expression of the Shapley Values 
for each party in the negotiation styled by the Shapley Value 
methodology. Id. ] 33 & app. C. Applying the ``characteristic 
function'' concepts he delineated earlier, Professor Willig notes that 
his algebraic analysis identifies ``[t]he difference between the 
characteristic function for a subset of the parties without the 
[noninteractive service] and the characteristic function for that 
subset with the [noninteractive service] added . . . .'' Id. at 33. 
Applying this mathematical difference, Professor Willig states that his 
model allows for the implementation of the applicable ``Shapley Value 
algorithm.'' Id. app. C at C-5 (] 9 therein). This algorithm allows 
Professor Willig to evaluate ``every possible arrival ordering'' and 
determine the negotiating parties' ``incremental value.'' Id.
    He then utilizes his model to determine the ``incremental value'' 
contributed by each ``arriving'' negotiating party identified in his 
model, relative to the value created by the parties that preceded the 
``arriving'' party. Professor Willig then averages the sum of these 
incremental contributions for each negotiating party across all 720 
arrival orderings.\227\ Id. Each party's average incremental 
contribution constitutes its individual Shapley Value.
---------------------------------------------------------------------------

    \227\ Given the presence of six ``players'' in his model, there 
are 6! (i.e., 720) arrival orderings.
---------------------------------------------------------------------------

    Professor Willig next explains how his model makes the link between 
Shapley Values and the royalties to be paid to the record companies:

    [O]nce Shapley Values are derived, the corresponding royalties 
from the two noninteractive distributors to the record companies can 
be computed. These are the payments that result in each party's 
bottom line equaling its Shapley Value.
    For each [noninteractive service], the total royalty payments it 
makes to the record companies must equal the difference between its 
profits from its market operations and its Shapley Value.
    For each record company, the total royalty payments it receives 
must equal the difference between its Shapley Value and the total 
compensation it receives from its other sources of distribution, 
less its costs of operation.

Id. ] 34; see also id. app. C, p. C-6 (] 10 therein).
b. The Empirical Inputs in Professor Willig's Shapley Value Model
    Having specified his Shapley Value Model, Professor Willig then 
identifies the following necessary categories of data inputs:
    1. Royalty rates that record companies earn from other forms of 
music distribution;
    2. noninteractive distributors' audience sizes;
    3. diversion ratios reflecting the amount of a noninteractive 
distributor's audience that would switch to other forms of music 
distribution and generate royalties if that noninteractive distributor 
were unavailable;
    4. record company play shares; and
    5. noninteractive distributors' fixed costs and marginal profit 
rates.

Willig WDT ] 35. He then explains how he selected the data for each of 
these

[[Page 59525]]

five input categories, as described below.
i. Royalties From Other Forms of Distribution
    Professor Willig uses ``currently observable'' sound recording 
rates as proxies for the sound recording royalty rates that will 
prevail during the rate period, 2021-2025. Id. ] 36. The first 
alternative category of distribution he considers is comprised of 
subscription on-demand streaming music and video services. Professor 
Willig obtains the royalty payment data detail for eight such services 
\228\ from the royalty statements of the three Majors and Merlin 
Network (Merlin), a digital rights agency for independent record 
labels. Id. ] 37.\229\ This royalty data reflected payment over the 12-
month period ending March 2019, the most recent four-quarter period for 
which data was available to Professor Willig. Id. The average monthly 
royalties paid by these eight services, weighted by each service's 
subscriber count, was approximately $[REDACTED] per subscriber. See id. 
app. D at ex. D.1.
---------------------------------------------------------------------------

    \228\ The eight services are: [REDACTED]. Willig WDT app. D, ex. 
D.1.
    \229\ Merlin is a non-profit association for independent labels 
with more than 800 members representing tens of thousands of labels 
from 63 countries, including the United States. Orszag WDT ] 25.
---------------------------------------------------------------------------

    The second alternative rate/service category Professor Willig 
considers is comprised of ad-supported on-demand streaming music and 
video services. He obtained the royalty payment data detail for three 
such services--Spotify, YouTube (free version) and Vevo. Id. ] 38. The 
royalty data was produced by the same four entities that provided the 
royalty data for subscription on-demand services, and covered the same 
four-quarter time period. The average amount of royalties these three 
services paid over this period, weighted by each service's total plays, 
was approximately $[REDACTED] per play. See id. app. D at ex. D.2.
    The third alternative rate/service category Professor Willig 
considers is Sirius XM satellite radio transmission. He obtained data 
on effective royalty rates, over the same 12-month period identified 
above, from: (i) Statements of Account provided by Sirius XM to 
SoundExchange showing the dollar value of royalties paid for satellite 
radio performances; and (ii) Sirius XM's SEC Forms 10-K and 10-Q 
filings setting forth its subscriber counts. Id. ] 39 & n.21 (and 
exhibits referenced therein). Professor Willig uses these data to 
compute average monthly subscriber counts, and then divides that count 
into average monthly royalties. Id. This division results in Sirius XM 
monthly royalties per subscriber of $[REDACTED].\230\
---------------------------------------------------------------------------

    \230\ Professor Willig asserts that the royalty rates he 
calculated for Sirius XM are ``artificially'' low, because they do 
not account for: (i) Royalties paid through licenses directly 
negotiated between Sirius XM and certain record companies; or (ii) 
royalties that--only since the October 2018 enactment of the Music 
Modernization Act--SiriusXM must pay for its performance of sound 
recordings fixed prior to February 15, 1972. See id. n.22 (and 
accompanying text). However, because Professor Willig does not 
provide a basis for the Judges to make an actual or estimated 
adjustment based on this assertion, the Judges make no such 
adjustment.
---------------------------------------------------------------------------

    The fourth alternative royalty-bearing category Professor Willig 
considers is generated not by royalty payments from intermediaries, but 
rather by consumer payments to purchase digital downloads and physical 
music (i.e., CDs and vinyl records). Id. ] 40. He relies on 2018 
wholesale and retail sales data from the Recording Industry Association 
of America (RIAA) and from a 2018 Annual Music Study by an industry 
research firm, MusicWatch, prepared for the RIAA. These data provide 
information on the average dollar amount spent by purchasers of sound 
recordings in these formats. Id. Professor Willig also relies on 
additional 2018 RIAA data on the percent of the retail prices of 
digital downloads, CDs and vinyl records, respectively, that is paid as 
royalties on sales in these three categories. Id. ] 40 app. D at ex. 
D.3. He then multiplies each retail revenue amount by the applicable 
royalty percentage, to generate the following calculation of ``average 
monthly royalties per purchaser'':

$[REDACTED] for digital download purchasers
$[REDACTED] for CD purchasers
$[REDACTED] for vinyl record purchasers

Professor Willig then calculates an average royalty per purchaser of 
$[REDACTED], weighted by retail revenue percentages across these three 
sales formats. Id. app. D at ex. D.3.
    The fifth (and final) alternative category of distribution 
Professor Willig considers is comprised of AM/FM broadcasts (to be 
clear, these are broadcasts via terrestrial radio rather than 
``simulcasts'' over the internet) and a miscellaneous category for all 
other forms of music. Id. at 41.
    The royalty rates calculated by Professor Willig for the foregoing 
categories are set forth in the figure below:

Figure 4--Royalty Rates for Outside Distributors (RESTRICTED)

[REDACTED]

Willig WDT fig.4.
    Professor Willig testifies that in his Shapley Value Model, for the 
outside distributors identified in the above table, ``[e]ach of their 
respective royalty rates are taken as they actually are or are expected 
to be.'' Willig WDT ] 28. Accordingly, ``the options of listening to 
broadcast AM/FM radio or not listening to music . . . are modeled 
realistically as not producing any royalties for the record 
companies.'' Id.; see also 8/5/20 Tr. 406 (Willig) (``I took those 
elements of opportunity costs from the market data as they are.''); id. 
at 378-79, 488-89 (Willig). SoundExchange notes that Professor Willig's 
treatment of ``outside distributors,'' including those that do not 
generate any royalties, such as AM/FM radio, is ``[c]onsistent with the 
``fork in the road'' approach taken by Professor Willig and adopted in 
SDARS III.'' SX PFFCL ] 625 (citing SDARS III, 83 FR at 65328).
ii. Noninteractive Distributors' Audience Sizes
    In order to estimate the extent of diversion to alternative 
distribution methods and thus the value of the record companies' 
opportunity cost in licensing to noninteractive services (in the 
hypothetical market), Professor Willig also needs to estimate audience 
sizes for the noninteractive distributors. He identifies ``total 
numbers of plays per month'' as an appropriate measure to use in order 
to gauge audience size. Willig WDT ] 43.
    To make this calculation, Professor Willig relies on Pandora's 
publicly reported financial projections to estimate its audience size, 
see id. ex. D.6, and he relies on SoundExchange's royalty statements 
and other data to estimate Pandora's play share of the noninteractive 
markets. These data indicate that Pandora which has approximately 
[REDACTED]% of the play share of the ad-supported noninteractive market 
and an [REDACTED]% play share of the subscription noninteractive 
market. See id., app. D at ex. D.4. Professor Willig uses this play 
share percentage data as a proxy, to estimate Pandora's audience share 
percentage of the noninteractive ad-supported and subscription markets. 
He further assumes that Pandora will have the same shares of these 
markets throughout the 2021-2025 rate period as it did over the recent 
12-month period ending March 2019. Willig WDT ] 43.
    Using these Pandora's market shares, Professor Willig grosses up 
the Pandora audience size to reflect the total size of the 
noninteractive audience in these markets. By this method, he estimates 
that the ad-supported noninteractive

[[Page 59526]]

market has an audience of [REDACTED], and that the subscription 
noninteractive market has an audience of [REDACTED]. Id. ] 44 & Fig. 5.
    To adapt his audience size analysis to his opportunity cost 
analysis, Professor Willig converts the play count data into play-per 
user and play-per subscriber metrics.\231\ Using Pandora's public 
financial projections, see id. app. D, ex. D.6, he divides the 
projected average monthly play counts for Pandora's two tiers 
(respectively, for the ad-supported and subscription tiers) by the 
projected number of active users (for the ad-supported tier) and by the 
projected number of subscribers (for the subscription tier). By this 
exercise, Professor Willig estimates that ``users of Pandora's ad-
supported service are projected to listen to approximately [REDACTED] 
plays per month and subscribers to Pandora's subscription 
noninteractive service (i.e., Pandora Plus) are projected to listen to 
approximately [REDACTED] plays per month over the 2021-2025 period.'' 
Id. ] 45.
---------------------------------------------------------------------------

    \231\ Professor Willig converts this data into a per-user metric 
in order to apply it in conjunction with the per-user information 
derived from the survey results upon which he relies in the 
development of his opportunity cost estimates.
---------------------------------------------------------------------------

iii. Estimating Opportunity Costs With Diversion Ratios
    Professor Willig utilizes the dollar value of the previously 
discussed alternative distribution methods--``if a noninteractive 
distributor were no longer available in the marketplace''--to estimate 
the ``opportunity cost that record companies experience by licensing to 
noninteractive distributors instead of only licensing to all the 
outside forms of music distribution'' Id. ]] 46, 47. More particularly, 
he multiplies these dollar values by the diversion ratios indicated by 
the survey work undertaken by another SoundExchange expert, Professor 
Gal Zauberman (the Zauberman Survey).\232\ Professor Willig's 
opportunity cost estimates for each alternative method of distribution 
are set forth in the figure below:
---------------------------------------------------------------------------

    \232\ See Zauberman WDT. Professor Zauberman's survey testimony 
is discussed elsewhere in this Determination.
[GRAPHIC] [TIFF OMITTED] TR27OC21.007

Willig WDT ] 47 & fig. 6.\233\
---------------------------------------------------------------------------

    \233\ Professor Willig provides a detailed explanation of how he 
incorporated Professor Zauberman's survey results as inputs in his 
calculation of diversion ratios needed to estimate record company 
opportunity costs.
---------------------------------------------------------------------------

iv. Record Company Play Shares in the Noninteractive Market
    Because Professor Willig constructed his Shapley Value Model to 
identify the separate values attributable to each of the Majors and to 
his aggregation of Indies, he must identify their separate ``play 
shares'' in the noninteractive markets. To estimate these ``play 
shares,'' he relies on ``the royalty statements that music streaming 
and video services provide to record companies when operating under 
directly negotiated license agreements.'' Id. ] 48. More particularly, 
he analyzes the most recent monthly royalty statements available for 
the 12-month period ending March 2019, from: (i) Nonstatutory streaming 
music and video services (with varying degrees of interactivity); (ii) 
statutory noninteractive services; and (iii) Pandora's and iHeart's 
noninteractive play counts ([REDACTED]).\234\
---------------------------------------------------------------------------

    \234\ Even more granularly, Professor Willig evaluates all tiers 
of service (with varying degrees of interactivity) on the following 
services: Apple Music, Amazon Music Unlimited, Amazon Prime, Google 
Play, iHeart (both interactive and noninteractive tiers), Pandora 
(both interactive and noninteractive tiers), Napster, Spotify, Vevo, 
and YouTube. He notes that play share data from two other 
distribution methods--satellite via SiriusXM and physical retail and 
digital downloads--were ``not available'' to him. However, he 
testifies that he has ``no reason to think the content of any of the 
record companies is played with more or less frequency on these 
distribution methods, when compared to the distribution methods 
(interactive and noninteractive streaming) for which I did have 
data.'' Thus, he asserted that he had ``no reason to believe this 
additional data would materially change'' his play share estimates. 
Willig WDT ] 48 n.26.
---------------------------------------------------------------------------

    Professor Willig explains that these royalty statements set forth 
the total plays on each service in any given month, itemized by the 
record company that owned each copyrighted sound recording. He also 
states that he has no reason to believe these shares would be

[[Page 59527]]

substantially different over the 2021-2025 rate period, compared to the 
data he had applied. Id.
    From this data, Professor Willig calculates the relative 
proportions of plays of sound recordings whose copyrights are owned by, 
respectively, Sony, Warner, and Universal, as well as from his grouping 
of Indies. More specifically, he computes each Major's play share, and 
then computes the Indies' play share as equal to 100% minus the sum of 
the Majors' shares. Id. at ] 48 & app. D at ex. D.5.
    Professor Willig summarized these play shares in the following 
figure:

Figure 7: Estimated Play Shares (RESTRICTED)

[REDACTED]

v. Noninteractive Services' Fixed Costs and Marginal Profit Rates
    As noted supra, Professor Willig's Shapley Value Model also 
requires data quantifying: (i) Each record company's ``fallback 
value''; and (ii) the surplus value brought by each of the negotiating 
parties to the notional Shapley market negotiations. With specific 
regard to the noninteractive services, Professor Willig states that the 
value they bring to the notional Shapley negotiations depends on their 
ability to generate profits, which subtract out from revenues variable 
costs, including the royalties noninteractive services pay for musical 
works (but not the sound recording royalties, which, to repeat, are the 
outputs of the Shapley Value Model). Willig WDT ] 49. To make this 
calculation, Professor Willig compiles categorical data relating to 
``fixed costs, variable or marginal costs and the associated marginal 
profit rates of noninteractive distributors . . . .'' Id.
c. Professor Willig's Chosen Source of Financial Data
i. Financial Statements vs. Financial Projections
    Professor Willig relies on the ``Pandora Merger Proxy,'' dated 
December 20, 2018, and filed with the Securities and Exchange 
Commission (SEC), Trial Ex. 5045, that described the proposed merger 
(subsequently consummated) between Pandora and Sirius XM. Id. & app. D, 
ex. D.6 (p.3 therein). Professor Willig utilizes Pandora data 
exclusively to represent the noninteractive services because: (i) 
Pandora was the only noninteractive service for which he could find 
``forward-looking estimates'' of the data that he required; and (ii) 
Pandora is the largest noninteractive distributor in the market, 
accounting (as noted supra) for more than [REDACTED]% of total plays in 
the noninteractive market. Id. & app. D at ex. D.4.
    Perhaps in (correct) anticipation of the Services' rebuttal, 
Professor Willig explains in detail why he decides to rely on the 
``Pandora Merger Proxy''--which included predictions (what he 
characterized as ``forward-looking estimates'') of Pandora's future 
financial performance, and which Pandora sent to its shareholders in 
connection with the then-proposed (and subsequently consummated) 
acquisition of Pandora by Sirius XM. More particularly, he explains why 
he favored these projections, rather than older data in Pandora's most 
recent financial statements contained in its 2017 Form 10-K (annual 
report) filed with the Securities & Exchange Commission (SEC), Trial 
Ex. 5043, or data even more current than the proxy statement data in 
Pandora's financial statements for the first half of 2019. Trial Ex. 
5054. See Willig WDT, app. D (] 2 therein).
    Professor Willig acknowledges Pandora's ``recent history of 
operating losses'' (before and after Sirius XM's proposed acquisition 
of Pandora). However, he opines that such operating losses do not 
``accurately reflect expectations about the incremental value'' that 
Pandora could bring to the notional Shapley Value negotiation 
concerning royalty rates for the 2021-2025 period. Willig WDT app. D (] 
2 therein). Rather, he states, it is more appropriate to rely on: (i) 
Financial projections that undergird ``the approximately $3.5 billion 
purchase price paid by Sirius XM'' to acquire Pandora; and (ii) 
Pandora's substantial market capitalization of approximately $2.4 
billion immediately prior to the announcement of the Sirius XM 
acquisition . . . .'' Id. According to Professor Willig, these are 
market-based values, and therefore the data on which they were based--
utilized by Pandora's investment bankers as an input into their merger 
fairness opinions--are more probative of Pandora's likely financial 
performance over the forthcoming 2021-2025 rate period. Willig WDT app. 
D (]] 2-3 therein).
    Although Professor Willig states a preference for projections as 
opposed to the most recent historical financial information, he also 
chose to ignore different financial projections created for Pandora by 
Sirius XM after it had acquired Pandora. He acknowledges that these 
newer financial projections ``[REDACTED].'' Regardless, as a basis for 
rejecting these projections, Professor Willig states: ``I 
``understand'' Pandora . . . produced [these] additional projections . 
. . for these proceedings . . . .[,]''--but he does not attribute his 
understanding to any source. Id. ] 3 n.4.\235\
---------------------------------------------------------------------------

    \235\ As discussed elsewhere in this Determination, Pandora 
vigorously denies the unattributed assertion that it created these 
newer projections, labeled ``Long Run Scenarios'' by Sirius XM, for 
the purpose of these proceedings.
---------------------------------------------------------------------------

ii. Professor Willig's Reliance on Merger ``Scenario 2'' Data
    The Proxy Statement on which Professor Willig elects to rely 
contains two different sets of projections, denoted as ``scenarios,'' 
regarding Pandora's predicted financial future. ``Scenario 1a'' 
projected a relatively lower value for Pandora, whereas ``Scenario 2'' 
projected a relatively higher value. Professor Willig elected to 
utilize the higher-value Scenario 2 projections, ignoring the lower-
value Scenario 1a projections. He made this decision because he 
understood that Pandora's investment bankers relied on the Scenario 2 
projections to produce their valuation of Pandora in connection with 
the Sirius XM acquisition, and those projections were ``in-line with 
the $3.5 billion market price paid by Sirius XM to acquire [Pandora].'' 
Willig WDT app. D, ] 3 & n.5.\236\ He notes that, by contrast, the 
Scenario 1a projections implied valuations substantially below this 
$3.5 billion market price.'' Id.
---------------------------------------------------------------------------

    \236\ Professor Shapiro concedes that the Scenario 2 data needs 
to be taken ``seriously'' and are ``a big deal,'' because they were 
included in the ``merger proxy documents . . . used as part of the 
acquisition.'' 8/19/20 Tr. 2732-33 (Shapiro).
---------------------------------------------------------------------------

    Using the higher-valued Scenario 2 projections, Professor Willig 
estimates Pandora's annual fixed costs at $397 million for its Pandora 
Free ad-supported service, and annual fixed costs of $85 million for 
its Pandora Plus subscription service. He then converts these annual 
figures into monthly fixed costs. To convert these monthly Pandora 
fixed cost estimates into noninteractive service industrywide data, he 
grosses them up by dividing by Pandora's market share (as he did when 
grossing up the audience size). Through this method, Professor Willig 
estimates monthly fixed costs of $40.4 million for ad-supported 
noninteractive services, and $8.9 million for subscription 
noninteractive services. Willig WDT app. D, ] 4 & n.6.
    Having identified and segregated the fixed costs, Professor Willig 
then utilizes the Scenario 2 data for his estimate of Pandora's 
variable costs.\237\

[[Page 59528]]

In this regard, Professor Willig also relies on other information, 
including a September 24, 2018 report by an investment banking firm 
(JMP Securities, engaged to analyze Sirius XM's acquisition of 
Pandora), that projected ``content acquisition costs'' for Pandora's 
three service tiers (Pandora Free, Pandora Plus and Pandora Premium). 
Willig WDT app. D at ex. D.6 (nn.8, 11 and 14 therein).
---------------------------------------------------------------------------

    \237\ As noted supra, these variable costs are necessary inputs 
in the Shapley Value model because these are costs that must be 
subtracted from revenue in order to estimate the ``surplus'' that 
can be the shared by the participants in the notional Shapley 
arrival orderings.
---------------------------------------------------------------------------

    Generally, Professor Willig allocates Pandora's multi-tier variable 
costs on a per-tier basis proportionate to each tier's share of 
projected total (all-tier) revenue, through 2025, except where he 
identifies specific per tier costs. Specifically, these other 
identifiable variable costs include: (i) ``Cost of Goods Sold'' 
(including musical works royalties (performance right and mechanical 
rights royalties)); (ii) ``Operating Expenses''; (iii) ``Product 
Development Expenses''; (iv) ``Sales and Marketing''; (v) ``General and 
Administrative Expenses'' and ``Stock Based Compensation.'' Willig WDT 
app. D, ex. D.6 (at 3 therein).
    Professor Willig also makes the following revenue-related 
assumptions regarding Pandora: \238\
---------------------------------------------------------------------------

    \238\ Revenue data is necessary in the Shapley Value Model 
because revenue minus variable costs yields the surplus that can be 
allocated among the negotiating parties according to their 
respective Shapley Values.
---------------------------------------------------------------------------

    (i) Revenue growth per subscriber annually from 2021-2025;
    (ii) monthly revenue per subscriber for Pandora Plus in 2020;
    (iii) annual revenue growth per subscriber for years 2021 to 2025;
    (iv) monthly revenue per subscriber for Pandora Plus in 2020; and
    (v) continued existence of the 2018 ad-supported and subscription 
noninteractive per-play royalty rates from 2021-2025 equal to the 
current statutory rates plus an annual 2% inflation rate.

Id. He bases his calculations of these five types of revenue 
information on ``the assumptions accompanying the Proxy Scenario 2 
projections and recent history which indicate that Pandora Premium is 
expected to grow faster than Pandora Plus.'' Id.\239\
---------------------------------------------------------------------------

    \239\ Professor Willig also assumes that the number of ad-
supported users for years 2021-2024 should be ``calculated based on 
a liner [sic] user growth trend between the 2018 actual and 2025 
projected figure. Id.
---------------------------------------------------------------------------

    Based on the data upon which he relies, and the assumptions he 
makes in connection with that data, Professor Willig estimates an ad-
supported marginal profit rate of $0.0042 per play, and a subscription 
marginal profit rate of $0.0048 per play. Willig WDT app. D, ex. D.6 
(at 2 therein).\240\
---------------------------------------------------------------------------

    \240\ For the avoidance of confusion, the Judges point out that 
these figures are not Professor Willig's proposed royalty rates, but 
rather his estimated marginal profit rates. His calculation of 
royalty rates is discussed infra.
---------------------------------------------------------------------------

iii. Professor Willig's Caveat Regarding the Foregoing Cost and Profit 
Data
    Although Professor Willig elects to rely in his corrected written 
direct testimony on the Scenario 2 data, he recognizes that the data 
sets he then possessed when drafting that direct testimony did not 
contain granular cost and revenue information regarding Pandora. 
Accordingly, the assumptions he was compelled to make, as itemized 
supra, were necessarily tentative in nature. Specifically, Professor 
Willig acknowledged:

    [C]ertain key inputs to the Pandora projections were not 
disclosed in Pandora's proxy statements (e.g., projected ad-
supported user and subscriber counts, projected plays, and a 
breakdown of subscription revenue into its underlying Pandora Plus 
and Pandora Premium component parts). Accordingly, certain 
allocation assumptions were required to estimate key parameters from 
Pandora's projected financial information. Estimates derived from 
these projections may require amendment following the completion of 
discovery.
* * * * *
    The Pandora projections on which these estimates are based do 
not disclose certain key inputs that were used to create the 
projections. For instance, the projections do not include a 
breakdown of subscription revenue into the portions related to its 
Pandora Plus noninteractive and Pandora Premium on-demand services, 
respectively, and therefore require an allocation assumption to 
exclude Pandora Premium revenue and costs from the analysis. 
Moreover, the projections do not include the projected subscriber 
counts, active user counts, and play counts underlying the 
projections, requiring these figures to be derived so that profit 
rates can be computed. Accordingly, the assumptions required to 
estimate key parameters for use in my Shapley Value model may need 
to be updated following the completion of discovery.

Willig WDT ] 50 n.30, app. D at D-3. Professor Willig did not amend his 
direct testimony to update these ``key parameters.''
    In Pandora's rebuttal testimony, it criticizes Professor Willig's 
assumptions, and demonstrates that the more granular data provided an 
accurate description of Pandora's economic condition that served as the 
basis for the Scenario 2 projections on which Professor Willig elected 
to rely. See Trial Ex. 4109 (WRT of Jason Ryan) (Ryan WRT); Shapiro WRT 
(applying Mr. Ryan's economic data).
    Later, in his written rebuttal testimony, Professor Willig utilizes 
the more granular economic data underlying the Scenario 2 projections 
to amend his direct testimony by substituting that data for the 
assumptions he had made in his direct testimony. Specifically, he 
testified as follows regarding the ``updates'' he made in his rebuttal 
testimony (at Appendix L):

    These revised profit rate estimates adopt certain of Professor 
Shapiro's cost allocation assumptions, his definition of variable 
costs, and make use of further details relating to the projections 
publicly disclosed in Pandora's merger proxy . . . (including 
subscriber counts, Pandora Plus revenues, advertising hours, and 
operating expense synergies).

Willig WRT ] 75 n.138.
    Further, Professor Willig essentially adopted the analysis 
undertaken by Pandora's Vice President of Financial Planning and 
Analysis, Jason Ryan, regarding the allocation of advertising revenues; 
projected growth of subscription revenue; classification of certain 
sales and marketing expenses; classification of product development 
costs; and projected number of users, subscribers and plays. See 8/5/20 
Tr. 525 (Willig) (``[W]hen you check the numbers that [Mr. Ryan] says 
are right against the numbers I use in my rebuttal report, they are 
exactly the same.''); see also Willig WRT app. L at 1, 3-4 & nn.2-4, 11 
55-58 & 72-74; 8/5/20 Tr. 361-62, 520-25, 527-528 (Willig); SX PFFCL ]] 
669-674 (noting that Professor Willig's testimony, mooted many of the 
issues raised by Mr. Ryan and Professor Shapiro). Accordingly, the 
Judges adopt Mr. Ryan's analysis of the more granular cost and revenue 
data necessary to generate Pandora's profit margins on its subscription 
and ad-supported services. Additionally, the Judges find that Mr. Ryan, 
as a financial executive at Pandora, is a more competent witness to 
make the necessary categorizations and allocations of revenue and costs 
than Professor Willig.\241\
---------------------------------------------------------------------------

    \241\ Thus, the Judges do not rely on Professor Willig's 
assertion that the more granular revenue and cost information did 
require him to materially change his royalty rate calculations. Id. 
More particularly, Pandora asserts that Professor Willig's analysis 
is still erroneous in two respects because he: (1) Misallocates 
product development costs across the ad-supported and Pandora Plus 
services by applying revenue proportions; and (2) fails to deduct 
non-music revenue from his calculation of Pandora's margin. Services 
PFFCL ]] 277-286 (and record citations therein). These disputes do 
not require extended analysis. Suffice it to say, with regard to the 
first issue, the Judges repeat their finding that Professor Willig's 
attempt--for the first time in rebuttal testimony--to justify his 
allocation of product development costs across Pandora's services, 
is less credible than the analyses made by Mr. Ryan, who is a fact 
witness with direct knowledge of these details regarding Pandora's 
product development costs. However, with regard to the second 
numbered issue above, Professor Willig explained persuasively that 
Pandora's criticism of his treatment of non-music revenue did not 
impact the royalty rate he calculated, because he made his profit 
calculations on a per-play basis that was unaffected by the 
treatment of non-music revenue, in that ``non-music revenue and non-
music listening travel together in roughly equal proportion,'' with 
each representing approximately [REDACTED]% of revenue and 
listening.'' SX RPFFCL (to Services) ] 284 (and record citations 
therein). Moreover, because the amount of listening and revenue at 
issue in this allocation is only [REDACTED]% of each metric, the 
allocation of this revenue would have only a de minimis impact on 
the royalty rate ultimately estimated by Professor Willig's Shapley 
Value Model.

---------------------------------------------------------------------------

[[Page 59529]]

d. Professor Willig's Calculation of the Record Companies' Opportunity 
Costs
    As noted supra, Professor Willig assumes that each of the three 
Majors in his Shapley Value Model provides a ``Must Have'' repertoire 
for a noninteractive service. Willig WDT app. C at C-1 (] 1 therein). 
Therefore, his modeling assumes that ``only when all three [Majors] are 
present in a coalition can the [noninteractive service] begin making 
profits.'' Id. at C-3 (] 5 therein). This means that ``in any other 
case''--including when a noninteractive service obtains licenses from 
only one or two Majors--Professor Willig's Shapley Value Model assumes 
that the noninteractive service ``cannot operate.'' Id. at C-5 (] 8 
therein).
    Professor Willig acknowledges that the assumed ``Must Have'' status 
of each Major generates ``complementary oligopoly power'' in the 
market. However, he understands that the Judges' determination in a 
prior proceeding, Phonorecords III, ``credited a Shapley Value analysis 
as one way of addressing concerns about complementary oligopoly power 
[because] the analysis performed in the proceeding eliminated this 
`walk away' power by valuing all possible orderings of the players' 
arrivals.'' Willig WDT ] 14 (quoting Phonorecords III, 84 FR at 1933 
n.69).\242\
---------------------------------------------------------------------------

    \242\ The Judges again discuss the issue of whether the 
repertoire of each Major is a ``Must Have'' infra, in connection 
with Pandora's assertion that its Label Suppression Experiments 
(LSEs) demonstrate that no one Major's repertoire is a ``Must 
Have.''
---------------------------------------------------------------------------

e. The Noninteractive Services' Shapley Values Derived by Professor 
Willig
    By inserting the data inputs, discussed above,\243\ into the 
Shapley Value formulas,\244\ Professor Willig derives Shapley Values 
and corresponding royalty rates for ad-supported and subscription 
noninteractive services, respectively. Id. at 51 & fig.9. These results 
are set forth below:
---------------------------------------------------------------------------

    \243\ See also Willig WDT app. D.
    \244\ See Willig WDT app. C.
    [GRAPHIC] [TIFF OMITTED] TR27OC21.008
    
    Because the royalty rates derived by Professor Willig are based in 
part on the diversion ratio results obtained from the Zauberman Survey, 
i.e., a survey of a sample from the larger population, the royalty 
rates are statistically inexact.

[[Page 59530]]

Accordingly, Professor Willig calculates a confidence interval for his 
results, utilizing a ``bootstrap procedure'' \245\ that produces a 95 
percent confidence interval. This confidence interval establishes 
ranges for the royalties from $0.00290 to $0.00299 for the ad-supported 
noninteractive royalty rate and of $0.00299 to $0.00316 for the 
subscription noninteractive royalty rate. Willig WDT ] 51 & app. E.
---------------------------------------------------------------------------

    \245\ The Judges have previously described the ``bootstrap'' 
procedure in the survey context as ``a sampling of the survey 
respondents [that is] itself randomly selected and thereby create[s] 
a confidence interval around each of the reported survey results''--
in this case the entirety of the Zauberman Survey. SDARS III, 83 FR 
at 65232 n.90. There is no challenge by any of SoundExchange's 
adverse parties to this process.
---------------------------------------------------------------------------

    Professor Willig emphasizes and explains several features of his 
results. First, he points out that ``the resulting Shapley Value for 
the ad-supported noninteractive [service] is near zero.'' Id. ] 51. The 
reason for this near-zero Shapley Value, he opines, is that ``the 
record companies' opportunity costs are high relative to the total 
projected profits of [the ad-supported noninteractive services].'' Id. 
Stating this point in commercial terms, Professor Willig explains that 
it reflects the alleged fact that ``the vast majority of those profits 
are necessary to compensate the record companies for the ad-supported 
noninteractive distributors' cannibalization of listeners that would 
otherwise consume music via other compensatory forms of music 
distribution.'' Id.\246\
---------------------------------------------------------------------------

    \246\ Professor Willig also finds support for these high 
opportunity costs and royalties in: (i) Pandora documents that he 
understands [REDACTED]; and (ii) testimony from record company 
witnesses that [REDACTED]. See Willig WDT ]] 52-54.
---------------------------------------------------------------------------

f. The Royalty Rates Derived From Professor Willig's Shapley Value 
Model
    Based on the foregoing analysis, and as stated at the outset of 
this description of Professor Willig's modeling, he opines that his 
Shapley Value Model generates a royalty rate for ad-supported 
noninteractive services of $0.0028 per play for 2021 and for 
subscription noninteractive services of $0.0030 per play for 2021.\247\
---------------------------------------------------------------------------

    \247\ Professor Willig also uses a different set of survey 
results as a check on his Shapley Values and royalty rates. 
Specifically, he utilizes data from market research conducted by 
Edison Research--known as the ``Share of Ear'' study--that analyzes 
the share of time Americans spend listening to all different forms 
of music distribution. He concludes that this alternative data set 
confirms the royalty rates he derived from the Zauberman Survey 
results. Willig WDT ]] 56-60 & ex.F. The Judges analyze this 
alternative approach in their discussion of the Services' criticisms 
of Professor Willig's Shapley Value modeling, infra section 
IV.C.1.g.
    Additionally, Professor Willig tested the sensitivity of his 
Shapley Value model using a Nash-in-Nash (N-I-N) bargaining 
framework, another approach for modeling a multi-party negotiation. 
Willig WDT ]] 61-67); 8/6/20 Tr. 738-39 (Willig). Under that 
framework, each potential negotiating record company/noninteractive 
service pair reaches a ``Nash'' bargain in which the record company 
receives its fallback value and each counterparty receives one half 
of the surplus created by the deal. Willig WDT ] 62. In these Nash-
in-Nash (N-I-N) negotiations, the parties assume that all other 
pairs of parties have reached (or will reach) an equilibrium 
agreement. Id. A solution is reached when there is no negotiating 
pair with an incentive to change its agreement. See id. ]] 65-66 & 
fig.11, app. G. His N-I-N model produces royalty rates similar to 
those obtained from Professor Willig's Shapley Value model--royalty 
rates for 2021 of $0.0030 per play for ad-supported noninteractive 
services and $0.0030 per play for subscription noninteractive 
services. Willig WRT ] 82 n.147; 8/6/20 Tr. 739 (Willig).
---------------------------------------------------------------------------

g. The Services' Criticisms of Professor Willig's Shapley Value Model 
Approach and the Judges' Analysis and Findings
i. Is Professor Willig's Shapley Value modeling appropriate for setting 
noninteractive rates?
(A) Professor Willig's Shapley Value Model is Inconsistent With the 
Shapley Modeling in Phonorecords III and Thus Fails to Generate 
Effectively Competitive Rates
    Professor Willig's Shapley Value Model--like all Shapley modeling--
incorporates all potential ``arrival orderings.'' Therefore, unlike in 
the actual market, the modeling does not include any scenario in which 
a Major record company can leverage a threat to ``Walk-Away'' from 
negotiations into a royalty rate that includes the effect of its 
complementary oligopoly status. As noted supra, Professor Willig--
relying on Phonorecords III--thus opines that a Shapley Value analysis 
is ``one way of addressing concerns about complementary oligopoly power 
. . . .'' Willig WDT ] 14. Therefore, in his opinion his Shapley Value 
Model is ``an appropriate approach for assessing rates that would be 
negotiated in the hypothetical marketplace for noninteractive 
webcasting.'' Id. ] 24.
    However, notwithstanding the fact that Shapley modeling includes 
all possible ``arrival orderings,'' expert economic witnesses for 
Pandora and Google, respectively, argue that Professor Willig's Shapley 
Value Model nonetheless incorporates complementary oligopoly power. See 
Shapiro WRT at 52, 57 (Jan. 10, 2020); Peterson WRT ]] 82, 85, 100 
n.103 (Jan. 10, 2020). As a second criticism, Professor Shapiro further 
asserts that Professor Willig misapplies the Shapley Value analysis in 
Phonorecords III. Shapiro WRT at 57.
    Dr. Peterson summarizes his first criticism and that of Professor 
Shapiro regarding the purported presence of a complementary oligopoly 
effect in Professor Willig's Shapley Value Model:

    Professor Willig explicitly assumes that the major record labels 
are essential to a noninteractive streaming service. This implies 
that a single label can shut down the service, which allows the 
label to guarantee itself a high value or monetary payoff when 
acting alone.
* * * * *
    [Because] Professor Willig's Shapley Value model explicitly 
models the major record labels as being essential . . . each [Major] 
can individually extract the value that a monopolist would extract 
from the streaming service or distributor. In the Shapley Value 
model, this set up allows the essential labels to extract the 
monopoly value of their recordings from the streaming service . . . 
.

Peterson WRT ] 87.
    There is no dispute that in Professor Willig's Shapley Value 
Model--when the last arriving party is assumed to be a ``Must Have'' 
Major--that this last arriving Major will generate the entire value 
generated by noninteractive streaming. That monopoly value is repeated 
for each of the three Majors when it is the last to arrive in a Shapley 
ordering. Thus, when the modeling assumes the presence of complementary 
oligopolists--as does Professor Willig's modeling--it preserves a 
substantial measure of the Majors' ``Must Have'' power and translates 
it into higher shares of the Shapley surplus and, ultimately, higher 
royalty rates.
    The validity of this criticism is made obvious by the following 
simple example, which reveals the different Shapley Values that arise 
even though all arrival orderings are present in a Shapley model: \248\
---------------------------------------------------------------------------

    \248\ The following examples assume only one service, in order 
for the example to be tractable and simply to demonstrate that, 
ceteris paribus, changing the number of licensor record companies 
alone will change the relative Shapley Values and resulting 
royalties. Cf. Phonorecords III, 84 FR at 1950 n.119 (discussing the 
practical value of attempting to model effective competition by 
limiting the number of ``arrival orderings'' via a reduction in the 
number of licensees rather than an increase in the number of 
licensors). The Judges are not suggesting that an appropriate 
Shapley Value Model would necessarily contain only a single service, 
unless supported by the marketplace facts.

Assume the total Shapley Surplus = 12
Assume 2 Majors (``1'' & ``2'') with ``Must Have'' repertoires (i.e., 
complementary oligopolists)
Assume 1 Noninteractive Service, ``S''

[[Page 59531]]



----------------------------------------------------------------------------------------------------------------
                                                                   Contribution    Contribution    Contribution
                        Arrival orderings                              by S            by #1           by #2
----------------------------------------------------------------------------------------------------------------
1, 2, S.........................................................              12               0               0
2, 1, S.........................................................              12               0               0
S, 1, 2.........................................................               0               0              12
1, S, 2.........................................................               0               0              12
S, 2, 1.........................................................               0              12               0
2, S, 1.........................................................               0              12               0
----------------------------------------------------------------------------------------------------------------

Shapley Value for S = 4 (24/6); Shapley Value for #1= 4 (24/6); Shapley 
Value for #2 = 4 (24/6)

    So, in a Shapley Value model with complementary oligopoly, Service 
S pays 8/12 of surplus (67%) toward royalties to Record Companies #1 
and #2.
    But, compare below the royalty payment by the service if there was 
no complementary oligopoly structure, and instead one record company 
(#1) owned all the copyrights for sound recordings:

------------------------------------------------------------------------
                                           Contribution    Contribution
            Arrival orderings                  by S            by #1
------------------------------------------------------------------------
1, S....................................              12               0
S, 1....................................               0              12
------------------------------------------------------------------------

Shapley Value for S = 6 (12/2); Shapley Value for #1 = 6 (12/2)

    So, in the Shapley Model with monopoly instead of complementary 
oligopoly, Service S pays only 6/12 of surplus (50%) toward royalties 
to Record Companies #1 and #2, substantially less than if a 
complementary oligopoly exists.
    Alternatively, the Judges note that, if the market structure 
contains two substitute oligopolies that compete with each other 
(rather than complementary oligopolies) and each is able to satisfy 50% 
of market demand, the Shapley modeling would look as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Contribution    Contribution    Contribution
                        Arrival orderings                              by S            by #1           by #2
----------------------------------------------------------------------------------------------------------------
1, 2, S.........................................................              12               0               0
2, 1, S.........................................................              12               0               0
S, 1, 2.........................................................               0               6               6
1, S, 2.........................................................               6               0               6
S, 2, 1.........................................................               0               6               6
2, S, 1.........................................................               6               6               0
----------------------------------------------------------------------------------------------------------------

Shapley Value for S = 6 (36/6); Shapley Value for #1 = 3 (18/6); 
Shapley Value for #2 = 3 (18/6)

    So, in the Shapley Model with substitute competing oligopolies 
instead of complementary oligopoly, Service S pays only 6/12 of surplus 
(50%) toward royalties to Record Companies #1 and #2, again 
substantially less than if a complementary oligopoly exists.\249\
---------------------------------------------------------------------------

    \249\ The purpose of these examples is to demonstrate the 
significant limitations of a Shapley Value Model that simply takes 
as a given the complementary oligopoly structure of the market being 
modeled. Monopolies or oligopolies may well exist because of their 
``efficiencies and economies of scale and/or their superior 
operations.'' Web IV, 81 FR at 26368. Whether any such entity 
utilizes such power in a manner that generates rates that are 
inconsistent with the workings of an effectively competitive market 
is a separate issue not addressed in the application of the Shapley 
Value Model in this proceeding. See Web IV, 81 FR at 26335 
(distinguishing between ```[c]omplementary oligopoly' power 
exercised by the Majors designed to thwart price competition and 
thus inconsistent with an `effectively competitive market,' [and] 
the Majors' non-complementary oligopolistic structure not proven to 
be the consequence of anticompetitive acts or the cause of 
anticompetitive results.''). The narrow point here is that the 
complementary oligopolistic market structure is not well-modeled via 
the Shapley approach, without an adjustment to offset the 
complementarity of the ``Must Have'' repertoires, as was done by 
Professor Marx in Phonorecords III and adopted by the majority in 
Phonorecords III in its application of the Shapley approach.
---------------------------------------------------------------------------

    In sum, these examples demonstrate how Shapley Value modeling is 
sensitive to the number of participants, the number of orderings, 
substitutability and perfect complementarity of the services, even 
though in each case all arrival orderings are generated by the Shapley 
modeling.
    With regard to the second criticism, Professor Shapiro claims:

    [T]he Shapley Value models used in Phonorecords III explicitly 
avoided complementary oligopoly power among separate copyright 
holders for each set of rights by removing the oligopoly. Professor 
Willig does not follow that approach to removing complementary 
oligopoly power among the major record companies in his Shapley 
Value model. As a result, for the very reasons given by the Judges 
in Phonorecords III, Professor Willig's model gives additional 
returns to the major record companies by endowing them with 
complementary oligopoly power.

Shapiro WRT at 57.
    In this regard, in Phonorecords III, the Judges analyzed two 
Shapley Value models and one ``Shapley-inspired'' model in the same 
context of perfect complements/complementary oligopoly. Ultimately, the 
Judges combined elements of all three approaches, but, importantly 
here, they credited the Shapley Value model of Professor Leslie Marx 
for the purpose of calculating the total amount of royalties. In 
determining that total, Professor Marx first equalized the number of 
licensees in order to reduce the complementary oligopoly effect that is 
embodied in a Shapley Value approach, even though the use of Shapley 
``arrival orderings'' eliminates the complementary oligopolists' 
``walk-away'' (hold-out'') power. In this manner, she intentionally 
altered the number of arrival orderings in which one of the 
complementary oligopolists provided the entirety of the additional 
value. Phonorecords III, 84 FR at 1948-50 (``Professor Marx . . . 
offset the concentrated market power that the rightsholders possess, 
separate and apart from any holdout power, which the Shapley ordering 
algorithm would address . . . address[ing] an issue--market power--that 
the Shapley Analysis does not address.'').\250\
---------------------------------------------------------------------------

    \250\ In this regard, it should be noted that the Phonorecords 
III dissent was in accord with the Majority. The dissenting opinion 
pointed to expert testimony and evidence making clear that there is 
a distinction between: (1) The ``abuse of market power'' that arises 
when a ``Must Have'' licensor holds-out (or threatens to hold out) 
during negotiations, in order to earn economic rents arising from 
the fragmentation of ownership of ``Must Have'' inputs; and (2) the 
presence of existing market power disparities that may otherwise be 
implicit in Shapley Value modeling. The former ``abuse'' of market 
power is indeed ameliorated by the Shapley Value approach, whereas a 
complementary oligopoly effect inconsistent with effective 
competition can only be mitigated in Shapley Value modeling if the 
modeler adjusts for that market power disparity. See Phonorecords 
III, 84 FR 2023 & n.342 (dissenting opinion) (applying consistent 
testimony from, and evidence regarding, four economic expert 
witnesses, Professors Watt, Marx, Katz and Gans).

---------------------------------------------------------------------------

[[Page 59532]]

    Professor Willig's Shapley Value Model specifications deviate in 
another important manner from those in the Shapley modeling in 
Phonorecords III. In that case, all the economists' Shapley modeling 
aggregated the record companies as a single entity, eliminating their 
complementary oligopoly power. Moreover, one of the economists who 
utilized Shapley Value modeling in that case, Professor Leslie Marx, 
utilized two different market structure models--her ``baseline'' model 
in which these two perfectly complementary (``Must Have'') rights (for 
sound recordings and musical works) were assumed to be owned by a 
single collective, and her ``alternative'' model in which these 
complementary rights were assumed owned by two separate entities. She 
used these two models (like the Judges use their examples above) as a 
pedagogical demonstration of how the fragmentation of ownership of 
complementary rights leads to higher and more inefficient royalty 
rates, even in Shapely modeling that includes (by definition) all 
possible arrival orderings.\251\ See Phonorecords III, 83 FR at 2022 
(dissenting opinion) (Professor Marx ``made this adjustment to offset 
the concentrated market power that the rights holders possess . . . 
that the Shapley value approach does not address.''). By contrast, 
Professor Willig here models each Major as a separate ``Must Have,'' 
which incorporates the complementary oligopolists' pricing power, 
notwithstanding the inclusion of all arrival orderings.
---------------------------------------------------------------------------

    \251\ That is, Professor Marx demonstrated precisely what the 
Judges have shown in the example in the text, supra.
---------------------------------------------------------------------------

    Professor Willig did not address this aspect of Phonorecords III, 
either in his WDT or WRT. At the hearing, the Judges asked Professor 
Willig if he had read the Phonorecords III Determination before he 
wrote those written testimonies, and he responded: ``Portions of it, 
yes [but] I must confess, not the whole thing.'' 8/25/20 Tr. 3863 
(Willig). (In both of his written testimonies, though, he identified 
the Phonorecords III Determination as a document upon which he relied, 
without noting that he did not read it in its entirety. Willig WDT, 
app. B at B-2; Willig WRT, app. I. at I-1.).\252\
---------------------------------------------------------------------------

    \252\ Professor Willig was also unable to recall, and did not 
address, an article on which the Judges expressly relied in Web IV 
for the proposition that ``even economists quite unwilling to assume 
that a given monopoly or oligopoly structure is inefficient and 
anticompetitive bristle at the idea that supranormal pricing arising 
from a complementary oligopoly is reflective of a well-functioning 
competitive market. Web IV, 81 FR at 26368 (citing Francesco Parisi 
& Ben DePoorter, The Market for Intellectual Property: The Case of 
Complementary Oligopoly, in The Economics of Copyrights: 
Developments in Research and Analysis (W. Gordon and R. Watt eds. 
2003).
---------------------------------------------------------------------------

    The Judges then asked Professor Willig if he had read the portions 
regarding ``the distinction between holdout power and market power . . 
. that was . . . actually adopted by way of adjustments by the majority 
. . . in Phonorecords III, [or] discuss that Phonorecords III issue in 
either of your written testimonies?'' 8/25/20 Tr. 3864 (Willig). 
Professor Willig's response made it clear that he had not addressed 
that specific issue. Rather, he provided a discursive answer in which 
he repeated that his Shapley Value Model ``has at least a prominent 
virtue on this very subject that you are mentioning of eliminating any 
special hold out power, or market power that derives from the ability 
to be a holdout . . . .'' 8/25/20 Tr. 3864-65 (Willig) (emphasis 
added). But the usefulness of the Shapley Value approach in eliminating 
``hold out power'' was not ``the very subject'' of the Judges' 
question. Rather, their inquiry was whether Professor Willig had 
addressed the issue in Phonorecords III as to whether the ``arrival 
orderings'' themselves embedded the complementary oligopoly power of 
the Majors.
    Continuing his response to the Judges' inquiry, Professor Willig 
further stated that it is necessary to ``to distinguish between the 
holdout power and the value that a party to the negotiations brings to 
the enterprise. And if one of the parties is a must-have, because it's 
so important, well, it shouldn't be denied the value that it brings . . 
. you don't want to strip away the value because that's part of the 
marketplace and part of the incentives to the parties to do what they 
need to do to provide that value.'' 8/25/20 Tr. 3865 (Willig).
    But, this too does not resolve the issue of whether the arrival 
orderings in his Shapley Value model embed complementary oligopoly 
power into his Shapley Values and thus, ultimately, inflate the royalty 
rates. Moreover, his answer essentially states that a ``must have'' 
licensor should retain the value of that status, even though it is an 
artifact of the fragmented ownership of the ``must have'' nature of 
their repertoires, leading to a consequence where the Shapley Value 
modeling would provide the Majors with the value of this artifact, 
beyond the considerable value of their repertoires. See Web IV, 81 FR 
at 26368 (noting that eliminating the ``must have'' power of 
complementary oligopoly does not ``diminish the firm-specific monopoly 
value of each Major's repertoire taken as a whole.''). Moreover, the 
perfect complementarity generates market consequences that are even 
worse than monopoly. See Web IV, 81 FR at 26342 (relying on the ``logic 
first identified by Antoine Cournot in 1838, firms offering 
complementary products tend to set higher prices than would even a 
monopoly seller . . . .'') (emphasis added); see also id. at 26368 & 
n.142); 8/18/20 Tr. 2642-43 (Shapiro); 8/25/20 Tr. 3655-56 
(Peterson).\253\
---------------------------------------------------------------------------

    \253\ Professor Willig did address the type of adjustment made 
by Professor Marx to her Shapley Value model in Phonorecords III, in 
response to a general question from the Judges. He testified as 
follows:
    I think it would matter if somehow the majors were collapsed 
into a single major. That would affect the results, but in a way 
that would deviate from the features of the marketplace that are 
realistic and important.
    8/5/20 Tr. 323 (Willig). However, the Judges find that changing 
the structure of the licensor-side of the market to eliminate 
complementary oligopoly effects is necessary. Although the Judges do 
not dispute Professor Willig's characterization of that 
complementary oligopoly power as ``realistic'' or ``important'' in 
an actual market for the licensing of noninteractive services, they 
find, as they did in Web IV, that a rate formula incorporating 
complementary oligopoly power is antithetical to an effectively 
competitive rate.
---------------------------------------------------------------------------

    Accordingly, the Judges agree with Professor Shapiro's criticism of 
Professor Willig's approach for failing to ``remov[e] complementary 
oligopoly power among the major record companies in his Shapley Value 
model,'' and ``for the very reasons . . . in Phonorecords III, giv[ing] 
additional returns to the major record companies by endowing them with 
complementary oligopoly power.'' Shapiro WRT at 57.\254\
---------------------------------------------------------------------------

    \254\ To be clear, the Judges do not disagree with Professor 
Willig as to the ``Must Have'' status of each Major as a ``Must 
Have.'' Rather, as noted in the Judges' prior discussion in this 
Determination regarding ``effective competition,'' they continue to 
find that an appropriate downward adjustment must be made to royalty 
rates that reflect the effects of a complementary oligopoly market 
structure. The Judges consider infra whether the record provides a 
basis for making the necessary effective competition adjustment to 
Professor Willig's Shapley Value Model.
---------------------------------------------------------------------------

ii. Did Professor Willig correctly reject the 2019 ``Long Range 
Scenario'' (LRS) for Pandora prepared by Sirius XM?
    Pandora also criticizes Professor Willig's decision to ignore the 
data contained in Sirius XM's LRS, Trial Ex. 4010, in his calculation 
of Pandora's profit margins over the 2021-2025 rate period. Although 
Professor Willig

[[Page 59533]]

contends (with no attribution) that this LRS was prepared solely for 
this proceeding, Pandora's Vice President of Financial Planning and 
Analysis, Jason Ryan, describes the LRS as a document ``generated by 
Sirius XM in the ordinary course of business,'' and is intended, inter 
alia, to ``guide management in the preparation of its operating budget 
and business plan for the next year.'' Ryan WRT ] 36 (emphasis added). 
According to Mr. Ryan, the budgets created through Sirius XM's LRS 
process ``are also a tool that the Board of Directors of Sirius XM uses 
throughout the year to gauge the health of the business and at the end 
of the year when assessing performance-based compensation of executive 
officers and employees.'' Id. More particularly, Mr. Ryan explains that 
the LRS process proceeds in the following manner:

    The [REDACTED] flow from our reasonable efforts to plan and 
predict the trajectory (contraction or growth) of the business.

Id. ] 38.
    Mr. Ryan's testimony is uncontroverted on this point. Further, 
there is no record evidence to support Professor Willig's 
``understanding'' that Sirius XM's purpose in creating this particular 
LRS was to use it as evidence in this proceeding. See Willig WDT app. D 
] 3 n.4. There is also no evidence to suggest that Sirius XM 
manipulated the financial information in this June 2019 LRS in order to 
affect the financial analyses undertaken in this proceeding.\255\
---------------------------------------------------------------------------

    \255\ When asked by the Judges why he included this language in 
his WDT, Professor Willig testified:
    I'm not sure that that's what I had in mind with those words. 
Rather, that it had been produced recently relative to the timing of 
the submission by me, and it was produced for these proceedings, and 
I didn't mean, as I recall, unless there's something that I'm 
forgetting, which is always possible, that the LRS data were 
actually created just for these proceedings as opposed to produced 
for these hearings. . . . I may have had some evidence of the 
specialization of the purpose, but I don't recall that now. But what 
I surely meant was, at least, that the production was for these 
hearings. And I'm well aware that LRS is something that Sirius had 
been preparing for its own purposes going back years . . . . So I 
don't remember whether it was really produced specifically for these 
purposes . . . .
    8/5/20 Tr. 366-67 (Willig) (emphasis added). The Judges find 
this response equivocal at best, and incomprehensible at worst.
---------------------------------------------------------------------------

    Nonetheless, as noted supra, Professor Willig independently 
justifies his reliance on the Scenario 2 merger financial data on the 
fact that ``Pandora's investment bankers prepared discounted cash flow 
valuation analyses using these Scenario 2 projections, which produced 
valuations in-line with the $3.5 billion market price paid by Sirius XM 
to acquire the company.'' Id. Accordingly, the Judges must examine on 
its own merits the Scenario 2 data upon which Professor Willig relies 
to compute Pandora's profit margins.
    Professor Shapiro takes issue with Professor Willig's claim that 
the price paid to Pandora shareholders by Sirius XM is supported by the 
Scenario 2 financial projections, noting that the acquisition price was 
determined ``in part by synergies not included in Scenario 2 which 
considers Pandora as a standalone company.'' Consequently, Professor 
Shapiro asserts that the ``discounted cash flow'' set forth in the 
Scenario 2 materials does not generate the acquisition price paid by 
Sirius XM. Shapiro WRT at 72-73.
    The Judges find that Professor Shapiro's criticism neither 
compromises the probative value of the Scenario 2 data nor Professor 
Willig's reliance on it to support his Shapley Value Model. Although 
the ``discounted cash flow'' contained in the Scenario 2 materials, 
standing alone, may not generate the actual acquisition price paid by 
Sirius XM, Professor Shapiro does not dispute that such information was 
relied upon by the investment bankers in their development of an 
appropriate price--one that ultimately was accepted by Pandora 
shareholders. That purchase price is not disconnected from projections 
based on Pandora's economic condition as of the date of the 
acquisition.\256\
---------------------------------------------------------------------------

    \256\ Professor Shapiro does not assert that the inclusion of 
synergistic value necessarily disqualifies financial projections as 
useful inputs into a Shapley model in this proceeding. In fact, he 
points out that the alternative and subsequent financial projection 
in the LRS, on which he relies, explicitly includes ``anticipated 
synergies'' in its financial projections. Shapiro WRT at 73.
---------------------------------------------------------------------------

    Moreover, the price that willing sellers (here, Pandora 
shareholders) agree to pay to a willing buyer (here, Sirius XM), 
reflects a price established in a market--the market for corporate 
control. See Henry G. Manne, Mergers and the Market for Corporate 
Control, 73 J. Pol. Econ. 110, 112 (1965) (``[C]ontrol of corporations 
may constitute a valuable asset'' and is purchased and sold in ``an 
active market for corporate control. . . .''). The fact that the 
purchase price incorporates not only Pandora's capitalized discounted 
cash flow, but also the synergistic value assigned to Pandora by the 
investment banks and Sirius XM, upon the consummation of the merger, 
does not negate the evidentiary usefulness of the financial data 
underlying that acquisition price. A company's shares, like any assets, 
are appropriately valued at their highest and best use. Given that the 
acquisition of Pandora by Sirius XM indeed occurred, it is reasonable 
to conclude that Pandora's highest and best use, in terms of market 
value, was as a division of Sirius XM.
    Accordingly, the Judges find that Professor Willig's reliance on 
Scenario 2 data was reasonable.\257\
---------------------------------------------------------------------------

    \257\ And as explained infra, the Judges' adoption of certain of 
Professor Shapiro's itemized critiques of Professor Willig's data 
applications essentially equates the rates generated by Professor 
Willig's reliance on the Scenario 2 data and Professor Shapiro's 
reliance on LRS data.
---------------------------------------------------------------------------

iii. Professor Shapiro's Calculation of Scenario 2 ``Marginal Profit'' 
After Applying the Foregoing Criticisms
    Professor Shapiro combines the foregoing criticisms based on 
Professor Willig's Shapley Value Model data inputs into a recalculation 
of marginal profits that is otherwise consistent with Professor 
Willig's Scenario 2 approach. The recalculation with regard to the 
subscription service is set forth in Figure 6 of Shapiro WRT at 47, and 
the recalculation with regard to the ad-supported service is set forth 
in Figure 7 of Shapiro WRT at 48. Each figure is reproduced below:

Figure 6: Pandora Projected Margins: Pandora Plus Subscription Service 
[RESTRICTED]

    [REDACTED]

    Figure 6 shows that substituting Professor Shapiro's changes for 
Professor Willig's original estimated data inputs results in a 
significantly lower per-performance margin at Pandora Plus, the 
subscription service. Shapiro WRT at 47. (As noted supra, Professor 
Willig also made most of these adjustments in his WRT.) Specifically, 
whereas Professor Willig calculated a per-performance margin of 
$0.0048, Professor Shapiro re-calculated a per-performance margin of 
$[REDACTED].\258\
---------------------------------------------------------------------------

    \258\ The impact of these adjustments on the royalty estimates 
generated by Professor Willig's Shapley Value Model, together with 
the impact of the adjustments to Professor Willig's opportunity cost 
calculations, is set forth infra.
---------------------------------------------------------------------------

Figure 7: Pandora Projected Margins: Advertising-Supported Service 
[RESTRICTED]

    [REDACTED]

    Figure 7 shows that substituting Professor Shapiro's changes for 
Professor Willig's original estimated data inputs results in a 
significantly lower per-performance margin at Pandora Plus, the 
subscription service. Shapiro WRT at 46-47. (As noted supra, Professor 
Willig also made most of these adjustments in his WRT.) Specifically, 
whereas Professor Willig calculated a per-performance margin of 
$0.0042, Professor Shapiro re-calculated a per-

[[Page 59534]]

performance margin of $[REDACTED].\259\
---------------------------------------------------------------------------

    \259\ The impact of these adjustments on the royalty estimates 
generated by Professor Willig's Shapley Value Model, together with 
the impact of the adjustments to Professor Willig's opportunity cost 
calculations, is set forth infra. The Judges also note that Figures 
6 & 7 show that Professor Shapiro's adjustments and corrections to 
the original profit margins in Professor Willig's Shapley Value 
Model result in Scenario 2 profit margins that are essentially 
identical to the profit margins estimated by Professor Shapiro in 
the ``alternate forecasts'' based on the LRS and Merger Proxy 
Scenario 1A. Shapiro WRT, Figs. 6 & 7 (last two columns). 
Accordingly, there is no necessity to consider those alternatives as 
necessary to establish different royalty rates in this proceeding.
---------------------------------------------------------------------------

    The Judges adopt these adjustments to Professor Willig's profit 
margin calculations in his Shapley Value Model.\260\
---------------------------------------------------------------------------

    \260\ The Judges explain in text accompanying note 241, supra, 
that they rely on Mr. Ryan's categorizations and allocations of 
revenues and costs because of his competency with regard to these 
issues, given his role as a financial executive, and because of the 
Judges' perception of his credibility as a witness. By contrast, 
SoundExchange did not proffer an accounting or financial expert to 
testify regarding these categorization and allocation issues, 
leaving these issues to an economist, Professor Willig. Although 
Professor Willig is without question an esteemed economist, the 
Judges find that he is not nearly as competent as Mr. Ryan to give 
testimony regarding Pandora's financial and accounting issues. See 
also 8/5/20 Tr. 306-08 (Willig) (Professor Willig was qualified as 
an expert in this case in ``microeconomics, industrial organization, 
the use of statistics in economics, and the use of survey research 
and economics,'' and was previously qualified in other matters also 
as an expert in the economics of antitrust and intellectual property 
issues.). Finally, the Judges note that Professor Willig himself, in 
his role as an expert economic witness, explained that the 
differences in Pandora's marginal profits did not drive his Shapley 
Value Model results, because the opportunity costs of the record 
companies were so great as to dominate the royalty payout due to 
them pursuant to his modeling. Id. at 555 (``the opportunity costs 
almost exhaust[] the pre-royalty distributor profits 
[because][a]fter the distributor pays out to the labels their 
opportunity costs, there is not very much left . . . to split among 
the parties.'').
---------------------------------------------------------------------------

iv. Alleged Errors in Professor Willig's Scenario 2 Opportunity Cost 
Calculations
    Professor Shapiro alleges that Professor Willig made several errors 
in his calculation of opportunity costs that resulted in an 
overestimation of the opportunity costs incurred by record companies in 
his Shapley Value Model.\261\ More particularly, Professor Shapiro 
addresses Professor Willig's calculation of these opportunity costs 
through the latter's application of the ``diversion rate'' \262\ 
estimations in the survey undertaken by Professor Gal Zauberman 
(Zauberman Survey) to estimate the extent to which listeners to 
noninteractive services reported they would divert their listening to 
alternative forms of music listening if noninteractive services were no 
longer available.
---------------------------------------------------------------------------

    \261\ To be clear, the opportunity cost issues addressed in this 
section of the Determination do not involve Professor Shapiro's 
broader economic argument regarding the asserted ``Must Have'' 
status of each Major, and the impact of that status on the 
calculation of opportunity costs.
    \262\ A ``diversion rate'' as used in the Zauberman Survey and 
as applied by Professor Willig is the percentage of surveyed 
listeners to a noninteractive service who would switch (divert) to 
another form of listening to music if the noninteractive service was 
not available. Professor Willig multiplies each percentage diversion 
rate by the royalty generated per-subscriber (or per-user, for the 
ad-supported service) by that other form of listening. The sum of 
those products equal Professor Willig's opportunity cost estimate. 
Willig WDT ] 47 & fig.6. As discussed supra, that opportunity cost 
estimate constitutes an economic cost that record companies must 
recover (i.e., as a fallback value). The usefulness of the Zauberman 
Survey to calculate such switching, in the face of the Services' 
criticism, is separately discussed, elsewhere in this Determination.
---------------------------------------------------------------------------

    Professor Shapiro calculates a lower estimated opportunity cost 
than calculated by Professor Willig through the latter's application of 
the Zauberman Survey. Specifically, Professor Shapiro alleges that 
Professor Willig made errors that inflated the opportunity costs 
attributable to purchases of CDs, vinyl records (vinyl) and digital 
downloads that the survey data indicated would occur if noninteractive 
services were unavailable.
(A) Royalties per Purchaser of CDs, Vinyl & Digital Downloads
    First, Professor Shapiro alleges that Professor Willig erroneously 
calculates the ``CD/Vinyl/Digital Download Royalties per Purchaser'' 
presented in Exhibit D.3 of the Willig WDT. Professor Willig first 
separately calculates these monthly per-purchaser royalties for each of 
the three product subcategories--CDs ($[REDACTED] monthly per 
purchaser), Vinyl ($[REDACTED] monthly per purchaser) and Digital 
Downloads ($[REDACTED] monthly per purchaser). Willig WDT, app. D, ex. 
D.3 (Row ``I'' therein). The Zauberman Survey reported the diversion to 
all three of these purchases as a single diversion. But to calculate 
opportunity costs accurately, Professor Willig needs to unbundle the 
monthly per purchaser royalties for each of these three products 
separately. Accordingly, in order to generate his estimated opportunity 
cost calculation from the bundled categorization in the Zauberman 
Survey, Professor Willig attempts to calculate the ``Weighted Average'' 
of these three royalty figures. Id. (Row ``I,'' Column 4 therein). He 
calculates his opportunity cost total for this category--a monthly per 
purchase royalty of $[REDACTED]--by weighting each of these three 
categories by their share of retail revenue, inter se. Id. (Row ``G'' & 
n.4 therein).
    According to Professor Shapiro, weighting by share of retail 
revenue is incorrect. The correct weighting, he asserts, is by the 
number of units purchased per buyer of each of the three formats. 
Shapiro WRT, app. D at 81. To demonstrate that weighting by units 
purchased is the appropriate method, Professor Shapiro presents a step-
by-step example:

1. Assume 10 individuals buy CDs and 10 individuals buy Digital 
Downloads
2. Assume each CD buyer spends an average of $3 per month for CDs
3. Assume each Digital Download buyer spends $9 per month for Digital 
Downloads
4. So, total retail revenues are $30 per month for CDs ($3 x 10 people)
5. And, total retail revenues are $90 per month for Digital Downloads 
($9 x 10 people)
6. Assume net royalties paid are 50% of retail revenue for each unit of 
either product
7. So, CD monthly royalties equal $15 (50% of $30)
8. And, Digital Download royalties equal $45 (50% of $90)
9. Total royalties are therefore $60 ($15 + $45)
10. Because there are 20 assumed buyers (10 for each product) average 
monthly royalties per buyer = $3 ($60 / 3)
11. But under Professor Willig's approach, the answer is NOT $3.
12. Professor Willig instead weights the monthly royalties by the share 
of retail revenue attributable to each product, CDs or Digital 
Downloads.
13. For CDs, this represents 25% of total retail revenue ($3 x 10 
people = $30 = 25% of $120)
14. For Digital Downloads, this represents the remaining 75% of total 
retail revenue ($9 x 10 people = $90 = 75% of $120)
15. The 25% of total retail revenue attributable to CDs is one-third of 
the 75% of total retail revenue attributable to Digital Downloads
16. So, weighting monthly royalty via retail revenue would be done via 
the following ratio:
    $30 CD revenue x ($1.50 royalty per buyer) + ($90 Digital Download 
revenue x $4.50 royalty per buyer) / 30 + 90 = ($45 + $405) / ($120) = 
$450 / $120 = $3.75
17. $3.75 is 25% greater than $3.00.

Shapiro WRT at 81-82.
    Professor Willig acknowledges that Professor Shapiro's approach is 
the correct way to calculate opportunity

[[Page 59535]]

costs for these physical royalties. 8/5/20 Tr. 504 (Willig) 
(``Professor Shapiro pointed out that maybe I wasn't perfectly logical 
in where I applied my weights, and I think there was some merit to that 
point that Professor Shapiro made, so I went back and I changed that. . 
. .'').\263\
---------------------------------------------------------------------------

    \263\ Professor Willig attempted to add new testimony at the 
hearing regarding what he asserted was an unrelated but offsetting 
error made by Professor Shapiro in his calculations of these 
particular opportunity costs that, combined with Professor Willig's 
admitted error, generated a higher opportunity cost of $[REDACTED] 
for this category. However, Pandora's counsel interposed a prompt 
objection, arguing that this proffered testimony would constitute 
``new analysis . . . that's out of bounds.'' SoundExchange's counsel 
did not respond when Pandora's counsel asserted this objection, and, 
after a scheduled 15 minute mid-afternoon recess, SoundExchange's 
counsel proceeded to question Professor Willig on other matters. The 
Judges then, sua sponte, afforded SoundExchange's counsel an 
opportunity to respond to the objection by Pandora's counsel that 
had prevented Professor Willig from testifying on this topic before 
the recess, so that the Judges could decide whether to sustain or 
overrule the objection raised by Pandora's counsel. However, 
SoundExchange's counsel declined to address the objection, claiming 
(incorrectly) that the testimony that was the subject of the 
objection ``is already in the record.'' 8/5/20 Tr. 504-05; 514-15 
(colloquy). Thus, no such testimony regarding an alleged offset as 
to Professor Shapiro's physical opportunity cost correction 
(accepted by Professor Willig) is in the record. (In SX PFFCL ]] 
635-636, SoundExchange attempts to rely on counsel's own analysis of 
the record to substitute for the missing testimony by Professor 
Willig on this subject. That is plainly unacceptable.).
---------------------------------------------------------------------------

    The Judges find Professor Shapiro's re-calculation of these royalty 
weights--agreed to by Professor Willig--to be appropriate. The purpose 
of this opportunity cost analysis is to estimate the number of units of 
each subcategory of product (CDs, Vinyl and Digital Downloads) that 
would be purchased by each listener to a noninteractive service if that 
service was no longer available, and then multiply the number of units 
attributable to each subcategory by the royalty attributable to each 
item purchased. This exercise does not implicate retail prices. 
Accordingly, Professor Willig's use of retail prices as weights 
introduces an irrelevant factor.
    Applying the foregoing principles, the weighted average opportunity 
cost for these three products is $[REDACTED], rather than the 
$[REDACTED] in the Willig WDT, app. D, D.3 (Row ``I,'' column 4 
therein). See Shapiro WRT, app. D at 82 (Figure D.1: Correction to 
Exhibit D.3 in the Willig WDT, Revised Exhibit D.3 (Row J therein).
(B) Alleged Overestimation of Incremental Expenditures on CDs/Vinyl/
Digital Downloads
    Professor Shapiro's next criticism with regard to Professor 
Willig's opportunity cost analysis is that it ``overestimates the 
incremental expenditures that listeners would make on CDs, Vinyl, and 
Digital Downloads if statutory webcasting were no longer available.'' 
Shapiro WRT at 83. More specifically, Professor Shapiro asserts that 
Professor Willig makes two errors in this computation: First, he avers 
that Professor Willig allegedly overestimates the amount of money 
individuals would spend on CDs, Vinyl and Digital Downloads, an alleged 
error that causes Professor Willig to inflate the opportunity cost 
input into the Shapley Value Model. Second, according to Professor 
Shapiro, Professor Willig allegedly underestimates the number of 
individuals who would switch from a noninteractive service and to CDs, 
Vinyl and Digital Downloads, an alleged error by which Professor Willig 
actually incorrectly reduces the opportunity cost input in the Shapley 
Value Model. Id.
    With regard to the allegation of overestimating the amount of 
spending on these three products, Professor Shapiro understands that 
Professor Willig assumes that people who switch some of their listening 
from noninteractive to CDs, Vinyl and Digital Downloads will then 
incrementally ``spend as much as the average consumer who purchases 
those media types.'' Id.\264\ As Professor Shapiro notes, this 
assumption carries with it the implicit assumption that these switching 
consumers did not buy any of these three products when they were 
listening to a noninteractive service, but then bought the same amount 
of these music formats as an average user subsequent to the 
hypothetical elimination of noninteractive services. Id. In fact, 
Professor Willig acknowledges that he treats these substitutions in the 
same all-or-nothing manner as the binary choice of whether to subscribe 
to an interactive streaming service if noninteractive services were 
unavailable. See Willig WDT, app. E, ] 13 (``I estimate incremental 
royalties from diversion to [CDs, Vinyl and Digital Downloads] in the 
same way as for [subscriptions to] Paid-[On Demand] and [Sirius 
XM].'').
---------------------------------------------------------------------------

    \264\ As explained above, according to Professor Willig, the 
weighted average per consumer is $[REDACTED] per month. However, as 
corrected by Professor Shapiro and credited by the Judges, the 
properly weighted average monthly spending for these products in the 
Scenario 2 analysis is $[REDACTED] per month.
---------------------------------------------------------------------------

    Professor Shapiro opines that the proper approach is to treat the 
purchase of each of these three products in a manner analogous to the 
use of an ad-supported service, where the listener makes marginal 
listening decisions on a per performance basis. In support of his 
argument, Professor Shapiro enlists a useful supporter--Professor 
Willig himself--who, in SDARS III, converted royalties from incremental 
purchases of these three products on a per performance basis. Shapiro 
WRT at 83 n.205 (citing Professor Willig's SDARS III Written Direct 
Testimony at B-5 to B-6). In further reliance on Professor Willig's own 
analysis (in the present proceeding), Professor Shapiro points out that 
a document on which Professor Willig relied, Trial Ex. 5039, showed 
that on-demand listeners spend less per month on these three products 
than the average purchaser, generating only $[REDACTED] in monthly 
royalties, substantially less than the $[REDACTED] weighted average per 
month calculated by Professor Willig or the $[REDACTED] recalculated 
weighted monthly average computed by Professor Shapiro. Professor 
Shapiro opines that it is unreasonable to conclude (as did Professor 
Willig), that noninteractive listeners--with their revealed lower 
Willingness-to-Pay for a streaming service--would spend multiple times 
more money than on demand listeners on CDs, Vinyl and Digital 
Downloads. Shapiro WRT at 83 n.206.
    Professor Shapiro further relies on SoundExchange's own survey 
expert to support his critique of Professor Willig's estimation of 
opportunity cost emanating from the shift by some listeners to 
purchases of these three products. That survey expert, Professor 
Zauberman, reports that such diverted ad-supported listeners would 
allocate only 14.1% of their diverted time to these three products, and 
such diverted subscribing listeners would allocate even less of their 
diverted time, 9.9%, to these three products. Shapiro WRT at 84 n.207. 
According to Professor Shapiro, it is untenable for Professor Willig to 
assume that listeners and subscribers who divert such small fractions 
of their diverted time to these three products would also purchase 
these products in the same quantities (generating the same royalties) 
as all consumers who purchase these three products. Shapiro WRT at 84.
    Instead, Professor Shapiro claims that it is more reasonable to 
assume that people who switch from noninteractive services to these 
three products ``would generate incremental royalties consistent with 
the proportion of time they divert. . . .'' Id. Once more, he enlists 
Professor Willig in support of his position, noting that, in SDARS III, 
Professor Willig's opportunity cost calculation applied the same 
assumption--estimating incremental

[[Page 59536]]

royalties from CDs and downloads as proportional to incremental 
listening to these products. Id.
    Professor Shapiro attempts to apply this ``proportionate 
diversion'' assumption by applying data from the ``Share of the Ear'' 
survey to his spending calculations. First, he incorporates in this 
analysis his calculation of the weighted average spending of 
consumers--$[REDACTED] per month--on all three products. Second, 
Professor Shapiro calculates the incremental share of time that people 
would devote to these three products after switching from 
noninteractive services. Here, he relies on the ``Share of the Ear'' 
survey, which reports that Pandora subscribers allocate about 
[REDACTED]% of their music listening time to streaming music services, 
of which [REDACTED]% is spent listening to Pandora. Thus, Pandora 
subscribers spend [REDACTED]% ([REDACTED]% x [REDACTED]%) of their 
music listening time on Pandora. And, as noted above, according to the 
Zauberman Survey, listeners to ad-supported noninteractive services 
will divert an average of 14.1% of their time to these three products, 
and noninteractive subscribers will divert an average of 9.9% of their 
time to these three products.
    Putting these data points together, Professor Shapiro explains that 
``[t]he product of the share of time allocated to Pandora and the 
diversion rate to these three products [yields] the incremental time 
allocated to these [three products] in the absence of webcasting. Id. 
at 85. So, he calculates that users of the ad-supported service will 
allocate an incremental [REDACTED]% (i.e., [REDACTED]% x [REDACTED]%) 
of their listening time to these three products and, in the same 
manner, subscribers will allocate [REDACTED]% (i.e., [REDACTED]% x 
[REDACTED]%) of their listening time to these three products. Id.
    The final step in Professor Shapiro's analysis is his comparison of 
this incremental listening time to the average time listening to these 
three products. To take this step, Professor Shapiro applies additional 
data from the ``Share of the Ear Survey.'' That survey reports that the 
average music consumer spends [REDACTED]% of his or her listening hours 
listening to ``Owned Music,'' which is another way of referring to CDs, 
Vinyl and Digital Downloads. As Professor Shapiro notes, this implies 
that, for listeners switching away from the ad supported noninteractive 
services, incremental spending increases for these three products by 
approximately [REDACTED]% (i.e., [REDACTED]%/[REDACTED]%), and, for 
listeners switching away from subscriptions to noninteractive services, 
the increase is about [REDACTED]% (i.e., [REDACTED]%/[REDACTED]%). 
Shapiro WRT app. D at 84-85.\265\
---------------------------------------------------------------------------

    \265\ Professor Shapiro acknowledges that the data in the 
``Share of Ear'' survey is sufficient only to render his estimates 
informed approximations, because that survey [REDACTED]. However, 
Professor Shapiro believes this latter point makes his approximation 
more favorable to SoundExchange, because he posits that Pandora 
Premium subscribers listen to more songs than Pandora Plus 
subscribers (apparently because their willingness to pay a higher 
subscription price reveals their relatively greater preference to 
listen to songs). Thus, because the switching subscriber group in 
the survey includes such increased listening, their switching 
decisions would be greater than the switching behavior of Pandora 
Plus subscribers alone, raising the reported diversion ratio for 
these three products, raising the calculated opportunity cost and, 
accordingly, increasing the proposed royalty rate for subscription 
services derived by Professor Willig's Shapley Value Model. Id. at 
85 n.210. The Judges acknowledge these limitations in the Share of 
Ear survey, but they agree with Professor Shapiro that these issues 
are insufficient to reject his criticisms based on that survey's 
data.
---------------------------------------------------------------------------

    Professor Shapiro acknowledges that he is using data on switches in 
listening time (from noninteractive services to these three products) 
in order to estimate changes in the total monthly amount spent on those 
three products. Id. at 85. However, he considers increases in listening 
to be a reasonable proxy for increased purchases, rather than a 
confounding conflation of two data sets. Id. The Judges agree, and find 
his use of this change in listening to be a reasonable window into the 
likely changes in purchases. People who would increase their listening 
to music via these three products would need to purchase such 
products,\266\ and it would be highly irrational for people to purchase 
these new products but not ``consume'' them, in order to substitute for 
their lost listening to noninteractive services.
---------------------------------------------------------------------------

    \266\ People who would choose instead to substitute (in whole or 
part) listening to their already-owned CDs, Vinyl and Digital 
Downloads would not necessarily purchase new quantities of these 
three products, but because that potential behavior is ignored in 
Professor Shapiro's analysis here, the opportunity cost is skewed 
higher by his decision to ignore such consumer behavior in this 
context. (However, Professor Shapiro does attempt to adjust for the 
additional purchases by switchers who also switch by listening to 
their existing collections of these three products, as discussed 
below.)
---------------------------------------------------------------------------

    Applying the foregoing changes, Professor Shapiro makes the 
following revisions to Professor Willig's calculation of per person 
monthly incremental royalties for people who switched from 
noninteractive services to these three products:

    For switching from ad-supported noninteractive services, 
Professor Shapiro calculates incremental royalties of $[REDACTED] 
(i.e., $[REDACTED] x [REDACTED]% x ([REDACTED]%/[REDACTED]%), less 
than Professor Willig's calculation of $[REDACTED]; and
    For switching from subscription noninteractive services, 
Professor Shapiro calculates incremental royalties of $[REDACTED] 
(i.e., $[REDACTED] x [REDACTED]% x ([REDACTED]%/[REDACTED]%), less 
than Professor Willig's calculation of $[REDACTED].

Id. at 85-86.
    The Judges find Professor Shapiro's foregoing corrections to be 
reasonable and appropriate.
    Professor Shapiro's next opportunity cost adjustment, relating to 
these three products pertains to what he alleges is Professor Willig's 
failure to address incremental purchases by ``consumers who already 
listen to [owned] CDs, Vinyl, and Digital Downloads . . . .'' Id. at 
86. As noted supra, this correction is contrary to Pandora's interest 
because it increases the opportunity cost associated with diversions to 
these three products, and, ceteris paribus, increases the royalties 
paid by Pandora under Professor Willig's Shapley Value Model.
    Professor Shapiro notes that the Zauberman Survey finds that 69% of 
listeners to an ad-supported noninteractive service and 67% of 
listeners to a subscription noninteractive service would divert some of 
their time to these three products in the absence of such 
noninteractive services. However, Professor Willig does not estimate 
any opportunity cost associated with these listeners.\267\ This result 
suggests that these individuals would divert some time to buying and 
listening to new purchase of these three products, thereby creating an 
additional opportunity cost that would generate incremental royalties 
to the record companies under Professor Willig's Shapley Value Model. 
Shapiro WRT, app. D at 86.
---------------------------------------------------------------------------

    \267\ Professor Willig classifies respondents in the Zauberman 
survey as ``new'' buyers of these three products only if they 
indicate both that they have not listened to CDs, Vinyl, and Digital 
Downloads in the previous 30 days and that they would listen to 
these media in case the webcaster went away. Under this definition, 
Professor Willig finds that [REDACTED]% of the listeners to the 
advertising-supported webcasters and [REDACTED]% of listeners to the 
subscription-based webcasters qualify as new buyers of CDs, Vinyl, 
and Digital Downloads. See Willig WDT, Fig.6.
---------------------------------------------------------------------------

    According to Professor Shapiro, the correct opportunity cost 
associated with these purchases can be estimated as the product of: (1) 
These listener shares ([REDACTED]% for ad-supported listeners and 
[REDACTED]% for

[[Page 59537]]

subscribers, multiplied by (2) the incremental monthly royalties per 
buyer of these three products, which Professor Shapiro (as discussed 
above) calculated as $[REDACTED] for ad-supported switching and 
$[REDACTED] for subscription switching.
    Professor Shapiro therefore adjusts the opportunity cost associated 
with switching to these three products to $[REDACTED] (i.e., 
$[REDACTED] x [REDACTED]%) for switching ad-supported users and to 
$[REDACTED] (i.e., $[REDACTED] x [REDACTED]%) for switching 
subscribers. Shapiro WRT, app. D at 86; see also id.at Fig. 8.
    The Judges find Professor Shapiro's adjustments in connection with 
the three products (CDs, Vinyl and Digital Downloads) to be reasonable 
and appropriate bases to increase the opportunity cost arising from 
diversions to these products.
(C) The Treatment of Non-Music and AM/FM Diversion in Professor 
Willig's Opportunity Cost Analysis
    Google's economic expert witness, Dr. Peterson, finds fault with 
Professor Willig's application of the results of the Zauberman Survey, 
by which he assumes that all the plays diverted from noninteractive 
services would be recaptured through listeners' accessing of royalty-
bearing plays. Specifically, Dr. Peterson testifies as follows:

    [Professor] Willig's model assumes that the entire ad-supported 
non-interactive statutory streaming business can be shut down, and 
the music industry won't lose a single performance. So that's 
inconsistent with how economists think of choice, and it's 
inconsistent with commonsense. If there are people whose favorite 
way to listen to music is through a Pandora-like service, we would 
certainly expect them to expand their listening hours as well and 
find opportunities to use that service when they would not listen to 
another service.
    And . . . the evidence for this is . . . in the Zauberman 
surveys, where if you take the service away, some people say they 
will spend some of their day doing something other than listening to 
music. So it is incorrect to assume that all of the performances are 
preserved if you shut down the service.

8/25/20 Tr. 3734-35 (Peterson). This point ties in directly to the 
calculation of opportunity cost. As Dr. Peterson further notes, because 
the Zauberman Survey asks respondents how they would replace time spent 
listening to noninteractive services, those who would substitute non-
royalty bearing activities would, necessarily, if noninteractive 
services were available, substitute away from the non-royalty bearing 
activities and listen to royalty-bearing noninteractive services. 8/25/
20 Tr. 3735 (Peterson) (``[T]he consequence . . . of course, is that if 
you join the [noninteractive] service, [the label] gain[s] . . . 
performances and the opportunity cost of the performances on the 
services is reduced as a result [and] this leads to an overstatement of 
opportunity costs.'') (emphasis added).
    During cross-examination, Dr. Peterson made this point in greater 
detail in a manner that is well-worth quoting in full:

    Q. And do you recall that one of the [Zauberman Survey] 
switching options was do something other than listen to music?
    A. That is an option in the Zauberman Survey that I think is not 
properly reflected in Dr. Willig's model.
    Q. Well, just looking at the survey, since the survey does 
contemplate people doing something other than listening to music, if 
a . . . free non-interactive service was taken away, some people 
would go back to doing things other than istening to music, right?
    A. That's correct.
    Q. And doesn't that account for the idea that free non-
interactive services could expand listening overall?
    A. That free non-interactive services would expand listening 
overall?
    Q. Right.
    A. Oh, that's exactly my point. So . . . Dr. Willig's model says 
if there are a million plays on the service, and the must-have 
labels shut it down, a million plays are diverted and a million 
plays are collected in the aggregate by the labels . . . . That's 
the assumption that's built into his model. And I'm asserting, I 
think what you just said, which is that that's not a very good 
assumption because some people would say, well, I loved Pandora but 
since I can't have Pandora . . . I'm going to read a book. And so 
there would be fewer performances overall. And so that aspect of Dr. 
Zauberman's survey is not at all reflected in the mathematics of Dr. 
Willig's model. And that's--that's a problem.
    Q. But looking at the survey, it does allow for the possibility 
that the--that the service could expand listening or not expand 
listening? That option is there in the survey, right?
    A. But not in his model. I mean, it--and it actually doesn't 
really play into his opportunity cost either, which is very 
important here. So I disagree wholeheartedly with what you're 
saying.

8/25/20 Tr. 3799-3800 (Peterson) (emphasis added).
    The Judges agree with Dr. Peterson. The Shapley Value Model 
constructed by Professor Willig overstates the opportunity costs 
because it does not consider the ``opportunity benefits'' \268\ 
generated by listeners to noninteractive services who would otherwise 
divert to a non-royalty bearing activity, such as reading a book, as 
Dr. Peterson notes. But this defect in Professor Willig's opportunity 
cost calculation goes further, extending to any non-royalty bearing 
activity undertaken by a diverted listener, including listening to AM/
FM (terrestrial radio).
---------------------------------------------------------------------------

    \268\ See Ferraro and Taylor, supra, at 7 (``An avoided benefit 
is a cost, and an avoided cost is a benefit. Thus, the opportunity 
cost . . . is . . . the net benefit forgone.'') (emphasis added).
---------------------------------------------------------------------------

    As noted supra, AM/FM (terrestrial) radio stations do not pay 
royalties for their performances of sound recordings (because the 
Copyright Act does not confer a general public performance right on 
sound recording copyright owners). However, if noninteractive services 
attract listeners who would otherwise divert to terrestrial radio (as 
survey data in evidence indicate), there is a ``negative opportunity 
cost'' (i.e., an ``opportunity benefit'') foregone by the record 
companies if they were to refuse to license noninteractive services. 
For example, at current statutory rates, the foregone ``opportunity 
benefit'' would be $0.0018 per play listened to by terrestrial 
listeners who would have otherwise accessed music via an ad-supported 
noninteractive service if it existed, and $0.0023 per play listened to 
by terrestrial listeners who would have otherwise accessed music via a 
subscription noninteractive service if it existed.
    These ``opportunity benefits'' foregone are likely not de minimis, 
as the surveys in evidence in this proceeding indicate a significant 
amount of diversion to these alternatives by respondents who completed 
the survey. See, e.g., Zauberman Survey ]] 24-27 (85% of ad-supported 
noninteractive listeners would spend 27% of their diverted time 
listening to AM/FM radio over-the-air, and 79% of noninteractive 
subscribers would spend 18% of their diverted tine listening to AM/FM 
radio in this royalty-free manner--if their form of noninteractive 
services were unavailable). See also id. (48% of ad-supported 
noninteractive listeners would spend 16% of their diverted time doing 
something other than listening to music and, for subscribers to 
noninteractive services, 50% would spend 10% of their diverted time in 
these non-royalty-bearing activities). As noted supra, the 
``opportunity benefit'' of these lost listeners is $0.0018 and $0.0023 
for the plays diverted during such time periods from the ad-supported 
and subscriber noninteractive services, respectively.
    SoundExchange notes though that Professor Willig engaged in a 
similar treatment of AM/FM listening, with his so-called ``fork in the 
road approach,'' that the Judges adopted in SDARS III, leaving 
interactive royalties unadjusted downward (thus not adjusting

[[Page 59538]]

downward to correct for their complementary oligopoly power and not 
adjusting upward to reflect the absence of sound recording royalties 
for AM/FM plays). But, the NAB points out, although Professor Willig's 
``fork in the road'' testimony in SDARS III went unchallenged on cross-
examination and in Sirius XM's proposed findings, see SDARS III, 83 FR 
at 65238, the Services are challenging the point here. Thus, the NAB 
asserts that the appropriateness of that approach is properly at issue 
in this proceeding.
    The Judges agree with the NAB in this regard. All rate proceedings 
are conducted de novo, and any factual determinations made in a prior 
proceeding therefore certainly can be considered anew now.
    The Judges find that Professor Willig's ``fork in the road'' 
approach does not adequately address the opportunity cost issue raised 
by Dr. Peterson. It is insufficient and off-point to treat lost 
listeners who divert to any non-royalty bearing alternatives as simply 
irrelevant to the complementary oligopoly premium attached to 
interactive opportunity costs. In fact, as Dr. Peterson makes clear, 
such non-royalty bearing alternatives--because they substitute for 
royalty-bearing noninteractive plays--generate what can be called 
``opportunity benefits.''
    In addition to the ``opportunity benefit'' point addressed above, 
the NAB makes a separate legal criticism of Professor Willig's ``fork 
in the road'' approach. Specifically, the NAB argues:

    [T]o the extent including supracompetitive royalty inputs in an 
opportunity cost analysis yields supracompetitive outputs, those 
outputs are inconsistent with the established legal standard 
requiring the rates set here to reflect effective competition. Web 
IV, [81 FR 26316] at 26332. Further, as a legal matter, there is a 
fundamental difference between complementary oligopoly rates for 
sound recording rights in interactive services and the lack of 
royalties for terrestrial radio play. The latter is a function of a 
Congressional judgment enshrined in federal copyright law. See 17 
U.S.C. 106(6); id. sec. 114(a). The existence of complementary 
oligopoly power, in contrast, has never been blessed by Congress. To 
the contrary, this body has always regarded the majors' 
complementary oligopoly power as a feature of the market that must 
be corrected in establishing rates here. There is no sense in which 
it would be legally appropriate for the Judges to similarly 
``correct'' lack of royalties resulting from the lack of a legally 
recognized public performance right for terrestrial radio play of 
sound recordings.

NAB PFFCL ] 136 n.34. In response, SoundExchange argues as follows:

    For the first time at any point in this proceeding, NAB offers a 
lengthy argument against the ``fork in the road'' analysis offered 
by Professor Willig and endorsed by the Judges in SDARS III. See [83 
FR 65210] at 65238. This is completely inappropriate argumentation 
that, despite being offered as a ``finding of fact,'' is tellingly 
bereft of even a single supportive citation to the record in this 
case. See NAB PFFCL p.1 n.1. Notably, both Dr. Leonard and Professor 
Shapiro made explicit at trial that they were not challenging this 
concept.

SoundExchange's Corrected Replies to NAB's Proposed Findings of Fact 
and Conclusions of Law ] 136 (footnote) (SX RPFFCL (to NAB)).
    SoundExchange's reply is unavailing. The NAB's argument is not in 
the form of a proposed ``finding of fact.'' Rather, it quite clearly is 
in the nature of a proposed ``conclusion of law.'' \269\ Further, 
SoundExchange has not substantively replied to the NAB's argument.\270\
---------------------------------------------------------------------------

    \269\ The NAB did not label ] 136 n.34 of its PFFCL as a 
conclusion of law. See NAB PFFCL at 1 n.1. However, the parties' 
labeling of separate portions of their post-hearing filings as 
proposed ``findings of fact'' or ``conclusions of law'' does not 
prevent the Judges from independently considering whether a 
particular proposal is either factual or legal, based upon the 
substance of the proposal. Indeed, because these submissions are 
merely proposals, neither the substance nor labeling of the 
submissions by the parties is binding on the Judges. Here, the NAB 
specifically argues that it would not be ``legally appropriate'' for 
the Judges to offset the complementary oligopoly effect based on the 
lack of a ``legally recognized public performance right for 
terrestrial radio play of sound recordings.'' NAB PFFCL ] 136 n.34 
(emphasis added). Clearly, as a matter of substance, this assertion 
is a proposed legal conclusion.
    \270\ SoundExchange neither responded substantively to this 
legal argument in its post-hearing Reply to the NAB, nor during 
closing arguments that followed the submission of the Proposed 
Findings of Fact and Conclusions of Law. See 11/19/20 Tr. 6062 et 
seq. (closing arguments).
---------------------------------------------------------------------------

    Moreover, the Judges conclude that the legal substance of the NAB's 
argument is persuasive. The absence of a public performance right for 
sound recordings on terrestrial radio--and hence the absence of any 
attached royalty obligation--was a statutory decision by Congress. The 
Judges identify no legal authority by which they may use that 
Congressional decision as an offset against the effect of complementary 
oligopoly power on the rate setting process. Moreover, because there is 
no royalty paid by terrestrial broadcasters for playing sound 
recordings, there is no basis for the Judges to simply assume either 
the existence or extent of a positive royalty, if such a public 
performance right actually existed. Indeed, regardless of the economic 
merits, the issue of whether such a public performance right and an 
associated royalty obligation should be created remains a matter of 
dispute in the legislative arena. Compare https://www.soundexchange.com/advocacy/closing-the-amfm-radio-royalty-loophole/ 
(asserting that ``the reality is that AM/FM radio--terrestrial 
broadcast radio--uses music to draw an audience that in turn allows 
broadcasters to bring in $14.5 billion/year of revenue from 
advertising. While paying nothing for their primary product!'') with 
https://www.nab.org/documents/newsroom/pressrelease.asp?id=4130 
(asserting the allegedly ``tremendous benefits of free, promotional 
airplay for musicians and labels.'').
    Finally, the Services also make a further factual challenge 
regarding Professor Willig's ``fork in the road approach.'' While not 
directly challenging that approach as a device for offsetting 
complementary oligopoly effects from the zero terrestrial royalty 
payments, Dr. Leonard, the NAB's economic expert witness, asserts that 
this ``fork in the road'' approach does not address the complementary 
oligopoly impact of the ``Must Have'' nature of the Majors, which makes 
a noninteractive service's ``no license'' negotiating strategy 
untenable. 8/24/20 Tr. 3411-13 (Leonard).
    The Judges find Dr. Leonard's point to be helpful. Elsewhere in 
this determination, the Judges make essentially the same point 
regarding the imbedding of a complementary oligopoly effect in the 
``arrival orderings'' in Professor Willig's Shapley Value Model. Dr. 
Leonard's testimony in this regard is helpful because it makes clear 
that the ``fork in the road'' approach simply does not address this 
separate inclusion of a complementary oligopoly effect on the rates 
derived from Professor Willig's Shapley Value Model.
v. The Adjusted Opportunity Costs in Professor Willig's Shapley Value 
Model, Incorporating the Foregoing Changes in the Opportunity Cost 
Attributable to Music Purchases
    Based on the foregoing adjustments accepted by the Judges, 
Professor Willig's opportunity cost calculation must be adjusted, as 
set forth in the figure below:

Figure 8: Correcting Professor Willig's Opportunity Cost Calculations 
[RESTRICTED]

    [REDACTED]

Shapiro WRT at 50, Fig.8.
    As the above table shows, Professor Shapiro's adjustments reduce 
the opportunity cost for ad-supported services from $[REDACTED] 
(Professor Willig's estimate) to $[REDACTED] (Professor Shapiro's 
adjusted estimate).

[[Page 59539]]

For subscription services, these adjustments would reduce Professor 
Willig's opportunity cost estimate from $[REDACTED] to Professor 
Shapiro's adjusted estimate of $[REDACTED]. Id.; see also Willig WDT ] 
47, Fig. 6.\271\
---------------------------------------------------------------------------

    \271\ In an attempt to find data consistent with his opportunity 
cost derived from the Zauberman Survey and other surveys in this 
proceeding, Professor Willig considered listening information 
generated by the Edison Research ``Share of Ear'' survey. Willig WDT 
]] 56-60 & app. F. However, on cross-examination, Professor Willig 
admitted that ``it's absolutely my view that the [S]hare of the 
[E]ar study is not nearly as well founded for this purpose . . . . 
[I]n many ways it's really not really comparably informative for the 
issue at hand . . . .'' 8/10/20 Tr. 1100 (Willig); see also Leonard 
WRT ]] 23-29 (explaining that ``royalty calculations based on the 
`Share of Ear' survey are flawed'' because, inter alia, they 
``ignore[ ] that some users already have subscriptions and already 
own CD/Vinyl/Digital Downloads [so that] [p]lays diverted to these 
options would not represent an opportunity cost to 
SoundExchange.''). When both the proponent of survey evidence and 
the adversary decline to endorse its usefulness, the Judges will not 
consider that evidence as confirmation of other surveys, and the 
Judges place no weight on data generated by the Share of the Ear 
survey.
---------------------------------------------------------------------------

    However, according to Professor Shapiro, the ``Share of Ear'' 
analysis by Professor Willig erroneously inflates these opportunity 
costs, by overestimating the diversion rates to new subscriptions and 
new owned media purchases. Shapiro WRT, app. D at 86. Accordingly, 
Professor Shapiro rebuts this alternative approach by explaining the 
alleged limitations in Professor Willig's methodology and presenting an 
adjusted version that Professor Shapiro claims is a superior 
application of the ``Share of Ear'' data.
vi. The Impact of All of Professor Shapiro's Data Input and Opportunity 
Cost Adjustments to Professor Willig's Calculation of Statutory 
Royalties in the Scenario 2 Approach
    Applying all of Professor Shapiro's data and opportunity cost 
adjustments to Professor Willig's Scenario 2 approach, the Judges find 
that the royalty rates proposed by Professor Willig must be 
significantly reduced. Specifically, these royalty rate differences are 
as follows: \272\
---------------------------------------------------------------------------

    \272\ Professor Shapiro does not propose that the Judges utilize 
the foregoing royalty rates he calculates as the statutory royalty 
rates. See Shapiro WRT at 60.

------------------------------------------------------------------------
                                           Ad supported    Subscription
------------------------------------------------------------------------
Willig parameters.......................        $0.00297        $0.00312
Shapiro Adjusted Inputs.................     $[REDACTED]     $[REDACTED]
------------------------------------------------------------------------

See Willig WDT ] 51, Fig.9; Shapiro WRT, Fig.15 at 64.\273\
---------------------------------------------------------------------------

    \273\ As noted supra, note 247, Professor Willig also utilizes a 
N-I-N Model as a sensitivity check to his Shapley Value results. The 
Services assert, correctly, that the opportunity cost, profit margin 
and ``Must Have'' inputs Professor Willig utilizes in his N-I-N 
Model are identical to the inputs he utilizes in his Shapley Value 
Model. Services RPFFCL ] 693 (incorporating by reference the 
Services' critiques of Professor Willig's Shapley Value Model). 
Similarly, the Judges' consideration of the inputs in Professor 
Willig's Shapley Value, supra, are equally applicable to his N-I-N 
Model, and reduce his proposed royalty rates to the same extent.
---------------------------------------------------------------------------

    Additionally, because these adjusted rates are average rates over 
the 2021-2025 rate period, like Professor Willig's proposed rates, they 
need to be discounted back to 2021 to establish rates for that first 
year of the rate period. Professor Willig deflated these rates by a 
factor of 0.96117, applying the U.S. Federal Open Market Committee's 
inflation rate forecast for 2021 of two percent. Willig WDT ] 55 & 
n.43. (The Services have not objected to Professor Willig's application 
of this inflation-adjustment process.). Applying Professor Willig's 
adjustment factor of 0.96117, the Judges' calculate 2021 royalty rates, 
based on their adoption of Professor Shapiro's input-adjusted version 
of Professor Willig's Shapley Value Model parameters, to be $[REDACTED] 
for ad-supported services and $[REDACTED] for subscription 
services.\274\
---------------------------------------------------------------------------

    \274\ For the ad-supported rate, $[REDACTED] x [REDACTED] = 
$[REDACTED] (rounded to $[REDACTED]). For the subscription rate, 
$[REDACTED] x [REDACTED] = $[REDACTED] (rounded to $[REDACTED]).
---------------------------------------------------------------------------

vii. The Impact of Shapley ``Arrival Orderings'' Given the Judges' 
Finding That They Do Not Reflect ``Effective Competition''
    The Judges must incorporate their prior finding that Professor 
Willig's Shapley Value Model incorporates complementary oligopoly power 
in the number of arrival orderings. There is no record evidence that 
suggests how Shapley Values and resulting royalties would be computed 
if the arrival orderings were changed to ameliorate the market power 
generated by the number of arrival orderings created by the 
fragmentation of copyright ownership of ``Must Have'' repertoires 
across three Majors.
    The Judges note that Professor Willig's Shapley Value Model does 
not explicitly address the potential impact of steering by a 
noninteractive service, i.e., one that promises to play more sound 
recordings from a record company that agrees to a lower royalty or 
threatens to play fewer sound recordings from a record company that 
declines to agree to a lower royalty.\275\ Accord 8/18/20 Tr. 2638 
(Shapiro) (``The primary focus of competition certainly . . . in 
Professor Willig's model . . . is not steering'').
---------------------------------------------------------------------------

    \275\ As explained in Web IV, such promises and threats can 
result in the absence of actual steering, as all record companies 
agree to reduce their rates in order to avoid being ``steered 
against.'' Web IV, 81 FR at 26366.
---------------------------------------------------------------------------

    Professor Willig maintains that his Shapley Value Model implicitly 
incorporates the value of steering because the characteristic function 
embodies ``the extreme form of steering,'' that is, ``a black-out, non-
license situation,'' which, as explained supra, would result in the 
commercial demise of the noninteractive service because each Major is a 
``Must-Have.'' 8/10/20 Tr. 1070-72 (Willig).
    The Judges find Professor Willig's treatment of a Major blackout to 
be a difference in kind rather than one of degree when compared with 
steering. An essential aspect of steering is that it serves to 
partially disaggregate a record company's repertoire by allowing the 
noninteractive service to modify its song selection to marginally lower 
its royalty costs, while increasing the royalty revenue paid to the 
record company increasing plays via steering and decreasing royalty 
revenue to the record company ``steered against'' by the service. See 
Web IV, 81 FR at 26367. As also explained therein, the noninteractive 
service would not go out of business as it would if it lacked a license 
from a Major, but rather would see an improvement to its bottom line. 
Id. Clearly, therefore, marginal steering is different in kind. The 
characteristic function, on whose features Professor Willig relies, 
does not contemplate this steering-based disaggregation.\276\
---------------------------------------------------------------------------

    \276\ The record does not reflect whether any Shapley Value 
Model even could address the impact of steering, but it is clear 
that Professor Willig's modeling does not. As explained in Web IV, 
supra, the function of steering is a redistribution of value to 
adjust for complementary oligopoly power, whereas the characteristic 
function establishes the maximum value of the coalition.
---------------------------------------------------------------------------

    Thus, because the royalty rates derived from Professor Willig's 
Shapley Value Model reflect complementary oligopoly power (even as 
adjusted supra), they must be discounted to reflect effective 
competition. However, the Judges find nothing in the record to estimate 
the value of an effective competition adjustment to Professor Willig's 
Shapley Model-derived royalty rates (as adjusted herein).\277\

[[Page 59540]]

Accordingly, the evidentiary record only allows the Judges to state 
with regard to the royalty rates they have determined--by adjusting 
Professor Willig's Shapley Model-derived rates--that those 2021 rates, 
$[REDACTED] for ad-supported services and $[REDACTED] for subscription 
services, exceed an effectively competitive rate by an indeterminate 
amount. As such, these rates serve only as limited guideposts,\278\ 
indicating that effectively competitive rates generated via a Shapley 
Value Model would be less than these levels.\279\
---------------------------------------------------------------------------

    \277\ More particularly, the Judges do not find that the 
effective competition adjustments applied to the benchmark and 
ratio-equivalency rates discussed elsewhere in this Determination, 
particularly those based on steering, can be logically applied to 
Professor Willig's Shapley Value-derived rate. See 8/6/20 Tr. 777-
79, 8/10/20 Tr. 1077-78 (Willig) (acknowledging he did not conduct 
an analysis based on steering because steering-based competition 
among the Majors would be inconsistent with the maximization of the 
``characteristic function,'' i.e., the maximization of the surplus 
the bargaining parties can obtain within his Shapley Value Model); 
see also 8/26/20 Tr. 3921 (Shapiro) (``none of our models have 
steering . . . .'').
    \278\ When ``the Judges are confronted with evidence that, 
standing alone, is not itself wholly sufficient, they may rely on 
that evidence ``to guide the determination,'' i.e., by using it as a 
``guide post'' when considering the application of more compelling 
evidence. SDARS II, 78 FR at 23063, 23066 (emphasis added).
    \279\ As discussed supra, Professor Willig's estimated rates are 
also too high because they do not reflect the ``opportunity 
benefit'' of listeners who would substitute noninteractive listening 
for non-royalty bearing activities, including listening to AM/FM 
radio. And, given the legal infirmity of the ``fork in the road'' 
approach, also discussed supra, his proposed rates are further 
improperly inflated.
---------------------------------------------------------------------------

2. Professor Shapiro's Nash-in-Nash Model

    On behalf of Pandora, Professor Shapiro proffers two game theoretic 
bargaining theories to support proposed benchmark rates. In his direct 
testimony, he presents his ``Nash-in-Nash'' (N-I-N) model, and in his 
rebuttal testimony, as a critique of Professor Willig's Shapley Value 
Model, Professor Shapiro advances his ``Myerson Value'' model.
    Professor Shapiro explains that the licensing of performances of 
sound recordings needs to be analyzed with a ``bargaining model [that] 
account[s] for the multiple bilateral negotiations that would take 
place'' between noninteractive services and record companies. 8/18/20 
Tr. 2654-55 (Shapiro). The dynamic in such a market, he explains, is 
that ``although each record label would negotiate separately with each 
webcaster (assuming no coordination), the outcome of negotiations 
between one label-webcaster pair would be expected to affect the 
outcomes between other pairs.'' Id.; Shapiro WDT at 27.\280\
---------------------------------------------------------------------------

    \280\ In a two-player negotiation, the solution to the model is 
based on assumptions by each party regarding the negotiating 
strategy of the counterparty. In the N-I-N model, this concept is 
expanded to account for the expected outcomes in multiple two-player 
bargaining. Allan Collard-Wexler et al., ``Nash-in-Nash'' 
Bargaining: A Microfoundation for Applied Work, 127 J. Pol. Econ. 
163, 165-166 (2019).
---------------------------------------------------------------------------

    The game theoretic approach that best addresses this simultaneous 
competition and bargaining context and is the ``dominant way'' of 
modeling such a market, according to Professor Shapiro, is the N-I-N 
model, a ``non-cooperative'' game theory model which utilizes ``a 
consistent solution to simultaneous [bi-lateral] negotiations between 
multiple pairs of actors.'' 8/18/20 Tr. 2655 (Shapiro).\281\ Using his 
N-I-N model, Professor Shapiro generates an ad-supported royalty rate 
of $[REDACTED] per play, and $[REDACTED] per play for subscription 
services. Shapiro WDT at 28 tbl.4, 32 tbl.7.
---------------------------------------------------------------------------

    \281\ For the difference between such a ``non-cooperative'' 
model and a ``cooperative'' model such as Professor Willig's Shapley 
Value Model, see supra note 215. Professor Shapiro opines that a 
``non-cooperative'' model better describes the bilateral 
negotiations hypothesized by the willing buyer/willing seller 
standard than the ``cooperative'' model invoked by Professor Willig, 
which is better suited for examining the behavior of ``coalitions'' 
of participants. Id. 2817-18 (Shapiro).
---------------------------------------------------------------------------

    Professor Shapiro applies his N-I-N bargaining model for both ad-
supported and subscription webcasting. For both forms of webcasting, 
his N-I-N model includes eight record companies with the largest shares 
of listening on Pandora \282\ plus two ``catch-all'' categories of 
independent record companies. Shapiro WDT at 27-28 & tbl.4; id. at 75-
76; 8/19/20 Tr. 2742, 2747 (Shapiro).
---------------------------------------------------------------------------

    \282\ The eight record companies are [REDACTED].
---------------------------------------------------------------------------

    In Professor Shapiro's N-I-N modeling ``the first step'' in 
identifying royalty rates ``is to examine the opportunity cost to an 
individual record company of licensing its repertoire to a statutory 
webcaster.'' Shapiro WDT at 4 (emphasis added). He defines record 
company opportunity costs in the same general manner as Professor 
Willig--the royalties foregone by a record company if it licenses its 
repertoire to a noninteractive service rather than to another type of 
service or offers its repertoire for sale as a physical or digital 
product.\283\ However, in performing his opportunity cost analysis, 
Professor Shapiro relies on a fundamental difference in the 
hypothetical unregulated noninteractive market. Specifically, he 
testifies:
---------------------------------------------------------------------------

    \283\ Professor Shapiro describes opportunity cost in the 
present context as follows:
    The opportunity cost approach recognizes that, when a record 
company licenses its repertoire to a music service, some customers 
will devote additional listening time to that music service rather 
than listening to music in other ways. Because of the decreased 
listening to sound recordings through other media, the record 
company in question will lose some of the royalties it would 
otherwise have earned on performances or sales of recordings through 
these other media, to the extent the record company would have 
received incremental royalties from that listening.
    Shapiro WDT at 3. In Professor Shapiro's N-I-N model, a record 
company's opportunity cost for licensing a webcaster is the product 
of four factors: (1) The total number of performances on the given 
webcaster's service (referred to as ``N'' in his model); (2) the 
percentage of those performances that would be lost to other forms 
of listening in the absence of a license from the record company 
(referred to as ``L'' in his model); (3) the average per-performance 
royalty the record company would earn from other forms of listening 
(referred to as ``R''); and (4) the record company's share of 
performances on the webcaster and the alternative services (referred 
to as ``S''). Shapiro WDT at 17; 8/18/20 Tr. 2663-65 (Shapiro).

    [S]ome degree of competition among record companies would also 
arise if a webcasting service can obtain significant bargaining 
leverage by threatening to drop a given record company from its 
service entirely if the royalty rate offered by that record company 
is unreasonably high.
* * * * *
    Importantly, my analysis here relies on new evidence that no 
individual record company is even close to being ``must-have'' for 
Pandora's advertising-supported webcasting service.

Shapiro WDT at 11-12.
    Accordingly, Professor Shapiro's entire N-I-N Model relies upon 
``new evidence'' that he asserts demonstrates that no single record 
company in fact is a ``Must Have'' for a noninteractive service. 
Because further application of his N-I-N Model turns on the sufficiency 
of this new evidence, the Judges to turn now to an examination of that 
evidence.
a. Pandora' ``Label Suppression Experiments''
    To determine whether each of the Majors is a ``Must Have'' for 
noninteractive services, Professor Shapiro asked Pandora to conduct 
several ``Label Suppression Experiments'' (LSEs) pursuant to general 
instructions he provided to Pandora. Shapiro WDT app. E. The LSEs were 
conducted and supervised by an in-house Pandora economist employed as a 
``Distinguished Scientist,'' Dr. David Reiley. Trial Ex. 4091 ]] 1-4, 
6, 11-13 (WDT of David Reiley) (Reiley WDT). Dr. Reiley constructed 
LSEs to answer the question: ``What effect, if any, there would be on 
users' listening if Pandora stopped playing the entire catalog of a 
particular record company on Pandora's ad-supported service?'' Reiley 
WDT ]] 11, 13.
    In an attempt to answer this question, Dr. Reiley and his 
colleagues ran five experimental treatments among listeners

[[Page 59541]]

of Pandora's ad-supported tier.\284\ One group in each experiment 
received the ``treatment'' (described below) and the other group in 
each experiment was the ``control'' group, which did not received the 
``treatment.''
---------------------------------------------------------------------------

    \284\ To be included in either the LSE treatment or control 
groups, users must have listened to Pandora's ad-supported radio 
product during the experimental period, and were not included if 
they did not satisfy that criterion. See 9/1/20 Tr. 4902-03 
(Reiley).
---------------------------------------------------------------------------

    Each treatment intentionally suppressed music from a different 
record company--not totally--but as completely as possible. Two of the 
treatments separately suppressed music from [REDACTED], and three 
separately suppressed music from [REDACTED]. Id. ] 12; 9/1/20 Tr. 4899 
(Reiley).
    Dr. Reiley then compared the listening behavior of users in the 
five treatment groups to the behavior of the control group, which did 
not receive any suppression treatment. Reiley WDT ] 19. He ran these 
LSEs over a roughly three-month period, from June 4 to August 31, 2019, 
and again for another approximately three-month period concluding 
December 4, 2019. Reiley WDT ] 16; Trial Ex. 4108 ]] 4 (WRT of David 
Reiley) (Reiley WRT).
    In analyzing the results, Dr. Reiley focused primarily on a 
particular metric: The average hours listened per registered Pandora 
ad-supported user, noting that ``average hours per listener was a 
standard metric for in-house experiments at Pandora. Reiley WDT ] 19. 
According to Dr. Reiley, the LSEs demonstrated that ``for the initial 
three-month experimental period, a near-total suppression of spins of 
any single record company [REDACTED].'' Id. ]] 21-24; 9/1/20 Tr. 4906-
07. (Reiley). He depicted the results of his three-month run of these 
LSEs in the following figure:
    [RESTRICTED]
    [REDACTED]

Reiley WDT, Fig. 2.\285\
---------------------------------------------------------------------------

    \285\ The figures are probabilistic, because they were derived 
from a survey of Pandora ad-supported listeners, rather than from 
the entire population of such listeners. Dr. Reiley testified that 
the LSE survey size was sufficient to produce, for the listening 
hour reported effects, 95% confidence intervals that would be no 
wider than +/-5% for [REDACTED], and no wider than +/-0.5% for 
[REDACTED]. Reiley WDT ] 18. Accordingly, in the results displayed 
in Figure 2 in the accompanying text, the point estimates are shown 
by the dots, and horizontal lines indicating the width of the 95% 
confidence intervals.
---------------------------------------------------------------------------

    As noted supra, Dr. Reiley also extended these LSEs for an 
additional three months. He reported his cumulative six month totals, 
which, he testified, confirmed his conclusion regarding the three 
months of experiments, viz., that [REDACTED]. Reiley WRT ]] 12-16 & 
Fig.1.\286\
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    \286\ In a pre-hearing Motion, the Judges disallowed Pandora 
from using the cumulative results of the six month survey, because 
Dr. Reiley's testimony regarding the final three months of the 
survey should have been included in his direct testimony, or in 
timely filed amended direct testimony, rather than in his written 
rebuttal testimony. However, the Judges admitted Dr. Reiley's 
rebuttal testimony for the narrower purpose of attempting to rebut 
SoundExchange's position that the Judges should deem all three 
Majors to be ``Must Haves'' for noninteractive services. To be 
clear, the Judges do not consider the cumulative (six months) data 
for any affirmative purpose.
---------------------------------------------------------------------------

b. SoundExchange's Criticism of Pandora's LSEs, Pandora's Responses, 
and the Judges' Findings and Analysis
i. The LSEs Are Unreliable and Uninformative
    According to SoundExchange, the LSEs are not a reliable source of 
evidence, and thus cannot be utilized as an economic analysis to 
calculate Professor Shapiro's input ``L'' in the opportunity cost 
calculation necessary for his N-I-N- modeling. Willig WRT ]] 22-27; 8/
5/20 Tr. 351-53, 570-72, 574 (Willig). Even at this high conclusory 
level, Pandora offers less than a full-throated defense of the LSEs, 
asserting not that the LSEs are objectively sufficient and persuasive 
evidence, but that, comparatively, they are ``the best, most reliable 
evidence of the effects of a record label blackout on listening on 
Pandora's ad-supported radio tier.'' Services RPFFCL ] 852 (citing 9/1/
20 Tr. 4927-28 (Reiley).
    The first criticism levelled by SoundExchange is that the design of 
the LSEs impeded detection by respondents who were exposed to a label 
blackout (the treatment group) of the existence of the blackout. More 
particularly, a SoundExchange economic expert witness, Professor 
Catherine Tucker, criticized the LSEs for making the LSEs' 
participants, ``blind'' to the experiments' nature (see Reiley WDT ] 
7), in that they were not made aware that they had lost access to the 
repertoire of the suppressed record company. Trial Ex. 5605 ] 18 (CWRT 
of Catherine Tucker) (Tucker WRT); 8/17/20 Tr. 2280-81 (Tucker).
    Pandora responds by pointing to Dr. Reiley's testimony, in which he 
invokes the principal scientific reason for making the study ``blind'' 
to participants. Specifically, he identifies what is known in 
experimental work as the ``Hawthorne effect,'' by which participants in 
an experiment modify their behavior simply because they become aware of 
the experiment. 9/1/20 Tr. 4927-28 (Reiley). Moreover, Pandora argues 
that it would have no reason to notify ad-supported users of the 
existence of a real-world label black-out, and that any communication 
Pandora could have attempted to convey to the ``treatment groups'' 
would not even ``come close to replicating the sort of real-world 
third-party communications'' disclosing the blackout (discussed below) 
that Professor Tucker claims (wrongly in Pandora's opinion) would 
occur. Services RPFFCL ] 858.
    The Judges find significant merit in SoundExchange's criticism. The 
failure of the LSEs to provide notice to participants in the 
``treatment groups'' that they had lost access to the repertoire of a 
given record company is an important omission. Its importance is based 
on the fact that the value of a webcasting service lies not only in the 
sound recordings a listener hears, but the listeners' understanding of 
the repertoire to which the service has access and derivatively, which 
the listener can expect to be included in the sound recordings he or 
she may hear. To be sure, such access likely has more value to an 
interactive (on demand) service than to a noninteractive service, but 
that comparison is hardly dispositive. And the assertion by Pandora 
that it could hardly have provided the same type of notice and 
disclosure that third parties would have disseminated (discussed in 
more detail below), while likely correct, only underscores the 
incompleteness and lack of necessary ``real world'' elements in the 
experiments. That is, the fact that the necessary disclosures of 
information could not possibly have been included in the experiment--by 
Pandora's own admission--indicates to the Judges that the error lies in 
the fundaments of the LSEs, and that Pandora's unavoidable omission of 
such notices is hardly an argument supportive of the use of the LSEs in 
this proceeding.\287\
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    \287\ The absence of disclosure to the treatment group of the 
loss of access to the repertoire of a record company is inconsistent 
with if not antithetical to, the idea of modeling the hypothetical 
market in a manner consistent with ``effective competition.'' As 
Professor Shapiro concedes, if a Major is blacked-out on Pandora, 
listeners have lost what economists describe as ``access value.'' 8/
19/20 Tr. 2709 (Shapiro). But without disclosure of that lost value, 
the diminished access is not known to listeners (unless they learn 
of the lost access from some other source, as posited by 
SoundExchange). This informational deficiency is important. One of 
the necessary conditions for a market to be effective is the absence 
of asymmetric information. See Clifford Winston, Government Failure 
versus Market Failure at 27 (2006) (``efficiency . . . requires that 
buyers and sellers be fully informed . . . . If consumers are 
uninformed or misinformed about the quality of a product, they may 
derive less utility from it than they expected.''); Karl-Gustaf 
Lofgren et al., Markets with Asymmetric Information: The 
Contributions of George Akerlof, Michael Spence and Joseph Stiglitz, 
104 Scandinavian J. Econ., no. 2, 195, 205 (2002) (Joseph Stiglitz, 
winner of the Nobel Prize for his work on the economics of 
information, and ``probably the most cited researcher within the 
information economics literature . . . has time and again pointed 
out that economic models may be quite misleading if they disregard 
informational asymmetries [and] that many markets take on a 
different guise in the perspective of asymmetric information . . . 
.''); Diane Coyle, Markets, State, and People 73, 303 (2020) (``The 
absence or presence of information asymmetries can make all the 
difference to how a market functions . . . . The assessment of 
efficiency . . . should account for . . . likely behavioral 
responses.''). But the LSEs tacitly assume a market infected by such 
informational asymmetry regarding the offerings of a noninteractive 
service, and in so doing create an experimental market infused not 
with effective competition, but rather with market failure. See 
Joseph E. Stiglitz & Jay K. Rosengard, Economics of the Public 
Sector 93 (4th ed. 2015) (identifying ``imperfect information'' as 
one of ``six basic market failures''); Anne Steineman, 
Microeconomics for Public Decisions 147 (3d. ed. 2018) (``Market 
failures can also occur because of imperfect information. Efficiency 
requires that all relevant information be available to consumers . . 
. .'') (emphasis added). The irony of this point is not lost on the 
Judges: Professor Shapiro endorses as evidence of a hypothetical 
effectively competitive market an experiment (the LSEs) that 
generate the absence of a condition--adequate information--whose 
presence is necessary to avoid market failure.

---------------------------------------------------------------------------

[[Page 59542]]

    The Judges also reject Dr. Reiley's reliance on the general 
principle that participants in an experiment should not be made aware 
of the nature of the experiment. Rather, the Judges concur with 
Professor Tucker, who testifies that this principle is inapplicable 
where, as here, ``we're interested in actually measuring what happens 
when people receive and know about receiving a degraded service.'' 8/
17/20 Tr. 2281 (Tucker).
    Several SoundExchange witnesses testify that services in 
competition with Pandora (if it was the service blacking-out a label) 
would have strong economic incentives to disseminate and exploit this 
information by: (1) Publicizing Pandora's shrunken repertoire; (2) 
emphasizing their own more complete repertoires; (3) targeting existing 
Pandora users via advertising campaigns; (4) offering promotional 
prices in conjunction with an emphasis on the new gap in repertoires, 
to encourage switching away from Pandora; and (5) expanding their own 
offerings or changing their prices in response to the change offering 
environment. Tucker WRT ]] 48-49; Willig WRT ]] 23-24; Zauberman WRT ]] 
23-25, 30-32; Simonson WRT ]] 21-27, 30; 8/5/20 Tr. 570-74 (Willig). 
Moreover, SoundExchange notes that even Professor Shapiro concedes that 
Pandora's competitors would engage in such messaging if Pandora 
blacked-out a Major. 8/19/20 Tr. 2704-06 (Shapiro). Further, Professor 
Shapiro also concedes that ``there would very likely be external 
sources of information about this that users would receive.'' In an 
attempt to address this likely reality, he simply used the high 
statistical point estimate [REDACTED] as a proxy for the lost 
listening, even though he [REDACTED]'' 8/19/20 Tr. 2703 (Shapiro) 
(emphasis added). In fact, Professor Shapiro broadly acknowledges it is 
``true'' that ``the experiments [are] imperfect in various respects . . 
. .'' Id. at 2710.
    Despite its expert making these concessions regarding its own 
experiments, Pandora criticizes SoundExchange for not offering evidence 
beyond its witnesses' testimony regarding the likely industry responses 
to a Major's blackout. The Judges find this criticism is meritless and 
only underscores the inherent deficiencies in the LSEs. Pandora's 
argument is essentially that, although its model does not specify 
necessary elements of reality, the adverse party, SoundExchange, bore 
the burden of producing evidence of how that reality would affect 
noninteractive services in the real world.
    Quite the contrary, Pandora, as the proponent of the LSE evidence, 
bears the burden of producing sufficient evidence to demonstrate the 
necessary realism of its experimental modeling.\288\ Economic 
experiments are models,\289\ and all economic models need to be 
analyzed through a ``realism filter.'' Dani Rodrik, Economics Rules at 
27 (2015) (noting that the ``critical assumptions'' of an economic 
model must be evaluated through a ``realism filter'' to determine 
whether more realistic assumptions ``would produce a substantive 
difference in the conclusion produced by the model''). Pandora's LSEs 
do not pass through such a ``realism filter.''
---------------------------------------------------------------------------

    \288\ Pandora also casts doubt on whether any ``third party has 
any reliable method for reaching the vast majority of Pandora 
users.'' Services RPFFCL ] 860. Although this, too, is speculation, 
it is noteworthy in that Pandora is specifically making the general 
asymmetric information point the Judges made supra--arguing in 
essence that it has superior information that prevents third parties 
from providing customers of information regarding the service they 
are accessing. This argument hardly supports a finding that the LSEs 
reflect a real world market that would be effectively competitive.
    \289\ See Uskali M[auml]ki, Models are Experiments, Experiments 
are Models, 12 J. Econ. Methodology 303, 306 (2005) (``experimental 
systems . . . are artificially designed and constructed substitute 
systems, controlled mini-worlds that are directly examined in order 
to indirectly generate information about the . . . world outside the 
laboratory--such as economic systems and behavior . . . . [S]uch 
experimental systems are . . . material models of aspects of the 
rest of the world.'') (emphasis added).
---------------------------------------------------------------------------

    SoundExchange further asserts that the disclosure of the black-out 
would not be made only by Pandora's competitors. It notes that, in the 
real-world, beyond the confines of the experimental world, consumers 
would learn about a Major's blackout on a noninteractive service from a 
number of additional sources, specifically, by artists and managers 
whose sound recordings and musical works would be unavailable and by 
the record company that had been subject to the blackout. SoundExchange 
asserts that these persons and entities would have the economic 
incentive to disseminate information regarding the blackout, and how 
their sound recordings could otherwise be accessed. 8/5/20 Tr. 352-53, 
570-71 (Willig); 8/17/20 Tr. 2285 (Tucker). Other witness testimony 
explained that additional information channels--social media platforms, 
news media and personal networks of friends and family--would also be 
able to inform listeners to a noninteractive service that the 
repertoire of songs to which they have access had been reduced. Tucker 
WRT ]] 19-27; Willig WRT ] 24; Zauberman WRT ]] 25-33; Simonson WRT ]] 
21-30.
    In response, Pandora again chastises SoundExchange for offering 
only speculation regarding the anticipated response by noninteractive 
listeners upon learning of the blacking out of a Major record company 
from economically motivated industry competitors and stakeholders. 
Pandora further criticizes SoundExchange's witnesses for relying on 
anecdotes pertaining to the reactions of listeners to on demand 
services upon learning that they had lost access to identifiable music 
from a particular Major. As noted above, the Judges agree with Pandora 
that the reactions by noninteractive listeners could be less intense, 
given that they have no expectation of hearing a particular song. But 
again, the market for noninteractive music also involves the promotion 
of access to a large repertoire of music that can be accessed by the 
curators (algorithmic or human) of that repository. A shrinking of that 
repertoire clearly would constitute important relevant information for 
a listener in choosing to remain with, or begin listening to, a 
noninteractive service. And once again, the burden of producing 
evidence regarding the importance, vel non, of such information is 
properly borne by Pandora, as the proponent of the experimental 
evidence, so that its model is sufficiently realistic and useful when 
proffered to set statutory rates with real world impact. Finally, as 
noted supra

[[Page 59543]]

regarding the response by Pandora's competitors, Pandora's assertion 
that its experiment could not model third-party dissemination of true 
information and listener reaction thereto is actually a self-criticism 
by Pandora of the usefulness of its experiment, rather than an 
appropriate critique of the SoundExchange witnesses whose testimony 
revealed the insufficiency of the experiment's design. That is, if the 
LSEs could not possibly have been designed to demonstrate real-world 
effects, that evidence is lacking in probative value, and Pandora 
cannot escape that finding by attempting to lay off on its adversary a 
burden of producing contrary evidence.\290\
---------------------------------------------------------------------------

    \290\ Pandora also emphasizes that [REDACTED]. However, the 
record reflects no basis for the Judges to apply the circumstances 
surrounding the launching of a new form of music distribution to the 
overall noninteractive market. Similarly, the Judges give little 
weight to SoundExchange's reliance on the specific example of 
[REDACTED]. See SX PFFCL ] 862; Services RPFFCL ] 862.
---------------------------------------------------------------------------

    Another defect in the LSEs alleged by SoundExchange is that Pandora 
did not prevent listeners in the treatment group from listening to 
songs via Pandora's ``Premium Access'' feature, which allows ad-
supported users to access on-demand functionality for a limited time in 
exchange for viewing additional video advertisements. Reiley WDT ] 15; 
Phillips WDT ]] 25-26. Pandora entices ad-supported users with repeated 
prompts and an offer to access bespoke songs if an ad-supported user 
``opt[s] into a Premium Access Session.'' 8/31/30 Tr. 4645-46, 4632-33 
(Phillips).
    According to SoundExchange, Pandora's decision not to suppress 
content when listeners in a treatment group were using ``Premium 
Access'' had the effect of masking the label blackouts, logically 
leading listeners in the treatment groups to believe that the 
repertoire of the blacked-out label was still available to them. Reiley 
WDT ] 15; Phillips WDT ]] 25-26; Tucker WRT ] 38; 8/17/20 Tr. 2319-20 
(Tucker); 8/31/30 Tr. 4645-46 (Phillips). Moreover, SoundExchange 
maintains that this disguise effect existed regardless of whether ad-
supported listeners ultimately opted into Premium Access sessions, 
because the offer suggested the accessibility of all repertoires, 
including those of the blacked-out record company. Tucker WRT ]] 37-38.
    Pandora acknowledges that the non-suppression of the blacked-out 
record company's repertoire on ``Premium Access'' was not an error or 
oversight, but rather intentional. Services RPFFCL ]] 870, 872. It also 
concedes that listeners in the treatment groups heard a ``small 
number'' of tracks from the otherwise blacked-out record company. SX 
PFFCL ] 874. Pandora further asserts that SoundExchange has proffered 
no evidence that such Premium Access was intended to, or in fact did, 
``disguise'' the absence of a blacked-out repertoire, because such 
limited access would not be confused with access on Pandora's 
noninteractive service. Services RPFFCL ] 873. In sum, Pandora, while 
acknowledging that the LSEs therefore did not generate ``perfect 
suppression,'' notes that [REDACTED]% of the blacked-out record 
companies' recordings were in fact suppressed. Services RPFFCL ] 875 
(and citations therein).
    The Judges find SoundExchange's criticism of the LSEs in this 
regard well-taken. If listeners heard otherwise blacked-out songs after 
accessing Pandora's ad-supported service, there is no persuasive 
evidence that they would recall, going forward, whether that the songs 
or artists they heard--which included recordings that they selected--
had been accessed via the noninteractive curation process or via the 
Premium Access feature on that otherwise noninteractive service. 
Rather, Pandora asks the Judges simply to assume that listeners would 
be so attentive as to parse and recall the specific Pandora services 
through which they heard certain recordings. There is simply no reason 
to make such a counterintuitive assumption. Further, because a 
noninteractive service offers a listener the potential to hear music 
from a large repertoire, when a listener hears a sound recording from a 
particular favored artist, the listener has no reason to conclude that 
such recordings are in fact unavailable via the noninteractive service. 
That is, it seems at least equally reasonable to assume that a listener 
would expect to be able to access songs it hears on a service, 
regardless of the precise tier on which the service provided the song 
to the listener--at least without some further sufficient evidence to 
the contrary. Once again, Pandora bears the burden of producing 
sufficient evidence in this regard, and no such evidence is in the 
record.
    Additionally, Pandora's own experience in conducting experiments 
should have put it on notice that the periodic playing of songs that 
are otherwise suppressed is sufficient to disguise the suppression. In 
its steering experiments relied upon by the Judges in Web IV, Pandora 
explained that by decreasing the frequency of the plays of songs from 
high-royalty record companies, without completely eliminating plays of 
those songs, Pandora could reduce its royalty costs without degrading 
the listener's perception of the repertoire of the service. Here too, 
the playing of otherwise blacked-out record company songs accessed via 
the noninteractive service, in the Premium Access promotional space, 
potentially allowed the listener to assume no such degradation. And 
importantly, Pandora does not provide any reason why it did not turn 
off the Premium Access feature for listeners selected for the LSEs, 
which would have mooted this concern.\291\
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    \291\ Turning off the Premium Access feature apparently would 
have represented a degrading of the ad-supported service that 
listeners might notice, interfered with Pandora's attempt to market 
its premium product to these ad-supported listeners and perhaps even 
violated its agreements with its licensors (Pandora does not say). 
But Pandora's desire to maintain the Premium Access feature for the 
treatment groups underscores its inability (or unwillingness) to 
construct a sufficiently probative experiment given the nature of 
the ad-supported service.
---------------------------------------------------------------------------

    SoundExchange notes that in light of the foregoing deficiencies in 
the LSEs, even Dr. Reiley and Professor Shapiro make a consequential 
admission: They simply do not know how ad-supported listeners would 
have reacted if they were made aware of the label blackouts. See 9/1/20 
Tr. 4928 (Reiley) (``[I]f we imagine that listeners were informed of 
[the missing content], then I don't know what impact that would have on 
listening.''); Shapiro WDT at 21 (``LSEs ``do not fully capture what 
would happen in the real world in the event of a blackout resulting 
from one of [the] record companies withholding its repertoire from 
Pandora . . . . [L]isteners were presumably not aware of the blackout, 
and they might react more strongly if they were aware.'').
    SoundExchange further notes that, although Pandora's goal was to 
achieve 100% label suppression in the treatment group (aside from 
allowing Premium Access to plays of suppressed labels), it failed even 
in that endeavor, for several reasons. First, SoundExchange identifies 
what it describes as a ``technical error,'' whereby the suppression was 
turned off for a period of time over several days--June 13-16 and 26--
during the treatment period because of various software and system 
upgrades. Reiley WDT ] 31; Reiley 9/1/20 Tr. 4956-58 (Reiley). For 
Pandora's 89-day experiment, this five-day period represents 
approximately 6% of the entire experimental period during which the 
suppression was partially interrupted. The Judges find that this 
technical error in the experiment, standing alone, would not invalidate 
the LSEs, but in combination with the other defects, serves to 
eliminate further any

[[Page 59544]]

weight the Judges could place on the LSEs.
    Next, SoundExchange points out that Pandora continued to provide a 
number of ``miscellaneous provider tracks '' \292\ to the treatment 
group, including recordings from the suppressed labels, again causing 
the suppression level to be reduced. Reiley WDT ] 28; Reiley WRT ]] 21-
23; 8/17/20 Tr. 2321-2322 (Tucker). More particularly, Professor Tucker 
testified that approximately [REDACTED]% of users in the major label 
treatment groups were exposed to at least one ``miscellaneous 
provider'' track during the LSEs. See Tucker WRT app. 1 (Rows 13-14); 
8/17/20 Tr. 2322 (Tucker).
---------------------------------------------------------------------------

    \292\ ``Miscellaneous provider tracks'' are recordings that have 
not yet been identified as covered by Pandora's current direct 
license agreements but are nonetheless played by Pandora ``because 
of the long history of user data associated with those tracks'' 
(i.e., they are popular tracks). Reiley WDT ] 28.
---------------------------------------------------------------------------

    [REDACTED] Dr. Reiley's understanding that few spins of these 
``miscellaneous provider tracks'' constituted plays from the suppressed 
labels. Reiley WDT ] 30; Reiley WRT ] 23 (noting that his team tested a 
sample of miscellaneous provider tracks and determined that only 10-15% 
of them (i.e., 10-15% of 6% of total plays) were from the suppressed 
label); 9/1/20 Tr. 4921-24 (Reiley) (``Most of [the miscellaneous 
provider tracks] are going to be tracks that belong to other owners, 
since [REDACTED]).
    With regard to Professor Tucker's testimony, Pandora notes that she 
conceded that the fact that approximately [REDACTED]% of users heard a 
miscellaneous provider track during the experimental period does not 
mean that they heard a suppressed label track. See 8/18/20 Tr. 2403 
(Tucker). Also, Pandora points out that the [REDACTED]% figure reported 
here by SoundExchange ([REDACTED]% to be precise) includes 
miscellaneous provider tracks played during Premium Access sessions. 
See Tucker WRT app. 1 at lines 13-14. As explained supra, Premium 
Access sessions had been intentionally excluded from the LSEs.
    With regard to the number of potential miscellaneous provider 
tracks to which a listener in the treatment group may have been 
exposed, the Judges agree that it is likely that such exposure was 
relatively low. However, even this likely small effect, when combined 
with the other deficiencies in the LSEs, renders the experimental 
results less than conclusive. Moreover, the fact that many of these 
miscellaneous provider tracks may have been provided within the Premium 
Access feature does not mitigate the imperfection. As stated supra, 
Pandora has not offered a sufficient explanation as to why ad-supported 
listeners would accurately parse the difference between songs played as 
ad-supported or as Premium Access songs accessed via the ad-supported 
service, in order to be cognizant of the loss of certain songs on the 
ad-supported tier alone. Further, because these ``miscellaneous 
provider tracks'' are apparently relatively popular,\293\ they may have 
an outsized influence on a listener's satisfaction with the ad-
supported service compared to less popular songs, and thus a relatively 
greater impact on the accuracy of the experiment.
---------------------------------------------------------------------------

    \293\ See supra note 292.
---------------------------------------------------------------------------

    Another issue raised by SoundExchange is the LSEs' handling of ad-
supported users who upgraded to Pandora Plus or Pandora Premium 
subscription tiers during the experiment and thus did not receive the 
suppression treatment during the entire experimental period. Despite 
these upgradings, Pandora continued to analyze these upgraded listeners 
as part of the treatment group. See Reiley WDT ] 32 (``[A]lthough 
listeners who upgraded to Plus or Premium no longer received treatment 
after subscribing, I have not excluded those listeners or their 
listening metrics from the analysis . . . . .''); see also Reiley WRT ] 
19. More particularly, the experimental data showed that [REDACTED]% of 
ad-supported users in the [REDACTED] treatment group and [REDACTED]% in 
the [REDACTED] treatment group upgraded to a subscription tier during 
the LSEs. Tucker WRT app. 1; Reiley WDT ] 32. Professor Tucker 
explained that this upgrading has the potential of masking the shift by 
ad-supported users in the ad-supported service. 8/17/20 Tr. 2318 
(Tucker).
    Pandora does not dispute the accuracy of the data as presented by 
Professor Tucker. Rather, Dr. Reiley states that he did not exclude 
these listeners in part ``because they did receive at least partial 
treatment prior to the upgrade . . . .'' Reiley WRT ] 19. Although that 
is not inherently unreasonable, there is also merit in Professor 
Tucker's assertion. The upgrading individuals may have abandoned the 
ad-supported service (via their upgrading) because of the label 
suppression, which would have justified either the elimination of those 
upgraders from the experiment, or perhaps counting them as having 
abandoned the ad-supported service because of the suppression.\294\
---------------------------------------------------------------------------

    \294\ Professor Reiley responded to this criticism, but his 
testimony in that regard is unclear. However, he did report on the 
minimal level of exposure these participants received of the 
suppressed labels after they had upgraded. Reiley WRT ] 19.
---------------------------------------------------------------------------

    Next, SoundExchange avers that the LSEs cannot estimate how 
consumers would react over a time period longer than the LSEs, such as 
the five-year rate-setting period. See Tucker WRT] 77 (``Consumer 
learning can lead to substantial difference in the measured effect of a 
treatment over time''); 8/17/20 Tr. 2323-25 (Tucker) (``[C]ertainly the 
substance of these critiques does not change when you look at a longer 
time period.).
    In response, Pandora relies on the testimony of Professor Shapiro 
and Dr. Reiley, in which they extrapolate to the LSEs longer-term 
effects from other experiments that had measured the longer-term impact 
of ad-loads on listening and the impact of steering, respectively. 
Reiley WDT ] 36; Reiley WRT ] 27. More particularly, Dr. Reiley and 
Professor Shapiro found that, by this extrapolation, the three-month 
LSEs should be adjusted by a factor of three, increasing the negative 
impact associated with a label blackout (and finding that the 
adjustment factor should equal two for the six-months of data). Shapiro 
WDT at 21, 24-25, tbl.3; 8/19/20 Tr. 2701 (Shapiro).
    SoundExchange challenges as ad hoc Pandora's reliance on these 
unrelated experiments. It argues that neither Dr. Reiley nor Professor 
Shapiro provides ``legitimate support for why this relationship, which 
was obtained from a different experiment involving a different 
treatment and a different experimental design, is applicable here.'' 
Tucker WRT ] 93; 8/5/20 Tr. 583-84 (Willig). Going more deeply, 
Professor Willig opined that ``there is really no particular reason to 
believe, from a logical basis or an economic basis, that the three 
times or the two times is an accurate correction.'' 8/5/20 Tr. 583 
(Willig). Multiple SoundExchange witnesses further explained that these 
other two experiments are simply too unlike the LSEs to provide useful 
information. Tucker WRT ]] 76-83; Zauberman WRT ]] 40-45, 53-56; 
Simonson WRT ]] 41-45; Willig WRT ] 26.
    Going even further, Professor Willig distinguished the ad-load 
experiment from the LSEs:

    [A]d load is a different sort of a degradation of the service 
from the point of view of the listeners than a narrowing of the 
repertoire of the music that's played, and the

[[Page 59545]]

ability of a listener to discern that the ad load has increased is 
going to be relatively obvious. And whether or not that's the case 
for the missing music is somewhat less certain . . . . And so the 
applicability of the information from the ad loads study to the LSEs 
is really questionable. It is really rather speculative.

8/5/20 Tr. 584 (Willig). Finally, with regard to the ad load experiment 
comparison, SoundExchange notes that Dr. Reiley acknowledged the 
absence of any record evidence to support what is essentially nothing 
more than his assumption of a correlation between the effects of ad 
load and label suppression. 9/1/20 Tr. 4970 (Reiley).
    Regarding the other purportedly comparative experiment--the 
steering experiments conducted by Pandora's Dr. Stephan McBride--
SoundExchange's witnesses identified an important dissimilarity with 
the LSEs: The McBride steering experiments measured the effects of 
steering only up to a 30% level. See 9/1/20 Tr. 4925, 4990 (Reiley). 
Nonetheless, Dr. Reiley simply assumed that he could extrapolate from 
the results of a steering experiment in order to generate long-term 
effects from a [REDACTED]% suppression of a label. Id. at 4925 
(Reiley).
    Finally, SoundExchange again relies on the testimony of Professor 
Reiley himself to demonstrate the arbitrariness of his decision to 
multiply the three-month results by three, and the six-month results by 
two. Specifically, Dr. Reiley acknowledged that ``it's impossible to 
know exactly what would happen without running the experiment for a . . 
. much longer period of time,'' and that his comparison to the ad-load 
experiment was a ``best guess at what we think the long-run effects are 
likely to be.'' 9/1/20 Tr. 4910-11 (Reiley).
    In rebuttal to these criticisms, Pandora relies first on Dr. 
Reiley's testimony that he had the benefit of having been involved in 
Pandora's ad-load experiments, but he acknowledged that Pandora had 
engaged in few other long-term experiments. Reiley WDT ]] 27-28; 9/1/20 
Tr. 4915-16 (Reiley). Based on that experience, he observed a decline 
in listening hours over approximately the first year of the ad-load 
experiments that was linear in nature, which he testified could render 
reasonable and justifiable Professor Shapiro's decision to double the 
effects of the six-month LSE experiment. Reiley WDT ] 28; 8/19/20 Tr. 
2701 (Shapiro).
    Pandora nonetheless concedes that its ad-load experiment was not 
perfectly correlated with the LSEs with regard to long-term effects. 
Attempting to turn the tables on SoundExchange, Pandora and Dr. Reiley 
chastise SoundExchange (yet again) for not presenting any contrary 
evidence. 9/1/20 Tr. 4907-09 (Reiley).
    In similar fashion, Pandora relies on Dr. Reiley's conclusion that 
the LSEs were also consistent with longer-run extrapolations of Dr. 
McBride's steering experiments. However, Dr. Reiley acknowledges the 
wider confidence intervals in the LSEs' results compared to the 
steering experiments. 9/1/20 Tr. 4925, 4990 (Reiley). And, as with the 
alleged correlation between the LSEs and the ad-load experiments, 
Pandora points to the absence of any contrary evidence from 
SoundExchange to refute this alleged correlation. Services RPFFCL ] 
961.
    The Judges agree with SoundExchange that Pandora has failed to show 
the long term effects of a sustained blackout of a Major or other label 
by Pandora. There is insufficient evidence to support a finding that 
the results of two unrelated experiments--testing the impact of 
changing ad-loads and the steering of plays--can be mapped onto the 
LSEs. The fact that these other experiments may be the only available 
potential comparators does not mean that they are useful, or even that 
they are the best comparators.\295\
---------------------------------------------------------------------------

    \295\ Indeed, given Dr. Reiley's acknowledgement that Pandora 
has engaged in few longer-term experiments, and did not identify any 
other such experiments, it is equally true that the ad-load and 
steering experiments may be the ``worst'' comparators available. In 
any event, the concept of ``better' or ``worse'' comparators is 
meaningless--the experiments are simply inapposite and cannot 
support Pandora's attempt to establish credible long-term effects 
arising from the LSEs.
---------------------------------------------------------------------------

    SoundExchange also focuses on an aberrational statistical output 
from the LSEs. The three-month results showed a [REDACTED]--i.e., this 
aspect of the LSEs found that listening [REDACTED]. Reiley WDT ] 22. 
Similarly, after six months, the [REDACTED] treatment group showed 
[REDACTED]. Reiley WRT ]] 12-14 & Fig. 1. Considering these results, 
Professor Willig found it implausible that ``users would listen to 
Pandora more if it lost access to [REDACTED].'' Willig WRT ]] 28-29.
    According to Dr. Reiley, these results are not statistically 
significant from a zero effect, and therefore should not be considered 
anomalous. Reiley WDT ] 22 & Fig. 2. Nonetheless, Professor Shapiro 
discarded the [REDACTED] data, replacing it with the three-month 
[REDACTED] loss rate, which he noted generated an even greater 
opportunity cost result. 8/19/20 Tr. 2699 (Shapiro); Shapiro WDT at 22, 
27; tbl.4 at 26.
    Professor Willig explained why, in his opinion, Professor Shapiro's 
substitution of [REDACTED] for [REDACTED] data is inappropriate:

    [I]t is completely illogical to reject the results of an LSE 
applied to one [REDACTED], while simultaneously claiming the results 
from the same experiment applied to a [REDACTED] are not only 
reliable, but can be extrapolated to the record company for which 
the experiment was deemed to be unreliable. None of the LSEs produce 
results that are statistically different from zero, and as such, 
Professor Shapiro's approach amounts to drawing on the random 
``noise'' from one LSE and asserting that such noise constitutes a 
better estimate of blackout effects than the random noise from his 
other LSEs. This is completely inappropriate and cannot form the 
basis for reliable results.

Willig WRT ] 28.
    The Judges agree with Professor Willig's criticism. Although it was 
``conservative'' for Professor Shapiro to plug in the [REDACTED] data 
for the [REDACTED]data, that act of purported ``fairness'' does not 
make the LSEs reliable. Indeed, because the LSEs also did not include a 
treatment group blacking-out [REDACTED]'s repertoire (for reasons that 
Pandora did not explain), Pandora is left with the data generated from 
the [REDACTED] results to serve as a proxy for the [REDACTED], when the 
experiment was designed to include [REDACTED]. Although there can be 
circumstances when information gleaned from only one Major is 
sufficient, an expert witness cannot simply discard data sources that 
he believed, ex ante, to be necessary, but which, ex post, cast doubt 
on the usefulness of the experiment, in order to paper-over anomalous 
results.\296\
---------------------------------------------------------------------------

    \296\ Thus, the Judges disagree with Pandora that Professor 
Shapiro's discarding of the [REDACTED] data--leaving the LSEs with 
lost listening data from but one Major ([REDACTED]--is similar to 
the Judge's reliance of industry data from fewer than all three 
Majors. See Services RPFFCL ] 953. Here, Dr. Reiley and Professor 
Shapiro constructed an experimental world and established its 
parameters. When those parameters produced an anomalous result, they 
discarded it, thereby revising their own experiment. That treatment 
by a party of data in conflict with the position it advocates 
resembles a cherry-picking of data, and is quite distinguishable 
from the Judge's reliance on real world data from less than all 
industry participants as probative of the workings of a market.
---------------------------------------------------------------------------

    In fact, SoundExchange takes Professor Shapiro to task for making 
other adjustments to the LSE results that it claims are equally ad hoc 
in nature. First, it criticizes Professor Shapiro for attempting to 
mitigate the real world fall-out (through third-party disclosure of the 
blackout, discussed supra) that would likely ensue upon a blackout of a 
Major by Pandora by simply relying on the upper end of the 95% 
confidence interval from the LSEs. Professor Willig notes that the 
upper end of these confidence intervals would be as tainted by the 
experiments' inability to measure the impact of these real world 
effects as

[[Page 59546]]

the point estimates that Professor Shapiro decided to ignore. 
Alternately stated, the confidence intervals, like the point estimates, 
are simply unrelated to the real world dissemination of information 
regarding the blackouts, and thus cannot be invoked as a proxy for the 
effect of such real world events. See 8/5/20 Tr. 581 (Willig); see also 
8/17/20 Tr. 2335 (Tucker) (finding this adjustment to be ``incredibly 
ad hoc and unreliable'' and ``anything but conservative''); Tucker WRT 
] 92 (finding these adjustments ``untethered to any valid procedure to 
produce reliable field experiment estimates''). Moreover, SoundExchange 
asserts that Professor Shapiro did not present a logical, mathematical 
or statistical justification for this adjustment. Rather, he instead 
multiplied the effect of the treatment four times over, a multiple that 
he testified--in decidedly imprecise language--``[REDACTED]'' 8/19/20 
Tr. 2704-27 (Shapiro).
    In response, Pandora claims that Professor Shapiro never claimed 
there was a correlation between the impact of the non-disclosure of the 
label suppression and the parameters of the confidence interval. 
Services RPFFCL ] 955. But to the Judges, that response merely 
underscores SoundExchange's broader criticism--no aspect of the data 
arising from the LSEs addresses this non-disclosure problem.
    Accordingly, the Judges are in agreement with the criticism 
levelled by SoundExchange. The mere fact that Professor Shapiro moved 
in the direction of greater listening loss by relying on the results at 
the upper end of the 95% confidence interval is undeniably uncorrelated 
with the real-world effects of third-party disclosure of the existence 
of the blackout of a label. As the record testimony and evidence 
discussed above demonstrates, Pandora proffered no evidence to counter 
the argument that such a blackout would likely lead to the cratering of 
Pandora's listener base, making even Professor Shapiro's quadruple 
adjustment meaningless.\297\
---------------------------------------------------------------------------

    \297\ And, as noted elsewhere in this Determination, for the 
same reasons, the Judges find that the likely real-world 
disclosures--from multiple interested sources--of an interactive 
service's blacking-out of a Major would cause a rapid collapse of 
the interactive service as well ([REDACTED]).
---------------------------------------------------------------------------

ii. Conclusion Regarding the LSEs and the Implication for Professor 
Shapiro's N-I-N Model
    For all of the foregoing reasons, the Judges cannot rely on the 
LSEs to support Professor Shapiro's calculation of his input ``L'' in 
his N-I-N model), i.e., the percentage of those performances that would 
be lost to other forms of listening in the absence of a license from 
the record company. The failure (or inability) of the LSEs to address 
the effects of third-party motivated disclosure over the longer-term of 
the existence of the blackouts on Pandora's listenership, is alone a 
fatal defect in the LSEs. The other defects catalogued above constitute 
a further metaphorical ``death by a thousand cuts,'' further supporting 
the Judges' decision to put no weight on the results of the LSEs. The 
Judges are in agreement with Professor Willig's testimony that, after 
considering the foregoing issues, Professor Shapiro's parameter ``L'' 
is flawed because it is based on unreliable data from the LSEs. Willig 
WRT ]] 22-27); 8/5/20 Tr. 351-53, 570-74 (Willig) (LSEs are 
``absolutely not'' a reliable source of evidence for use in economic 
analysis).
    Because a useful input ``L'' is a sine qua non of Professor 
Shapiro's opportunity cost calculation within his N-I-N Model, the 
Judges' decision to reject the calculation of that value (which was 
intended to show that any one Major is not a ``Must Have'') renders 
Professor Shapiro's N-I-N Model unusable.\298\
---------------------------------------------------------------------------

    \298\ Accordingly, the relative merits and criticisms of the 
other aspects of Professor Shapiro's N-I-N Model are moot.
---------------------------------------------------------------------------

3. Professor Shapiro's Myerson Value Model
    In his rebuttal testimony, Professor Shapiro utilizes what he 
described as a ``Meyerson Value'' modeling, developed by the economist 
Roger Myerson, which Professor Shapiro claims is a superior to 
Professor Willig's ``Shapley Value'' approach as a form of analysis in 
this proceeding. More particularly, Professor Shapiro testifies that 
Myerson Value modeling is similar in nature to the Shapley Value, and 
in fact can generate values equal to those produced by Shapley Value 
modeling in certain circumstances. Here, however, Professor Shapiro 
maintains that the two values depart from one another. The reason for 
the different outcomes is that the Myerson Value is applicable when 
there are ``contract externalities,'' a complication that is not 
addressed in Shapley Value modeling. Shapiro WRT at 32. By ``contract 
externalities,'' Professor Shapiro is referring to a situation where, 
in the present context, any one notional licensing agreement reached by 
a Major record company with a noninteractive service would affect the 
agreements reached by that noninteractive service with the other two 
Majors. Shapiro WRT at 59.
    Professor Shapiro opines that these ``contract externalities'' 
would occur if the repertoire of each Major was not a ``Must Have'' for 
a noninteractive service.\299\ In this regard, he acknowledges that, 
for his Myerson Value approach to be relevant (as with his N-I-N model) 
the Judges would need to find that the Majors are not ``Must Have'' 
licensors for noninteractive services. See 8/19/20 Tr. 2755-56 
(Shapiro) (acknowledging that the differences between the Shapley Value 
modeling results and the Myerson Value modeling results would be 
relatively small if the Majors are indeed ``Must Haves'' for 
noninteractive services). Applying this model, Professor Shapiro 
generates an ad-supported rate of $0.00146 per play, and a subscription 
rate of $0.00155 per play. Shapiro WRT at 63.
---------------------------------------------------------------------------

    \299\ See Shapiro WRT at 63-64. The external effect is that 
Major ``A'' must consider the possibility that agreements between 
Major ``B'' and/or ``C,'' on the one hand, and the noninteractive 
service, on the other, could result in Major ``A's'' inability to 
enter into a license agreement with that noninteractive service 
unless Major ``A'' reduced its royalty demand in order to avoid 
being the ``odd man out.'' But, each Major would be in the same 
position during negotiations, so each Major has the incentive to 
avoid this ``contract externality'' by proposing a lower rate than 
it would in the absence of this bargaining uncertainty.
---------------------------------------------------------------------------

    The dispositive defect in Professor Shapiro's Myerson Value 
modeling is that it too requires the application of the results from 
the LSEs to demonstrate that no one Major is a ``Must Have,'' and that 
bi-lateral negotiations within the model would account for this 
situation. But, as noted above in the Judges' discussion of Professor 
Shapiro's N-I-N model, an approach that is dependent upon a finding 
that the Majors are not ``Must Haves'' for a noninteractive service is 
in conflict with the Judges' finding that such a ``Must Have'' 
condition exists. Accordingly, the Judges decline to apply Professor 
Shapiro's Myerson Value modeling and results.

D. Evaluation of NAB Proposal for a Separate Rate for Commercial 
Simulcasters

    The NAB participated in this proceeding on behalf of commercial 
radio stations that simulcast their over-the-air broadcasts on the 
internet. In this proceeding, the Judges focus on the internet 
transmissions of these broadcasters.
    The NAB argues that commercial simulcasting (simulcasting) is 
distinct from other forms of commercial statutory webcasting. Given the

[[Page 59547]]

purported differences, the NAB advocates for a separate (lower) rate 
for simulcasters than for other eligible nonsubscription transmissions 
by webcasters. The NAB maintains that simulcasting constitutes a 
distinct submarket in which buyers and sellers would be willing to 
agree to lower royalty rates than their counterparts in the commercial 
webcasting market. It proposes a statutory rate of $0.0008 per play for 
simulcasts and $0.0016 for other eligible nonsubscription 
transmissions. NAB PFFCL ] 10. The NAB's proposal defines a simulcast 
transmission as ``a public performance of a sound recording by means of 
the simultaneous or near-simultaneous retransmission, as part of an 
eligible nonsubscription transmission, of the same sound recording 
included in a `broadcast transmission,' as the term is defined in 17 
U.S.C. 114.'' NAB Proposed Rates and Terms at 8.
    The NAB broadly contrasts simulcasting with custom radio services, 
which, it asserts, are standalone products, untethered to a 
corresponding radio broadcast. Leonard WDT ] 33. It indicates that 
custom radio provides a personalized experience that reflects a 
specific user's preferences. Leonard WDT ] 33; 8/18/20 Tr. 2430-31 
(Tucker); see also 8/13/20 Tr. 1819 (Orszag). The NAB adds that such 
services also permit more interactivity than simulcasts, such as 
seeding stations, skipping to another song, and thumbing up or down, 
all of which curate the listening experience. 8/24/20 Tr. 3427 
(Leonard); Leonard WDT ] 49; Leonard WRT ]] 41-47.
    Dr. Leonard, whom the NAB engaged to analyze the appropriate 
statutory royalty for public performance rights for sound recordings 
for webcasting under the Section 114 license and to evaluate the NAB's 
proposal regarding that statutory royalty, set out three types of 
webcasting services subject to the Section 114 license: Simulcast, 
Custom Radio, and internet Radio. Leonard WRT ]] 32-35. His stated 
criteria for simulcasts tracks closely to the proposed regulatory 
definition offered by the NAB. Dr. Leonard characterized custom radio 
as a service that ``streams music to listeners over the internet 
without any simultaneous terrestrial broadcast. Unlike simulcasts, 
custom radio is a `one to one' stream, with a particular listener 
receiving an individualized stream reflecting his or her expressed 
preferences, subject to the limitations on `interactivity' imposed by 
the Section 114 license, as interpreted by U.S. courts.'' Leonard WRT ] 
33.
    He characterized internet radio as ``a `native digital' service 
[that] does not involve the retransmission of a terrestrial 
broadcast.'' Leonard WRT ] 34. He went on to state that internet radio 
is more similar to custom radio than to simulcast and that, while 
internet radio stations do not vary the music played based on an 
individual listener's preferences, such services nonetheless often 
feature greater user functionality than simulcast, such as allowing 
listeners to pause and skip songs. He also maintained that internet 
radio services do not feature much non-music or localized content, nor 
are they subject to FCC regulation or public interest requirements. He 
also asserted that internet radio services are not a significant part 
of the streaming market and noted that his report does not treat 
internet radio services as distinct from custom radio services. Leonard 
WRT ] 35.
    As the proponent of a rate structure that treats simulcasters as a 
separate class of webcasters, the NAB bears the burden of demonstrating 
not only that simulcasting differs from other forms of commercial 
webcasting, but also that it differs in ways that would cause willing 
buyers and willing sellers to agree to a lower royalty rate in the 
hypothetical market. Web IV, 81 FR at 26320. As discussed below, based 
on the record in the current proceeding, the Judges find that the NAB 
has not satisfied that burden. Therefore, the Judges do not adopt a 
different rate structure for simulcasters than that which applies to 
other commercial webcasters.
1. History
    No prior rate determination has treated simulcasters differently 
from other webcasters. In Web I, the Librarian, at the recommendation 
of the Register, rejected a CARP report that set a separate rate for 
retransmission of radio broadcasts by a third-party distributor and 
adopted a single rate for commercial webcasters. 67 FR at 45252.\300\
---------------------------------------------------------------------------

    \300\ The Librarian also rejected arguments that broadcasters 
who stream their own radio broadcasts should be treated differently 
from third parties who stream the same broadcasts. Id. at 45254.
---------------------------------------------------------------------------

    In Web II, the Judges rejected broadcasters' arguments that rates 
for simulcasting should be different from (and lower than) royalty 
rates for other commercial webcasters. 72 FR 24084, 24095 (May 1, 
2007), aff'd in relevant part sub nom. Intercollegiate Broad. Sys. v. 
Copyright Royalty Bd., 571 F.3d 69 (D.C. Cir. 2009) (Web II).
    The NAB reached a WSA settlement with SoundExchange prior to the 
conclusion of Web III covering the remainder of the Web II rate period 
and all of the Web III rate period. At the request of the NAB and 
SoundExchange, the Judges adopted the settlement as statutory rates and 
terms binding all simulcasting broadcasters. See 75 FR 16377 (April 1, 
2010). Consequently, simulcasters did not participate in the Web III 
proceeding, in which the Judges determined rates for ``all other 
commercial webcasters.'' Although the Judges did not determine separate 
rates for simulcasters in Web III, because the Judges adopted the NAB 
settlement, simulcasting broadcasters paid different rates than 
webcasters that operated under the rates determined by the Judges.
    In Web IV, the Judges also rejected broadcasters' arguments that 
rates for simulcasting should be different from (and lower than) 
royalty rates for other commercial webcasters. 81 FR at 26323.
2. Proposed Benchmark Agreements
    In the current proceeding, the NAB offered proposed benchmark 
agreements in support of its rate proposal, supplemented by an 
alternative economic analysis. The NAB offered different types of 
voluntary agreements in support of its proposal: Direct license 
agreements between sound recording rights owners and webcaster iHeart 
and license agreements for musical compositions between performing 
rights organizations and webcasters Pandora and iHeart.
a. The iHeart/Indie Agreements
    The NAB sets forth as proposed benchmarks a set of 16 renewed 
direct license agreements between iHeart and independent (``indie'') 
record labels that include rights for simulcasting and other 
webcasting. Exs. 2013-2026, 2081-2082 (the iHeart/Indie Agreements). 
The NAB's economist, Dr. Leonard, accurately indicated that the terms 
and conditions of iHeart's direct deals with indies are generally 
consistent across all of these agreements. Leonard WDT ] 63. The NAB 
argues that these agreements provide insight into how willing buyers 
and willing sellers license simulcast and custom radio streams on 
different terms. 8/24/20 Tr. 3355 (Leonard); Leonard WDT ] 65; Trial 
Ex. 2154 ] 14 (WDT of James Russell Williams III (``Tres Williams'')) 
(Williams WDT).
    The NAB maintains that the iHeart/Indie Agreements are the only 
willing buyer/willing seller agreements offered by any participant that 
are between statutory services and sound recording companies for the 
same rights at issue under the section 114/112 licenses. 8/24/20 Tr. 
3375-76 (Leonard); see also id. at 3355; Leonard WDT ] 65. Dr.

[[Page 59548]]

Leonard focused his analysis on the renewal agreements because he 
concluded that these agreements indicate that the effective per-play 
rates under those agreements were acceptable to both parties and that 
the iHeart-Indie benchmarks are the best evidence of a willing buyer/
willing seller transaction at the effective per-play rates that 
predated the renewal. Leonard WRT ] 50; Leonard WDT ] 65; 8/24/20 Tr. 
3357-58.
    The NAB argues that the iHeart/Indie Agreements reflect licensors' 
views of the relative promotional and substitutional considerations 
associated with licensing iHeart's simulcast and custom radio services 
and generate average rates below the statutory rate. Leonard WDT ] 71, 
75. In the NAB's view, the indie labels' willingness to accept below-
statutory rates was motivated by steering, including both the ability 
to garner more plays of the indies' catalogs and special relationships 
with top programmers at iHeart. 8/31/20 Tr. 4538-39; 4542-43 
(Williams).
    SoundExchange asserts that the iHeart/Indie Agreements are not a 
reliable or appropriate benchmark. It points out Dr. Leonard's 
acknowledgement that the iHeart/Indie Agreements account for only 
[REDACTED]%, [REDACTED]%, and [REDACTED]% of iHeart's total simulcast, 
custom radio, and webcast performances, respectively. Leonard WDT ] 72 
& app. A4. SoundExchange maintains that the scope of these licenses 
makes them insufficiently representative to serve as persuasive 
benchmarks, citing the Judges' decision, in SDARS III, not to use as a 
benchmark a far larger number of direct licenses with indie record 
labels, 500 direct licenses representing 6.4% of the tracks on Sirius 
XM playlists because they were not representative of the market. SDARS 
III, 83 FR at 65249.
    SoundExchange also criticizes the persuasiveness of the iHeart/
Indie Agreements because the agreements [REDACTED] 8/24/20 Tr. 3492 
(Leonard). SoundExchange adds that all but two of the agreements 
[REDACTED]. Orszag WRT ] 59. SoundExchange also maintains that under 
the iHeart/Indie Agreements, iHeart had little incentive to steer plays 
toward the contracting indie labels' content. It cites to Dr. Leonard's 
acknowledgment that broadcasters' choice of content is driven not by 
simulcasting but by terrestrial radio choices and the considerations 
there. 8/24/10 Tr. 3503 (Leonard).\301\ SoundExchange adds that 
[REDACTED]. SX PFFCL ]] 1181-1182; Orszag WRT ] 59.
---------------------------------------------------------------------------

    \301\ 17 U.S.C. 114(g)(2) requires that SoundExchange distribute 
50% of collected license fees to the copyright owner of a sound 
recording, 45% to recording artist or artists featured on such sound 
recording, and the remaining 5% to independent administrator that 
represents non featured musicians and vocalists who have performed 
on sound recordings.
---------------------------------------------------------------------------

    SoundExchange asserts that the iHeart/Indie Agreements do not fully 
account for the economic value of simulcasting to the parties. It 
maintains that the indie labels that entered into the iHeart/Indie 
Agreements received several other benefits not available under the 
statutory license in exchange for accepting a lower royalty rate. 
Orszag WRT ] 62. It asserts that these motivating factors serve as key 
differentiators between direct license agreements and the statutory 
environment and that taking royalty rates from direct licenses at face 
value would distort the estimate of overall market rates. Orszag WRT ] 
68.
    SoundExchange indicates that the labels entering into the iHeart/
Indie Agreements were motivated by [REDACTED]. Orszag WRT ]] 65. The 
agreements include payments that are characterized [REDACTED]. See, 
e.g., Trial Ex. 2013 ]] 1(j), 1(g)(g), and 4(a)(i) The U.S. copyright 
law confers no exclusive right of public performance by means of 
terrestrial radio transmissions for sound recording copyright owners. 
Mr. Orszag [REDACTED] Orszag WRT ]] 66. Mr. Orszag argued that a label 
whose catalog performs better on terrestrial radio than it does on 
simulcasting or custom webcasting might expect [REDACTED]. Id. He added 
that several indie labels generally [REDACTED], or [REDACTED]. Orszag 
WRT ]] 66 n.139. Mr. Orszag also indicated that in addition to the 
financial benefits, this [REDACTED] served as an [REDACTED]. Id. ] 65; 
8/31/20 Tr. 4606-07 (Williams) (acknowledging that ``[REDACTED]'').
    SoundExchange also argues that the labels entering into the iHeart/
Indie Agreements direct license were motivated by royalties for pre-
1972 catalog, something the labels were not otherwise entitled to prior 
to the passage of the Music Modernization Act in 2018. Orszag WRT ]] 
67.
    SoundExchange notes that the iHeart/Indie Agreements enabled indie 
labels to both avoid deduction of SoundExchange's administrative fee 
and capture the full amount of royalties owed by iHeart, without any 
mandatory share of royalties under the iHeart/Indie Agreements going 
directly through SoundExchange to featured or non-featured performing 
artists, as would have been the case under the statutory license. 8/13/
20 Tr. 1852-53 (Orszag); Orszag WRT ] 63. The NAB elicited testimony 
from Mr. Orszag indicating that he was aware of only one of the indie 
labels that agreed to the iHeart/Indie Agreements, [REDACTED], which 
primarily focuses on budget classical music, that [REDACTED]. 8/13/20 
Tr. 1853 (Orszag). Mr. Orszag indicated that one of the indie labels 
that agreed to the iHeart/Indie Agreements, [REDACTED], may still 
employ splits with certain artists, equal to or proximate to the 50/50 
split due to performing artists under the statutory license. However, 
he did not represent that he knew know all of [REDACTED]'s deals with 
its artists, or the share of royalties that artists may be due. 8/13/20 
Tr. 1855-57 (Orszag).\302\
---------------------------------------------------------------------------

    \302\ The iHeart/Indie Agreements include substantially similar 
language indicating that the relevant label ``[REDACTED].''
    All but one of the iHeart/Indie Agreements, the [REDACTED] 
Agreement, Trial Ex. 2027, went on to clarify that ``[REDACTED]'' 
See, e.g., [REDACTED] Agreement, Trial Ex. 2013 ] 4b.
---------------------------------------------------------------------------

b. The PRO Agreements
    The NAB offers agreements licensing public performance rights in 
musical works to webcasters as a providing evidence to reinforce the 
conclusion that simulcast should receive a lower royalty rate than 
custom radio. Leonard WDT ] 83, 89. The NAB argues that agreements 
between performance rights organizations and webcasters indicate that 
simulcast and custom radio exist as distinct products subject to 
different rates in voluntary agreements. 8/24/20 Tr. 3389-91 (Leonard); 
Leonard WDT ] 81.
    Dr. Leonard referenced a 2017 ASCAP Radio Station License Agreement 
with iHeart. He represented that the license includes coverage for 
simulcasts and certain non-simulcast webcasts but excludes coverage for 
custom radio webcasts that offers music programming customized for any 
specific user or enables a user to provide feedback to customize the 
music programming made available to such specific user. Leonard WDT ]] 
85-86. Dr. Leonard maintained that this ASCAP license is informative 
because: The radio stations licensees offering simulcast services are 
the same licensees at issue in this proceeding; the license covers 
analogous rights, for performance of musical compositions as compared 
to performance of sound recordings; the license covers simulcast and 
non-simulcast (non-custom) internet radio, [REDACTED]; the agreement is 
a transaction negotiated under the competitive protections of the ASCAP 
antitrust consent decree; and it functions as an industrywide 
agreement.

[[Page 59549]]

Leonard WDT ] 87. Dr. Leonard testified [REDACTED], so he compared the 
ASCAP license's percentage of revenue rate for simulcasts with an 
effective Pandora royalty, which he calculated as a percentage of 
revenue. Leonard WDT ] 88; 8/24/20 Tr. 3390 (Leonard). His analysis 
indicated that the ratio of the ASCAP royalty rate as a percentage of 
revenue for simulcast to the ASCAP royalty rate as a percentage of 
revenue for Pandora ranges from 38% to 48%. Leonard WDT ] 88.
    Dr. Leonard represented that BMI has offered to the Radio Music 
License Committee \303\ a percentage of revenue royalty rate for 
terrestrial broadcasts simulcast and certain limited non-simulcast non-
custom streaming. He maintained this is an indication that BMI treats 
simulcasting as equivalent to radio stations' terrestrial broadcasts. 
Leonard WDT ] 89. He also acknowledges that the RMLC did not request 
and BMI did not offer a rate for custom radio. Leonard WDT ] 90. Dr. 
Leonard also indicated that a group of radio stations represented by 
the RMLC entered into licenses with the PRO SESAC covering the period 
from January 1, 2016 to December 31, 2018 that provided a percentage of 
revenue royalty rate for terrestrial broadcasts and simulcast. Leonard 
WDT ] 91.
---------------------------------------------------------------------------

    \303\ The Radio Music License Committee represents the interests 
of the commercial radio industry on music licensing matters.
---------------------------------------------------------------------------

    The NAB also argues that litigation with ASCAP and BMI over the 
royalty rates it was required to pay to those PROs for its custom radio 
product indicates that custom radio services are not similarly situated 
to radio stations' product, and that the two services are not 
``similarly situated'' under the ASCAP consent decree but are 
``different types of services.'' SX PFFCL ]] 90-91; see In re Pandora 
Media, Inc., 6 F. Supp. at 320; BMI v. Pandora Media, Inc., 140 F. 
Supp. 3d 267, 270 (S.D.N.Y. 2015).
    SoundExchange counters the NAB's arguments regarding the PRO 
agreements by asserting that it is not informative that custom 
webcasting is generally licensed separately and at a higher rate 
because licensees pay the PROs on a percentage of revenue basis. 8/24/
20 Tr. 3534-35 (Leonard). SoundExchange notes that Dr. Leonard 
acknowledges that radio broadcasters typically play less music per hour 
than custom webcasters, and the percentage-of-revenue rates paid to the 
PROs by simulcasters would reasonably be lower than the rates paid to 
the PROs by custom webcasters. See, e.g., Leonard WDT ] 39 & app. C2-
C18; see also 8/24/20 Tr. 3535-36 (Leonard); Orszag WRT ] 48. 
SoundExchange maintains that the different intensities of music use 
explain the different effective percentage of revenue rates in PRO 
agreements for simulcast and custom radio. Orszag WRT ]] 50-51.
    SoundExchange adds that the NAB did not actually submit into the 
record any operative agreement between any PRO and any webcaster that 
covers custom radio and that NAB's claimed evidence about what custom 
radio pays is from unseen agreements between Pandora and two PROs is 
inadequate. SX PFFCL ]] 1096-97; 8/24/20 Tr. 3541, 3542 (Leonard). 
SoundExchange argues that Dr. Leonard does not know what the agreements 
may actually say and he cannot say whether the rates for custom 
webcasting reflect potential tradeoffs on other terms. SX PFFCL ]] 
1097-99. SoundExchange adds that Dr. Leonard admitted that he did not 
know if there were such tradeoffs or how they were negotiated because 
he had not actually seen the agreements. 8/24/20 Tr. 3542, 3551 
(Leonard).
    SoundExchange then argues that the definitions regarding 
``similarly situated'' licensees in the ASCAP and BMI consent decrees 
include factors that are distinct from the provisions of 17 U.S.C. 
114(f)(1)(B). SoundExchange maintains that the differences between the 
consent decrees and the statute explain why PROs treat custom radio 
differently from broadcast and simulcast. It notes that the ASCAP 
consent decree expressly identifies, ``the nature and frequency of 
musical performances'' as a factor to identify whether services are 
similarly situated, and states that similarly situated services ``use 
music in similar ways and with similar frequency.'' SX RPFFCL (to NAB) 
] 102, citing United States v. ASCAP, No. 41-1395 (WCC), 2001 WL 
1589999, at *3 (S.D.N.Y. June 11, 2001).
3. Conclusions Regarding Benchmark Evidence for Simulcasting as 
Distinct From Other Forms of Statutory Webcasting
a. iHeart/Indie Agreements
    Based on the entirety of the record, the Judges do not accept the 
iHeart/Indie Agreements as sufficiently probative of the relevant 
market to accept them as meaningful or persuasive benchmarks, or 
therefore as adequately persuasive to establish a separate rate for 
simulcasting. Importantly, these direct licenses cover only a small 
portion of the sound recordings performed by iHeart, and an even 
smaller portion of the entire market for simulcast, custom radio, and 
internet radio performances. The Judges also find that the record is 
insufficiently informative as to the effect of steering on the agreed 
upon royalty rates because none of them contain [REDACTED]. In 
addition, because U.S. copyright law confers no exclusive right of 
public performance by means of terrestrial radio transmissions for 
sound recording copyright owners, or prior to passage of the MMA a 
right to royalties for pre-1972 sound recordings, the Judges have 
misgivings regarding the extent to which the royalties under the 
agreements accurately reflect the myriad of motivations, and value 
received, for labels to enter into them. In sum, the characterization 
of part of the compensation in these agreements [REDACTED] is suspect, 
as it is not economically rational for a licensee to pay a royalty for 
an activity for which no license is required. The NAB has not sustained 
its burden to provide an adequate basis in evidence or economic theory 
that would permit the Judges to allocate this compensation 
accurately.\304\
---------------------------------------------------------------------------

    \304\ While Dr. Leonard's analysis of the iHeart/Indie 
Agreements offered adjustments that considered allocating various 
levels of revenue [REDACTED]. The Judges would need further evidence 
to determine whether and the extent to which, as an economic matter, 
[REDACTED] should be treated as compensation for simulcasting, in 
contrast to custom webcasting.
---------------------------------------------------------------------------

    The Judges find that SoundExchange offered compelling indications 
that the indie labels that entered into the iHeart/Indie Agreements 
were motivated by non-monetary benefits that undermine the application 
of the agreements as reliable benchmarks. The Judges find that the NAB 
did not adequately counter or account for these concerns.
    SoundExchange also raised legitimate concerns that several indie 
labels generally [REDACTED], or [REDACTED], on the [REDACTED] of the 
direct licenses across multiple monthly royalty statements, thus 
skewing the motivations of the Indie labels, especially in the context 
of payments for unrecognized rights under U.S. copyright law. The NAB 
did not present the Judges with adequate evidence to address or account 
for these legitimate concerns.
    The Judges observe, and find concern with the fact that while the 
NAB's proposal seeks to contrast simulcasting with all other statutory 
webcasting, the NAB chose to more consistently draw a contrast between 
simulcasting and custom radio services, by treating internet radio, 
without adequate justification, as indistinct from custom radio. The 
Judges find that this conflating of internet radio and custom

[[Page 59550]]

radio services was not adequately supported by the record evidence, and 
that therefore the proper comparison between simulcasting and all other 
statutory commercial webcasting was insufficiently established.\305\
---------------------------------------------------------------------------

    \305\ The Judges also observe, but do not necessarily rely upon, 
the apparent ability of the [REDACTED]. While there was an 
indication that some labels and artists agreements, in particular a 
notably successful recording artist group, may employ artist share 
splits equal to or proximate to the 50% share due to performing 
artists under the statutory license, the Judges have sparse 
indication regarding the range or frequency of actual artists' 
shares that may be equal to or proximate to the statutory 50/50 
split. The Judges also note that the [REDACTED] Agreements 
[REDACTED]. See e.g., [REDACTED] Agreement, Ex 2013, ] 4b. This is 
in contrast to at least one other agreement in evidence covering 
webcasting uses eligible for the 114 statutory license, the 2016 
Pandora/UMG agreement, which indicates an obligation for UMG to 
``[REDACTED],'' Ex 5013, SOUNDEX_W5_000010111.
---------------------------------------------------------------------------

b. PRO Agreements
    Based on the entirety of the record, the Judges find that evidence 
regarding agreements between performance rights organizations and 
webcasters is insufficiently persuasive to establish that simulcast and 
custom radio exist as distinct products subject to different rates in 
voluntary agreements. As an initial matter, the Judges note that PRO 
negotiations and agreements cover different rights, and involve 
different parties from those at issue in this proceeding. It is also 
relevant that the rights at issue are often subject to detailed on-
going government oversight via consent decrees. The Judges are in 
agreement with SoundExchange that the definitions regarding ``similarly 
situated'' licensees in the ASCAP and BMI consent decrees include 
factors that are distinct from the provisions of 17 U.S.C. 
114(f)(1)(B).
    In addition, the Judges find it troubling that the NAB did not 
actually submit into the record any operative agreement between any PRO 
and any webcaster that covers custom radio. The Judges find the NAB's 
claimed evidence about what custom radio pays, purportedly derived from 
unseen agreements between Pandora and two PROs, to be inadequate and 
unreliable. SoundExchange correctly points out that neither the NAB nor 
the Judges can know what the agreements actually say, and whether the 
agreements may reflect tradeoffs on other terms.
4. Qualitative Arguments Regarding a Separate Rate for Simulcasters
    In addition to its proposed benchmarks, the NAB offers several 
qualitative arguments why willing buyers and sellers would agree to 
lower simulcasting rates. For the reasons set forth below, and based on 
the entirety of the record, the Judges are not persuaded that the 
offered qualitative arguments sufficiently establish that willing 
buyers and sellers would agree to separate, lower simulcasting rates.
a. Degree of Interactivity
    The NAB argues that simulcasters should pay a lower royalty because 
simulcast transmissions are among the least interactive form of 
webcasting. NAB PFFCL ]] 147-153. It asserts that in establishing a 
digital performance right for sound recordings and the statutory 
license at issue, Congress recognized that ``interactive services are 
most likely to have a significant impact on traditional record sales'' 
while noninteractive services were more promotional and less 
substitutional. NAB PFFCL ] 148 (citing H.R. Rep. No. 104-274, at 14). 
The NAB suggests that this legislative history indicates Congress's 
recognition that a service's interactivity is a good proxy for its 
ability to substitute or interfere with other streams of revenue. 
Leonard WDT ] 49. It points to the Copyright Office's recognition that 
``it may be appropriate [for the Judges] to distinguish between custom 
and noncustom radio, as the substitutional effect of personalized radio 
on potentially competing interactive streaming services may be greater 
than that of services offering a completely noncustomized experience.'' 
NAB PFFCL ] 149 (citing Copyright and the Music Marketplace, supra at 
178). The NAB also offers the testimony of Aaron Harrison, Senior Vice 
President, Business and Legal Affairs of UMG Recordings, who agreed 
that typically ``[REDACTED]'' 9/3/20 Tr. 5691 (Harrison).
    As a record company executive, Mr. Harrison's testimony provides 
some evidence that record companies [REDACTED] because those services 
are less likely to displace sales of sound recordings. However, the 
value of his statements for determining whether a differential rate is 
justified for simulcasters is limited. First, Mr. Harrison was not 
addressing specific negotiations or transactions. Second, the series of 
questions Mr. Harrison was responding to were focused on additional 
functionality of directly licensed interactive services. 9/3/20 Tr. 
5690-92 (Harrison). Mr. Harrison clarified this in his testimony 
stating his understanding that UMG has only licensed ``[REDACTED].'' 9/
3/20 Tr. 5691 (Harrison).
    While the NAB posits that simulcasting is less interactive than 
custom webcasting, it has not established that simulcasting, as a rule, 
is materially less interactive than the full scope of noninteractive 
webcasting, all of which would be subject to the general commercial 
webcasting rates. The statutory license is available to services that 
offer a continuum of features, including various levels of 
interactivity, which are offered in a manner consistent with the 
license. While the Judges recognize, as have others, that a variety of 
factors may support a separate rate, on the record before them, the 
Judges find insufficient basis for parsing the interactivity across 
statutory services as proposed, or to set a customized rate structure 
among categories of commercial webcasters based on statutorily 
permissible levels of interactivity.
b. Promotional Effect
    The record includes numerous statements concerning the specific 
promotional value to copyright owners of terrestrial radio plays for 
stimulating revenue for sound recordings, thus leading to a licensee's 
willingness to accept lower rates for such plays. See, e.g., 9/3/20 Tr. 
5734 (Harrison); Trial Ex. 2153 at 7-19 (WDT of Tom Poleman) (Poleman 
WDT); 9/9/20 Tr. 5944 (Sherwood); Leonard WRT ]] 97-101. The record 
also indicates that characteristics that enhance promotional value 
include tight playlists with limited recordings and repeated plays of 
recordings on those playlists. Additionally, the record includes some 
indication that labels may not distinguish the between terrestrial 
radio versus simulcasting in terms of promotional benefit. Poleman WDT 
]] 7; 8/27/20 Tr. 4418-19.
    The bulk of the evidence is persuasive that labels perceive a 
distinct promotional value in over the air radio play of their 
recordings, including participation in certain promotional programs and 
opportunities to enhance their ability to leverage promotional plays on 
terrestrial radio, with some necessary tie-in to simulcast plays. 
However, the record provides little persuasive indication that labels 
similarly, affirmatively, seek plays over simulcasts for purposes of 
promotion. The indications that labels may not distinguish the between 
terrestrial radio versus simulcasting in terms of promotional benefit 
is reasonably indicative that labels simply do not consider the 
promotional value of simulcasts (which reaches a relatively small 
number of listeners) in their pursuit of the promotional value of 
terrestrial radio plays. The NAB fails to analyze adequately the degree 
to which labels assign promotional value, or take actions motivated by 
promotional value

[[Page 59551]]

of simulcasts in relation to the promotional value labels seek via 
terrestrial plays.
c. The Value of Non-Music Content as a Differentiator
    The NAB points to simulcasts' differentiated use of music versus 
non-music content, compared to custom radio, which is geared more 
toward music content. NAB PFFCL ]] 165-167. It sets forth that 
terrestrial radio and simulcasters play relatively few songs compared 
to custom radio services. NAB PFFCL ] 167; Leonard WDT ] 47; 8/24/20 
Tr. 3427:3-8 (Leonard) (``[terrestrial broadcasters and simulcasters] 
use forms of non-music content to compete in the marketplace . . . in 
contrast, a custom radio station is basically 100 percent music.''). It 
adds that terrestrial radio and simulcasters play relatively small 
catalogs of songs compared to custom radio services and that as a 
result any particular sound recording is not significantly important 
for the transmitted programming. NAB PFFCL ] 167; 9/3/20 Tr. 5734 
(Harrison); Leonard WDT ] 45. The NAB also offers that radio stations 
receive the most ad revenue during parts of the day where they play the 
least music, as an indication that terrestrial radio and simulcasters 
value non-music content less. 8/24/20 Tr. 3429-31 (Leonard). It also 
suggests that audience surveys and proposed benchmark agreements 
(addressed above) indicate that listeners place a relatively high value 
on non-music content. The NAB maintains that taken together this 
``evidence suggests music content has less value per minute, and 
therefore less value per-play, on simulcast than on custom radio.'' NAB 
PFFCL ] 172.
    Like the NAB's proposed analysis of promotional value, its 
arguments regarding differentiated use of music versus non-music 
content by terrestrial radio and simulcasters compared to custom radio 
are insufficient. Both analyses fail adequately to address the relative 
motivations behind programming choices as they may apply to terrestrial 
radio versus simulcasting, and extent to which each transmission method 
plays a role in programming choices. Additionally, the bulk of the 
evidence and analysis regarding differentiated use of music versus non-
music content involves comparison of simulcasts and custom radio, the 
latter of which is merely a subset of other eligible nonsubscription 
transmissions. This type of evidentiary comparison does not match with 
the proposal to differentiate rates between simulcast and all other 
eligible nonsubscription transmissions. While the NAB posits that 
simulcasts are able to differentiate by use of non-music content and 
that simulcasters play relatively few songs compared to custom radio, 
it has not adequately established that simulcasting, as a rule, is 
materially less music intensive than the full scope of noninteractive 
webcasting, all of which would be subject to the general commercial 
webcasting rates.
d. Competition With Other Commercial Webcasters
    SoundExchange argues that simulcasters and other commercial 
webcasters compete for listeners and revenue in the same submarket and 
therefore should be subject to the same rate. It cites to numerous 
statements in government filings submitted by broadcasters and the NAB 
in support of this position. See, e.g. NAB 2018 comments filed with the 
FCC (Trial Ex. 5472) (acknowledging radio broadcasters have myriad 
competitors for streaming audiences); Cumulus Media, Inc. December 31, 
2019 SEC filing Form 10-K (Trial Ex. 3042) at 8 (discussing competition 
with various digital platforms and services, including streaming music 
and other entertainment services for both listeners and advertisers). 
Additionally, SoundExchange points to internal NAB and iHeart documents 
indicating that broadcasters view digital music services as 
competitors. See, e.g. NAB Board Meeting Minutes from January 29, 2018 
(Trial Ex. 5196) at 3 (discussing ``[REDACTED]''). SoundExchange also 
offers evidence that certain webcasters affirmatively seek to compete 
with simulcasters as well as terrestrial radio, including [REDACTED]. 
Trial Ex. 5056 at 73. The Judges find these indications of mutual 
competition between simulcasters and other commercial webcasters to be 
a compelling indication that simulcasters and other commercial 
webcasters operate in the same, not separate submarkets.
5. Survey Evidence Regarding Separate Rate for Simulcasters
a. The Hauser Survey
    The NAB engaged Professor John Hauser to determine the degree to 
which listening to simulcasts substitutes for various alternative 
activities, the importance of different types of content to simulcast 
listeners, and how much consumers listen to simulcasts. See Trial Ex. 
2151 ]] 6-7, app. E (WDT of John Hauser) (Hauser WDT); 8/27/20 Tr. 
4333-35 (Hauser). Professor Hauser's survey results are expressed as a 
series of ``diversion ratios'' reflecting the percentage of respondents 
that, in the absence of simulcasts, would consume content from the 
potential alternative activities presented in the survey. Hauser WDT 
app. R.
    Professor Hauser indicated that his survey employed standard 
scientific methods to maximize reliability. The method included 
Screening Questions to ensure an appropriate target audience and 
attention checks to verify that respondents read the survey questions 
carefully. He also used a double-blind methodology and included 
question and response options unrelated to the study's objective and 
used filters and randomization of response options (when appropriate) 
to avoid certain biases. Hauser WDT ]] 14, 22-24, 39.
    After screening for the appropriate target sample audience, 536 
respondents moved to the main survey. Of that group of qualified 
respondents, 532 completed the survey. Professor Hauser testified that 
this sample size was adequate to enable him to provide statistically 
significant results. Hauser WDT ] 76.
    In an introduction to the survey, the respondents were instructed 
that ``There are various ways in which you can listen to content, some 
of which are defined below. Please read these definitions carefully, 
and keep them in mind when responding to questions in this survey.'' 
The descriptions of the listening options were:

    Live AM/FM radio broadcasts through a radio: Live AM/FM radio is 
broadcast locally, thus allowing listeners to listen to local 
stations that may offer news, sports, weather, talk, and/or music 
through an AM/FM radio that is portable, in the home, or built into 
a car. Stations may broadcast programming created locally (e.g., 
morning shows with local traffic and weather), or nationally. Radio 
stations may be not-for-profit (e.g., NPR, college radio stations) 
or commercially supported by ad sales (commercial radio).
    Live AM/FM radio broadcasts over the internet: Live AM/FM radio 
broadcasts over the internet allow listeners to listen to the same 
content through their computers or other internet-capable devices 
that is simultaneously transmitted to AM/FM radios. Live AM/FM radio 
broadcasts over the internet may be accessed by going to the website 
or app of a radio station, or to the website or app for a platform 
such as iHeartRadio or TuneIn.
    Satellite radio (SiriusXM): Satellite radio is broadcast 
nationwide via satellite, thus allowing listeners to listen to the 
same stations anywhere in the country through a receiver that is 
portable, in the home, or built into a car. Satellite radio is 
available by subscription and offers commercial-free music as well 
as sports, news, talk, and other programming. Satellite radio may 
offer different stations that are not available on live AM/FM radio 
broadcasts through a radio or over the internet.
    On-demand music streaming services: On-demand music streaming 
services allow

[[Page 59552]]

listeners to choose the specific song, artist, or playlist they wish 
to hear, in addition to playlists provided by the service. These 
services may be available for free with ads, or through a paid 
subscription without ads. On-demand music streaming services include 
Apple Music, ad-supported Spotify, Spotify Premium, Google Play 
Music, and others.
    Not-on-demand music streaming services: Not-on-demand music 
streaming services do not allow listeners to choose the specific 
song or artist they wish to hear, but instead provide a pre-
programmed list of songs based on listener preferences. The specific 
planned selection and order of songs remain unknown to the listener 
(i.e., no prepublished playlist). These services may be available 
for free with ads, or through a paid subscription without ads. Not-
on-demand music streaming services include adsupported Pandora, 
Pandora Plus, and others.

Hauser WDT app. D-6-7. At various points in the survey, respondents 
were informed may click a link to review these definitions. See, e.g. 
Hauser WDT app. D-11.
    The first question in the main survey, Q1, asked respondents to 
approximate the total number of hours they spent listening to live AM/
FM broadcasts from commercial radio stations over the internet over the 
prior three days. Hauser WDT ] 93.
    On average, respondents estimated that they spent 5.3 hours 
listening to internet simulcasts of terrestrial commercial radio during 
the past three days (approximately 1 hour per day). The median 
respondent estimated spending four hours listening to internet 
simulcasts of terrestrial commercial radio during the past three days--
approximately 1.5 hours per day. A total of 91.6 percent of the 
respondents spent less than twelve hours over three days (i.e., four 
hours per day) and 96.7 percent spent less than eighteen hours over 
three days (i.e., six hours per day). Three respondents spent more than 
ten hours per day and no respondents spent more than forty-eight hours 
over the three-day period. The average estimated number of hours spent 
listening to internet simulcasts of terrestrial commercial radio by day 
of week ranged from 1.7 to 1.8 hours. Hauser WDT ]] 94-95.
    The next question, Q2, asked respondents about the types of content 
to which they listened on internet simulcasts of terrestrial commercial 
radio. Respondents were prompted to select all of the offered types of 
content to which they listened on internet simulcasts of terrestrial 
commercial radio in the last three days. Hauser WDT ] 96. The offered 
types of content were as follows:

--Music (all genres, e.g., pop country rock children's music religious 
music)
--Sports (e.g., game broadcasts commentary)
--News weather and traffic
--Religion (nonmusic content, e.g., preaching education)
--Talk (e.g., live DJ commentary politics personal finance
--Comedy (e.g., sketch comedy stand up)
--Kids and family nonmusic content (e.g., educational programs)
--Other content. Please specify [TEXT BOX DO NOT ALLOW BLANKANCHOR GO 
TO Q4 IF ONLY OTHER IS SELECTED ANCHOR]
--Don't know/Unsure [EXCLUSIVE ANCHOR] [IF ``DON'T KNOW/UNSURE'' IS 
SELECTED GO TO Q4 OTHERWISE GO TO Q3]

Hauser WDT app. D-10.

    On average, respondents indicated that they listened to 2.6 types 
of content on internet simulcasts of terrestrial commercial radio in 
the last three days. The breakdown was as follows: 413 respondents 
(82.4 percent) selected music; 277 respondents (55.3 percent) selected 
news weather and traffic; 248 respondents (49.5 percent) selected talk; 
182 respondents (36.3 percent) selected sports; 89 respondents (17.8 
percent) selected comedy; 34 respondents (6.8 percent) selected 
religion; 32 respondents (6.4 percent) selected kids and family; and 2 
respondents (0.4 percent) selected other content types. Hauser WDT ] 
97.
    Appendix O, displays a table of the results.
    If respondents indicated that they listened to one or more types of 
content in the past three days, they were next asked, in Q3, to 
indicate the level of importance each type of content had for them, 
choosing between ``not important,'' ``somewhat important,'' and ``very 
important'' for each type of content. Hauser WDT ] 99.
    A total of 256 (51.1 percent) indicated music was very important, 
185 (36.9 percent) indicated news, weather and traffic was very 
important, 123 (24.6 percent) indicated talk content was very 
important, 99 (19.8 percent) indicated sports content was very 
important, 45 (9.0 percent) indicated comedy was very important, 22 
(4.4 percent) indicated religious content was very important, and 18 
(3.6 percent) indicated that kids and family content was very 
important. Hauser WDT ] 100.
    Appendix P, displays a table of the results.
    The respondents were then asked, in Q4, about options they would 
consider in place of internet simulcasts as follows:

    Now suppose that live AM/FM radio broadcasts from commercial 
radio stations over the internet were not available for the next 
five years. Assume that everything else would be available for the 
next five years as it is now. Which of the following if anything 
would you consider doing in place of listening to such broadcasts 
over the internet during the next five years? The prices below are 
examples and do not include promotional discounts taxes or fees. If 
you are unable to say whether you would do or would not do a 
particular activity please indicate this by choosing the `Don't know 
Unsure' option. It is important that you do not guess.

Hauser WDT ]] 101-104, app. E, Q4

    Then, in Q5, respondents were asked, out of the selected 
consideration set, which option they would choose, as follows:

    Continue to suppose that live AM/FM radio broadcasts from 
commercial radio stations over the internet were not available for 
the next five years. Assume that everything else would be available 
for the next five years as it is now. Now think about the most 
recent time you listened to live AM/FM radio broadcasts from 
commercial radio stations over the internet. Please consider 
situations similar to that time and the content you listened to at 
that time. Which one of the following would you do in place of 
listening to such broadcasts over the internet in similar situations 
during the next five years. The prices below are examples and do not 
include promotional discounts taxes or fees. If you are unable to 
say which particular activity you would do please indicate this by 
choosing the `Don't know/Unsure' option. It is important that you do 
not guess.

Hauser WDT ]] 101-105, app. E, Q5.

    Professor Hauser indicated that the consider-then-choose question 
formulation served two functions. First, the question serves a filter. 
Respondents cannot select a medium if they would not at least consider 
it. By using such a filter, the survey avoids asking respondents to 
guess about which medium they would choose. Second, Professor Hauser 
represented that there is strong scientific evidence that consumers use 
a two-stage consider-then-choose decision process when they make a 
consumption decision, and that this format is more realistic and 
provides a better representation of the decision processes that 
consumers use. Hauser WDT ]] 102.
    The options in Q4 and Q5 were as follows: \306\
---------------------------------------------------------------------------

    \306\ The question presentation included informing respondents 
that they may click a link to review the definitions for ``Live AM/
FM radio broadcasts through a radio'' ``Live AM/FM radio broadcasts 
over the internet'' ``Satellite radio (SiriusXM)'' ``On-demand music 
streaming services'' ``Not-on-demand music streaming services''. 
See, e.g. Hauser WDT app. D-11.

(A) On-demand music streaming services in place of live AM/FM radio 
---------------------------------------------------------------------------
broadcasts from commercial radio stations over the internet


[[Page 59553]]


    [1] I would listen to on-demand music streaming service(s) 
through the paid subscription(s) I already have (e.g., Apple Music, 
Spotify Premium, Google Play Music).
    [2] I would purchase new paid subscription(s) to on-demand music 
streaming service(s) that I don't currently subscribe to (e.g., an 
individual subscription to Apple Music, Spotify Premium, or Google 
Play Music at $9.99 per month or $119.88 per year).
    [3] I would listen to on-demand music streaming service(s) that 
have ads and that I do not need to pay for (e.g., ad-supported 
Spotify).
    [4] I would listen to music on video site(s) that have ads and 
that I do not need to pay for (e.g., ad-supported YouTube).

(B) Not-on-demand music streaming services in place of live AM/FM 
radio broadcasts from commercial radio stations over the internet

    [5] I would listen to not-on-demand music streaming service(s) 
through the paid subscription(s) I already have (e.g., Pandora 
Plus).
    [6] I would purchase new paid subscription(s) to not-on-demand 
music streaming service(s) that I don't currently subscribe to 
(e.g., an individual subscription to Pandora Plus at $4.99 per month 
or $59.88 per year).
    [7] I would listen to not-on-demand music streaming service(s) 
that have ads and that I do not need to pay for (e.g., ad-supported 
Pandora).

(C) Satellite radio (Sirius XM) in place of live AM/FM radio 
broadcasts from commercial radio stations over the internet

    [8] I would listen to satellite radio through the paid 
subscription I already have (Sirius XM).
    [9] I would purchase a new paid subscription to satellite radio 
that I don't currently subscribe to (e.g., a Sirius XM subscription 
at $10.99 per month or $131.88 per year for ad-free music, $15.99 
per month or $191.88 per year for ad-free music, news, traffic, 
weather, and other content).

(D) Other ways of listening to live AM/FM radio broadcasts in place 
of such broadcasts from commercial radio stations over the internet

    [10] I would listen to live AM/FM radio broadcasts from 
commercial radio stations through a radio.
    [11] I would listen to live AM/FM radio broadcasts from not-for-
profit radio stations (e.g., NPR, college radio stations) through a 
radio.
    [12] I would listen to live AM/FM radio broadcasts from not-for-
profit radio stations (e.g., NPR, college radio stations) over the 
internet.

(E) Owned or purchased audio in place of live AM/FM radio broadcasts 
from commercial radio stations over the internet

    [13] I would listen to digital music files or CDs that I already 
purchased.
    [14] I would purchase and listen to digital music files or CDs 
that I don't currently own.
    [15] I would listen to music obtained through peer-to-peer file 
sharing or free download sites.
    [16] I would listen to non-music digital content that I already 
purchased or downloaded (e.g., podcasts, audiobooks).
    [17] I would purchase or download and listen to non-music 
digital content that I don't currently own (e.g., podcasts, 
audiobooks).

(F) Television and video options in place of live AM/FM radio 
broadcasts from commercial radio stations over the internet

    [18] I would watch video content that I already purchased, 
subscribe to, or have access to (e.g., movies, cable television, 
Hulu, Netflix).
    [19] I would purchase or subscribe to video content that I don't 
currently own or subscribe to (e.g., movies, cable television, a 
Hulu subscription at $5.99 per month or $71.88 per year, a Netflix 
subscription at $8.99 per month or $107.88 per year).
    [20] I would listen to music channels through my existing cable 
or satellite television subscription (e.g., Music Choice).

(G) Print options in place of live AM/FM radio broadcasts from 
commercial radio stations over the internet

    [21] I would read print or online content that I already 
purchased, subscribe to, or have access to (e.g., books, newspapers, 
magazines).
    [22] I would purchase or subscribe to print or online content 
that I don't currently own or subscribe to (e.g., books, newspapers, 
magazines).

Others

    [23] Other [PIPE IN RESPONSE TEXT FROM Q4]
    [24] Don't know/Unsure

Hauser WDT app. D-15-17

[[Page 59554]]

    Appendix Q, displays a table of the results to Q4 regarding 
consider options, and is reproduced below.
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[[Page 59555]]


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[[Page 59556]]


Hauser WDT app. Q.
    Appendix R, displays a table of the results to Q5 regarding which 
option they would choose, and is reproduced below.
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[[Page 59557]]


[GRAPHIC] [TIFF OMITTED] TR27OC21.012


[[Page 59558]]


Hauser WDT app. R.
    Professor Hauser developed a table to summarize the alternatives 
that were selected by more than 3.0 percent of survey respondents, 
which is reproduced below.
[GRAPHIC] [TIFF OMITTED] TR27OC21.013

Hauser WDT ]] 108, table 3.
    As reflected in the table, ``I would listen to live AM/FM radio 
broadcasts from commercial radio stations through a radio'' was 
selected by 127 respondents (25.3 percent), and was the most commonly 
selected alternative. Other commonly-selected alternatives included ``I 
would listen to on-demand music streaming service(s) through the paid 
subscription(s) I already have (e.g., Apple Music, Spotify Premium, 
Google Play Music),'' which was selected by 37 respondents (7.4 
percent), and ``I would watch video content that I already purchased, 
subscribe to, or have access to (e.g., movies, cable television, Hulu, 
Netflix),'' which was selected by 37 respondents (7.4 percent). 
Fourteen respondents (2.8 percent) selected ``don't know/unsure'' in 
response to this question. Hauser WDT ]] 109.
    Professor Hauser weighted the results of Q5 by the total number of 
hours each respondent reported listening to internet simulcasts of 
terrestrial commercial radio in Q1 in to evaluate whether the 
alternatives respondents consider as substitutes for internet 
simulcasts of terrestrial radio varied based on the total amount of 
time respondents spend listening to such simulcasts. He explained that 
if a respondent listened to only one hour of such simulcasts over the 
prior three days, his or her response to Q5 would count as one, while 
if a respondent listened to four hours of such simulcasts over the 
prior three days, his or her response to Q5 would count as four. Hauser 
WDT ]] 110.

[[Page 59559]]

    Appendix S, displays a table of the weighted results to Q5, and is 
reproduced below.
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[[Page 59560]]


[GRAPHIC] [TIFF OMITTED] TR27OC21.015

BILLING CODE 1410-72-C
Hauser WDT app. S.
b. Criticisms of the Hauser Survey
    SoundExchange offers several critiques of the Hauser surveys, 
including those noted below. SX PFFCL ]] 1208-1269.

[[Page 59561]]

i. Hypothetical Scenario
    SoundExchange notes that Professor Hauser's hypothetical scenario 
requires respondents to predict what they would do if ``live AM/FM 
radio broadcasts from commercial radio stations over the internet were 
not available for the next five years.'' Hauser WDT, app. D at D-11. It 
maintains that the hypothetical, which does not mention music content, 
may cause respondents to answer the replacement questions in terms of 
how they would replace non-music content, rather than how they would 
replace music content. Zauberman WRT ] 64. SoundExchange also argues 
that the long, five year, period toward which respondents are directed 
to forecast their behavior can be cognitively taxing and confusing for 
individuals. Zauberman WDT ] 62; see also Simonson WRT ]] 111-112. 
SoundExchange notes expert testimony from Professor Zauberman who 
maintained that the ambiguity of Professor Hauser's hypothetical does 
not adequately follow best practice, which dictates that hypotheticals 
be posed in a way that ensures the maximum relatability so that 
respondents are not confused about the scenario they are asked to 
consider. Zauberman WRT ] 65, See, e.g., Floyd Jackson Fowler, Jr., How 
Unclear Terms Affect Survey Data, 56 Pub. Opinion Q. 218-231 (1992); 
see also, Norbert Schwartz & Daphna Oyserman, Asking Questions About 
Behavior: Cognition, Communication, and Questionnaire Construction, 22 
Am. J. Evaluation, no.2, 127-160 (2001).
ii. Response Options
    SoundExchange argues that Professor Hauser did not customize his 
list of Q4 replacement options to match respondents' individual 
circumstances. Instead, SoundExchange notes, all respondents received 
the same list of replacement options, regardless of whether or not all 
of these options were applicable to them. Professor Zauberman noted 
that eight of the 22 specific options that Professor Hauser poses for 
all respondents to consider in Q4 refer to services or content that 
they are told they already own, have access to, or have purchased, 
regardless of whether that is true or not. Professor Zauberman asserted 
that providing such response options to respondents, which do not apply 
to them, is confusing. Zauberman WRT ] 66-67. Professor Zauberman added 
that providing respondents with options regardless of the service/
content they already own, have access to, or have purchased is poor 
survey design. Zauberman WRT ] 66-67, See, e.g. Questionnaire Design, 
Pew Res. Center, https://www.pewresearch.org/methods/u-s-survey-research/questionnaire-design/(last visited Jan. 8, 2020); see also, 
Don A. Dillman et al., The Fundamentals of Writing Questions, in 
internet, Phone, Mail, and Mixed-Mode Surveys: The Tailored Design 
Method 94, 114-116 (4th ed. 2014).
    Professor Zauberman explained the potentially troubling impact of 
this question design by considering how a respondent who does not 
already subscribe to a paid on-demand streaming service may react to 
option 1, in Q4 (``I would listen to on-demand music streaming 
service(s) through the paid subscription(s) I already have''), given 
the choices: ``Would consider'' ``Would not consider'' and ``Don't 
know/Unsure?''. Professor Zauberman opined that, in such a scenario, 
none of the available options makes sense. He maintained that the only 
logical answer regarding a service that the respondent does not already 
have would be ``N/A'' or ``I do not have such a subscription'' and 
these choices were not present in the survey. Instead, he suggested 
that respondents may be forced to answer as if they have the service. 
Zauberman WRT ] 68.
    Professor Zauberman identified another alleged flaw in that 
Professor Hauser's response options are designed in a way that confuses 
respondents. He argued that the Hauser survey presented respondents 
with too many response options, and cited scholarship indicating that 
such choice options may causes cognitive overload and thus unreliable 
responses. Zauberman WRT ] 68; see, e.g., Sheena S. Iyengar & Mark R. 
Lepper, When Choice is Demotivating: Can One Desire Too Much of a Good 
Thing?, 79 J. Personality & Soc. Psychol., no.6, 995-1006 (2000); Elena 
Reutskaja et al., Choice Overload Reduces Neural Signatures of Choice 
Set Value in Dorsal Striatum and Anterior Cingulate Cortex, 2 Nature 
Hum. Behav., 925-935 (2018).
    Professor Zauberman explained that Q4 presented respondents with a 
list of 22 specific response options, plus an open response ``Other.'' 
And, in Q5, respondents are presented with a list of 22 options, plus a 
``Don't know/Unsure'' option, and a potential ``Other'' option, 
depending on their answers Q4. Professor Zauberman offered his view 
that this is indicative of choice overload. Zauberman WRT ] 70; see, 
e.g., Alexander Chernev et al., Choice overload: A conceptual review 
and meta[hyphen]analysis, 25 J. Consumer Psychol., no.2, 333-358 
(2015).
    Professor Zauberman argued that Professor Hauser's survey design 
nudges respondents toward choosing free music services and other non-
royalty-bearing options, over paid music options, and nudges them to 
select low or non-royalty-bearing switching options. He asserted that 
15 out of the 22 specific options in Q4 and Q5 lead to zero new 
royalties for record labels, and that this is disproportionally biased 
towards zero royalties options. Zauberman WRT ] 71. Professor Zauberman 
also opined that the options may confuse respondents by mixing types of 
content (e.g. ``non-music digital content'' or ``music on video 
sites''). He added that providing options that are not mutually 
exclusive (e.g. ``streaming service(s)'' or ``AM/FM radio broadcasts'') 
is troubling. Zauberman WRT ] 71. Professor Zauberman maintained that 
Professor Hauser's descriptions within the response options suffer from 
inconsistent framing and definitions, which he found to privilege free 
options. In Professor Zauberman's view the survey fails to emphasize 
``free vs. paid'' music listening options in a consistent manner in Q4 
and Q5, namely that the non-monetary cost of the free options is less 
clear or emphasized than the clear indication of the ``paid'' 
characteristics. Professor Zauberman pointed out that in Option 3, 
Professor Hauser chose to use the phrase ``have ads and that I do not 
need to pay for'' rather than simply saying ``free'' to contrast 
``paid'' in Option 2. In Professor Zauberman's view, this wording in 
Option 3, rather than simply saying ``free on-demand music streaming 
service(s),'' makes the cost (or lack thereof) of the option less 
salient than the cost (or lack thereof) of its paid counterpart. 
Zauberman WRT ] 71.
    Professor Zauberman also found fault with the Hauser survey for 
excluding options to which respondents might reasonably switch. He 
noted that the survey does not, for example, describe or offer 
listening to Sirius XM online as a response option. He argued that if 
legitimate options had been offered as potential choices, respondents 
might have been more likely to select other existing paid 
subscriptions. And, he added, limiting the number of royalty-bearing 
response options available is likely to depress the number of 
respondents who select royalty-bearing options. Zauberman WRT ] 71.
    Professor Zauberman concluded that the cumulative effect of the 
criticized survey response options is to privilege certain response 
options (e.g., AM/FM radio) over others. He maintained that Professor 
Hauser's survey failed to ensure that the survey hypothetical was as 
clear and well-defined as possible. Zauberman WRT ] 71.

[[Page 59562]]

    Professor Simonson also criticized the Hauser survey response 
options, characterizing the survey as burying music within a wide range 
of content alternatives, such as traffic, religion, and sports. He 
pointed out that in the Hauser survey Q2 and Q3, ``music'' represented 
just one out of eight response options, and that all types and genres 
of music were reduced to just one item, listed alongside a wide range 
of equally prominent, unrelated categories. Simonson WRT ] 102-105.
    Mr. Simonson asserted that respondents tend to choose among the 
options presented to them, citing scholarship on that conclusion:

    [R]espondents tend to confine their answers to the choices 
offered, even if the researcher does not wish them to do so (Bishop 
et al. 1988, Presser 1990). That is, people generally ignore the 
opportunity to volunteer a response and simply select among those 
listed, even if the best answer is not included.

Zauberman WRT ] 106 (citing Jon A. Krosnick, Survey Research, 50 Ann. 
Rev. Psychol. 537, 544 (1999)). Mr. Simonson argued that in the context 
of a proceeding about music, including numerous non-music response 
options biases survey results, including through diversification bias, 
order effects, and demand artifacts. Simonson WRT ] 106 (citing Fritz 
Strack, ``Order Effects'' in Survey Research: Activation and 
Information Functions of Preceding Questions, in Context Effects in 
Social and Psychological Research 23-34 (Norbert Schwarz & Seymour 
Sudman eds., 1992), https://doi.org/10.1007/978-1-4612-2848-6_3.
    He referred to additional research, indicating that the mere fact 
that respondents are presented simultaneously with multiple options 
causes them to spread their choices among the options instead of 
choosing only the option they like most. He argued that a survey 
designer can decrease the percentage of respondents who indicate they 
will switch from one music service to another by presenting respondents 
with a wide range of options, and that the Hauser Survey does that by 
leading respondents to consider a wide set of switching options, 
including options that are unrelated to music. Simonson WRT ]] 106, 67-
74 (citing Itamar Simonson, The Effect of Purchase Quantity and Timing 
on Variety Seeking Behavior, 27 J. Marketing Res. 150 (1990); Daniel 
Read & George Loewenstein, Diversification Bias: Explaining the 
Discrepancy in Variety Seeking Between Combined and Separated Choices, 
1 J. Experimental Psychol.: Applied 34 (1995); and Schlomo Benartzi & 
Richard H. Thaler, Naive Diversification Strategies in Defined 
Contribution Saving Plans, 91 Am. Econ. Rev. 79 (2001); and Craig R. 
Fox, David Bardolet & Daniel Lieb, How Subjective Grouping of Options 
Influences Choice and Allocation: Diversification Bias and the 
Phenomenon of Partition Dependence, 134 J. Experimental Psychol.: Gen. 
538 (2005); Craig R. Fox, David Bardolet & Daniel Lieb, Partition 
Dependence in Decision Analysis, Resource Allocation, and Consumer 
Choice, 3 Experimental Bus. Res. 229 (2005)). Professor Simonson 
concluded that by offering ``irrelevant options'' the Hauser survey 
misrepresents people's real-world experience, in which other content 
does not generally satisfy a desire for music, and the result is likely 
to lower the likelihood that respondents choose music options. Simonson 
WRT ] 107.
iii. Two-Stage Decision Making Process
    SoundExchange argues that Professor Hauser's two-stage decision-
making structure compounds the alleged errors identified above and 
further depresses diversion to royalty-bearing options.
    SoundExchange notes that the Hauser survey first asks respondents, 
in Q4, to identify from a list of 22 identified music and non-music 
options all of the alternatives they would ``consider'' switching to in 
place of simulcasts. Then, in Q5, the survey forces respondents to pick 
just one option from this consideration set that they would use if 
``live AM/FM radio broadcasts from commercial radio stations over the 
internet were not available for the next five years.'' SoundExchange 
alleges that it was inappropriate for Professor Hauser to present his 
replacement questions using this ``consider-then-choose'' structure. 
SoundExchange argues that this two-stage process, in which respondents 
must consider a large set of options before making a final choice, does 
not match the decision-making processes that consumers actually would 
engage in if they were replacing their simulcast listening. Zauberman 
WRT ]] 10-14, 73; Simonson WRT ]] 108-109.
    SoundExchange also argues that the Hauser survey is flawed because 
Professor Hauser provides no justification for forcing respondents, in 
Q5, to choose only one option to replace their simulcasting over the 
course of the next five years. SoundExchange asserts that in the real 
world consumers can replace music options with multiple substitutes, 
and takes issue with what it characterizes as an unrealistic notion 
that, for the next five years, respondents must limit themselves to 
only one alternative option. Zauberman WRT ] 73; Simonson WRT ]] 112. 
SoundExchange notes that Professor Hauser acknowledges that it is ``not 
uncommon for individuals to have subscriptions to multiple services, 
even within the same service type'' and that some listeners employ 
multiple services ``because different services within the same service 
type may offer different features for listeners and different libraries 
of content.'' Hauser WDT ] 85. SoundExchange also posits that the 
requirement that respondents to the Hauser survey choose only one of 
the offered currently available options stands in contrast to the 
reality of a fast changing market. SX PFFCL ] 1245 (citing Tucker WDT 
]] 10-15).
    SoundExchange observes that Professor Hauser attempts to ameliorate 
this concern by focusing respondents on the last three days, and asking 
what one alternative they would choose in situations similar to their 
most recent listening session. Hauser WDT ] 13 & n.8, app. D; 8/27/20 
Tr. 4344 (Hauser). However, SoundExchange asserts that this approach 
fails because, although the survey does mention the last three days, 
the replacement questions themselves do not contain this language. SX 
PFFCL ] 1251 (citing Zauberman WRT ] 74-75 & n.92 (Professor Hauser's 
``replacement question is for the next five years, not a single 
use'')). SoundExchange also argues that Professor Hauser's replacement 
questions create a winner-take-all problem, which biases his results. 
It offers the example scenario in which Netflix is the primary 
streaming video service for consumers, but that many consumers also use 
Amazon Prime Video to a lesser degree. If asked to name only one 
streaming video service that they use, consumers would choose Netflix. 
SoundExchange maintains that such responses would mask the extent to 
which the secondary choice, Amazon Prime Video, is used. Zauberman WRT 
] 75. Professor Zauberman testified that this type of the winner takes 
all structure of the replacement questions ``is highly confusing,'' and 
``tremendously underplays [the] secondary players''. 8/27/20 Tr. 4210-
11 (Zauberman).
iv. Time Estimation Question
    SoundExchange argues that Professor Hauser's time estimation 
question highlights the unreliability of his survey and biases the key 
questions that follow it. SX PFFCL ] 1262. It notes Professor Hauser's 
finding that, on average, respondents estimated that they spent 5.3 
hours listening to AM/FM radio broadcasts from commercial radio 
stations over the internet in the past

[[Page 59563]]

three days (or approximately 1.75 hours per day). SX PFFCL ] 1263 
(citing Hauser WDT ] 94). SoundExchange asserts that time estimate does 
not at all match reality, and that this mismatch highlights a bias in 
Professor Hauser's survey population. SX PFFCL ] 1264. It points to 
Professor Zauberman's testimony that, according to The Infinite Dial 
2019, Digital AM/FM (i.e., streaming AM/FM radio) accounts for only 3% 
of time spent listening to music, and the average online audio listener 
spends approximately 16.72 hours per week (or 2.39 hours per day) 
listening to all online audio sources. Professor Zauberman noted that, 
by contrast, Professor Hauser's time estimates, if accurate, would mean 
that AM/FM streamed over the internet accounts for more than 70% of all 
online audio listening time, on average. Zauberman WRT ] 76 (citing 
Edison Research & Triton Digital, The Infinite Dial 2019 at 26; and 
Edison Research, Share of Ear Q2 2019 at 16). Professor Zauberman added 
that Professor Hauser provides no empirical evidence, such as industry 
data, to suggest that respondents are able to provide reliable 
estimates, and that available industry data calls the accuracy of the 
time estimates derived from Professor Hauser's survey into question. 
Zauberman WRT ] 77. Professor Zauberman also argued that qualitative 
pretests in surveys cannot assure that this type of timing question is 
reliable or that the right timeframe is being used. Zauberman WRT ] 77; 
8/27/20 Tr. 4181-82 (Zauberman) (a pretest is ``where you test for 
confusion,'' not an instrument for ``parameteriz[ing] your elements of 
your survey,'' like time); id. at 4291-92, 4293-94 (Simonson) (same).
    Professor Zauberman argued that because the timing question is the 
first question in the main questionnaire, it has the potential to 
influence responses to all subsequent questions. He cites to 
scholarship indicating that starting with a difficult-to-estimate 
question can influence the way that respondents answer the rest of the 
questions, especially when the rest of the survey is complex and 
difficult to understand. Zauberman WRT ] 78 (citing Shari Seidman 
Diamond, Reference Guide on Survey Research, in Reference Manual on 
Scientific Evidence 359, 395-96 (2011); Seymour Sudman & Norbert 
Schwartz, Contributions of Cognitive Psychology to Advertising 
Research, 29 J. Advertising Res., no.3, 43-53 (1989); Jon A. Krosnick & 
Stanley Presser, Question and Questionnaire Design, in Handbook of 
Survey Research 263, 291-94 (2nd. ed. 2010)).
    Professor Zauberman also faulted the Hauser surveys for not asking 
respondents to estimate listening time in the future. He maintained 
that absent responses about future use, any inferences made based on 
the offered results must rely on an assumption about the extent to 
which a hypothetical change in the marketplace (i.e., the 
unavailability of AM/FM streaming) would in fact alter both the amount 
of time respondents spend listening to music in total, as well as for 
each of the options they would replace it with. Professor Zauberman 
argues that such an assumption would be problematic without empirical 
support. Zauberman WRT ] 79.
c. Responses to Criticism of the Hauser Survey
    The NAB responded to criticism regarding the number and type of 
alternatives offered in the switching questions, by noting that 
Professor Hauser crafted the switching options based on his experience 
from prior rate-setting proceedings in which his surveys were accepted 
(including SDARS III, where the survey had 19 switching options), 
research into the different ways respondents access different types of 
content, industry studies, and the feedback he received in the course 
of conducting qualitative interviews and pretests. 8/27/20 Tr. 4340-44 
(Hauser); Hauser WDT ]] 19-20, 25, 31-33. Professor Hauser testified 
that his pretests confirmed that respondents found the options to be 
comprehensive but not too numerous, and to reflect the full scope of 
options they would consider instead of listening to simulcasts. 8/27/20 
Tr. 4340-43 (Hauser). The NAB adds that SoundExchange has advanced 
arguments and evidence in this proceeding to establish that a wide 
variety of services, including on-demand video services, broadcast 
television, video games, and other forms of media, are in competition 
with each other, and that therefore it was not unreasonable for 
Professor Hauser to include a variety of services as switching options 
in his survey. See, e.g., Trial Ex. 5387 at 28; Trial Exs. 5521, 5353, 
5472; Orszag WRT ] 46 n.96 (citing public financial documents, 
including iHeart 10-Ks).
    The NAB addresses SoundExchange's criticism of the Hauser survey 
for directing respondents to choose one switching option, when 
consumers in the real world might replace simulcast with more than one 
alternative, by noting that the survey was ``fielded over ten days, 
invitations were released at different times of the day to ensure 
representative by day of week.'' The NAB argues that this approach 
ensures a random draw in time from the distribution of all instances of 
listening to simulcast. 8/27/20 Tr. 4352-53, 4356-57 (Hauser). 
Professor Hauser maintained that under the approach he used, even if 
some respondents would listen to terrestrial radio for 60% of their 
time, but on-demand for the remaining 40%, and listening is reasonably 
randomly distributed, respondents would pick terrestrial radio 60% of 
the time and on-demand 40% of the time when asked about the most recent 
time they listened. 8/26/20 Tr. 4354 (Hauser); Hauser WDT ] 37.
    The NAB addressed Professor Simonson's concern that the Hauser 
survey asked respondents to pick just one option that they would do for 
the next five years, by maintaining that Professor Hauser question was 
never meant to say that respondents will do the same thing in every 
similar situation. Professor Hauser indicated that the qualitative 
interviews and pretests confirmed that is not how respondents 
interpreted the question. 8/27/20 Tr. 4355-56 (Hauser); see also Hauser 
WDT app. G at 8. He testified that because respondents were primed to 
think of ``situations similar to'' the ``most recent time'' they 
listened to simulcast, their responses reflect what they would do in a 
similar circumstance, not what they would do ``repetitively each day 
over the next five years.'' 8/27/20 Tr. 4356-58 (Hauser).
    The NAB argues that Professor Hauser's time estimation question is 
not unreliable and does not conflict with results in the Infinite Dial 
2019 and Share of Ear surveys. It asserts that the critique is based on 
an ``apples-to-oranges mistake.'' See, e.g., Zauberman WRT ] 76. 
Professor Hauser posits that his survey was focused on simulcast 
listeners, whereas the Infinite Dial and Share of Ear targeted 
listeners to all online audio. 8/27/20 Tr. 4361 (Hauser). He points out 
that Professor Zauberman's comparison does not take into account 
respondents who listened to zero hours of simulcasts. Professor Hauser 
offered that ``if you put those zeros in, that zero listening, my study 
lines up pretty well with the [I]nfinite [D]ial.'' Id. at 4361.
d. Judges' Conclusions Regarding the Hauser Survey
    The Judges accept that there are a variety of choices to be made 
when designing a reliable survey. The selected design choices will 
often be subject to second-guessing. While the Judges are wary of 
unreasonably demanding ideal survey design, many critiques will

[[Page 59564]]

inevitably merit consideration, to varying degrees.
    In this instance, the Judges find that the main hypothetical 
scenario set forth requiring respondents to predict what they would do 
if live AM/FM radio broadcasts from commercial radio stations over the 
internet were not available for the next five years is reasonable. 
While the record reflects some reason to caution against the long, five 
year, prediction timeframe as potentially confusing respondents, the 
Judges do not find that this to be unduly concerning in this instance. 
However, as discussed further below, the Judges find that the critique 
regarding the main hypothetical scenario not honing in on music content 
(thus skewing the results) is worthy of concern.
    The Judges find that the Hauser survey approach to the time 
estimation question was unduly biased toward simulcast listeners in a 
manner that biased the overall results. The fact that the results of 
the time estimate question diverge so widely from what may be 
considered reasonable in light of available industry data exacerbates 
the Judges' concerns of bias. These concerns ultimately weigh against 
the overall reliability of the survey.\307\
---------------------------------------------------------------------------

    \307\ The Judges are less troubled that the time estimate 
questions in the Hauser survey may be unduly confusing or that any 
confusion caused would unduly skew the overall results of the 
survey.
---------------------------------------------------------------------------

    The Judges find that the ``consider-then-choose'' structure is an 
acceptable design choice in this instance. A case could be made that 
certain consumer choices on specific products or services are ill-
suited to such a format. However, SoundExchange has not established 
convincingly that the design is inappropriate in this case. The 
decision to offer only one option is more concerning, given that it is 
widely accepted that consumers often choose more than one music (or 
non-music) option, especially over a five year period. The NAB's 
argument that this concern is addressed by the survey being fielded 
over multiple days does little to ameliorate the Judges concern that, 
in this particular switching survey addressing music options, limiting 
respondents' choice to one option may confuse respondents and bias 
results. The NAB's reference to qualitative interviews does not 
establish to the Judges' satisfaction that respondents understood the 
question clearly, or that bias is not likely present in the results.
    The actual response options provided are the most troubling aspect 
of the survey. Based on the expert testimony of Professors Zauberman 
and Simonson the Judges find that the number of choices, in the format 
provided, can reasonably be expected to produce biased and unreliable 
results. Professor Hauser indicates that he crafted the switching 
options based on his experience from prior rate-setting proceedings in 
which his surveys were accepted (including SDARS III, where the survey 
had 19 switching options). However, the SDARS III survey was offered in 
a different format in which the 19 choices were set forth in two 
stages. Additionally, the offered choices were far more oriented toward 
music options, which the Judges find more appropriate in the current 
proceeding to set rates for transmissions of recorded music.
    The Judges also note that the defined parameters of not-on-demand 
music streaming services are limited in a troubling--and ultimately 
unreasonable--fashion. As SoundExchange noted, the category excludes 
Sirius XM online as a response option. Additionally, the category 
excludes a wider array of webcast transmissions that do not vary the 
music played based on an individual listener's preferences, which Dr. 
Leonard characterizes as ``internet radio.'' The 22 specific options in 
Q4 and Q5, on their face, and in reference to the definition of ``Not-
on-demand music streaming services'' exclude ``internet radio.'' 
Professor Hauser did not explain or justify these exclusions 
adequately.
    Professor Hauser testified that his pretests confirmed that 
respondents found the options to be comprehensive but not too numerous, 
and to reflect the full scope of options they would consider instead of 
listening to simulcasts. But, the offered options are not 
comprehensive. Professor Hauser stated that he generated the options 
from qualitative interviews, which explored what listeners of internet 
simulcasts of terrestrial commercial radio considered as substitutes 
for listening to internet simulcasts. However, it is not apparent that 
the pretests or interview clearly referenced the ensuing survey's 
hypothetical loss of simulcasting in the marketplace.
    Professor Hauser testified that these interviewees described a 
number of different activities they would do if they could not listen 
to internet simulcasts of terrestrial commercial radio, including 
listening to music through paid and ad-supported streaming services, 
listening to podcasts, watching television or movies, and reading news 
on their computers or smartphones. He indicated that the qualitative 
interviews revealed that respondents were not familiar with the terms 
``simulcast'' or ``simulcasting,'' nor were many of them familiar with 
the term ``terrestrial radio.'' Respondents understood the phrase 
``live radio broadcasts over the internet'' to describe internet 
simulcasts of terrestrial radio. He used the responses to inform the 
list of alternatives for Q4 of the survey. However, Professor Hauser 
does not adequately explain why he only offered a subset of 
personalized ad-supported streaming services in the alternatives for 
Q4.
    He also states that he augmented these option choices with 
additional background research into the different ways in which 
respondents may access different types of content, including Edison 
Research & Triton Digital, ``The Infinite Dial--The Heavy Radio 
Listeners Report,'' April 2018, available at https://www.edisonresearch.com/heavy-radio-listeners-new-insights-from-the-infinite-dial, p. 8; Edison Research & Triton Digital, ``The Infinite 
Dial 2019,'' 2019, available at https://www.edisonresearch.com/infinite-dial-2019/, p. 30. However, these two pieces of industry data 
do not exclude ``internet radio.''
    Another of the NAB's witnesses, Dr. Leonard, who relied on 
Professor Hauser's survey and testimony for purposes of his opportunity 
cost analysis, addresses a related issue of his own treatment of 
internet radio as a product category. Dr. Leonard opined that internet 
radio is more similar to custom radio than to simulcast. He 
acknowledged that internet radio stations do not vary the music played 
based on an individual listener's preferences, which the Judges note is 
a characteristic that is shared with simulcasters. However, Dr. Leonard 
maintained that internet radio stations nonetheless often feature 
greater user functionality than is possible with a linear simulcast 
stream. He asserted many internet radio services (including AccuRadio) 
allow listeners to pause and skip songs on an internet radio station, 
which is not available with a simulcast. Dr. Leonard also offered that 
internet radio services do not feature much if any non-music content. 
He added that internet radio services are not localized services, they 
are not broadcasters subject to FCC regulation, and they have no public 
interest requirement nor any obligation to serve any local community. 
Finally, Dr. Leonard stated his own understanding that internet radio 
services are not a significant part of the streaming market. Therefore, 
he stated, his report did not treat internet radio services as distinct 
from custom radio services.
    The Judges find that these observations do not explain or cure the 
absence of internet radio options in the

[[Page 59565]]

Hauser Survey. It is notable that for Dr. Leonard's analysis he 
proposed to treat internet radio services as undistinguished from (or 
part of) custom radio services, while Professor Hauser excluded it from 
the scope of any of the options he provided in his survey. Among the 
most compelling of possible reasons to exclude internet radio from the 
scope of the provided options might be that internet radio may offer 
distinct features such as allowing listeners to pause and skip songs, 
making it more closely similar to custom radio. However, the Judges do 
not have persuasive evidence of how widely-available such features are 
on internet radio. Furthermore, even if internet radio services are not 
a significant part of the current streaming market, that does not 
establish a compelling reason to exclude it from the scope of provided 
options in Professor Hauser's survey, because the survey was about a 
hypothetical marketplace over the next five years during which 
simulcasts are not available. Even if the NAB had offered the Judges 
compelling evidence of low market usage of internet radio in the 
contemporary world, that does not provide adequate reason to exclude an 
option that shares key characteristics with simulcasts. For instance, 
the Judges note that both internet radio and simulcasts may be amongst 
the most ``lean back'' offerings that do not vary the music played 
based on an individual listener's preferences, which is a reasonable 
basis for including internet radio as a potential switching option.
    While the Judges do not fault the Hauser survey for including too 
many non-music options, that decision does tend to undermine any 
reasonable rationale for excluding relevant and readily apparent music 
options, like internet radio and Sirius XM online, that are not 
excluded in relied-upon industry studies.
    For the above-stated reasons, the Judges do not rely on the Hauser 
survey to support the NAB's petition for a separate rate for 
simulcasters.
6. Judges' Conclusion Regarding Separate Rate for Simulcasters
    Based on the entirety of the record in this proceeding and for the 
foregoing reasons, the Judges do not find that a separate rate category 
for simulcasters is warranted. Additionally, significant evidence in 
the record persuades the Judges that simulcasters and other commercial 
webcasters compete in the same submarket and therefore should be 
subject to the same rate. Granting simulcasters differential royalty 
treatment would distort competition in this submarket, promoting one 
business model at the expense of others.
    The Judges' conclusion regarding the unreliability of the Hauser 
Survey also renders Dr. Leonard's opportunity cost modeling unreliable 
to the extent it depends on the survey results. Additionally, given the 
Judges' overall conclusion that the NAB has not sustained its case for 
a separate rate for simulcasters, we do not proceed through an 
unnecessary analysis of the NAB's requested royalty rates.

V. Noncommercial Webcasting Rates

    Five entities representing noncommercial broadcasters filed 
petitions to participate in this proceeding. Three of them--College 
Broadcasters, Inc. (CBI), the Corporation for Public Broadcasting 
(CPB), and National Public Radio, Inc. (NPR)--entered into settlements 
and withdrew from further participation. See 85 FR 11857 (Feb. 28, 
2020) (public broadcasters' (NPR/CPB) settlement); 85 FR 12745 (Mar. 2, 
2020) (noncommercial educational webcasters' (CBI) settlement). Of the 
remaining two noncommercial participants, only one--the National 
Religious Broadcasters Noncommercial Music Licensing Committee 
(NRBNMLC)--participated actively. Educational Media Foundation, while 
technically a participant, participated only through its membership in 
the NRBNMLC. See Educational Media Foundation's Notice Re Joining in 
Direct Case of NRBNMLC (Sep. 23, 2019).
    In the current rate period, noncommercial webcasters other than 
public broadcasters pay a minimum fee of $500 per station or channel, 
which entitles them to make up to 159,140 aggregate tuning hours (ATH) 
\308\ per month of digital audio transmissions.\309\ Digital audio 
transmissions in excess of that ATH threshold incur fees at the 
applicable commercial rate. 37 CFR 380.10(a)(2). The current rate 
structure for noncommercial webcasters (including the 159,140 ATH 
threshold and $500 minimum fee) has been in force since the Judges 
first adopted it nearly 14 years ago in Web II. See Web II, 72 FR at 
24100.
---------------------------------------------------------------------------

    \308\ ``Aggregate Tuning Hours'' (ATH) are defined as the total 
hours of programming that the Licensee has transmitted during the 
relevant period to all listeners within the United States from all 
channels and stations that provide audio programming consisting, in 
whole or in part, of eligible nonsubscription transmissions or 
noninteractive digital audio transmissions as part of a new 
subscription service, less the actual running time of any sound 
recordings for which the Licensee has obtained direct licenses apart 
from 17 U.S.C. 114(d)(2) or which do not require a license under 
United States copyright law. 37 CFR 380.7 (2019). Or, more 
succinctly, the number of hours of programming on all channels and 
stations multiplied by the number of listeners.
    \309\ Noncommercial educational webcasters (NEWs) also pay a 
$500 minimum fee per channel or station that allows them to transmit 
up to 159,140 ATH per month. 37 CFR 380.22(a). NEWs that exceed that 
threshold in any month must pay the rates established for all other 
noncommercial webcasters. 37 CFR 380.22(b). NEWs that do not 
transmit more than 80,000 ATH on any channel or station for more 
than one month in the preceding year may also pay a ``proxy fee'' of 
$100 per year that entitles them to a waiver of the requirement to 
file reports of use. 37 CFR 380.23(g)(1). Other NEWs may elect to 
provide reports of use on a sample basis. 37 CFR 380.23(g)(2).
---------------------------------------------------------------------------

A. Parties' Proposals

1. SoundExchange's Rate Proposal
a. Proposed Rates
    SoundExchange proposes a continuation of the current rate structure 
for noncommercial webcasters but with the same across-the-board 
increases to the minimum fee and commercial rates that SoundExchange 
also proposes.\310\ See SoundExchange's Proposed Rates and Terms at 3 
(Written Direct Statement of SoundExchange vol. 1 sec. B) (Sep. 23, 
2019) (SoundExchange Rate Proposal). Under SoundExchange's proposal, 
noncommercial webcasters would pay an annual minimum fee of $1000 per 
channel or station. This minimum fee would cover up to 159,140 ATH per 
month of digital audio transmissions. Noncommercial webcasters would be 
obligated to pay the applicable commercial rate for usage in excess of 
159,140 ATH per month. See id.
---------------------------------------------------------------------------

    \310\ SoundExchange's minimum fee proposals are discussed infra, 
section VI. SoundExchange's proposed rates for commercial webcasters 
are discussed supra, section IV.
---------------------------------------------------------------------------

b. Rationale and Justification
    In proposing to continue the existing rate structure, SoundExchange 
endorses and adopts the rationale for the existing rate structure that 
the Judges articulated in Web II, when they originally put that rate 
structure in place. See SX PFFCL ]] 1346-1354. SoundExchange asserts 
that there is no adequate marketplace benchmark for licenses to 
noncommercial webcasters. SoundExchange's expert, Mr. Orszag, testified 
that, to his knowledge, ``there is no market for licensing 
noncommercial services, and therefore no voluntary agreements 
negotiated in unregulated markets that could serve as potential 
benchmarks specific to such services.'' Orszag WDT ] 184.
    Rather than basing its proposal on a benchmark analysis, therefore, 
SoundExchange's proposal rests on the economic insight articulated in 
Web II that larger noncommercial webcasters

[[Page 59566]]

have the same or similar competitive impact in the marketplace as 
similarly sized commercial webcasters. See Web II, 72 FR at 24097; see 
also Web IV, 81 FR at 26395 (``the Judges apply commercial rates to 
noncommercial webcasters above the ATH threshold because economic logic 
dictates that outcome, not because it was observed in benchmark 
agreements''). In Web II, the Judges recognized that noncommercial 
webcasters ``may constitute a distinct segment of the noninteractive 
webcasting market that in a willing buyer/willing seller hypothetical 
marketplace would produce different, lower rates'' than those for 
commercial webcasters but only ``up to a point'', i.e., the point at 
which a noncommercial webcaster poses a ``threat of making serious 
inroads into the business of those services paying the commercial 
rate.'' Web II, 72 FR at 24097. The Judges employed the noncommercial 
webcaster's size, as measured by its listenership, as a ``proxy'' for 
determining when a noncommercial webcaster poses a competitive threat 
to commercial webcasters. See id. at 24098-99. Based on the then-
average online listenership to NPR stations of 218 simultaneous users, 
the Judges set a threshold of 159,140 ATH per month for applying 
commercial webcasting rates.\311\ See id. at 24099.
---------------------------------------------------------------------------

    \311\ (24 hrs. x 365 days 218 users) / 12 mos. = 159,140 ATH/mo.
---------------------------------------------------------------------------

    Although Mr. Orszag opined that he saw ``no reason why commercial 
and noncommercial services would be treated differently with respect to 
the rates they pay'' in an unregulated market, id. ] 185, he 
nevertheless supported the existing rate structure based on a history 
of settlements in rate proceedings. Mr. Orszag acknowledged that 
SoundExchange had reached settlements in the past with smaller 
noncommercial webcasters for a ``nominal per-channel rate.'' Id. ] 186. 
For larger noncommercial webcasters, ``there has long existed a 
demarcation at 159,140 aggregate tuning hours . . . per month'' under 
the compulsory license, ``with services that exceed that threshold 
paying commercial rates on the incremental usage.'' Id. ] 187. He 
contended ``[t]here is no empirical evidence to suggest, and no reason 
based in economic theory to think, that record companies would license 
large noncommercial services that compete meaningfully with commercial 
services at a fraction of the commercial rate.'' Id. He noted, 
moreover, ``this structure is supported by precedent and settlements of 
prior proceedings before the Judges.'' Id.
    SoundExchange also presented expert testimony from Professor 
Catherine Tucker concerning the impact of the current rate structure on 
noncommercial webcasters. She testified that under the current 
noncommercial rates the vast majority of noncommercial webcasters pay 
only the minimum fee. See Trial Ex. 5604 ] 165 (Tucker WDT). In 2018 
(the most recent year for which Professor Tucker had data), [REDACTED] 
out of a total of [REDACTED] noncommercial webcasters ([REDACTED]%) 
paid only the minimum fee per station. See id. Professor Tucker also 
testified that, among those noncommercial webcasters that exceed the 
music ATH threshold and must pay per-performance royalties, 
``[REDACTED].'' Id. ] 166. Across the five noncommercial webcasters 
paying the most for excess usage, ``[REDACTED] [REDACTED].'' \312\ Id. 
Professor Tucker also opined that these noncommercial webcasters would 
be ``well positioned'' to pay royalties under this rate structure even 
with the increases in the minimum fee and per-performance rates that 
SoundExchange proposes: [REDACTED].'' Id. ] 167.
---------------------------------------------------------------------------

    \312\ The five noncommercial webcasters paying the most 
royalties for excess usage were [REDACTED]. Tucker WDT ] 166.
---------------------------------------------------------------------------

c. NRBNMLC Response
    NRBNMLC controverts nearly every element of SoundExchange's 
proffered rationale for its rate proposal (and, by extension, the 
Judges' rationale in Web II, Web III, and Web IV for the existing rate 
structure). See Services RPFFCL ]] 1343-1348. Specifically, NRBNMLC 
rejects SoundExchange's assertions that no adequate marketplace 
benchmark exists for licenses to noncommercial webcasters, that there 
is no difference between commercial and noncommercial webcasters from 
the standpoint of the consumer, and that ``there has long been 
acceptance of the current royalty rate structure for noncommercial 
webcasters.'' Id. ]] 1344, 1345, 1346.
    Regarding Mr. Orszag's assertion concerning the lack of appropriate 
benchmarks, NRBNMLC economic expert Professor Richard Steinberg 
testified that the settlement agreement SoundExchange reached on behalf 
of record companies with NPR/CPB and, to a lesser extent, 
SoundExchange's settlement with CBI, constitute suitable benchmarks. 
See Trial Ex. 3060 ]] 30-39 (AWDT of Richard Steinberg) (Steinberg 
WDT). NRBNMLC asserts that ``[t]he entities negotiating these 
agreements are precisely the type of entities who negotiated past 
agreements that the Judges and their predecessors have relied on as 
benchmarks in past webcasting proceedings.'' Services RPFFCL ] 1344. As 
examples, NRBNMLC refers to the agreement the Recording Industry 
Association of America (RIAA) negotiated with Yahoo! on behalf of 
record companies that ``the Web I CARP chose as its key benchmark;'' 
settlement agreements between SoundExchange and CBI, the National 
Association of Broadcasters (NAB), and Sirius XM, respectively, that 
the Judges cited in Web III; and a direct license between Merlin (an 
entity representing independent record companies) and Pandora that the 
Judges relied on in Web IV.\313\ Id.
---------------------------------------------------------------------------

    \313\ NRBNMLC does not cite any economic testimony for this 
analysis of the suitability of SoundExchange's settlement agreements 
with NPR/CPB and CBI as benchmarks, or their comparability to 
benchmarks that the Judges used in past proceedings. The discussion 
is, rather, arguments of counsel.
---------------------------------------------------------------------------

    NRBNMLC argues that, contrary to Mr. Orszag's assertion, ``there 
are very real differences to consumers between noncommercial and 
commercial webcasters.'' The National Religious Broadcasters 
Noncommercial Music License Committee's Corrected Proposed Findings of 
Fact and Conclusions of Law ] 1345 (NRBNMLC PFFCL). For example, 
Jennifer Burkhiser, Director of Broadcast Regulatory Compliance and 
Issues Programming at Family Radio, Inc. (a large noncommercial 
religious broadcaster), testified that ``[t]hose who really listen to 
Christian music and . . . radio stations can tell the difference 
between commercial and non-commercial pretty easily. . . . [T]here's a 
big difference in motivation and just the programming content based on 
the two different drivers, profit or mission.'' 8/31/20 Tr. 4764 
(Burkhiser); see also Steinberg WDT ] 19 (contrasting profit 
maximization and mission maximization); Trial Ex. 3061 ] 29 (CWDT of 
Joseph Cordes) (Cordes WDT) (stating that programming on noncommercial 
service, including music, ``is chosen for mission-driven reasons rather 
than commercial popularity''). Professor Steinberg also emphasized the 
absence of advertising from noncommercial programming. See 8/26/20 Tr. 
3997 (Steinberg). Moreover, Professor Steinberg asserts as a matter of 
economic logic that, ``[e]ven if the webcasters play identical songs in 
an identical context, whether they are commercial or non-commercial, as 
long as there is different willingness to pay, there's a different 
market segment, and we would naturally expect different prices in each 
segment.'' 8/26/20 Tr. 4002 (Steinberg).

[[Page 59567]]

    NRBNMLC rejects SoundExchange's assertion that the existing rate 
structure for noncommercial webcasters has long been accepted, stating, 
``there has never been noncommercial buyer acceptance of a structure 
incorporating above-threshold commercial-level per-performance fees.'' 
Services RPFFCL ] 1346. Counsel for NRBNMLC supports that statement 
with the observation that NRBNMLC has ``never proposed such a 
structure'' in past webcasting proceedings, and, up until Web IV rates 
went into effect, most noncommercial webcasters paid lower Webcaster 
Settlement Act (WSA) rates, instead of the rates set by the Judges. See 
id.
    NRBNMLC also disputes a key underpinning of the current rate 
structure: That larger noncommercial webcasters pose a greater 
competitive threat to commercial webcasters. NRBNMLC economics expert 
Professor Joseph Cordes testified that there is ``no particular 
economic reason to believe'' that as noncommercial webcasters grow in 
size ``their attributes will converge to those of commercial 
broadcasters.'' 8/20/20 Tr. 3271-72 (Cordes). A noncommercial 
broadcaster's ``commitment to mission will, in fact, act as a restraint 
on their proclivity to simply want to go into a market and compete with 
commercial broadcasters. . . . So long as a nonprofit, indeed, has a 
strong commitment to mission, that is going to actually have an 
aversion to competing with its commercial counterparts, because that 
simply means it's going to have to devote scarce, time, energy and 
resources to competition rather than achieving its mission.'' Id. at 
3273. In addition, Professor Steinberg testified that even larger 
noncommercial webcasters are unlikely to cannibalize markets for 
commercial webcasters. See Steinberg WDT ]] 25, 42-53.
    NRBNMLC argues that Professor Tucker's testimony concerning the 
largest noncommercial webcasters being ``well positioned'' to pay 
increased fees under SoundExchange's proposal is irrelevant and 
unsupported. NRBNMLC PFFCL ] 259. NRBNMLC cites the Register of 
Copyrights' recommendation to the Librarian of Congress in Web I for 
the proposition that an analysis of a licensee's ability to pay is not 
relevant to the willing buyer/willing seller standard applied under 
section 114. See id. ] 260 (citing Web I, 67 FR at 45254). NRBNMLC 
notes, moreover, that the five entities that Professor Tucker examined 
were all ``broadcasters whose primary focus is not simulcasting, which 
is only a small part of their overall operations'' and that, as 
broadcasters, they ``would incur numerous expenses in connection with 
their broadcast operations, including `maintaining and operating their 
stations and translators' and `applying for and maintaining FCC 
licenses'.'' Id. ] 262 (quoting 8/18/20 Tr. 2484-86).
2. NRBNMLC's Rate Proposal
a. Proposed Rates
    Four days before the beginning of the evidentiary hearing in this 
proceeding, NRBNMLC submitted two proposed rate structures, which it 
refers to as ``Alternative 1'' and ``Alternative 2.'' \314\ See 
generally NRBNMLC Amended Proposed Rates and Terms (Jul. 31, 2020) 
(NRBNMLC Rate Proposal). Since NRBNMLC does not refer to its original 
rate proposal in its proposed findings and conclusions, the Judges deem 
the original rate proposal to be superseded by the amended rate 
proposal, and consider only the latter.
---------------------------------------------------------------------------

    \314\ The Judges' procedural rules permit filing of an amended 
rate proposal at any time up to, and including, the filing of 
proposed findings and conclusions. See 37 CFR 351.4(b)(3). The 
NRBNMLC's revised rate proposal was thus timely under the rules.
---------------------------------------------------------------------------

    Under NRBNMLC's Alternative 1, noncommercial webcasters would pay 
an annual minimum fee of $500 that would entitle them to make up to 
1,909,680 ATH of digital audio transmissions in a year.\315\ For 
transmissions in excess of that threshold, noncommercial webcasters 
would pay one third of the applicable per performance rate for the same 
type of transmissions by commercial webcasters.\316\ See id. ex. A at 
9.
---------------------------------------------------------------------------

    \315\ 1,909,680 ATH is an annualized version of the existing 
159,140 monthly ATH threshold (159,140 12).
    \316\ Alternative 1 provides for separate above-threshold per-
performance rates for noncommercial simulcasting, noncommercial 
nonsubscription webcasting, and noncommercial subscription 
webcasting. See NRBNMLC Amended Proposed Rates and Terms at 9. This 
structure parallels the rate structure that the Services propose for 
commercial webcasting.
---------------------------------------------------------------------------

    NRBNMLC modelled its Alternative 2 on SoundExchange's settlement 
with NPR/CPB. See id. ex. B at 11-15 (redline showing changes from NPR/
CPB settlement); NRBNMLC PFFCL ] 152. Under Alternative 2, NRBNMLC 
would pay a flat annual fee of $1,200,000 to SoundExchange on behalf of 
its members for usage by up to 795 noncommercial religious radio 
stations that NRBNMLC would name. See id. ex. A at 10-11. The proposal 
would permit NRBNMLC to add additional noncommercial radio stations by 
paying the minimum fees applicable to other noncommercial webcasters. 
See id. ex. A at 12. The religious radio stations that NRBNMLC names 
would be subject to an aggregate usage cap of 540,000,000 ATH in the 
first year, increasing by 15,000,000 ATH each year of the rate term. 
See id. ex. A at 11. The proposal does not establish any consequence 
for exceeding those thresholds.
    Like the CBI and NPR/CPB settlement rates, Alternative 2 only 
applies to a subset of noncommercial webcasters--those noncommercial 
religious radio stations named by NRBNMLC. NRBNMLC proposes that all 
other noncommercial webcasters would be subject to Alternative 1. See 
id., ex. A at 10.
b. Rationale and Justification
    NRBNMLC argues that noncommercial webcasters occupy a separate 
market segment, in which noncommercial webcasters and record companies 
would agree to royalty rates well below rates in the commercial 
webcasting market. See, e.g., 8/20/20 Tr. 3256 (Cordes); 8/26/20 Tr. 
3998 (Steinberg); Cordes WDT ] 16. On the buyers' side of that 
submarket, noncommercial webcasters of all sizes are characterized by a 
lower willingness to pay as a result of the legal constraints placed on 
nonprofit entities. See, e.g., 8/20/20 Tr. 3255-56, 3259-65 (Cordes). 
On the sellers' side of the submarket, record companies would agree to 
lower prices as a form of seller-side price discrimination in order to 
maximize their overall profits. See, e.g., 8/26/20 Tr. 4001-02 
(Steinberg); Steinberg WDT ] 45 n.14; Cordes WDT ] 21.
    NRBNMLC advocates a benchmark approach to setting a noncommercial 
rate, contending that a benchmark approach is superior to using 
theoretical models to support a rate proposal. NRBNMLC PFFCL ] 125. 
``[A] benchmark is, I think, always superior to a bunch of theorizing 
if one is available. . . .'' 8/26/20 Tr. 4028 (Steinberg). 
Specifically, NRBNMLC offers the 2019 NPR/CPB settlement with 
SoundExchange (2019 NPR/CPB Agreement) as a benchmark that supports its 
rate proposal.\317\ See, e.g.,

[[Page 59568]]

NRBNMLC PFFCL ]] 120-121. NRBNMLC contends that employing the 2019 NPR/
CPB Agreement as a benchmark ``is far superior to using agreements with 
commercial webcasters to set all or any part of those rates.'' NRBNMLC 
PFFCL ] 122. According to Professor Steinberg, ``there are no 
appropriate benchmarks from the commercial submarket because . . . the 
non-commercial sector has a different willingness to pay.'' 8/26/20 Tr. 
4028 (Steinberg). Notwithstanding NRBNMLC's submission of the 2019 NPR/
CPB settlement with SoundExchange as a benchmark, NRBNMLC did not 
present a comprehensive analysis of that settlement by its expert 
witnesses. This is likely because NRBNMLC did not offer its rate 
proposal until after it had already submitted the written direct and 
rebuttal testimony of its witnesses.
---------------------------------------------------------------------------

    \317\ In his WDT, Professor Steinberg cites RIAA's offer in Web 
I to set a noncommercial rate at one-third the commercial rate as 
evidence to support a per-play rate at that level for performances 
in excess of an ATH threshold--a structure that corresponds with 
NRBNMLC's Alternative 1 rate proposal. See Steinberg WDT ] 61. 
NRBNMLC does not refer to this element of Professor Steinberg's 
written testimony in its proposed findings, nor did Professor 
Steinberg refer to it in his oral testimony. The Judges deem this 
argument to have been abandoned in favor of Professor Steinberg's 
use of the 2019 NPR/CPB Agreement to support NRBNMLC's rate 
proposal. To the extent that NRBNMLC does maintain that argument, 
the Judges find Professor Steinberg's reliance on a rejected 
proposal made in the course of litigation two decades ago to be 
unpersuasive.
    Professor Cordes, in his WDT, offers the SoundExchange-CBI 
settlement for the Web IV rate period as a benchmark. Again, the 
Judges deem this argument to have been abandoned by NRBNMLC in favor 
of reliance on Professor Steinberg's use of the more recent 2019 
NPR/CPB agreement as a benchmark. To the extent that NRBNMLC does 
maintain the CBI Web IV settlement as a benchmark, the Judges note 
that the practical effect of the Web IV CBI settlement was to 
replicate the rate structure generally applicable to noncommercial 
webcasters under the Web IV determination. As the Judges noted in 
Web IV, although the parties to the settlement left the royalty rate 
for noncommercial educational webcasters (NEWs) undefined (NEWs that 
exceed the 159,140 ATH threshold are simply no longer eligible for 
the settlement rate), both parties were aware of SoundExchange's 
rate proposal for noncommercial webcasters that the Judges 
ultimately adopted. See Web IV, 81 FR at 26394. The Judges find 
Professor Cordes' assertion that both parties could have considered 
the agreement as effectively being a flat rate to be unreasonable 
and not credible. See Cordes WDT ] 36.
---------------------------------------------------------------------------

    As discussed supra, counsel for NRBNMLC argues that ``[t]he NPR 
benchmarks are by far the most comparable agreements to the agreements 
that noncommercial buyers would negotiate with sellers in the target 
market in this case.'' NRBNMLC PFFCL ] 121.\318\ Counsel contends that 
the 2019 NPR/CPB Agreement involves the same types of buyers, the same 
sellers, the same works, the same rights, and the same license term as 
the target noncommercial compulsory license rate. See id. The Judges 
have used similar factors to assess the comparability of proffered 
benchmarks in past determinations. See, e.g., Web III Remand, 79 FR at 
23115.
---------------------------------------------------------------------------

    \318\ See supra note 313 and accompanying text.
---------------------------------------------------------------------------

    As to the specifics of NRBNMLC's Alternative 1 rate proposal, 
Professor Steinberg testified that, based on his review of 
SoundExchange's Web IV and Web V settlements with NPR/CPB, he concluded 
``it's reasonable to have a minimum fee of $500 and a one-third the 
commercial broadcaster rate for additional usage.'' \319\ 8/26/20 Tr. 
4039-40 (Steinberg).
---------------------------------------------------------------------------

    \319\ Professor Steinberg views that rate as an upper bound of 
reasonable rates, arguing the rate ``may be a little high; that is, 
higher rates than we would see in a . . . willing buyer/willing 
seller framework with the religious non-commercial stations because 
they don't have access to government money.'' Id. at 4040 
(Steinberg).
---------------------------------------------------------------------------

    To reach that conclusion, Professor Steinberg relied on a statement 
in SoundExchange's 2015 settlement agreement with NPR and CPB (2015 
NPR/CPB Agreement) that breaks down the components of value included in 
the agreement's flat fee, and on an Excel workbook entitled 
``[REDACTED] Analysis.'' \320\ According to Professor Steinberg, 
SoundExchange prepared the [REDACTED] Analysis ``[REDACTED]'' for 
purposes of [REDACTED] to be included in the 2015 NPR/CPB Agreement. 
Trial Ex. 3064 ] 3 (WRT of Richard Steinberg) (Steinberg WRT); see 8/
26/20 Tr. 4030 (Steinberg). He contended that the [REDACTED] Analysis 
[REDACTED].\321\ See Steinberg WRT ] 8; 8/26/20 Tr. 4029-30 
(Steinberg).
---------------------------------------------------------------------------

    \320\ The [REDACTED] Analysis was admitted into evidence as 
Trial Ex. 3022.
    \321\ Professor Steinberg analyzed the [REDACTED] Analysis in 
his written rebuttal testimony because NRBNMLC received the document 
in discovery after the submission of his written direct testimony. 
See Steinberg WRT ]] 1, 3.
---------------------------------------------------------------------------

    The 2015 NPR/CPB agreement states:

    It is understood that the License Fee includes:
    (1) An annual minimum fee of $500 for each Covered Entity for 
each year during the Term;
    (2) Additional usage fees for certain Covered Entities; and
    (3) A discount that reflects the administrative convenience to 
the Collective of receiving annual lump sum payments that cover a 
large number of separate entities, as well as the protection from 
bad debt that arises from being paid in advance.

37 CFR 380.32(b); see also Steinberg WRT ] 8.

    According to Professor Steinberg, the [REDACTED] Analysis provides, 
inter alia, [REDACTED]. See id. ] 5. [REDACTED] \322\ Id. ] 5; see id. 
] 6. Professor Steinberg equated the [REDACTED] from the [REDACTED] 
Analysis with the first element of value cited in the 2019 NPR/CPB 
agreement and equated the [REDACTED] with the second element of value 
cited in that agreement. See id. ] 8; 8/26/20 Tr. 4031, 4034-35 
(Steinberg).
---------------------------------------------------------------------------

    \322\ The [REDACTED] Analysis used [REDACTED] of $[REDACTED] for 
2014 and $[REDACTED] for 2015, while the commercial broadcaster 
rates for those years were $0.0023 and $0.0025. See Trial Ex. 3022; 
37 CFR 380.12(a)(4)-(5) (2011). The [REDACTED] Analysis does not 
actually refer to the commercial broadcaster rates or the 3:1 ratio 
posited by Professor Steinberg. Instead, it labels the rates as 
``[REDACTED].'' Trial Ex. 3022. The Judges, like SoundExchange, 
infer that ``[REDACTED]'' denotes the noncommercial webcaster 
settlement agreement under the Webcaster Settlement Act, which is a 
nonprecedential agreement. See SX RPFFCL (to NRBNMLC) ] 140. The 
Judges discuss this infra, at section V.B.1.c.iv.
---------------------------------------------------------------------------

    Professor Steinberg noted that the [REDACTED] rates employed in the 
[REDACTED] Analysis are approximately [REDACTED] the then-prevailing 
per performance rates for commercial broadcasters. See Steinberg WRT ]] 
3, 6 & n.6. He thus concluded that the [REDACTED] used in the 
[REDACTED] analysis support a rate for noncommercial webcasters 
consisting of a $500 minimum fee and a per-performance fee for 
performances over the ATH threshold of one-third the prevailing rate 
for commercial broadcasters. See 8/26/20 Tr. 4039-40 (Steinberg).
    As for the third element of value listed in the agreement (the 
discount for administrative convenience and protection against bad 
debt), Professor Steinberg stated:

    The most plausible explanation to account for the administrative 
convenience value component is that [SoundExchange] recognizes that 
its [REDACTED]. . . . We do not know what SX believed [REDACTED], 
but if it believed [REDACTED].

Steinberg WRT ] 9.

    Professor Steinberg acknowledged that he lacked the data to conduct 
a similar analysis with respect to the 2019 NPR/CPB Agreement that 
NRBNMLC offers as a benchmark but contended ``the numbers in that 
agreement are consistent with this interpretation.'' Id. ] 10. He based 
this contention on what he described as a ``check to see whether the 
calculations were done in the same way . . . .'' 8/26/20 Tr. 4039 
(Steinberg). He compared the average cost per music ATH under the 2015 
NPR/CPB Agreement ($0.0020) with the corresponding metric for the 2019 
NPR/CPB Agreement ($0.0021) and concluded that the calculation 
underlying the 2019 NPR/CPB Agreement ``does replicate the 
calculation'' underlying the 2016 NPR/CPB Agreement. Id.; see also 
Steinberg WRT ] 10. ``It would be better if l [REDACTED]'' Id.
    With respect to Alternative 2, Professor Steinberg stated ``we can 
design a flat-fee structure the same way NPR did it'' with adjustments 
to scale up the fees and ATH caps to reflect a larger number of covered 
entities than in the 2019 NPR/CPB Agreement. 8/26/20 Tr. 4041 
(Steinberg).


[[Page 59569]]


    You'd want to adjust the 800,000 [dollar annual fee] of [the] 
NPR [settlement] for the difference in the music ATH cap and the 
number of covered stations between the . . . religious non-
commercials and the NPR non-commercials. But other than that, you'd 
structure for a--an additional minimum fee, you can add stations, 
and you could structure into a flat-fee structure all of the factors 
listed for administrative convenience as well.

Id. In essence, Professor Steinberg described the arithmetic process of 
scaling up the terms of the NPR/CPB settlement by 150% to cover a 
larger number of radio stations and a greater amount of music. See SX 
PFFCL ] 1615.
c. SoundExchange's Response
    SoundExchange rejects NRBNMLC's use of the 2019 NPR/CPB agreement 
for multiple reasons. Moreover, SoundExchange contends that the 2019 
NPR/CPB agreement fails to support NRBNMLC's rate proposals. Finally, 
SoundExchange questions the Judges' authority to adopt one of NRBNMLC's 
proposed alternatives.\323\
---------------------------------------------------------------------------

    \323\ In its reply to NRBNMLC's proposed findings, SoundExchange 
also argues that NRBNMLC's presentation of an [REDACTED] as part of 
its rebuttal case was procedurally improper and deprived 
SoundExchange of a reasonable opportunity to rebut that analysis. 
See SX RPFFCL (to NRBNMLC) ]] 121, 241. However, SoundExchange did 
not seek to exclude Professor Steinberg's written rebuttal testimony 
in its pre-hearing motions. Nor did SoundExchange challenge any of 
the discussion of the [REDACTED] Analysis in the Steinberg WRT in 
its line-by-line objections. Nor did counsel for SoundExchange 
object when NRBNMLC offered the Steinberg WRT for admission at the 
hearing. See 8/26/20 Tr. 3993 (Steinberg). The Judges do not 
consider an objection first expressed in a party's proposed reply 
findings to be properly raised. Even if SoundExchange had raised its 
objection at the proper time, the Judges need not address this 
procedural argument in light of the Judges' rejection of the 2019 
NPR/CPB Agreement as a benchmark on substantive grounds. See infra 
section V.B.1.
---------------------------------------------------------------------------

    According to SoundExchange, Professor Steinberg ``utterly failed to 
do a proper benchmarking analysis.'' SX PFFCL ] 1497. Mr. Orszag 
described benchmarking as ``a process that uses rates freely negotiated 
in unregulated markets as a benchmark to set rates in a similar, 
regulated market.'' Orszag WDT ] 43 (emphasis added). SoundExchange 
notes that the parties to the 2019 NPR/CPB Agreement did not set a 
freely negotiated rate in an unregulated market, but the agreement was 
instead ``a settlement of a regulatory proceeding'' and thus ``not a 
proper benchmark.'' SX PFFCL ] 1497 (citing SDARS III, 83 FR at 65220 
(acknowledging that a proffered settlement rate was ``not a marketplace 
benchmark'' but ``instead a regulated rate'')). SoundExchange notes 
that, as a settlement of a statutory rate, the 2019 NPR/CPB Agreement 
(and its predecessors) ``reflect not only their negotiating history and 
the parties' valuations of the elements of the deal, but also 
considerations such as the parties' predictions of litigation outcomes 
and potential savings of litigation costs, and the potential for a 
party dissatisfied with a litigation outcome to seek redress from 
Congress.'' SX RPFFCL (to NRBNMLC) ] 149 (citations omitted).
    Even if the Judges were to find a settlement agreement informative, 
SoundExchange argues that NRBNMLC has not established that the 2019 
NPR/CPB agreement is sufficiently comparable to serve as a benchmark. 
SoundExchange and NRBNMLC both acknowledge the critical importance of 
comparability in assessing the value of a proffered benchmark. See 
NRBNMLC PFFCL ]] 120-121; SX RPFFCL (to NRBNMLC) ] 120 (citing SDARS I, 
73 FR at 4088). According to SoundExchange, NRBNMLC bears the burden of 
establishing the comparability of its proposed benchmark to the target 
market, and has failed to do so. See SX RPFFCL (to NRBNMLC) ] 130 
(citing Web IV, 81 FR at 26320).
    SoundExchange asserts that neither of NRBNMLC's economic experts 
``conducted a meaningful analysis of the comparability of 
SoundExchange's settlement with CPB/NPR to the hypothetical market for 
which the Judges must set rates in this proceeding.'' SX RPFFCL (to 
NRBNMLC) ] 121. According to SoundExchange, the only assessment of 
comparability put forward by NRBNMLC ``is solely the work of counsel 
for NRBNMLC.'' Id.
    SoundExchange argues that the NPR/CPB agreements are not comparable 
benchmarks and that the Judges should reject them as they have in 
previous webcasting determinations. See SX PFFCL ] 1363 (citing Web IV, 
84 FR at 26394). SoundExchange enumerates a number of differences 
between the NPR/CPB agreement and the hypothetical target market that 
it contends render that agreement valueless as a benchmark.\324\ See SX 
RPFFCL (to NRBNMLC) ] 121.
---------------------------------------------------------------------------

    \324\ As with NRBNMLC's contrary assertions, see supra note 313 
and accompanying text, these contentions are in the form of 
arguments of counsel, rather than expert testimony.
---------------------------------------------------------------------------

    SoundExchange also contends that the 2019 NPR/CBP agreement 
supports neither of NRBNMLC's alternative rate proposals. In addition 
to the other alleged infirmities of the agreement as a benchmark, 
SoundExchange notes that each of the alternative proposals lacks 
material elements of the proffered benchmark and/or includes elements 
that are not part of the proffered benchmark. Alternative 1 lacks the 
advance payment of royalties on an annual basis and the requirement of 
consolidated reporting as in the 2019 NPR/CPB agreement. See SX RPFFCL 
(to NRBNMLC) ] 154. It does, however, annualize the ATH threshold, 
which was not part of the [REDACTED] Analysis that Professor Steinberg 
reviewed. See id. Moreover, according to SoundExchange, the one-third 
of commercial rates for excess performances does not appear in the 2019 
NPR/CPB agreement and is instead drawn from the [REDACTED] Analysis--an 
analysis of non-precedential WSA agreements that the Judges are not 
permitted to consider. See id.
    With regard to NRBNMLC's Alternative 2, SoundExchange points out it 
also does not include consolidated reporting but does include a much 
larger number of covered entities and music ATH. See id. ] 159. 
According to SoundExchange, the requirement for consolidated reporting, 
in particular, is a ``major benefit'' of the NPR/CPB agreement for 
SoundExchange. Id. (quoting 8/17/20 Tr. 2232 (Tucker)).
    In addition, SoundExchange argues that the Judges lack statutory 
authority to adopt Alternative 2 through a determination (as 
distinguished from a settlement). See SX PFFCL ] 1518. According to 
SoundExchange, 17 U.S.C. 114(f)(1) directs the Judges to determine 
rates binding on copyright owners and ``entities performing sound 
recordings.'' Id. (quoting 17 U.S.C. 114(f)(1)(B)). ``[T]here is no 
obvious statutory basis for adopting in a litigated proceeding a 
royalty to be paid by a committee of a trade association'' like 
NRBNMLC, as opposed to an entity performing sound recordings. Id. ] 
1520. SoundExchange distinguishes NRBNMLC's Alternative 2 from its own 
settlement agreement with CPB and NPR, because 17 U.S.C. 801(b)(7) 
``has special provisions that permit adoption of the CPB/NPR agreement 
as a settlement.'' Id.

B. Judges' Findings and Conclusions

1. Rejection of NPR/CPB Agreement as a Benchmark
    NRBNMLC, as the participant offering the 2019 NPR/CPB Agreement as 
a benchmark in this proceeding, bears the burden of demonstrating that 
the agreement is sufficiently comparable to the target market to serve 
as a benchmark. To the extent that the benchmark market differs the 
target market, NRBNMLC bears the burden of adjusting the benchmark to 
account for

[[Page 59570]]

those differences. NRBNMLC has failed to meet either burden. The 
Judges, therefore, reject the use of the 2019 NPR/CPB Agreement as a 
benchmark for setting noncommercial webcaster rates in this proceeding.
a. NRBNMLC Presented Insufficient Analysis of the Effect of Ongoing 
Litigation on the Benchmark Rate
    The 2019 NPR/CPB Agreement is a settlement of ongoing rate 
litigation before the Judges. SoundExchange argues that that fact alone 
renders the agreement ``not a proper benchmark.'' SX PFFCL ] 1497. The 
Judges do not agree that a settlement of a rate proceeding is 
categorically barred from use in a benchmarking exercise. Section 
114(f)(1)(B)(ii) permits the Judges to consider rates and terms from 
comparable voluntary license agreements, and it does not create an 
exception for voluntary agreements reached as a settlement of 
litigation. Cf. Phonorecords III, 84 FR at 1932-33 (finding ``it is 
beyond dispute that Congress has authorized the Judges, in their 
discretion, to consider such agreements as evidence'' under then-
effective provisions of 17 U.S.C. 115(c)(3)(D)). Nevertheless, 
settlement agreements, unlike voluntary agreements reached outside the 
context of litigation, are not ``free from trade-offs motivated by 
avoiding litigation cost, as distinguished from the underlying 
economics of the transaction.'' Phonorecords III, 84 FR at 1935. To be 
informative on the question of willing buyer/willing seller rates, the 
proffered settlement must take into account trade-offs motivated by 
avoiding litigation cost.
    NRBNMLC's economic experts did not perform any analysis to 
disaggregate trade-offs motivated by avoiding litigation cost from the 
underlying economics of the deal. Neither of NRBNMLC's economic experts 
even acknowledged the existence of the issue. Professor Cordes did not 
analyze the 2019 NPR/CPB Agreement at all and Professor Steinberg's 
analysis of the 2015 NPR/CPB Agreement sought to derive from the flat 
annual fee a rate for performances in excess of the ATH threshold 
without any attempt to make adjustments to account for considerations 
relating to litigation costs (or any justification for not doing so).
    The Judges find that, in the absence of evidence concerning the 
effect of avoidance of litigation costs on the royalty rate agreed to 
by SoundExchange and NPR/CPB in their settlement agreement, NRBNMLC's 
analysis of the 2015 NPR/CPB Agreement is not adequately informative of 
a willing buyer/willing seller rate in the target market.
b. NRBNMLC Did Not Demonstrate That the Benchmark Was Comparable
    Section 114 states that the Judges ``may consider the rates and 
terms for comparable types of audio transmission services and 
comparable circumstances under voluntary license agreements.'' 17 
U.S.C. 114(f)(1)(B)(ii) (emphasis added). Congress thus directed the 
Judges to inquire into the comparability of a proffered voluntary 
license agreement. The Judges have long acknowledged that comparability 
is a key consideration in determining the usefulness of a proffered 
benchmark. See, e.g., Determination of Rates and Terms for Preexisting 
Subscription Services and Satellite Digital Audio Radio Services, 73 FR 
4080, 4088 (Jan. 24, 2008) (SDARS I).
    NRBNMLC presented no economic analysis concerning the comparability 
of its proffered benchmark. Instead, counsel for NRBNMLC prepared its 
own analysis as part of NRBNMLC's proposed findings. See NRBNMLC PFFCL 
] 121. Drawing on factors that the Judges found relevant in past 
cases,\325\ NRBNMLC contended that the proposed benchmark and target 
hypothetical market have the same types of buyers, same sellers, same 
works, same rights, and the same license term. See NRBNMLC PFFCL ] 121. 
Counsel for SoundExchange--also without the benefit of economic 
testimony--argues that the 2019 NPR/CPB Agreement is insufficiently 
comparable to the target hypothetical market. SX RPFFCL (to NRBNMLC) ] 
121. SoundExchange contends that there are different buyers (CPB as 
opposed to individual webcasters), different sellers (SoundExchange as 
opposed to individual record companies), different sets of works (all 
commercial sound recordings as opposed to an individual record 
company's repertoire), and different rights and obligations. See id.
---------------------------------------------------------------------------

    \325\ See, e.g., Determination of Rates and Terms for 
Preexisting Subscription Services and Satellite Digital Audio Radio 
Services, 78 FR 23054, 23058 (Apr. 17, 2013) (``a benchmark market 
should involve the same buyers and sellers for the same rights'') 
(SDARS II).
---------------------------------------------------------------------------

    The 2019 NPR/CPB Agreement (and its predecessor agreements) 
licenses the use of sound recordings by noncommercial entities for 
noninteractive transmissions. The agreement is between SoundExchange--a 
collective operating on behalf of record companies and recording 
artists--and CPB--a private entity, created by the government, that 
provides funding for public broadcasting entities, including NPR 
stations. Under the agreement, CPB pays SoundExchange funds 
appropriated by Congress to cover use of commercial sound recordings by 
NPR stations. The Judges find that, as a general matter the NPR/CPB 
agreements share common elements with the target market but, as 
enumerated by SoundExchange, differ in their particulars.
    There is insufficient expert testimony to determine the extent to 
which the similarities between the 2019 NPR/CPB Agreement and the 
target market support its use as a benchmark or the degree to which the 
differences between the agreement and the target market detract from 
that use (or require adjustments to the benchmark rates). As the party 
proffering the agreement as a benchmark, it was incumbent on NRBNMLC to 
adduce sufficient evidence to demonstrate that the agreement is 
sufficiently comparable to the target market. NRBNMLC failed to do so.
c. Professor Steinberg's Analysis of the 2019 NPR/CPB Agreement Is 
Based on Outdated Information That Applies Rates From a Non-
Precedential WSA Settlement Agreement
i. The Contents of the [REDACTED] Analysis
    NRBNMLC relies almost exclusively on Professor Steinberg's analysis 
of the [REDACTED] Analysis to derive rates from the 2019 NPR/CPB 
Agreement. See Steinberg WRT ]] 4-10. The [REDACTED] Analysis is an 
Excel Workbook prepared by SoundExchange in ``[REDACTED],'' id. ] 3, 
that consists of [REDACTED] spreadsheets, labelled ``[REDACTED],'' and 
``[REDACTED].'' Trial Ex. 3022. Professor Steinberg confined his 
analysis to the ``Estimations'' spreadsheet. See Steinberg WRT ]] 4-10.
    The heading for the ``[REDACTED]'' spreadsheet is ``[REDACTED] 
Analysis.'' The spreadsheet is divided into [REDACTED] sections 
labelled ``[REDACTED],'' and ``[REDACTED].'' Trial Ex. 3022, [REDACTED] 
sheet. Each section contains several lines of data and calculations. 
See id.
    The ``[REDACTED]'' section of the ``[REDACTED]'' spreadsheet (rows 
[REDACTED]) seeks to estimate the [REDACTED] [REDACTED]. See id.; 
Steinberg WRT ] 4. That estimate is used in the sections that follow.
    The ``[REDACTED]'' section (rows [REDACTED]) calculates the 
[REDACTED]. See Steinberg WRT ] 4 n.7. The spreadsheet calculates 
[REDACTED] by multiplying the

[[Page 59571]]

[REDACTED] from the previous portion of the spreadsheet by [REDACTED], 
then multiplying that product by the ``[REDACTED]'' of [REDACTED]. 
Trial Ex. 3022, Estimations sheet, rows 19-22.
    The ``[REDACTED]'' section (rows [REDACTED]) estimates [REDACTED]by 
multiplying the[REDACTED] by the ``[REDACTED].'' Id. rows [REDACTED]; 
see Steinberg WRT ] 5. Unlike the previous sections that calculate 
[REDACTED], this section includes an [REDACTED] as well. See Trial Ex. 
3022, Estimations sheet, rows 26-28.
    The ``[REDACTED]'' section (rows [REDACTED]) [REDACTED] Trial Ex. 
3022, [REDACTED]sheet, rows [REDACTED]; see Steinberg WRT ] 6. The 
spreadsheet computes the [REDACTED]. See id.
    To summarize, the ``[REDACTED]'' spreadsheet examines [REDACTED] 
scenarios: one in which [REDACTED]. SoundExchange computed [REDACTED]. 
See Steinberg WRT ]] 4, 6 n.11; Trial Ex. 3022, [REDACTED] sheet, rows 
[REDACTED], [REDACTED], [REDACTED].
ii. The Purpose of the [REDACTED] Analysis
    Professor Steinberg testified that SoundExchange prepared the 
[REDACTED] Analysis ``for the Web IV license agreement,'' i.e., for 
purposes of computing the [REDACTED]. Steinberg WRT ] 3; see 8/26/20 
Tr. 4030 (Steinberg). Professor Steinberg apparently infers that it was 
``done for the Web IV license agreement,'' 8/26/20 Tr. 4030 
(Steinberg), based on when it was performed and the fact that the 
annual flat fee in the agreement--$560,000--is ``at most, [REDACTED]'' 
of $[REDACTED]. Steinberg WRT ] 7. He attributes the [REDACTED] to 
[REDACTED]. See id.
    By contrast, SoundExchange argues that the [REDACTED] analysis 
``does not purport to address the Web IV CPB/NPR settlement.'' SX 
RPFFCL (to NRBNMLC) ] 140. SoundExchange describes it as ``an old and 
backward-looking document'' that ``[REDACTED]'' SX PFFCL ]] 1507-1508.
    The purpose for which SoundExchange performed the [REDACTED] 
Analysis is not apparent from the document itself. Neither scenario 
examined on the ``[REDACTED]'' spreadsheet is identified in a way that 
suggests that the purpose of the analysis is to derive a flat annual 
fee for a settlement in Web IV. As counsel for SoundExchange asserts in 
proposed findings, the document primarily looks backward at the 
experience under the Web III-era agreement.\326\
---------------------------------------------------------------------------

    \326\ The ``[REDACTED]'' spreadsheet in the [REDACTED] Analysis 
workbook does not shed any additional light on the question. The 
``[REDACTED]'' are cryptic at best and appear to consist primarily 
of a [REDACTED]. The Judges draw no inferences one way or the other 
from the [REDACTED] spreadsheet.
---------------------------------------------------------------------------

    Extrinsic evidence of the purpose for the [REDACTED] Analysis is 
also lacking. There is no testimony or documentary evidence in the 
record that identifies who requested the [REDACTED] Analysis and for 
what purpose, who prepared it, and to whom it was circulated.
    Nevertheless, the timing of the analysis ([REDACTED]) and the rough 
proximity of the value derived in the [REDACTED] scenario to the 
royalty rate adopted in the settlement agreement lend some support for 
the inference that the analysis was prepared for purposes of 
[REDACTED]. However, while a plausible inference, it is by no means a 
certainty--or even a strong probability.
    Because there is a plausible basis to infer that the [REDACTED] 
Analysis was prepared for the 2015 NPR/CPB Agreement, the Judges will 
not discount the analysis entirely as a tool for deriving an implicit 
per-performance royalty rate from that agreement. However, given the 
exceedingly thin record on which that inference is based, the Judges 
give little weight to the [REDACTED] Analysis and the conclusions 
Professor Steinberg draws from it.
iii. Reliance on an Analysis Based on Ten-Year-Old Data
    As described supra, SoundExchange prepared its estimations for the 
[REDACTED] scenarios in the [REDACTED] Analysis using usage data 
submitted by [REDACTED] between [REDACTED] and [REDACTED]. See 
Steinberg WRT ]] 4, 6 n.11. SoundExchange used the data together with 
``[REDACTED]'' rates to determine values for the [REDACTED] under 
[REDACTED] scenarios.\327\
---------------------------------------------------------------------------

    \327\ See supra section V.B.1.c.i.
---------------------------------------------------------------------------

    The utilization of usage data that is as much as a decade old to 
interpret the 2019 NPR/CPB Agreement is not necessarily improper. 
However, the Judges require some explanation why the use of data from 
another era and another settlement agreement nevertheless yields 
reliable results. The Judges find Professor Steinberg's analysis 
unconvincing on this point. To apply the [REDACTED] Analysis to the 
2019 NPR/CPB Agreement, Professor Steinberg relies on at least three 
inferences or assumptions that may be plausible individually but are 
unconvincing in aggregate.
    First, as discussed supra, Professor Steinberg infers that 
SoundExchange prepared the [REDACTED] Analysis of the Web III-era data 
to [REDACTED] under the Web IV-era settlement. The Judges find that 
inference plausible but weakly supported by the evidence.
    Second, Professor Steinberg infers that the annual royalty payments 
in the Web V-era settlement reflect the same underlying per-performance 
rate as the Web IV-era settlement. Professor Steinberg acknowledged 
that he lacked the information to perform an analysis similar to the 
[REDACTED] Analysis on the 2019 NPR/CPB Agreement. See Steinberg WRT ] 
10. The best he could do under the circumstances was to assert that the 
numbers in the 2019 NPR/CPB Agreement are ``consistent with'' his 
interpretation of the [REDACTED] Analysis, based on a comparison of the 
average royalty per music ATH under each agreement. The Judges find 
this a weak basis for applying to the 2019 NPR/CPB Agreement an 
analysis that [REDACTED]. Professor Steinberg's own awareness of the 
weakness of this inference is reflected in his statement that ``[i]t 
would be better if I had the data to replicate the whole analysis 
[REDACTED].'' Steinberg WRT ] 10. In his written testimony, Professor 
Steinberg did not hold out his analysis as a basis for quantifying a 
per-performance rate, but only as an indication that the rate would be 
``[REDACTED].'' Id.
    Third, Professor Steinberg's analysis assumes that the discount for 
administrative convenience that is mentioned in the NPR/CPB agreements 
is separate from the minimum fee and the usage fee that the agreement 
recites. Professor Steinberg did not consider the possibility that the 
discount is reflected in either or both of the minimum fee and usage 
fee that are included in the flat annual payment. Instead, Professor 
Steinberg speculated that the discount resulted from SoundExchange's 
underestimation of excess usage by NPR stations that do not provide 
census reports of usage. The Judges reject that attempt to identify the 
discount included in the agreement as unsupported by the evidence.
    In sum, the Judges find Professor Steinberg's application of the 
[REDACTED] Analysis to the 2019 NPR/CPB Agreement to be questionable, 
and they accord it little weight.

[[Page 59572]]

iv. Reliance on Valuations Based on a Non-Precedential WSA Settlement
    SoundExchange based the valuations it performed in the [REDACTED] 
Analysis on ``[REDACTED]'' per-performance rates. See Trial Ex. 3022 
rows [REDACTED], [REDACTED]; Steinberg WRT ] 6 n.10. ``NCW'' is an 
abbreviation that SoundExchange uses for ``Non-Commercial Webcasters.'' 
See 9/9/20 Tr. 5829 (Ploeger). ``WSA'' is the commonly used 
abbreviation for ``Webcaster Settlement Act.'' \328\ See, e.g., Web IV, 
81 FR at 26318. Based on the context and timing of the [REDACTED] 
Analysis, the Judges conclude that ``[REDACTED]'' refers to the 
Webcaster Settlement Act settlement agreement setting rates and terms 
for noncommercial webcasters that the Copyright Office published in the 
Federal Register on August 12, 2009. See Notification of Agreements 
under the Webcaster Settlement Act of 2009, 74 FR 40614, 40624-28 (Aug. 
12, 2009). That settlement agreement set rates and terms that 
noncommercial webcasters could elect to pay in lieu of rates and terms 
set by the Judges for the period from 2006-2015.
---------------------------------------------------------------------------

    \328\ Congress enacted three Webcaster Settlement Acts: the 
Small Webcaster Settlement Act of 2002, Public Law 107-321, 116 
Stat. 2780 (Dec. 4, 2002); the Webcaster Settlement Act of 2008, 
Public Law 110-435, 122 Stat. 4974 (Oct. 16, 2008); and the 
Webcaster Settlement Act of 2009, Public Law 111-36, 123 Stat. 1926 
(Jun. 30, 2009).
---------------------------------------------------------------------------

    The Webcaster Settlement Act of 2009 (2009 WSA) states that the 
provisions of a settlement agreement reached under the 2009 WSA are 
inadmissible as evidence and may not be taken into account by the 
Judges in any rate proceeding under section 114 or 112:

    Neither [the provisions of the WSA] nor any provisions of any 
agreement entered into pursuant to [the WSA], including any rate 
structure, fees, terms, conditions, or notice and recordkeeping 
requirements set forth therein, shall be admissible as evidence or 
otherwise taken into account in any administrative, judicial, or 
other government proceeding involving the setting or adjustment of 
the royalties payable for the public performance or reproduction in 
ephemeral phonorecords or copies of sound recordings, the 
determination of terms or conditions related thereto, or the 
establishment of notice or recordkeeping requirements by the 
Copyright Royalty Judges . . . . It is the intent of Congress that 
any royalty rates, rate structure, definitions, terms, conditions, 
or notice and recordkeeping requirements, included in such 
agreements shall be considered as a compromise motivated by the 
unique business, economic and political circumstances of webcasters, 
copyright owners, and performers rather than as matters that would 
have been negotiated in the marketplace between a willing buyer and 
a willing seller . . . . This subparagraph shall not apply to the 
extent that [SoundExchange] and a webcaster that is party to [a WSA 
agreement] expressly authorize the submission of the agreement in a 
proceeding under this subsection.

17 U.S.C. 114(f)(4)(C). Section 6.3 of the NCW-WSA agreement contains 
similar language, making it clear that SoundExchange and the 
noncommercial webcasters did not ``expressly authorize'' use of the 
agreement in rate proceedings. See 74 FR at 40627.
    On its face, it is apparent that the per-performance royalty rates 
that SoundExchange used in the [REDACTED] Analysis are rates derived 
from a non-precedential WSA agreement that the Judges are not permitted 
to consider in a rate proceeding. NRBNMLC does little to address this 
issue. Professor Steinberg's written rebuttal testimony, in which he 
analyzes the [REDACTED] Analysis, scarcely acknowledges that the rates 
he describes (imprecisely) as being [REDACTED] commercial per-
performance rates were taken from the non-precedential NCW-WSA 
agreement.\329\ In a proposed reply finding, counsel for NRBNMLC 
acknowledges that the rate comes from a non-precedential WSA agreement, 
and quotes from a memorandum opinion by the Register of Copyrights 
(Register) responding to questions referred by the Judges in Web IV--
presumably to justify use of a nonprecedential rate in this context. 
See Services RPFFCL ] 1509 (quoting Memorandum Opinion on Novel 
Material Questions of Law, Docket No. 14-CRB-0001-WR, at 14-15 (Sep. 
18, 2015) (Memorandum Opinion)). The reference is inapt. The Register 
opined that the WSA does not prevent the Judges from considering a 
direct license concluded outside of the WSA that incorporates terms 
``that are copied from, are substantively identical to, have been 
influenced by, or refer to, the provisions of a WSA agreement.'' 
Memorandum Opinion at 10. The [REDACTED] Analysis does not examine a 
non-WSA agreement. It seeks to determine what [REDACTED] (parties to a 
separate non-precedential WSA Agreement) \330\ would have paid under 
the NCW-WSA settlement agreement during the period when that settlement 
was in force.
---------------------------------------------------------------------------

    \329\ Professor Steinberg refers to labels in the CPB/NPR 
Analysis that mention ``NCW-WSA,'' but does not explain what the 
acronym means. See Steinberg WRT ] 6 n.10.
    \330\ See Notification of Agreements under the Webcaster 
Settlement Act of 2009, 74 FR 40614, 40620-24 (Aug. 12, 2009).
---------------------------------------------------------------------------

    The Judges conclude that they may not consider the [REDACTED] 
Analysis in accordance with the provisions of the Webcaster Settlement 
Act of 2009 as codified in 17 U.S.C. 114(f)(4)(C).
d. The 2019 NPR/CPB Agreement Does Not Support NRBNMLC's Rate Proposals
    NRBNMLC relies on the 2019 NPR/CPB Agreement to support its rate 
proposal. As previously discussed, the Judges find inadequate 
evidentiary and analytical support for reliance on that agreement as a 
benchmark. Even if the Judges found the 2019 NPR/CPB Agreement to be a 
sound benchmark, the Judges find that it does not adequately support 
NRBNMLC's rate proposal.
    SoundExchange has identified several elements from the 2019 NPR/CPB 
Agreement that are not present in NRBNMLC's two alternative rate 
proposals. To the extent these differences result in material 
differences between the benchmark and the proposed rates, the benchmark 
does not support the proposed rates without appropriate adjustment (or 
adequate explanation from a competent witness why an adjustment is 
unnecessary).
i. Absence of Up-Front Payment
    Under NRBNMLC's proposed Alternative 1, each noncommercial 
webcaster would pay an annual $500 per station or channel minimum 
payment plus monthly payments of per-performance royalties at one-third 
the rate for commercial webcasters for transmissions in excess of 
1,909,680 ATH per year. See NRBNMLC Rate Proposal ex. A at 2, 9. By 
contrast, the 2019 NPR/CPB Agreement requires up-front annual payments 
covering up to 530 NPR stations. See 85 FR 11857, 11857-58 (Feb. 28, 
2020).

    The 2019 NPR/CPB Agreement recites that the rate reflects
    (1) An annual minimum fee for each Public Broadcaster for each 
year during the Term;
    (2) Additional usage fees for certain Public Broadcasters; and
    (3) A discount that reflects the administrative convenience to 
[SoundExchange] of receiving annual lump sum payments that cover a 
large number of separate entities, as well as the protection from 
bad debt that arises from being paid in advance.

Id. at 11858. The parties to the 2019 NPR/CPB Agreement prominently 
highlight the ``administrative convenience'' and ``protection from bad 
debt'' that result from the advance payment structure as being 
economically significant elements of the agreement that justify a 
discount in the royalty rate. NRBNMLC does not adjust the per-
performance rate that it

[[Page 59573]]

purportedly derives from the 2019 NPR/CPB Agreement to reflect the 
discount for advance payments. In the absence of any adjustment, the 
2019 NPR/CPB Agreement does not support NRBNMLC's Alternative 1 rate 
proposal.
    While NRBNMLC's Alternative 2 rate includes advance payments, the 
issue would persist even if the Judges adopted Alternative 2. 
Alternative 2 is not a stand-alone rate proposal, since it only covers 
a subset of noncommercial webcasters (religious broadcasters selected 
by NRBNMLC). NRBNMLC proposes that all other noncommercial webcasters 
(not otherwise covered by a settlement) would fall into Alternative 1. 
In effect, Alternative 1 is part of the Alternative 2 rate proposal.
ii. Absence of Consolidated Reporting
    As part of their settlement, SoundExchange and CPB/NPR agreed to 
continue the practice of consolidating reports of use through CPB. See 
Joint Motion to Adopt Partial Settlement, Trial Ex. 3020 at 3 (Sep. 23, 
2019) (2019 Settlement Motion). The parties aver that they did not 
include the details of that part of their agreement in the settlement 
submitted with their motion because the Judges had stated previously 
that they ``do not wish to codify in the Code of Federal Regulations 
[reporting] arrangements pertinent only to specific licensees.'' Id. at 
3 n.2 (citing Notice and Recordkeeping for Use of Sound Recordings 
under Statutory License, Final Rule, 74 FR 52418, 52419 (Oct. 13, 2009) 
(``We have no intention of codifying these negotiated variances [from 
the Judges' regulations] in the future unless and until they come into 
such standardized use as to effectively supersede the existing 
regulations.'')).
    By contrast, NRBNMLC's rate proposal does not require consolidated 
reporting of usage data. See 8/26/20 Tr. 4068-69 (Steinberg). NRBNMLC's 
Alternative 2 rate proposal includes a provision stating ``NRBNMLC and 
Noncommercial Religious Broadcasters shall submit reports of use and 
other information concerning website Performances as agreed upon with 
[SoundExchange]. In the absence of such an agreement, Noncommercial 
Religious Radio Stations shall submit reports of use in accordance with 
then-applicable regulations . . . .'' NRBNMLC Rate Proposal ex. A at 
14. Unlike the settlement with NPR/CPB, there is no advance commitment 
to provide consolidated reporting. Compare id. with 2019 Settlement 
Motion at 3. NRBNMLC merely states that SoundExchange and the religious 
broadcasters are free to adopt an arrangement concerning reports of use 
that departs from the Judges' regulations. SoundExchange and religious 
broadcasters would have that ability without NRBNMLC's proposed 
language. See Notice and Recordkeeping for Use of Sound Recordings 
Under Statutory License, Final Rule, 74 FR at 52419 (``digital audio 
services are free to negotiate other formats and technical standards 
for data maintenance and delivery and may use those in lieu of 
regulations adopted by the Judges, upon agreement with 
[SoundExchange]'').
    The record reflects that consolidated reporting has value to 
SoundExchange. Travis Ploeger, Director of License Management for 
SoundExchange, testified that CPB (through an entity called NPR Digital 
Services), collects usage information from NPR stations and provides 
quality assurance before providing the information to SoundExchange, 
thus making the information more efficient to process. See 9/9/20 Tr. 
5803, 5822 (Ploeger); see also 8/17/20 Tr. 2232 (Tucker) (``one of the 
things that NPR does is it collects together the messy data of the 
individual stations and reports it as part of the agreement''). 
Professor Steinberg also recognized that consolidated reporting by CPB 
represents a cost savings to SoundExchange. See 8/26/20 Tr. 4068 
(Steinberg).
    NRBNMLC's proposed Alternative 2 thus differs materially from the 
proposed benchmark. NRBNMLC makes no attempt to adjust its proposed 
rate to compensate for this material difference, and provides no 
justification for not making an adjustment. See 8/26/20 Tr. 4068-69 
(Steinberg). Rather, counsel for NRBNMLC faults SoundExchange for 
failing to quantify the value of consolidated reporting. See Services 
RPFFCL ] 1523. It is not SoundExchange's (or the Judges') 
responsibility to rescue NRBNMLC's faulty benchmark by proposing an 
appropriate adjustment. In the absence of an appropriate adjustment, 
the 2019 NPR/CPB Agreement does not support NRBNMLC's Alternative 2 
rate proposal.
e. Conclusion Regarding NRBNMLC's Proposed NPR/CPB Benchmark
    Each of the foregoing critiques counsels for limited or no reliance 
on the proffered benchmark. In aggregate, the critiques constitute an 
overwhelming argument for rejecting entirely the 2019 NPR/CPB Agreement 
as a benchmark. The Judges, therefore, reject NRBNMLC's use of the 2019 
NPR/CPB Agreement as a benchmark.
2. Acceptance of Reasoning Underlying SoundExchange Rate Proposal
    SoundExchange relies on the same reasoning adopted by the Judges in 
webcasting proceedings going back to Web II to support its proposed 
rate structure.\331\ Absent persuasive counterarguments, the Judges 
will accept that reasoning.
---------------------------------------------------------------------------

    \331\ See supra, section V.A.1.b.
---------------------------------------------------------------------------

a. Evaluation of NRBNMLC Counterarguments
    NRBNMLC puts forward six principal counterarguments against the 
rationale that has supported the existing noncommercial rate structure 
since Web II. The Judges examine each of them in turn.
i. Noncommercial Webcasters Have a Lower Willingness To Pay Than 
Commercial Webcasters
    A common theme throughout the testimony presented by NRBNMLC is 
that noncommercial webcasters occupy a distinct market segment from 
commercial webcasters and have a lower willingness to pay license fees. 
See, e.g., 8/20/20 Tr. 3255-56 (Cordes); Cordes WDT ] 16; Steinberg WDT 
] 15. NRBNMLC argues that the reason noncommercial webcasters (and 
nonprofit entities in general) have a lower willingness to pay than 
their commercial counterparts is the ``nondistribution constraint,'' 
i.e., the prohibition under state and federal law on distribution of 
profits by nonprofit entities. See 8/26/20 Tr. 3996 (Steinberg); 
Steinberg WDT ] 14. ``[B]ecause profits can't be distributed, there are 
no shareholders. The Board of Directors has no financial interest in 
what the nonprofit does.'' 8/26/20 Tr. 3996 (Steinberg). Consequently, 
``nonprofit organizations are free to pursue charitable missions that 
are not rewarded in the marketplace.'' Id.
    The nondistribution constraint also limits the financing available 
to nonprofit entities. ``[B]ecause they can't distribute profits, 
there's no access to traditional equity capital. They can't issue 
shares of stock that pay dividends.'' Id. at 3997. The nondistribution 
constraint ``also may pose some challenges to [nonprofits] raising debt 
capital, because . . . it may limit the amount of collateral that they 
may be able to pledge in exchange for . . . debt financing.'' 8/20/20 
Tr. 3265 (Cordes). Nonprofits are able to receive donations, ``[b]ut 
donations are limited because donations benefit a group of people. It's 
a classical public goods problem.'' Because of free ridership, ``each 
donor gives less than their

[[Page 59574]]

willingness to pay in equilibrium.'' 8/26/20 Tr. 3998 (Steinberg). For 
noncommercial broadcasters specifically, FCC rules also limit their 
ability to raise funds by prohibiting the sale of advertising. See 
Steinberg WDT ] 28; Web IV, 81 FR at 26319-20. In sum, ``the limited 
access to capital and the fact that . . . there are no owners that can 
. . . capture the surplus, those two factors together from an economic 
perspective would lower the willingness to pay for--on the part of non-
commercial broadcasters for license fees.'' 8/20/20 Tr. 3265 (Cordes). 
On this basis, NRBNMLC repeatedly criticizes the existing rate 
structure for requiring noncommercial webcasters to pay commercial per-
performance royalties. See, e.g., NRBNMLC PFFCL ] 31.
    The Judges have recognized that noncommercial webcasters occupy a 
distinct submarket within the webcasting market. See, e.g., Web IV, 81 
FR at 26319-20. For that reason, the Judges adopted the existing rate 
structure, which provides a substantial discount to noncommercial 
webcasters. Unlike commercial webcasters, noncommercial webcasters pay 
no per-performance royalties for any transmissions up to the 159,140 
monthly ATH threshold. See 37 CFR 380.10(a)(2); see also SoundExchange 
Rate Proposal at 3, attach. at 21. A large majority of noncommercial 
webcasters pay only the annual minimum fee (currently $500) and pay no 
per-performance royalties at all. See Trial Ex. 5625 ]] 9, 33 (WRT of 
Travis Ploeger) (Ploeger WRT) (``in 2018, approximately 97% of 
noncommercial webcasters at the statement of account level (96% at the 
parent company level) paid only the minimum fee.''). All noncommercial 
webcasters, regardless of size, benefit from this allowance. See id. ]] 
35, 37 (in 2018 Family Radio, [REDACTED] religious noncommercial 
webcasters, received an effective [REDACTED]% discount from commercial 
webcasting rates and EMF, the noncommercial webcaster [REDACTED], 
received an effective [REDACTED]% discount). SoundExchange's proposal 
would increase noncommercial rates (as well as commercial rates), but 
the discount for noncommercial webcasters would remain at a similar 
level on a percentage basis. See id. ]] 36, 38.
    NRBNMLC is not correct in stating that the current rate structure 
(and SoundExchange's proposal) requires noncommercial webcasters to pay 
commercial rates. A more accurate statement would be that the current 
rate structure (and SoundExchange's proposal) requires noncommercial 
webcasters to pay per-performance royalties on performances over the 
159,140 ATH threshold at the same marginal rate as commercial 
webcasters.
    NRBNMLC did not examine the question whether noncommercial 
webcasters' lower willingness to pay requires lower marginal rates as 
distinguished from lower average rates. The only passing reference to 
the question was in a colloquy between SoundExchange's expert, 
Professor Tucker, and the Judges:

    Q: As an economist, do you think the more important way to look 
at this or the more important data point is the marginal rate that's 
paid per-play or the average rate as you have depicted it?
    A: So as an economist, as I was thinking about incentives where, 
for programming, the marginal rate is going to be hugely important. 
. . . But when I think about the arguments which were proposed by 
the non-commercial broadcasters about the idea that non-profits 
deserve a discount, I think this is the right way of looking at it 
when thinking about the way that they were framing a discount.

    * * *
    Q: And so do you see that the non-commercial broadcasters would 
have a marginal decision to make as to whether or not it was worth 
it to pay the .0028, or whatever the rate would be, per-play based 
on how much revenue they can anticipate receiving through 
contributions or whatever donations they could receive as non-
commercial broadcasters?
    A: You know, so I think as an economist one would have to 
acknowledge that that would play into their decision-making.

8/17/20 Tr. 2206-07 (Tucker). Professor Tucker's acknowledgement that 
marginal rates would have an impact on a noncommercial webcaster's 
decision-making does not persuade the Judges that average rates are 
unimportant.\332\ Nor does it mean that the effective discount for 
noncommercial webcasters under the current rate structure is 
meaningless. More importantly, this testimony does not address the 
question of the appropriate role of marginal rates versus average rates 
in determining whether a given rate structure exceeds noncommercial 
webcasters' willingness to pay. NRBNMLC has not adequately developed 
this argument.
---------------------------------------------------------------------------

    \332\ The Judges note, in this regard, that NRBNMLC's 
Alternative 1 rate proposal also includes a tranche of performances 
up to an ATH threshold that do not require payment of per-
performance royalties, thus lowering the effective average rate for 
all noncommercial webcasters. Presumably, the NRBNMLC proposal would 
not include this effective discount if it were meaningless to 
noncommercial webcasters.
---------------------------------------------------------------------------

    The Judges find, as they have in past proceedings, that 
noncommercial webcasters constitute a distinct submarket in which they 
have a lower willingness to pay for licenses than commercial 
webcasters. However, the Judges are not persuaded that a rate structure 
in which noncommercial webcasters pay no per-performance fees up to a 
threshold and commercial per-performance fees above that threshold is 
inconsistent with that finding.
ii. In an Unregulated Market Copyright Owners Would Be Willing To 
Accept Lower Royalties From Noncommercial Webcasters as a Form of Price 
Discrimination
    NRBNMLC argues that the existence of separate submarkets for 
licensing sound recording performance rights to commercial and 
noncommercial webcasters fosters seller-side price discrimination that 
would result in lower royalty rates for noncommercial webcasters.\333\ 
See NRBNMLC PFFCL ]] 91-102. Professor Cordes testified that four 
conditions must be present for price discrimination to occur:
---------------------------------------------------------------------------

    \333\ As relevant here, Professor Cordes defines price 
discrimination as ``the case in which sellers of a good or service 
are able to segment the market so that they are able to offer the 
same good or service at different prices to different groups of 
buyers.'' Cordes WDT ] 21.

    (a) buyers need to have different price elasticities of demand 
(sensitivity to higher and lower prices); (b) sellers need to be 
able to identify which groups of buyers have higher and lower price 
elasticities of demand; (c) sellers need to have an incentive to 
differentiate between the price charged to buyers with lower price 
elasticities and the price charged to buyers with higher price 
elasticities; and (d) buyers benefiting from the lower prices must 
---------------------------------------------------------------------------
not be able to re-sell the good to other buyers.

Cordes WDT ] 22. According to Professor Cordes, the hypothetical market 
for webcasting services would be ``conducive for price discrimination 
to occur . . . .'' 8/20/20 Tr. 3266 (Cordes).

    Well, first of all, it would be quite easy, obviously, for 
sellers to be able to identify different segments of the market. You 
know who the commercial broadcasters are. You know who the non-
commercial broadcasters are. So it's not hard to figure out, you 
know, which--which group is which. Secondly, because of the 
distinctive traits of nonprofit broadcasters, they would have a 
higher price elasticity of demand. They would be more likely to buy 
the good when they otherwise might not, if, in fact, the price were 
lowered to them. And, finally, non-commercial broadcasters would be 
prohibited by regulations from reselling the product.

Id. at 3267.
    Even if the Judges were to accept the proposition that record 
companies would engage in seller-side price discrimination in the 
hypothetical unregulated market,\334\ that does not

[[Page 59575]]

advance NRBNMLC's attack on the current rate structure and 
SoundExchange's proposed rate structure. As discussed supra, both the 
existing rate structure and that proposed by SoundExchange provide 
noncommercial webcasters a substantial discount from the fees charged 
to commercial webcasters. Professor Cordes' testimony does not address 
whether price discrimination in the hypothetical market would result in 
discounts for noncommercial webcasters that would be greater than, less 
than, or the same as the discount under the current or proposed rates. 
Nor does it address the particular structure those discounts would 
take. Nothing in Professor Cordes' testimony concerning price 
discrimination invalidates or undermines SoundExchange's proposed rate 
structure.
---------------------------------------------------------------------------

    \334\ Professor Cordes acknowledged in his written testimony 
that he did not perform any empirical analysis of the relative price 
elasticities of commercial and noncommercial webcasters. See Cordes 
WDT ] 24. Nor did he address in his oral testimony the incentives 
(or disincentives) for record companies to differentiate their 
prices (the third of his four conditions necessary for price 
discrimination to occur). For example, the risk of cannibalization, 
discussed infra, section V.B.2.a.iii, could affect record companies' 
incentives to engage in price discrimination. These would be 
relevant considerations in evaluating the strength of Professor 
Cordes' proposition concerning price discrimination in the 
hypothetical market.
---------------------------------------------------------------------------

iii. Concerns About Cannibalization of Commercial Markets by Larger 
Noncommercial Webcasters Are Unfounded
    In Web IV, the Judges identified the risk of cannibalization as an 
important consideration in adopting a rate structure that imposes 
commercial rates for performances by noncommercial webcasters above the 
159,140 ATH threshold. See Web IV, 81 FR 26392 (``there must be limits 
to the differential treatment for noncommercials to avoid `the chance 
that small noncommercial stations will cannibalize the webcasting 
market more generally and thereby adversely affect the value of the 
digital performance right in sound recordings''') (quoting Web II, 72 
FR at 24097). NRBNMLC contends ``the cannibalization argument is 
unsupported by the record and unlikely to occur.'' Steinberg WDT ] 25. 
NRBNMLC argues that there are a number of differences between 
commercial and noncommercial entities that make it unlikely listeners 
will be attracted away from commercial to noncommercial webcasting.
(A) Noncommercial Broadcasters Do Not Seek To Compete With Commercial 
Broadcasters
    NRBNMLC contends that, due to the constraints on, and mission-focus 
of, noncommercial broadcasters, they are averse to competing with 
commercial entities and are motivated instead to seek out ``unserved 
markets with respect to their mission.'' 8/26/20 Tr. 4008 (Steinberg); 
see Cordes WDT ] 16.
    The concerns about cannibalization that the Judges articulated in 
past webcasting proceedings focus on potential displacement in 
listenership from commercial to noncommercial webcasters and is 
independent of noncommercial webcasters' motivations. The record shows 
that at least some noncommercial broadcasters seek to expand their 
audiences. See Emert WDT (Web IV) ] 38 (``It is obviously not ideal for 
a noncommercial religious broadcaster to turn listeners away from their 
programming, as it works against our mission of reaching as many people 
as we can with our message of hope and inspiration . . . .'') (emphasis 
added). Whatever the motivation to increase its listenership--whether 
it be to ``compete'' or to ``advance their mission''--it is the 
increase in listenership itself that poses a risk of cannibalization if 
that increase results from diverting listeners who otherwise would be 
listening to a commercial service. See 8/20/20 Tr. 3275-76 (Cordes) 
(acknowledging that even if a noncommercial webcaster did not set out 
to compete with commercial webcasters, the noncommercial webcaster 
could compete with commercial webcasters ``simply by growing large 
because of its popularity.''); see also Steinberg WDT ] 49 
(acknowledging that ``it is possible that the cross-price elasticity 
between the submarkets is negative (indicating some degree of 
substitutability among listeners),'' though opining it is likely to be 
small due to differences in programming).
    Moreover, SoundExchange provided examples of noncommercial 
webcasters that are in direct competition with commercial webcasters 
for listeners. Mr. Orszag offered the example of Prazor, a large 
internet-only noncommercial webcaster with multiple channels of 
Christian-themed music, and Sirius XM, a commercial service that 
carries multiple Christian-themed music channels on its internet 
service. See Orszag WRT ] 159. ``It is reasonable that a record company 
negotiating voluntary licenses with Prazor and Sirius XM in an 
unregulated marketplace would be mindful of the potential for 
competition between them and limit any discount it might be prepared to 
provide Prazor accordingly.'' \335\ Id. (footnote omitted). In 
addition, Mr. Orszag testified concerning Salem Media, a large 
commercial Christian broadcaster, and EMF, a large noncommercial 
Christian broadcaster, which both have stations in Atlanta that 
broadcast in the Christian Adult Contemporary (Christian AC) format. 
See Orszag WRT ]] 160-161.
---------------------------------------------------------------------------

    \335\ NRBNMLC disputes Mr. Orszag's conclusion, arguing that 
Prazor's listenership is too small to constitute a competitive 
threat to Sirius XM. See NRBNLC PFFCL ] 211. The Judges agree that, 
while Mr. Orszag's example shows that competition between Prazor and 
Sirius XM is possible, it is de minimis at present.

    There is clear evidence of competition between Salem and EMF. 
WFSH is a Salem Christian music station in Atlanta, Georgia 
broadcasting as 104.7 The Fish and webcasting at https://thefishatlanta.com/. WAKL is EMF's K-Love affiliate in Atlanta. EMF 
acquired the station from for-profit Cumulus in mid-2019, changed 
its format from talk to Christian contemporary music, and rebranded 
it as WAKL. In connection with that acquisition, the press has noted 
that with those two stations and a third broadcasting in the same 
format, ``Atlanta has suddenly become a hotbed of Christian radio 
competition,'' and the competition included ``[a]ll three stations . 
---------------------------------------------------------------------------
. . simultaneously running aggressive billboard campaigns.''

Id. ] 161 (footnote omitted). The Judges find this evidence, albeit 
anecdotal, casts doubt on ``[t]he generalities concerning alleged 
programming differences that Dr. Steinberg and Dr. Cordes offer . . . 
.'' Id.
(B) Noncommercial Broadcasters Are Unlikely To Attract Listeners Away 
From Commercial Broadcasters
    NRBNMLC argues that noncommercial broadcasters' commitment to 
mission results in important differences between their on-air 
programming and that of commercial webcasters. See Cordes WDT ] 19; 8/
20/20 Tr. 3278 (Cordes); 8/31/20 Tr. 4763-64 (Burkhiser). Noncommercial 
broadcasts include mission-driven nonmusic content, and the music 
content is selected for its congruency with the mission rather than for 
its popularity with listeners. See Cordes WDT ] 29; 8/31/20 Tr. 4752-53 
(Burkhiser). In addition, NRBNMLC asserts that noncommercial 
broadcasters pursue different types of listeners than commercial 
services. Unlike commercial broadcasters, who seek listeners who will 
increase advertising revenues, noncommercial broadcasters ``seek 
listeners who will best advance their mission.'' 8/26/20 Tr. 4007 
(Steinberg).

[[Page 59576]]

    To rebut NRBNMLC's argument that the programming and audiences for 
those entities are so different that cannibalization is unlikely, 
SoundExchange introduced a study prepared by Massarsky Consulting that 
compared playlist information on commercial and noncommercial radio 
stations downloaded from Mediabase, a commercial database service that 
monitors airplay. See Ploeger WRT ]] 25-26 app. C. This overlap study 
compared playlist information from 10 randomly selected commercial 
Christian AC radio stations with 10 randomly selected noncommercial 
Christian AC stations during the third quarter of 2019:

    [T]he resulting summaries showed that there was an overlapping 
repertoire of 961 recordings by 259 artists used by both one or more 
commercial stations and one or more noncommercial stations during 
the quarter. Those artists represented on both commercial and 
noncommercial playlists constituted just 49.0% of the artists played 
on the commercial stations and 74.4% of the artists played on the 
noncommercial stations, but their recordings were used 
disproportionately. Thus, plays of recordings by those artists made 
up 99.0% of the total plays on the commercial stations and 99.4% of 
the total plays on the noncommercial stations. Similarly, the 
recordings used on both commercial and noncommercial stations were 
52.4% of the recordings played on the commercial stations and 70.5% 
of the recordings played on the noncommercial stations, but 
constituted 97.4% of the total plays on the commercial stations and 
97.7% of the total plays on the noncommercial stations.

Id. ] 25 (footnote omitted).
    NRBNMLC argues that this study ``suffer[s] from so many flaws as to 
be meaningless.'' NRBNMLC PFFCL ] 229. NRBNMLC enumerates several of 
what it views as flaws:
(1) SoundExchange Did Not Present Any Witnesses Who Were Familiar With 
the Design and Execution of the Study
    NRBNMLC contends that Mr. Orszag and Mr. Ploeger were unaware of 
basic information concerning study design, including whether 
SoundExchange considered including genres other than Christian AC in 
the study.\336\ See NRBNMLC PFFCL ]] 230-231; 9/9/20 Tr. 5845-49 
(Ploeger); 8/13/20 Tr. 2019 (Orszag). Nobody from Massarsky Consultant 
testified.
---------------------------------------------------------------------------

    \336\ Prior to the evidentiary hearing, NRBNMLC sought to 
exclude the overlap study, together with references to the study in 
Mr. Ploeger's and Mr. Orszag's testimony, on grounds that Mr. 
Ploeger, ``lacks both (a) the expertise necessary to determine and 
direct how the study should have been conducted and (b) basic 
factual knowledge regarding Mediabase, Massarsky Consulting, and the 
study's design and implementation.'' NRBNMLC Motion to Strike 
Written Rebuttal Testimony (WRT) of Travis Ploeger and Jonathan 
Orszag relating to Mediabase Study, at 3-4 (Mar. 11, 2020). The 
Judges denied the motion, concluding ``the Mediabase playlist 
database is the type of third-party commercial data source that 
industry participants rely on and that the Judges have relied upon 
in past proceedings when presented by lay witnesses.'' Order Denying 
NRBNMLC Motion to Strike, at 3 (Apr. 2, 2020). The Judges noted, 
however, that NRBNMLC raised legitimate questions concerning alleged 
deficiencies in Massarsky Consulting's methodology for selecting the 
subset of data presented in the study and Mr. Ploeger's alleged lack 
of knowledge about that methodology. Id. The Judges found those 
alleged deficiencies go to the weight rather than the admissibility 
of the study. Id.
---------------------------------------------------------------------------

    The Judges find the testimony of Mr. Ploeger and Mr. Orszag, 
including their testimony on cross-examination, provides a sufficient 
basis to assess the overlap study and its limitations. As discussed 
further, infra, the overlap study stands for a simple, and fairly 
limited, proposition: Commercial and noncommercial stations 
broadcasting in the Christian AC format play many of the same songs. 
Greater detail on the specific decisions that went into the design of 
the study are unnecessary to evaluate the study's support for that 
narrow proposition.
(2) The Study Did Not Replicate Real-World Behavior of Consumers
    NRBNMLC faults the overlap study because it ``did not purport `to 
replicate the real world in behavior of consumers.''' NRBNMLC PFFCL ] 
232 (quoting 8/13/20 Tr. 2039 (Orszag)). NRBNMLC argues, therefore, 
that the study ``cannot be used to infer anything about listener 
behavior.'' NRBNMLC PFFCL ] 232.
    In the quoted passage from Mr. Orszag's testimony, he argues 
against the premise of counsel's question on cross-examination, 
explaining the difference between a ``study'' and an ``experiment'':

    Q. So I will just ask you--I will ask you a more general 
question of do you agree with the proposition that litigation 
experiments need to replicate the marketplace to have external 
validity in measuring what market participants, you know, might do 
in that marketplace?

* * * * *

    A. Thank you. So embedded in the words that you asked me in your 
question are lots of terms that are important for consideration 
here.
    The word ``experiment'' is very different than the concept of 
study and different from the concept of analysis . . . . An 
experiment, which is trying to replicate the real world in behavior 
of consumers, is a different question. It's not something I tackle 
in this matter . . . . But nothing that I do here is an experiment . 
. . . And nothing in my written direct or written rebuttal testimony 
in this case involves an experiment.
    So your question, thus, becomes difficult for me to answer in 
any kind of reliable way.

8/13/21 Tr. 2038-39 (Orszag). NRBNMLC has not identified a flaw in the 
overlap study. The study was not, and never was intended to be, an 
experiment. The Judges disagree that the study ``cannot be used to 
infer anything about listener behavior,'' however. The study provides 
information about the songs that commercial and noncommercial religious 
radio stations transmit in common. That is relevant information from 
which the Judges can draw inferences about whether listeners to 
commercial religious stations might listen to noncommercial religious 
stations, and vice versa.
(3) The Study Only Looked at Commercial AC Stations
    NRBNMLC criticizes the overlap study for examining playlists only 
for stations broadcasting in the Christian AC format. See NRBNMLC PFFCL 
] 233. ``As such,'' according to NRBNMLC, ``the study shows nothing 
about overlap in any other genre.'' Id.
    SoundExchange has explained that it directed Massarsky Consulting 
to focus on the Christian AC format because that format is responsible 
for the majority of webcasting royalties from noncommercial stations. 
See Trial Ex. Ploeger WRT ] 22 ; 9/9/20 Tr. 5806, 5846 (Ploeger). 
Because the focus of the inquiry concerning cannibalization is on 
displacement of listenership, it is logical to examine the portion of 
the noncommercial webcasting market with the greatest listenership.
    NRBNMLC does identify a limitation of the overlap study: That it 
focuses exclusively on Christian AC stations. That limitation, however, 
is not accidental--it is by design. Moreover, it is a reasonable design 
choice and was apparent from Mr. Ploeger's description of the study. 
See Ploeger WRT ] 25.
(4) The Sample of Stations Is Not Representative
    NRBNMLC argues that the pool of Christian AC stations monitored by 
Mediabase is not representative of the universe of commercial and 
noncommercial religious stations, see NRBMNLC PFFCL ] 233 (citing 8/13/
20 Tr. 2026 (Orszag)), or even of the universe of Christian AC 
stations. See NRBMNLC PFFCL ] 234 (citing Ploeger WRT ] 25; 8/13/20 Tr. 
2025 (Orszag)). In addition, NRBNMLC contends that the ten commercial 
and ten noncommercial stations drawn from that pool is also 
unrepresentative. See NRBNMLC PFFCL ] 235 (citing 8/13/20 Tr. 2026-28 
(Orszag)).

[[Page 59577]]

    By definition, a pool of stations in a single format is not 
representative of radio stations as a whole. Mr. Orszag readily agreed 
to this proposition. See 8/13/20 Tr. 2026 (Orszag). As discussed in the 
previous section, the overlap study's focus on the format that is 
responsible for the majority of webcasting royalties from noncommercial 
stations was a reasonable design choice.
    Mr. Orszag testified that Mediabase monitors only larger stations 
and, in that sense, the pool of stations in its database is not 
representative of the broader universe of religious radio stations. See 
id. at 2025 (Orszag). However, Mr. Orszag stated that it was 
unnecessary to consider the small ``mom-and-pop stations'' because they 
do not pay royalties above the minimum fee. Id. at 2025-27. Again, the 
focus on stations with significant listenership that generate 
significant webcasting royalties is appropriate for the present 
inquiry.
    Regarding NRBNMLC's contention that the sample of stations selected 
from the Mediabase database is unrepresentative, Mr. Orszag 
acknowledged that they are not representative of the larger universe of 
stations. ``By definition, they are going to be larger adult 
contemporary stations, so basically that means they are not going to be 
representative of all by definition, they represent the larger ones 
that qualify to be within the Mediabase data.'' 8/13/20 Tr. 2027-28 
(Orszag).
    The Judges find that the samples drawn from the nonrepresentative 
collection of Christian AC stations in the Mediabase database are, 
perforce, not representative of the overall universe of radio stations 
(or religious radio stations). That limits the extent to which the data 
derived from that sample can be projected to the broader radio 
universe. However, the purpose of the present exercise is not to 
project results to the entire universe of radio stations, but to the 
much narrower universe of radio stations likely to be subject to per-
performance royalties under the current rate structure. The Judges also 
note that the sample was selected randomly, which diminishes the 
possibility of intentional bias.\337\
---------------------------------------------------------------------------

    \337\ NRBNMLC is critical of the fact that Mr. Ploeger, in his 
deposition, was unable to describe the technical process by which 
Massarsky Consulting carried out the random selection of stations. 
See NRBNMLC PFFCL ] 236. NRBNMLC does not controvert SoundExchange's 
assertion that the selection was random, and the Judges accept that 
assertion. The particular method by which the random selection took 
place is unimportant.
---------------------------------------------------------------------------

    In sum, the Judges find the sample sufficiently representative of 
the segment of the radio market that is of interest here for the Judges 
to draw inferences about that market.
(5) Five of the Ten Commercial Stations Examined in the Study are Owned 
by the Same Company
    NRBNMLC notes that Salem Media Group owns five of the ten 
commercial stations covered in the study. NRBNMLC PFFCL ] 237. Salem is 
the leading U.S. commercial Christian broadcaster. See Ploeger WRT ] 
22. NRBNMLC stresses that ``Mr. Orszag did `nothing to test empirically 
whether the effect of a single owner owning a big chunk of those 
stations would bias the analysis.' '' Id. (quoting 8/13/20 Tr. 2029 
(Orszag). NRBNMLC also points out that only 12 of Salem's 100 stations 
broadcast in the Christian AC format. NRBNMLC PFFCL ] 237 (citing Trial 
Ex. 3049).
    The fact that a large number of the stations that Massarsky 
Consulting randomly selected were owned by Salem is unsurprising and 
reflects Salem's position as one of the larger players in this market. 
Moreover, while owned by Salem, Mediabase data reflects that the five 
stations have distinct (albeit similar) playlists. See Ploeger WRT at 
app. C; Trial Ex. 3040.
    The fact that a large majority of Salem stations broadcast in other 
formats is immaterial. By design, the overlap study is limited to 
Christian AC stations.\338\
---------------------------------------------------------------------------

    \338\ See infra, section V.B.2.a.iii(B)(3).
---------------------------------------------------------------------------

(6) No Two Stations Used in the Study Operate in the Same Market
    NRBNMLC argues that, because no two stations used in the study 
operate in the same market, ``listeners to the stations largely would 
not overlap or pose risk of cannibalization . . . .'' NRBNMLC PFFCL ] 
238. The overlap study seeks to demonstrate that commercial and 
noncommercial stations broadcasting in the Christian AC format play 
many of the same songs. It does not purport to show the extent of 
geographic overlap. NRBNMLC's observation is not relevant. Moreover, it 
is factually incorrect as applied to webcasting, since any streamed 
station can be accessed from anywhere in the world regardless of where 
the broadcast station is located.
(7) The Study Measured the Existence, not the Extent, of Overlap
    NRBNMLC observes that ``the study counts all plays of a recording 
as overlapping, as long as a recording is played just one time in one 
group and at least one time in the other group . . . .'' 8/13/20 Tr. 
2032 (Orszag). NRBNMLC's suggestion is that the overlap study 
significantly overstates the degree of playlist overlap between 
commercial and noncommercial stations.
    NRBNMLC's suggestion is not borne out by the underlying data. Trial 
Ex.3040 shows the number of ``spins'' of songs on each station. Some 
songs that are played frequently on some commercial stations are also 
played frequently on noncommercial stations. For example, [REDACTED] 
was played in excess of [REDACTED] times on [REDACTED] of the 
commercial stations and on [REDACTED] noncommercial stations 
[REDACTED]. See Trial Ex. 3040. Mr. Ploeger testified that ``the 
recordings used on both commercial and noncommercial stations were 
52.4% of the recordings played on the commercial stations and 70.5% of 
the recordings played on the noncommercial stations, but constituted 
97.4% of the total plays on the commercial stations and 97.7% of the 
total plays on the noncommercial stations.'' Ploeger WRT ] 25. In light 
of these statistics and a review of the underlying data, the Judges 
conclude that the scenario described in NRBNMLC's observation is very 
unlikely.
(8) The Study Did Not Measure Similarities or Differences in Nonmusic 
Programming
    NRBNMLC observes that the overlap study did not examine any of the 
differences or similarities of nonmusic content between commercial and 
noncommercial stations and argues that it thus ignores important 
context. See NRBNMLC PFFCL ] 240. NRBNMLC contends ``[t]his is the very 
`context that offers listeners quite different listening experiences 
and thereby removes the chance that they would be indifferent between 
the two listening experiences.' '' Id. (quoting Cordes WDT ] 29).
    Again, the overlap study seeks to demonstrate that commercial and 
noncommercial stations broadcasting in the Christian AC format play 
many of the same songs. It does not purport to show that the listening 
experience on commercial and noncommercial stations is the same. While 
information about nonmusic content would have been helpful to the 
Judges in assessing the risk of cannibalization, its absence does not 
render the overlap study uninformative.

[[Page 59578]]

(9) SoundExchange Did Not Conduct a Similar Study To Test Commercial/
Noncommercial Overlap in Music Played on NPR Stations
    NRBNMLC asserts that ``an equally fatal deficiency in the overlap 
study is that SoundExchange did not conduct a study to test commercial/
noncommercial overlap of any musical genre played on NPR stations.'' 
NRBNMLC PFFCL ] 240. NRBNMLC argues that the absence of such a study 
renders the overlap study ``wholly uninformative'' as to how NRBNMLC's 
benchmark should be adjusted to account for any promotional or 
substitutional effect. Id. ] 243.
    Once again, NRBNMLC criticizes the overlap study for not doing 
something it was not designed to do. Moreover, it is NRBNMLC's burden 
to show that its benchmark is comparable and to propose adjustments to 
the extent that it is not. Arguing that the overlap study does not 
carry that burden for NRBNMLC is not a valid criticism. Finally, 
NRBNMLC did not advance its benchmark analysis of the NPR agreement 
until Professor Steinberg's written rebuttal testimony, by which time 
it was too late for SoundExchange to design and conduct a study. The 
Judges will not hold SoundExchange's lack of prescience against it.
(10) The Judges' Conclusions Regarding the Overlap Study
    The Judges find the overlap study to be informative on the question 
whether commercial and noncommercial stations play many of the same 
songs. Specifically, the Judges find that the overlap study 
demonstrates that there is substantial overlap in the music played by 
commercial and noncommercial stations broadcasting in the format that 
accounts for most noncommercial royalties. Due to the limitations in 
the overlap study, the Judges find that it does not support any 
conclusion as to the specific degree of overlap or whether the overlap 
actually results in audience diversion. Rather, it supports a 
conclusion that there is sufficient similarity in the music content of 
these stations to make diversion a realistic possibility.
(C) Listener Diversion Will Increase, Not Decrease, Record Company 
Royalties
    NRBNMLC argues that a decrease in the cost of webcasting by 
noncommercial broadcasters will most likely cause listener diversion 
from those broadcasters' over-the-air broadcasts to their webcasts. See 
NRBNMLC PFFCL ] 212. Professor Steinberg testified that ``if we make 
webcasting less costly to stations, they are less likely to limit their 
webcasting,'' permitting more listeners to switch from the broadcast to 
the webcast. 8/26/20 Tr. 4011-12 (Steinberg). Because webcast plays 
bear royalties while terrestrial radio plays do not, Professor 
Steinberg argues that this form of diversion will enhance record 
company revenue. See id. at 4012.
    NRBNMLC's hypothesis concerning the sources and destinations of 
listener diversion are speculative and unsupported by evidence. Since 
there is some internal logic to NRBNMLC's hypothesis, the Judges do not 
reject it outright, but they accord it little weight.
iv. Lower License Fees for Noncommercial Broadcasters Will Result in a 
Net Increase in Record Company Revenue
    NRBNMLC argues that ``even with identical products, SoundExchange 
still would collect--and sound recording copyright owners would 
receive--the same or greater royalties if the noncommercial market 
segment were charged a lower per-performance rate due to the additional 
noncommercial buying activity that would occur.'' NRBNMLC PFFCL ] 217; 
see Steinberg WDT ] 46 (``[W]hen two statutory prices are set, one for 
each submarket, the price set for commercial webcasters can be the same 
as the single price, while the [noncommercial webcasters] are charged a 
lower price and hence buy more licenses. When more licenses are sold, 
the value of digital performance rights increases.''). This a reprise 
of the argument concerning price discrimination discussed supra, 
section V.B.2.a.ii.
    The Judges find NRBMNLC's price discrimination argument 
unpersuasive. NRBNMLC's economic testimony establishes that one of the 
conditions necessary for price discrimination to take place in a market 
is ``sellers need to have an incentive to differentiate between the 
price charged to buyers with lower price elasticities and the price 
charged to buyers with higher price elasticities . . . .'' Cordes WDT ] 
22. But the NRBNMLC has not demonstrated that such an incentive is 
present.
    The NRBNMLC merely speculates that increased listenership on 
noncommercial internet stations will generate more royalties via a 
diversion of listeners from terrestrial broadcasts than are lost by the 
diversion of listeners away from commercial internet radio (i.e., 
cannibalization). The NRBMNLC proffers no evidentiary support for this 
speculation, precluding any reliance by the Judges on this argument.
v. SoundExchange Failed To Provide Empirical Evidence of 
Cannibalization
    Ironically, NRBMNLC contends that the record lacks empirical 
evidence of substantial cannibalization. See NRBNMLC PFFCL ] 219; 
Steinberg WDT ] 48 (``[T]here is no scientific study in the record 
demonstrating that cannibalization has ever occurred in this 
market.''). NRBNMLC notes that several record company witnesses 
testified that they were unaware of their companies ever having 
performed such an analysis. See, e.g., 9/3/20 Tr. 5599 (Adadevoh). But 
there is no reason why SoundExchange should be required to provide 
evidence regarding cannibalization to support NRBMNLC's price 
discrimination argument.
    The current rate structure for noncommercial webcasters, which has 
been in place since 2006, was designed to limit cannibalization of 
commercial webcasting by noncommercial webcasters. It is unsurprising 
that no participant has sought to measure the amount of cannibalization 
in the marketplace. If the rate structure has worked as intended, such 
a study would be expected to show little if any actual cannibalization. 
The Judges do not find the absence of empirical evidence of widespread 
cannibalization to undermine the argument that the risk of 
cannibalization under a different rate structure exists.
vi. The 2019 NPR/CPB Agreement Demonstrates That Copyright Owners Will 
License Noncommercial Broadcasters at a Lower Rate in Spite of Fears of 
Cannibalization
    NRBNMLC argues that SoundExchange's repeated settlements with NPR/
CPB show that record companies are willing to reach agreements with 
large noncommercial broadcasters ``at rates that are significantly 
lower on average than the current noncommercial rates.'' NRBNMLC PFFCL 
] 244. ``If willing record company sellers were genuinely concerned 
about alleged cannibalization above the threshold from larger 
noncommercial broadcasters, they would not have agreed to accept lower 
rates from NPR stations.'' Id. ] 247.
    The Judges concluded that NRBNMLC has failed to demonstrate that 
the 2019 NPR/CPB Agreement is a comparable benchmark. See infra, 
section V.B.1.b. In the absence of a demonstration of comparability, 
the Judges reject NRBNMLC's use of that agreement and its predecessors 
to demonstrate that

[[Page 59579]]

concerns about cannibalization are unfounded.
b. Judges' Conclusions Regarding Reasoning Underlying SoundExchange 
Proposed Rate Structure
    NRBNMLC's counterarguments do not persuade the Judges to reject the 
rationale for setting rates for above-threshold transmissions equal to 
commercial rates. The Judges find that there is a risk that large 
noncommercial webcasters may draw listeners from commercial webcasters 
and that adopting a rate structure that applies commercial per-
performance rates to above-threshold plays by those larger 
noncommercial webcasters is appropriate.
3. Adoption of Rate Structure
    NRBNMLC relies entirely on the 2019 NPR/CPB Agreement as a 
benchmark to support its rate proposal.\339\ Having rejected use of the 
2019 NPR/CPB Agreement as a benchmark,\340\ the Judges find NRBNMLC's 
rate proposal unsupported by the evidence and must reject it.\341\
---------------------------------------------------------------------------

    \339\ See supra note 317 and accompanying text.
    \340\ See supra, section V.B.1.
    \341\ In light of the Judges' rejection of the NRBNMLC rate 
proposal, they need not address SoundExchange's contention that they 
lack authority to adopt NRBNMLC's Alternative 2. See SX PFFCL ]] 
1518-1520; supra, section V.A.2.c.
---------------------------------------------------------------------------

    By contrast, the Judges find that the rationale for a continuation 
of the noncommercial rate structure in place since 2006 remains valid. 
The Judges, therefore, adopt SoundExchange's proposal for a two-part 
rate structure under which noncommercial webcasters pay a minimum fee 
that entitles them to transmit performances of sound recordings up to 
an ATH threshold and pay commercial, nonsubscription per-performance 
rates \342\ for transmissions in excess of that threshold.
---------------------------------------------------------------------------

    \342\ See infra, section IX.C.2.
---------------------------------------------------------------------------

    Neither SoundExchange nor NRBNMLC proposed that the minimum fee for 
noncommercial webcasters should differ from the minimum fee for 
commercial webcasters. The Judges find that noncommercial webcasters 
should continue to pay the same per station or channel minimum fee as 
commercial webcasters.\343\
---------------------------------------------------------------------------

    \343\ The Judges set the minimum fee infra, section VI.
---------------------------------------------------------------------------

    While both SoundExchange and NRBNMLC propose the same average ATH 
threshold, SoundExchange proposes retaining the current structure in 
which the ATH threshold is measured on a monthly basis (159,140 ATH per 
month), while NRBNMLC proposes (in its Alternative 1) that the ATH 
threshold be measured on an annual basis (1,909,680 ATH per year).\344\
---------------------------------------------------------------------------

    \344\ See supra, sections V.A.1.a and V.A.2.a.
---------------------------------------------------------------------------

    NRBNMLC contends that annualizing the ATH threshold will ``account 
for seasonal listener peaks and valleys'' and ``lower transaction costs 
for both parties . . . .'' NRBNMLC PFFCL ] 158. Professor Steinberg 
testified that ``by doing it on an annual basis, you have lower 
transactions costs for both parties, and I didn't see any real reason . 
. . not to do it. I didn't see any real reason why we shouldn't save 
that money.'' 8/26/20 Tr. 4040 (Steinberg). NRBNMLC also argues that 
the NPR agreements support an annualized threshold since they include 
annual music ATH allotments. See NRBNMLC PFFCL ] 158.
    NRBNMLC offered no evidence--apart from Professor Steinberg's 
unsubstantiated assertion--that an annualized ATH threshold would 
reduce transactions costs. NRBNMLC also offered no explanation why the 
NPR/CPB settlement agreements--agreements that include both an annual 
payment and an annual ATH allotment--supports a proposal that 
annualizes only the ATH allotment but retains monthly payments. The 
Judges find neither argument persuasive.
    With regard to levelling out ``seasonal peaks and valleys,'' 
NRBNMLC made no case why that is an appropriate or desirable outcome. 
To be sure, it may well result in lower royalty payments for certain 
noncommercial webcasters--particularly those that perform large amounts 
of music with seasonal appeal, such as Christmas music. However, many 
commercial webcasters also perform large amounts of music with seasonal 
appeal, increasing the likelihood that noncommercial webcasters will 
divert listeners from commercial webcasts. Without a more developed 
argument, supported by evidence, the Judges will not make such a 
significant change to the method of applying the ATH threshold to 
noncommercial webcasters. The ATH threshold shall apply on a monthly 
basis. Noncommercial webcasters will be subject to per-performance 
royalties for transmissions in excess of 159,140 ATH in a month.

VI. Minimum Fee

    Section 114 of the Copyright Act requires the Judges to determine a 
minimum fee for each type of service covered by the statutory license. 
See 17 U.S.C. 114(f)(1)(B). Section 112 contains a similar requirement 
for the statutory license for ephemeral recordings. See 17 U.S.C. 
112(e)(3)-(4). For the current rate period, the minimum fee for all 
services is $500 annually for each station or channel, with an 
aggregate cap for each commercial webcaster of $50,000 (i.e., 100 
stations or channels).\345\ See 37 CFR 380.10(b). For commercial 
webcasters, the minimum fee is credited toward per-performance usage 
fees. See id. For noncommercial webcasters, payment of the minimum fee 
covers usage up to 159,140 Aggregate Tuning Hours (ATH) of audio 
transmissions. See id. Sec.  380.10(a)(1), (b).
---------------------------------------------------------------------------

    \345\ Five percent of the minimum fee is allocated to ephemeral 
recordings. See 37 CFR 380.10(d).
---------------------------------------------------------------------------

    For the forthcoming rate period, SoundExchange proposes to increase 
the minimum fee to $1,000 annually for each station or channel. See 
SoundExchange's Proposed Rates and Terms at 2 (Sep. 23, 2019) 
(SoundExchange Rate Proposal). SoundExchange also proposes to increase 
the aggregate cap for commercial webcasters to $100,000. See id. The 
Services each propose no change to the current $500 minimum fee and 
$50,000 cap. See Google LLC's Proposed Rates and Terms at 2 (Sep. 23, 
2019) (Google Rate Proposal); NAB's Proposed Rates and Terms at 8 (Sep. 
23, 2019) (NAB Rate Proposal); The NRBNMLC's Amended Proposed 
Noncommercial Webcaster Rates and Terms, ex. A at 9 (Jul. 31, 2020) 
(NRBNMLC Rate Proposal); \346\ and Amended Proposed Rate and Terms of 
Sirius XM Radio Inc. and Pandora Media, LLC at 1 (Jan. 10, 2020) 
(Sirius XM Rate Proposal).
---------------------------------------------------------------------------

    \346\ The $500 minimum fee applies only to NRBNMLC's 
``Alternative 1'' rate proposal. NRBNMLC's ``Alternative 2'' employs 
a flat annual payment that includes minimum fees and usage payments 
for multiple stations. See NRBNMLC Rate Proposal ex. A at 12.
---------------------------------------------------------------------------

A. SoundExchange's Justification for Increasing the Minimum Fee

    SoundExchange argues that it is ``reasonable and appropriate for 
the minimum fee at least to cover SoundExchange's administrative 
cost.'' SX RPFFCL (to Services) ] 358 (quoting Digital Performance 
Right in Sound Recordings and Ephemeral Recordings, 79 FR 64669, 64672 
(Oct. 31, 2014) (Web II Second Remand)); see 8/13/20 Tr. 2055 (Orszag) 
(``it's important that that minimum fee be set at such a level that is 
consistent with the cost of processing and dealing with these royalty 
statements''). SoundExchange contends that its average per station or 
channel administrative cost more than doubled between 2013 and 2018, 
increasing from approximately $1,900 to approximately $4,448. See 
Ploeger WRT ]] 13-14; id. app. A. ] 50 (WDT of Jon Bender) (Bender 
WDT). According to

[[Page 59580]]

SoundExchange, increasing the minimum fee from $500 to $1000 would 
ensure that every webcaster contributes reasonably to SoundExchange's 
average administrative costs, even if it does not cover them entirely. 
See Ploeger WRT ] 13; Bender WDT ] 51.
    SoundExchange offers its settlement with CBI as confirmation of the 
need for an increase in the minimum fee. See SX PFFCL ]] 1554-1556. In 
that settlement the parties agreed to an increase in the minimum fee, 
starting at $550 in 2021 and increasing annually in $50 increments to 
$750 in 2025. See Determination of Rates and Terms for Digital 
Performance of Sound Recordings and Making of Ephemeral Copies to 
Facilitate Those Performances (Web V), 85 FR 12745, 12746 (Mar. 4, 
2020) (CBI Settlement). SoundExchange put forward two reasons why the 
increase in the CBI Settlement falls short of the 100% increase that it 
seeks in its rate proposal. ``First, it avoided the complexities and 
incremental costs of litigating with a group of webcasters that 
collectively paid only $336,800 in statutory royalties (including 
reporting waiver fees) in 2018.'' Ploeger WRT ] 15. ``Second, as a 
group, the noncommercial educational webcasters covered by the 
settlement impose lower costs on SoundExchange than other webcasters'' 
because 98% of them pay a $100 proxy fee that allows them not to file 
reports of use (thus alleviating SoundExchange of the cost of 
processing those reports or, if necessary, chasing down delinquent 
reports). Id. ] 16.
    SoundExchange also contends that the $500 annual minimum fee has 
remained the same for more than twenty years, in spite of general 
increases in the cost of goods and services. See Bender WDT ] 42; 8/11/
20 Tr. 1467 (Orszag). Mr. Orszag testified that using the Consumer 
Price Index (CPI-U) would be an appropriate, if imperfect, means of 
measuring the declining purchasing power of the minimum fee compared to 
the general cost of goods and services. See 8/11/20 Tr. 1469-71, 1473-
74 (Orszag). Jonathan Bender, SoundExchange's former CEO, testified 
that ``[a]ccording to the Bureau of Labor Statistics' CPI inflation 
calculator, $500 in October 1998 was equivalent to $782.19 in August 
2019. By the beginning of the next rate period in January 2021, that 
can reasonably be expected to exceed $800, and of course it will 
continue growing during the coming rate period.'' Bender WDT ] 43. 
Since prices for services have increased more rapidly than overall 
prices, SoundExchange contends it is reasonable to expect that its 
costs of administering the statutory license have increased more 
rapidly than the CPI-U. See 8/11/20 Tr. 1467-68 (Orszag).
    SoundExchange notes that the minimum fee has not kept pace with 
per-performance royalty rates for webcasting. Mr. Bender testified that 
the total royalty rate for nonsubscription commercial webcasters 
increased 2.36 times between 1998 and 2019.\347\ ``If the minimum fee 
today were set to cover the same number of performances as contemplated 
by the Librarian in Web I, it would be over $1180.'' Bender WDT ] 44. 
Performing the same calculation using 2006 rates under Web II as a 
starting point would yield a minimum fee of over $1437 for subscription 
services. See id. ] 45.
---------------------------------------------------------------------------

    \347\ Under the Web I rate structure, nonsubscription commercial 
webcasters paid $0.0007 per performance, plus an additional 8.8% for 
ephemeral recordings. Mr. Bender used the combined royalty of 
$0.0007616 (i.e., 0.0007 x 1.088) in his calculations. See Bender 
WDT ] 44.
---------------------------------------------------------------------------

    SoundExchange also seeks to justify an increase in the minimum fee 
by the generally increasing level of usage.

    SoundExchange has observed a marked increase in the average 
number of performances across all webcasters whose royalties are 
administered by SoundExchange. We are not aware of a corresponding 
increase in the average number of channels per webcaster, implying 
an increase in per channel or station usage. Growth in per channel 
or station usage means that if minimum fees are to both cover usage 
and ensure a contribution to the costs of administering the 
statutory license, minimum fees should go up.

Bender WDT ] 52.
    In addition, SoundExchange notes that its proposed minimum fees are 
roughly in line with minimum fees charged for performing musical works 
by the performing rights organizations (PROs) that represent 
songwriters and music publishers. SoundExchange asserts that the 
Judges, and the Librarian before them, used musical works rates ``as a 
check on the reasonableness of the minimum fee under the statutory 
license.'' Bender WDT ] 53.

    Pursuant to the Judges' regulations under Section 118 of the 
Copyright Act, in 2021, the smallest college broadcasting stations 
will pay $746 just for use of ASCAP and BMI musical works, plus more 
if they license musical works through SESAC and Global Music Rights. 
College broadcasting stations affiliated with large schools will pay 
$1,928 for use of ASCAP and BMI musical works. In the case of public 
broadcasting entities, music format stations in even the smallest 
markets will pay $1,639 for use of ASCAP, BMI and SESAC musical 
works. In large markets the number is $14,532. As the Judges are 
well aware, ``sound recording rights are paid multiple times the 
amounts paid for musical works rights'' in unregulated markets.

Id. (citations and footnotes omitted).
    Finally, SoundExchange contends that its proposed $100,000 cap on 
minimum fees for commercial webcasters with more than 100 stations or 
channels (up from $50,000 in the current rate period) ``is consistent 
with the minimum fees paid by PSS and SDARS and by new subscription 
services transmitted through cable and satellite television networks . 
. . .'' Id. ] 54 (citations omitted). SoundExchange avers the change 
will have a limited impact on commercial webcasters: ``In 2018, only 20 
webcasters paid the $50,000 minimum fee and so would presumably pay a 
$100,000 minimum fee under SoundExchange's proposal. Of them, 18 
ultimately paid total royalties in excess of $100,000.'' Id.

B. The Services' Response

    The Services reject SoundExchange's effort to justify an increase 
in minimum fees based on increases in its average administrative cost, 
arguing that that measure is irrelevant. ``The purpose of the minimum 
fee is to cover SoundExchange's incremental administrative costs, not 
its overall administrative costs.'' Services RPFFCL ] 1536. The 
Services cite the CARP report and the Librarian's decision in Web I as 
concurring with this position. See id. (citing Report of the Copyright 
Arbitration Royalty Panel, Docket No. 2000-9 CARP DTRA 1&2, at 32, 95 
(Feb. 20, 2002) (Web I CARP Report); Determination of Reasonable Rates 
and Terms for the Digital Performance of Sound Recordings and Ephemeral 
Recordings, Final rule and order, Docket No. 2000-9 CARP DTRA 1&2, 67 
FR 45240, 45263 (Jul. 8, 2002) (Web I Determination)).
    The Services draw a contrast between the mechanism for funding 
SoundExchange's administration of the section 114 license and the 
Mechanical Licensing Collective's (MLC) administration of the section 
115 license: Unlike the MLC, which is funded by an assessment on 
licensees (separate from, and in addition to, usage fees), 
SoundExchange's costs are deducted from the royalties it collects. 
Compare 17 U.S.C. 115(d)(7)(A) with 17 U.S.C. 114(g)(3). Based on this 
contrast, the Services conclude that ``using the minimum fee to help 
fund the overall administrative costs of SoundExchange would run afoul 
of the Act.'' Services RPFFCL ] 1536.
    The Services also argue that SoundExchange's average cost 
calculation is flawed. The Services contend that SoundExchange began 
its

[[Page 59581]]

calculation with ``Total Operating Administrative Expenses'' rather 
than the cost of processing and distributing royalties. See Steinberg 
WRT ] 19. The Services argue that ``Total Operating Administrative 
Expenses'' covers administration of licenses other than webcasting, and 
improperly includes ``Property and Equipment Depreciation,'' ``Rate-
Setting Proceedings Amortization,'' ``Interest expense,'' and ``Tax 
expense.'' See id.; 9/9/20 Tr. 5863, 5867-74 (Ploeger); Trial Ex. 3023 
at 43 (SoundExchange Consolidated Financial Statements, Years Ended 
December 31, 2018 and 2017). NRBNMLC's expert, Professor Steinberg, 
opined that SoundExchange's estimate of administrative costs is 
``grossly inflated.'' Steinberg WRT ] 19. The Services also fault 
SoundExchange for attributing 100 channels to services that actually 
had more than 100 channels or stations, which the Services contend also 
inflated SoundExchange's computation of administrative costs on a per-
channel basis. Services RPFFCL ] 1545; see 9/9/20 Tr. 5857-58 
(Ploeger); Bender WDT ] 49.
    The Services dispute SoundExchange's assertion that its settlement 
with CBI confirms the need for an increase in the minimum fee, pointing 
out that the minimum fee increase in that settlement falls short of the 
increase that SoundExchange has proposed. See Services RPFFCL ] 1554. 
The Services argue that the minimum fee in the CBI agreement is, ``if 
anything, too high for broader application'' because CBI had more to 
gain by settling than SoundExchange. Steinberg WDT ] 31. While the 
Services acknowledge SoundExchange's explanation that a lower minimum 
fee is justified for CBI members because they impose lower costs on 
SoundExchange than do other services, the Services point out that the 
same rationale could apply to all commercial and noncommercial 
webcasters that pay only the minimum fee. See Services RPFFCL ] 1554. 
The Services opine that ``SoundExchange could decrease those costs 
further by deciding to waive reports of use for . . . noncommercial 
webcasters also webcasting at or below 80,000 monthly ATH.'' Id.
    The Services dispute SoundExchange's argument that inflation over 
the past twenty years justifies a minimum fee increase. First, the 
Services deny that the current minimum fee has been in place that long, 
since the minimum fee under Web I was applied per licensee, not per 
station or channel. See id. ] 1557; 8/13/20 Tr. 2015 (Orszag). Second, 
the Services contend that ``SoundExchange agreed to $500 for 2020,'' in 
Web IV, ``so that year, not 1998, is the year from which to consider 
changes.'' Services RPFFCL ] 1558. Moreover, notwithstanding the 
general rate of inflation, the Services suggest that SoundExchange's 
processing costs have decreased over time due to increasing use of 
automation. See id. ] 1559; see also Bender WDT ]] 9-10; 8/11/20 Tr. 
1470 (Orszag).
    Regarding SoundExchange's argument that the minimum fee has not 
kept pace with per-performance rates, the Services point out that the 
Judges have stated that the minimum fee ``is meant to cover 
administrative costs'' and ``does not address actual usage.'' Web II, 
72 FR at 24099.
    The Services describe SoundExchange's arguments based on rates for 
use of musical works as ``improper.'' Services RPFFCL ] 1564-1565. The 
Services note that SoundExchange has long opposed, and the Judges have 
long rejected, use of musical works fees for setting sound recording 
rates. See, e.g., Web II, 72 FR at 24092-95; see also Bender WDT ] 53 & 
n.16 (``the use of musical work rates to set sound recording rates has 
otherwise been thoroughly rejected, which SoundExchange believes is 
proper''). In addition, the Services argue that the rates cited by 
SoundExchange are not comparable because they are flat fees covering 
unlimited broadcasting rather than minimum fees. See Services RPFFCL ] 
1564-1565 (citing 37 CFR 381.5(c)). The Services also note differences 
in the structure of the market for licensing musical works (i.e., 
multiple collecting societies with mutually exclusive repertoires 
versus a single collective covering the entire industry), as well as 
differing administrative costs at the level of each individual 
collecting society. See Steinberg WRT ] 20.
    Finally, the Services reject SoundExchange's reference to minimum 
fees for PSS and SDARS to justify increasing the cap on minimum fees 
for commercial webcasters, stating that the other statutory licenses 
are ``not applicable here.'' Services RPFFCL ] 1566.

C. The Judges' Findings and Conclusions Regarding the Minimum Fee

    SoundExchange offers six measures by which it argues that the 
current $500 minimum fee should increase: SoundExchange's average 
administrative cost, the minimum fee agreed to by SoundExchange and 
CBI, inflation, per-performance sound recording royalty rates, usage, 
and minimum fees charged for broadcasting of musical works. The 
Services' reject each of these measures (or SoundExchange's application 
of them) for various reasons. Instead, they offer two possible measures 
for adjusting the minimum fee: SoundExchange's incremental 
administrative costs and anticipated inflation between 2020 and 2025.
1. Increased Average Administrative Cost Since 2013 Supports Increasing 
the Minimum Fee
a. Use of Incremental Versus Average Administrative Costs
    The Judges and their predecessors have never determined that the 
minimum fee under section 114 exists solely to cover SoundExchange's 
incremental administrative costs. To be sure, the Services have made 
that argument consistently since Web I. However, the Judges and their 
predecessors have never embraced it.
    In Web I, for example, the CARP concurred with the Services that

one purpose of the minimum fee is to protect against a situation in 
which the licensee's performances are such that it costs the license 
administrator more to administer the license than it would receive 
in royalties. Another arguable purpose is to capture the intrinsic 
value of a service's access to the full blanket license, 
irrespective of whether the service actually transmits any 
performances.

Web I CARP Report at 95. The CARP did not find that the minimum fee 
existed solely to cover incremental costs, access value, or both.
    In his review of the Web I CARP Report, the Librarian stated ``the 
Panel could propose any rate consistent with the agreements so long as 
the proposed rate would cover costs for administering the license and 
access to the works. '' \348\ Web I Determination, 67 FR at 45263 
(emphasis added). Whether the CARP and the Librarian were referring to 
average or incremental costs of administering the license, it is clear 
that both agreed that covering those costs was only one purpose for the 
minimum fee.
---------------------------------------------------------------------------

    \348\ The minimum fee selected by the CARP was the lowest 
minimum fee found in the benchmarks put before the panel. See id. 
The CARP reasoned that a ``sophisticated and experienced negotiator 
. . . would not negotiate a minimum fee that would expose it to a 
loss.'' Id.
    The Services point out, correctly, that the Librarian referred 
to ``the incremental cost of licensing'' in a separate passage. See 
Services RPFFCL ] 1536. Elsewhere, including the passage quoted in 
the text, the Librarian refers merely to ``costs for administering 
the license.''
---------------------------------------------------------------------------

    As the Services acknowledge, in later decisions the Judges 
routinely referred to the minimum fee as covering SoundExchange's 
``administrative cost''

[[Page 59582]]

or ``average administrative cost,'' rather than SoundExchange's 
incremental cost of administering the license. See, e.g., Web II, 72 FR 
at 24096; Web III, 79 FR at 23124; and Web IV, 81 FR at. 26396-97.
    The Services are unable to point to relevant statutory language or 
legislative history that supports their position. While the Copyright 
Act itself is silent as to the purpose of the minimum fee, legislative 
history instructs that ``[a] minimum fee should ensure that copyright 
owners are fairly compensated in the event that other methodologies for 
setting rates might deny copyright owners an adequate royalty.'' H.R. 
Rep. No. 105-796, at 85 (1998) (DMCA Conference Report). The DMCA 
Conference Report plainly does not limit a minimum fee merely to 
covering incremental costs of administering the license. Covering 
incremental costs is one element of ensuring that copyright owners are 
``fairly compensated,'' but it is not the only element. Covering 
incremental costs is the bare minimum that a minimum fee must 
accomplish.
    The Judges find the Service's argument contrasting the funding 
mechanism for SoundExchange with the funding mechanism for the 
Mechanical Licensing Collective to be inapt. The minimum fee is not an 
assessment, over and above royalties, that funds SoundExchange's 
operations. For commercial webcasters, the minimum fee is credited 
against usage. For noncommercial webcasters, the minimum fee includes a 
substantial quantity of usage. While there are webcasters whose usage 
falls below the amount that is covered by the minimum fee, that is 
simply inherent in the nature of any minimum fee. The fact that some 
webcasters do not recoup the entire value of the minimum fee does not 
convert it into an administrative assessment.
    There is little testimony in the record on the subject of whether, 
from an economic standpoint, it is preferable to refer to incremental 
or average costs in setting the minimum fee. The following colloquy 
between Mr. Orszag and the Judges is on point:

    Q: Mr. Orszag, you mentioned a couple of times that you look at 
average cost, not incremental . . .. I'm equating that with marginal 
cost. But doesn't economics, basic economic principles [counsel] . . 
. that pricing should equal marginal cost if it's otherwise 
competitive?
    A: But pricing in those discussions also say that we need to 
ensure that the pricing covers costs as well, because if everyone 
got marginal cost pricing, then it could be the situation where 
everyone is getting a low price but they're not actually covering 
the cost to administer the service.
* * * * *
    Q: Are you saying--are you saying this is a declining cost of 
business for SoundExchange so the marginal cost is below average 
cost at the--at the level of production?
    A: I--I would assume that to be the case here. If [you] add one 
new licensee, the cost of adding that one licensee is far below the 
cost of the first licensee. And so we need to--one would need to 
ensure that the--the total costs are covered so that the service can 
actually be provided in that circumstance.

8/12/20 Tr. 1760-61 (Orszag). Mr. Orszag's unrebutted testimony 
supports setting the minimum fee with reference to SoundExchange's 
average administrative cost.
    The Judges, consistent with prior determinations, conclude that 
they may consider SoundExchange's average administrative cost in 
setting the minimum fee.
b. Computation of Average Administrative Cost
    Professor Steinberg testified that SoundExchange's computation of 
administrative costs was flawed because it ``does not distinguish 
between administrative costs attributable to licensing and processing 
fees from other administrative costs associated with running any modern 
corporation.'' Steinberg WRT ] 19. The Services contend that 
SoundExchange improperly included in its calculation of average 
administrative costs a number of items unrelated to license 
administration, such as property and equipment depreciation, interest 
and tax expenses, and amortization of the cost of participating in 
rate-setting proceedings. See id.; Services RPFFCL ] 1545.
    This aspect of Professor Steinberg's testimony follows from the 
Service's position that the function of the minimum fee is to cover 
SoundExchange's incremental cost of licensing. Given the Judges' 
conclusion that they may consider SoundExchange's average 
administrative cost in establishing a minimum fee, the Judges accord it 
no weight.
    Similarly, the Judges do not find SoundExchange's inclusion of 
costs related to the administration of licenses other than the 
webcasting license to be improper given that the Judges will consider 
SoundExchange's average administrative cost. SoundExchange has computed 
that average by dividing its total administrative costs by its total 
number of licensees (webcasting and non-webcasting), then dividing that 
quotient by the estimated number of channels or stations per licensee. 
See Bender WDT ]] 48-50; 9/9/20 Tr. 5893 (Ploeger). That is an 
appropriate means of determining SoundExchange's average administrative 
cost per channel or station.
    Finally, the Judges do not find SoundExchange's estimation of the 
number of channels or stations per licensee to be improper. In deriving 
that estimate, SoundExchange attributed 100 channels or stations to 
licensees that had more than 100 channels or stations. The existing and 
proposed minimum fee structure caps minimum fees for commercial 
webcasters at 100 times the per-channel or station minimum fee. 
SoundExchange's methodology thus divides per-licensee administrative 
costs over the average number of channels or stations for which 
licensees pay the minimum fee.\349\ See Bender WDT ] 49. The Judges 
find that it is appropriate to limit consideration to channels or 
stations for which licensees pay the minimum fee, given that the 
purpose of the calculation is to find a basis for setting that minimum 
fee.
---------------------------------------------------------------------------

    \349\ While the regulations do not cap minimum fees for 
noncommercial licensees, no noncommercial licensee has more than 100 
channels or stations. See Ploeger WRT ] 9 n.2.
---------------------------------------------------------------------------

    The Judges find SoundExchange's calculation of its average 
administrative cost on a per-channel or station basis to be acceptable. 
The Judges are mindful that, because it is based on an estimation of 
the number of channels or stations per licensee, it is itself an 
estimate rather than a precise quantification.
c. Judges' Conclusions Concerning Increased Average Administrative Cost 
as a Basis for Increasing the Minimum Fee
    The record reflects that SoundExchange's estimate of its average 
administrative cost on a per-channel or station basis increased from 
approximately $1,900 to approximately $4,448 between 2013 and 2018, an 
increase of 2.34 times. See Ploeger WRT ]] 13-14; Bender WDT ] 50. 
While both are estimates, SoundExchange calculated both using the same 
methodology.
    The absolute amount of SoundExchange's estimated average 
administrative cost exceeds SoundExchange's proposed minimum fee by a 
significant amount. The relative increase in average administrative 
costs (134%, which would yield a minimum fee of $1170) also exceeds the 
relative increase in the minimum fee that SoundExchange is seeking 
(100%, yielding a minimum fee of $1000). The

[[Page 59583]]

Judges conclude that the evidence relating to SoundExchange's average 
administrative cost supports the increased minimum fee that 
SoundExchange has proposed.
2. SoundExchange's Settlement With CBI Supports Increasing the Minimum 
Fee
    SoundExchange and CBI agreed to a gradual increase in the minimum 
fee to $750 by 2025. This increase is materially different from that 
proposed by SoundExchange, both in its magnitude and its gradual 
implementation. Nevertheless, SoundExchange offers it as confirmation 
of the need for an increase in the minimum fee and offers two 
explanations for the difference between the agreement and the proposed 
minimum fee: Litigation savings and a lower cost for processing usage 
statements from CBI members. See SX PFFCL ]] 1554-1556 (and record 
citations therein).
    On the existing record, the Judges cannot accept SoundExchange's 
first explanation. As the Services point out, both parties saved 
litigation costs by settling, and it is entirely possible that the 
litigation savings were of equal or greater value to CBI than 
SoundExchange.
    SoundExchange's second explanation is a stronger justification for 
the lower increase. The Judges reject the Services' counterargument 
that other low usage webcasters would have similarly low processing 
costs if they, like the noncommercial educational webcasters covered by 
the CBI agreement, were permitted to pay a proxy fee and thus avoid 
submitting reports of use. See Services RPFFCL ] 1554. They are not 
permitted to do that. The Judges will not assume away a cost that 
SoundExchange bears, based on the Services' counterfactual.
    The Judges conclude that the CBI agreement is evidence that willing 
buyers and willing sellers would agree to a minimum fee that exceeds 
the existing minimum fee. The unique circumstances of the CBI agreement 
may indicate that the increase agreed to in that settlement may be 
toward the low end of reasonable minimum fees. However, given the 
indeterminacy of the effect of litigation costs on the parties' 
relative bargaining positions, the Judges find that they cannot derive 
a specific minimum fee amount from that settlement.
3. General Inflation Since 2006 Supports an Increased Minimum Fee
    SoundExchange argues that increases in the general level of prices 
while the $500 minimum fee has been in effect, as measured by the CPI-
U, is another justification for increasing the minimum fee. The 
Services appear to acknowledge inflation as a justification for 
increasing the minimum fee, although they would have the Judges look 
only to prospective inflation from 2020 to 2025 because ``SoundExchange 
agreed to $500 for 2020'' in its Web IV rate proposal. Services RPFFCL 
] 1558.
    The Judges reject the Services' argument that the current $500 
minimum fee is a willing buyer/willing seller rate because 
SoundExchange and the Services both proposed that amount in Web IV. The 
current minimum fee was determined by the Judges and imposed as part of 
the regulatory scheme. SoundExchange's rate proposal was a position 
taken in a regulatory proceeding, not the action of a willing seller in 
a market unconstrained by a statutory license.
    The Judges also reject SoundExchange's contention that the 
appropriate starting point for calculating inflation is 1998. The Web I 
minimum fee was calculated per licensee, not per channel or station. 
See 8/13/20 Tr. 2015 (Orszag). It was not the same fee that the Judges 
adopted for the Web II rate period, beginning in 2006, that was 
assessed on a per-channel or station basis. The current $500 annual 
per-channel or station minimum fee has been in place since 2006; 2006 
is the appropriate base year for any inflation calculation.
    According to the Bureau for Labor Statistics, the CPI-U for January 
2006 was 198.3, and the CPI-U for December 2020 was 260.474.\350\ That 
represents a 31.35% increase. Consequently, to have the equivalent 
purchasing power of the minimum fee in 2006, the current minimum fee 
would need to increase to $656.77.
---------------------------------------------------------------------------

    \350\ See Historical Consumer Price Index for All Urban 
Consumers (CPI-U): U.S. city average, all items, by month, https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202101.pdf (last visited May 24, 2021). The Judges take official 
notice of these publicly available government data.
---------------------------------------------------------------------------

    The Judges recognize that general inflationary data are an 
imperfect substitute in this context for data concerning changes to 
SoundExchange's actual costs. Nevertheless, the Judges find that the 
increase in inflation over the period from 2006 to the end of 2020 
reflects an erosion in the purchasing power of the minimum fee that 
supports an increase, though not necessarily the doubling that 
SoundExchange seeks.
4. Other Justifications for Increasing the Minimum Fee
    The Judges reject SoundExchange's additional justifications for 
increasing the minimum fee: Increased royalty rates, increased usage, 
and failure to keep pace with minimum fees for public performance of 
musical works. While the minimum fee is recoupable against charges for 
usage, it is not a usage fee as such. SoundExchange has provided no 
reasoned explanation why the minimum fee should be tied to the royalty 
rates or the amount of usage, and the Judges see no reason, a priori, 
that it should be.
    Regarding the minimum fees charged by PROs for public performance 
of musical works, the Judges (at SoundExchange's urging) have long 
rejected use of musical works rates in setting sound recording rates. 
See, e.g., Web II, 72 FR at 24092-95; Bender WDT ] 53 & n.16. The 
Judges see no reason to make an exception for the minimum fee.
5. Conclusion
    The three justifications offered by SoundExchange and accepted by 
the Judges suggest a range of minimum fees from $656.77 at the low end 
to $1,170 at the high end. The Judges find this range to represent the 
zone of reasonable minimum fees supported by the record in this 
proceeding.
    Of the three accepted justifications, the Judges find the increase 
in SoundExchange's average administrative cost to be the most 
compelling. Unlike the inflation approach, average administrative cost 
relates directly to actual costs incurred by SoundExchange. Unlike the 
minimum fee agreed to by SoundExchange and CBI, the average 
administrative cost does not suffer from the indeterminacy of the 
relative savings in litigation costs achieved by the parties to the 
settlement. The Judges recognize that the average administrative cost 
put forward by SoundExchange is an estimate since it incorporates 
SoundExchange's estimate of the average number of channels or stations 
per licensee. Consequently, the Judges regard the 134% increase in 
average administrative costs, and the $1,170 minimum fee it implies, as 
an upper limit on a reasonable minimum fee. Nevertheless, since the 
Judges find the average administrative cost approach to be the most 
compelling, the Judges find that the minimum fee should be set closer 
to this upper limit than to the lower limit (set using the rate of 
inflation).

[[Page 59584]]

    SoundExchange's proposed $1,000 minimum fee falls comfortably 
within the zone of reasonable minimum fees determined by the Judges and 
falls closer to the high end of that range. The Judges, therefore, 
adopt SoundExchange's proposed $1,000 per-channel or station minimum 
fee for the forthcoming rate period. The Judges also adopt 
SoundExchange's proposal to increase the cap on minimum fees for 
commercial webcasters to $100,000, in effect retaining the existing 100 
channel or station cap for each commercial licensee. The Judges deem 
this adjustment to be arithmetically necessary because failure to 
increase the cap would negate the increase in the minimum fee for the 
largest webcasters (who would effectively pay the same amount on half 
as many channels).

VII. Ephemeral License Rate and Terms

    Section 112 of the Copyright Act creates a statutory license to 
make phonorecords to facilitate the transmission of sound recordings 
under the section 114(f) statutory license and requires the Judges to 
determine reasonable rates and terms of royalty payments for making 
those so-called ``ephemeral recordings.'' 17 U.S.C. 112(e). During the 
current rate period, the royalty for ephemeral recordings is part of 
the total royalty for webcasting and constitutes 5% of that amount. 37 
CFR 380.10(d).
    SoundExchange proposes that the Judges retain the current royalty 
rate and rate structure for ephemeral recordings in the forthcoming 
rate period with some ``clarifying editorial changes'' to the relevant 
regulatory terms. SX PFFCL ] 1568; see SoundExchange's Proposed Rates 
and Terms at 3, 22 (Sep. 23, 2019) (SoundExchange Rate Proposal). Most 
of the Services propose to retain the existing provision on ephemeral 
recordings. See Sirius XM and Pandora First Amended Proposed Rates and 
Terms at 1 (proposing that the current terms continue except as 
otherwise indicated); Google Proposed Rates and Terms at 1; NAB 
Proposed Rates and Terms at 9; NRBNMLC Amended Proposed Rates and Terms 
ex. A at 9 (Alternative 1). In its Alternative 2 rate proposal, NRBNMLC 
includes the same editorial changes that SoundExchange proposes. See 
NRBNMLC Amended Proposed Rates and Terms ex. A at 12 (Alternative 2). 
The Services do not dispute SoundExchange's proposal to adopt 37 CFR 
380.10(d) with the editorial changes SoundExchange and NRBNMLC 
propose.\351\ See Services RPFFCL ]] 1576-1577.
---------------------------------------------------------------------------

    \351\ SoundExchange and the Services are generally on the same 
page regarding ephemeral recordings, except as to the question 
whether the right to make ephemeral recordings has independent 
economic value. Compare SX PFFCL ] 1570 (and sources cited therein) 
(``ephemeral copies have economic value to services that publicly 
perform sound recordings because these services cannot, as a 
practical matter, properly function without those copies'') with 
Services RPFFCL ] 1570 (and sources cited therein) (``While the 
Services do not dispute that ephemeral recording right is frequently 
needed, it does not have independent economic value.''). The Judges 
need not (and do not) resolve this largely academic question to 
determine an ephemeral recordings rate.
---------------------------------------------------------------------------

    As in Web IV, SoundExchange relies on the designated testimony of 
economist Dr. George Ford from Web III. See Trial Ex. 5616 (Designated 
WDT of George Ford) (Ford Des. WDT); Web IV, 81 FR at 26397-98. Dr. 
Ford testified that ``it is typical for ephemeral copy rights to be 
expressly included among the grant of rights provided'' in marketplace 
agreements between record companies and music services. Ford Des. WDT 
at 11. ``Most of these agreements do not set a distinct rate for those 
ephemeral copies, incorporating them instead into the overall rate that 
the [music services] pay[] for the combined ephemeral copy rights and 
performance rights.'' Id. at 11-12. Dr. Ford also testified that to the 
extent marketplace agreements do set a royalty rate for ephemeral 
recordings they generally express that rate as a percentage of an 
overall bundled rate for both performances and ephemerals. See Ford 
Des. WDT at 12-14.
    SoundExchange also offers several direct licenses in the record of 
this proceeding as evidence that marketplace agreements do not set 
distinct rates (as distinguished from bundled rates) for ephemeral 
recordings. See, e.g., Trial Ex. 4035 at 11-12, 16-19 (2015 agreement 
between [REDACTED] and [REDACTED] granting [REDACTED]); Trial Ex. 5037 
at 3-4, 5-9 (2017 agreement between [REDACTED] and [REDACTED] granting 
[REDACTED]).
    As to the specific allocation of royalties between the performance 
and ephemeral recording rights, SoundExchange notes that this 
allocation has no effect on the Services. See SX PFFCL ] 1574. Rather, 
the real interested parties in determining the allocation are record 
companies and performing artists because payments under section 114 are 
subject to a mandatory division between artists and record companies 
and payments under section 112 are not. See id.; Ford Des. WDT at 13-
14; 17 U.S.C. 114(g)(2). ``Because the willing buyer'' (i.e., the music 
service) ``is disinterested with respect to that allocation, the 
agreement between the record companies and the artists thereby becomes 
the best indication of the proper allocation of royalties.'' Ford Des. 
WDT at 14. Dr. Ford testified to the existence of an agreement between 
artists and record companies that 5% of royalties should be allocated 
to the ephemeral recordings right and 95% should be allocated to the 
performance right. See id. at 15. Mr. Bender testified that the 
SoundExchange board of directors, which is comprised of record company 
and performing artist representatives, ``adopted a resolution 
reflecting agreement that 5% of the royalties for the bundle of rights 
should be attributable to the Section 112(e) ephemeral royalties, with 
the rest being allocated to the Section 114 performance royalties.'' 
Bender WDT ] 56. SoundExchange avers that ``[a]s a result, a 95%-5% 
split `credibly represents the result that would in fact obtain in a 
hypothetical marketplace negotiation between a willing buyer and the 
interested willing sellers under the relevant constraints.' '' SX PFFCL 
] 1575 (quoting Ford Des. WDT at 15).\352\
---------------------------------------------------------------------------

    \352\ The SoundExchange Board resolution reflecting the 
agreement between artists and copyright owners is not in the record. 
Dr. Ford's and Mr. Bender's testimony concerning the agreement, 
therefore, is hearsay. The Judges exercise their discretion under 37 
CFR 351.10(a) to admit and consider this hearsay testimony.
---------------------------------------------------------------------------

    SoundExchange states that the editorial changes it seeks to 37 CFR 
380.10(d) more ``clearly state[ ] the effect of the 95%-5% split,'' and 
opines that ``[t]his change will not have any effect other than making 
the current rule clearer.'' SX PFFCL ] 1576. SoundExchange notes that 
the change is consistent with NRBNMLC's Alternative 2 proposal and with 
SoundExchange's settlements with CBI and NPR/CPB. See id. ]] 1568, 
1577.
    The Judges find the testimony and agreements that SoundExchange 
cites in its proposed findings to be persuasive as to both the 
inclusion of ephemeral recordings royalties within a bundled rate for 
performances and ephemerals and the specific allocation of 5% of the 
bundled royalty to the section 112(e) license. The Judges also find 
SoundExchange's proposed editorial changes to be appropriate and 
supported by the record. The Judges, therefore, adopt SoundExchange's 
proposals regarding ephemeral recordings in their entirety.

VIII. Terms

    One of the purposes of this proceeding is to establish terms for 
the administration of the rates the Judges

[[Page 59585]]

determine for the rate period 2021 to 2025. The parties proposed 
adoption of certain terms to be included in Subchapter E of Chapter 
III, title 37 CFR The Judges have weighed the proposals and the 
arguments of the parties in support of or opposed to various regulatory 
provisions and adopt the Terms as detailed in ``Exhibit A'' to this 
determination. The parties' proposals, and the Judges' rulings, include 
the following.\353\
---------------------------------------------------------------------------

    \353\ The Judges also adopt several of the proposed changes that 
are merely technical, structural, or conforming amendments to the 
regulations.
---------------------------------------------------------------------------

A. Standards for the Adoption of Terms and Other Regulatory Language

    The Judges' employ the willing buyer/willing seller standard to 
establish terms for the administration of royalty rates. 17 U.S.C. 
114(f)(1)(B); Web II, 72 FR at 24102. SoundExchange offers that the 
Judges have an obligation to adopt terms that will facilitate an 
efficient collection, distribution, and administration of the statutory 
royalties. SX PFFCL ] 1578 (citing Web II, 72 FR at 24102); see also 
SDARS II, 78 FR at 23073. The Judges clarify that decisions to adopt 
terms, while informed by policy considerations, such as those suggested 
by SoundExchange, are ultimately guided by record evidence. Rulemaking 
proceedings are the proper avenue for consideration of several of the 
terms requested in this proceeding. As is addressed below, the Judges 
have a pending rulemaking proceeding in which they may address several 
such proposals.
    SoundExchange also argues for consistency of terms with those 
applicable to satellite radio and preexisting services. SX PFFCL ]] 
1579-1583. The Services counter that the standard the Judges must apply 
regarding proposed terms is the willing buyer/willing seller standard. 
Services RPFFCL ]] 1579-1583. As stated above, the Judges' decision 
regarding terms is informed by such considerations but is guided 
ultimately by the willing buyer/willing seller standard. As 
SoundExchange acknowledges, the market for webcasting is different from 
other services, and different rates and terms apply. In addition, 
evidence differs across proceedings. As a general matter, the Judges 
seek consistency across the regulatory provisions administering rates, 
to the extent consistency is warranted or permitted by the specific 
facts of individual rate proceedings.

B. Designating SoundExchange as the Collective

    The Judges designate SoundExchange as the Collective under this 
Determination. SoundExchange participated in this proceeding as the 
existing and presumed Collective. SoundExchange proposed to continue as 
the Collective. See SoundExchange Proposed Rates and Terms at 12. No 
party objected to SoundExchange continuing in the role of Collective. 
The Judges acknowledge the administrative and technological knowledge 
base developed by SoundExchange over its years of service as the 
Collective. Finding sufficient basis, in the entirety of the record, 
for SoundExchange to serve, the Judges re-designate SoundExchange to 
serve as the Collective for purposes of collecting, monitoring, 
managing, and distributing sound recording royalties established by 
part 380 of the Judges' regulations.

C. Audit Terms

    There are several issues presented in this proceeding regarding the 
audit provisions. The more persuasive evidence points to resolution of 
most of the issues in favor of continuing to apply the existing terms. 
The record contains evidence of a number of contracts that have 
substantially similar audit provisions to such regulations. The audit 
provisions are addressed below.
1. Late Fee for Late Payments Discovered in Audits
    The Services propose a separate interest rate for late payments 
resulting from underpayments discovered in audits. The Services propose 
a fee for audit-discovered late payments that is lower than the 
prevailing 1.5% late fee. Specifically, the Services propose the 
interest rate for preexisting subscription services and satellite radio 
services,\354\ which looks to the federal post-judgment rate in 28 
U.S.C. 1961. Services PFFCL ]] 328-330; Second Amended Proposed Rates 
and Terms of Sirius XM Radio Inc. and Pandora Media at 2; NAB Proposed 
Rates and Terms at 6; Google Proposed Rates and Terms at 3; NRBNMLC's 
Amended Proposed Rates and Terms ex. A at 6. SoundExchange counters, in 
part, that the current context differs from PSS/SDARS. SX PFFCL ]] 
1593-1601. The Judges agree that the context differs, but that is not 
the determining factor. As addressed below, the contract terms 
negotiated by willing buyers and willing sellers, in evidence from 
similar markets, are persuasive.
---------------------------------------------------------------------------

    \354\ See 37 CFR 382.7(g).
---------------------------------------------------------------------------

    Both the Services and SoundExchange make arguments about good faith 
and bad faith on the part of stakeholders in the context of audit-
discovered late payments. SX PFFCL ]] 1605-1609; Services PFFCL ] 329. 
The Judges find insufficient evidence in the record to suggest that any 
actor, in this context, is or has been significantly motived by, or 
acted in, bad faith. Such matters, if confronted, may be adequately 
addressed by the re-adoption of other requirements in the existing 
audit provision, such as those requiring reasonableness, the use of a 
Qualified Auditor, and actions being in accordance with generally 
accepted auditing standards. As for the arguments over whether the late 
fee, applied to all late payments, is a hardship, the Judges make no 
judgment either way. Such late fees in exemplary contracts demonstrate 
that willing parties have agreed to such terms, even if they may at 
times function as a hardship. See, e.g., Trial Ex. 4035 at 20, 28; 
Trial Ex. 5111 at 24, 34. Relatedly, the Services put forth an argument 
that applying a general late fee rate to audit-discovered late payments 
is unnecessarily ``punitive.'' Services RPFFCL ]] 1617-1618. The Judges 
find that differences between a reasonable late fee being viewed as 
alternatively punitive or motivating are largely semantics. Indeed, the 
Services recognize that in its original context, the general late fee 
of 1.5% monthly interest rate plainly serves as a short-term penalty to 
incentivize timely payment. Services PFFCL ] 330. Based on the entirety 
of the record, the Judges find a late fee, applicable across all late 
payments, motivates compliance, as it should.
    Specifically, several contract terms negotiated by willing buyers 
and willing sellers on matters such as this one serve as reliable 
evidence. See, e.g., Trial Ex. 5013 at 80; Trial Ex. 5037 at 69 
(regarding ``late payments discovered in audit''). The Judges find that 
the contracts in evidence indicate sufficient and persuasive instances 
in which willing buyers and willing sellers negotiated that the same 
late fee rate exists for any late payments, without separate treatment 
of underpayments discovered in an audit. Id. The Judges therefore 
conclude that the designated late fees will apply to any late payments, 
[REDACTED] the underpayments are discovered in audits.
    The Judges re-adopt the monthly late fee of 1.5 percent. The Judges 
observe that in admitted contracts, there is a range from [REDACTED] up 
to

[[Page 59586]]

[REDACTED]%. See, e.g., Trial Ex. 2013 ([REDACTED]); Trial Ex. 4035 at 
20, 28 ([REDACTED]%); Trial Ex. 5013 at 38, 80 ([REDACTED]%); Trial Ex. 
5074 at 2 ([REDACTED]%), 5037 at 68-69 ([REDACTED]%). The 1.5% rate is 
an accepted rate in the market. For this reason, the Judges adopt it as 
the generally applicable late fee, and reject the Services' proposed 
change.
2. Frequency of Audits
    SoundExchange proposes adoption of a provision regarding frequency 
of audits that would allow it to conduct multiple audits of a licensee 
in parallel, with each audit covering a different period of time. 
Specifically, SoundExchange proposes a change to reflect that the 
payor's payments for a particular year may be audited only once, rather 
than that a licensee may be audited only once a year. SoundExchange 
suggests a need for such a provision by offering evidence of various 
delays in recent audits. It also notes that its proposal is similar in 
effect to the statutory provision concerning audits of services 
licensed under the section 115 blanket license. SX PFFCL ]] 1619-1622. 
The Services dispute that delays in audit processing are attributable 
to licensees or that licensees may benefit from prolonging the audit 
process. Services RPFFCL ]] 1620-1621. The Services indicate that 
several of the Services' benchmark agreements limit the frequency of 
audits. Services RPFFCL ] 1622; see, e.g., Trial Ex. 5013 at 79; Trial 
Ex. 5037 at 69 (regarding ``audit'' no more than once per calendar 
year). The Judges are informed by the terms in negotiated contracts 
addressing the frequency of audits, cited by the Services and 
otherwise--namely, those that limit audits of a payor's or licensee's 
payments to once per year. The Judges find that such evidence, and the 
record as a whole, does not support SoundExchange's proposal to allow 
an audit of a payor or licensee more than once in any year. The Judges, 
therefore, reject SoundExchange's proposal.
3. Audit Deadlines and Audit Fee Shifting
    SoundExchange proposes response deadlines within audits, alleging 
various delays in past audit processes. SX PFFCL ]] 1623-1630. 
SoundExchange also proposes that the costs of an audit be shifted to 
the licensee if the auditor is not provided requested information that 
is in the possession of the licensee or its contractor within 60 days 
after a written request therefor, again, referring to various alleged 
delays in past audit processes. SX PFFCL ]] 1631-1642. The Services 
dispute the causes and nature of the alleged delays and offer that 
there is a lack of record evidence to support the SoundExchange 
proposals. Services PFFCL ]] 1623-1642. Sirius XM, Pandora, and NAB 
propose what they characterize as a much more effective solution than 
the SoundExchange proposal, which is to require that audits be 
completed within one year of being noticed. Services PFFCL ]] 341-346. 
The Judges find that the record does not provide persuasive evidence 
that either side's proposals would be negotiated by willing buyers and 
willing sellers. The Judges do not adopt the proposed deadlines or fee 
shifting. The Judges are persuaded that the existing, and broadly re-
proposed, provisions requiring reasonableness, the use of a Qualified 
Auditor, and actions being in accordance with generally accepted 
auditing standards, adequately address the concerns regarding delays. 
At the same time, these existing provisions are persuasively supported 
by record evidence, such as relevant contracts negotiated by willing 
buyers and willing sellers. See, e.g., Trial Ex. 5013 at 70-80. Trial 
Ex. 5037 at 69 (regarding [REDACTED]).
4. Auditor's Right To Consult Its Client
    SoundExchange requests terms clarifying that an auditor may consult 
with its client throughout the audit process, including to advise the 
client concerning the status of the audit, request information from the 
client relevant to the audit, and request the client's views concerning 
tentative findings and other issues. In support of this proposal, 
SoundExchange points to alleged impediments to efficient completion of 
audits that may be alleviated by its request. SX PFFCL ]] 1643-1655. 
The Services oppose this requested provision, alleging that it would 
disrupt the proper independence of an auditor. Services PFFCL ]] 353-
356; Services RPFFCL ]] 1623-1642. The Judges find that the record does 
not provide persuasive evidence that SoundExchange's proposals would be 
negotiated by willing buyers and willing sellers. The Judges do not 
adopt the proposed provisions allowing auditors broad consultation with 
its client. The Judges are persuaded that the existing, and re-
proposed, provisions requiring the use of a Qualified Auditor and 
actions being in accordance with generally accepted auditing standards 
appropriately address the scope of client and third-party-auditor 
consultations. At the same time, these existing provisions are 
persuasively supported by record evidence, such as relevant contracts 
negotiated by willing buyers and willing sellers. See, e.g., Trial Ex. 
5013 at 79; Trial Ex. 5037 at 69 (regarding [REDACTED]).
5. Credit for Overpayment
    Sirius XM/Pandora and NAB propose that the Judges specify that the 
amount of any overpayment discovered in an audit may be deducted from 
the next payment(s) due. Services PFFCL ]] 333-334; Sirius XM and 
Pandora First Amended Proposed Rates and Terms at 2; NAB Proposed Rates 
and Terms at 6. Sirius XM, Pandora, NAB, and the NRBNMLC suggest that 
the proposal is a matter of basic fairness and is in line with 
regulations issued by the Copyright Office related to the audit of 
statements of account under the statutory licenses in secs. 111 and 
115. Services PFFCL ]] 335-338. SoundExchange, in its opposition to 
this proposal, submits that it is unnecessary, as isolated overpayments 
in an audit are rare, and such overpayments have been offset by larger 
underpayments. SoundExchange adds that the proposal is administratively 
burdensome, noting that the money may not be recoupable once it is paid 
to artists. SX PFFCL ]] 1656-1660. On the balance of the record, the 
Judges are in agreement with SoundExchange. In addition, in this 
context, the burden of submitting accurate payments is on the licensee, 
and the licensee bears the risk of overpayment. Therefore, the Judges 
do not adopt this proposal.
6. ``Net'' Underpayments
    Under existing regulations, SoundExchange must bear the costs of 
audits that it requests unless the auditor determines that there was an 
underpayment of 10% or more, in which case the service being audited 
pays the reasonable cost of the audit. 37 CFR 380.6(h). NAB and the 
NRBNMLC seek to clarify that the costs of an audit shifted to a service 
only in the case of a net underpayment (i.e. underpayments less any 
overpayments) of 10% or more. NAB, through its witness, Tres Williams, 
offered the view that the clarification better reflects practices in 
the marketplace. Services PFFCL ] 339 (citing Williams WDT ] 42). The 
Judges are persuaded by the entirety of the record, including the 
testimony of Mr. Williams and relevant marketplace contracts in the 
record, that the proposal is representative of practices negotiated by 
willing buyers and willing sellers in the marketplace. See, e.g., Trial 
Ex. 5013 at 80; Trial Ex. 5037 at 69 (regarding [REDACTED]). The 
Judges, therefore, adopt the proposal.

[[Page 59587]]

D. Statements of Account Showing Recoupment of Minimum Fees

    SoundExchange proposes that even services that pay the minimum fee 
be required to file statements of account and reports of use. It urges 
that such reporting would pose a minimal burden on licensees and would 
promote timely and accurate calculation of minimum fee recoupment. 
SoundExchange avers that, in the absence of statements of account 
showing recoupment of minimum fees, SoundExchange frequently finds 
itself inquiring of licensees concerning missing statements of account, 
only to be told that the licensee's usage to date is covered by a 
minimum fee payment. SX PFFCL ]] 1664-1666. The Services oppose any 
requirement to report usage when royalties are not due, noting that 
licensees already are required to certify their statements of account 
on an annual basis. The Services also indicate that the proposed change 
would be unnecessary and burdensome. Services RPFFCL ]] 1664-1666. The 
Judges appreciate the desire to ensure the accuracy of payments, 
including minimum payments. However, the Judges note that the record 
contains little useful evidence regarding how licensees in this 
category would address such reports in a willing buyer/willing seller 
context. Additionally the Judges observe that goals of the requested 
provision may be addressed through revisions to the Reports of Use 
provisions in 37 CFR 370. A related rulemaking is pending, and the 
Judges intend to refresh the record on the subjects of that rulemaking. 
See Docket No. 14-CRB-0005 RM.

E. Account Numbers and Reporting of ISRCs

    SoundExchange proposes requirements for the use of account numbers 
on payments, statements of accounts, and reports of use. SXPFFCL ]] 
1667-1670. The Services do not oppose SoundExchange on this matter. 
Services RPFFCL ]] 1667-1670. The Judges find the proposal a reasonable 
and appropriate means of improving the efficiency of processing 
payments, statements of account, and reports of use and, therefore, 
adopt the proposal.
    SoundExchange proposes a provision requiring licensees to use 
International Standard Recording Codes (ISRCs) in their reports of use, 
where available and feasible, notwithstanding 37 CFR 370.4(d)(2)(v). 
SoundExchange expresses concern that the current regulations addressing 
reports of use are not sufficient to identify unambiguously which 
recordings a service used. SX PFFCL ]] 1671-1678. The Services point to 
the rulemaking that may address the use of ISRCs and suggest that it 
would be inappropriate to shift onto the Services the effort of 
gathering such information, which the Services often do not have 
complete access to and which originates with SoundExchange's own 
members in the first instance. Services RPFFCL ]] 1671-1678. The Judges 
note that the record contains little useful evidence regarding how 
licensees would address such a requirement in a willing buyer/willing 
seller context. Additionally the Judges observe that goals of the 
requested provision may be addressed through the Reports of Use 
provisions in 37 CFR 370. A related rulemaking is pending, and the 
Judges intend to refresh the record on the subjects of that rulemaking. 
See Docket No. 14-CRB-0005 RM.

F. Reporting Usage of Directly Licensed Tracks

    SoundExchange proposes adopting a provision requiring reporting of 
directly-licensed sound recordings excluded from royalty calculations. 
It offers that similar provisions have proven helpful for identifying 
potential payment errors and disputes relating to the classification of 
recordings as directly licensed. SX PFFCL ]] 1679-1684. The Services 
submit that SoundExchange has not pointed to evidence of any instance 
of significant errors in categorizing directly-licensed tracks, nor has 
it indicated that its ability to audit a webcaster would not be 
sufficient to allow it to address any such errors. They add that 
SoundExchange does not require this information to distribute royalties 
that are paid to it under the statutory license and that, in some 
instances, licensees are bound by confidentiality provisions preventing 
such disclosure. Services RPFFCL ]] 1679-1684. The Judges find that the 
record, including the instances of negotiated agreements regarding 
holding such direct license information confidential, is persuasive 
evidence for not adopting the requested provision. The Judges, 
therefore, do not adopt the proposal.

G. Unclaimed Funds

    SoundExchange proposes that if it is unable, for a period of three 
years, to identify or locate a copyright owner or performer who is 
entitled to receive a royalty distribution, it may apply such 
``unclaimed funds'' to offset any costs deductible under 17 U.S.C. 
114(g)(3), as it was permitted to do prior to Web IV. It points to the 
Music Modernization Act (MMA) and the new provisions in 
sections115(d)(3)(J)(i)-(ii) and 114(g)(7) as a signal from Congress 
that the Judges are authorized to preempt state property law claims to 
unclaimed funds. It urges that the Judges need not, and should not, 
direct SoundExchange to act in accordance with applicable federal, 
state, or common law with regard to such funds. SX PFFCL ]] 1685-1694. 
The Services oppose SoundExchange's request, pointing out that it would 
allow SoundExchange to spend the unclaimed funds on legislative and 
litigation expenses and potentially profit from the use of such funds. 
They further note that if SoundExchange is authorized to use unclaimed 
funds to offset its administrative costs, it may undermine the 
Collective's case regarding minimum fees. Services RPFFCL ]] 1692-1693. 
Sirius XM and Pandora oppose the requested provision for similar 
reasons and go on to dispute the application of section 
115(d)(3)(J)(i)-(ii) to the request. Sirius XM and Pandora request that 
the Judges require that any unclaimed funds be distributed among 
copyright owners based on usage data, instead of providing a windfall 
to SoundExchange. Pandora/Sirius XM PFFCL ]] 250-252.
    The Judges agree with Sirius XM and Pandora that the provisions of 
sec. 115 are not applicable to the current proposal. The Judges also 
accept SoundExchange's arguments that the new section 114(g)(7) 
authorizes regulations that preempt state law and are persuaded that 
the MMA provision expresses a policy choice favoring such preemption. 
On the entirety of current record, the Judges are not convinced that 
the unclaimed funds should be distributed among copyright owners based 
on usage data. The Judges are persuaded that the more appropriate path 
(and the path that is consistent with intent of Congress) is to allow 
the Collective (i.e., SoundExchange), after three years,\355\ to apply 
unclaimed funds against administrative expenses, thus reducing the 
burden of administrative expenses that must be borne by copyright 
owners and performing artists.
---------------------------------------------------------------------------

    \355\ The proposed three-year period is not in dispute. See 17 
U.S.C. 507(b). The three-year period for the unclaimed funds term 
(in then Sec.  260.7) was adopted on June 18, 2003, and remains 
based in the statute, 17 U.S.C. 507(b). See 68 FR 36469.
---------------------------------------------------------------------------

H. Proxy Distribution for Missing Reports of Use

    SoundExchange proposes a provision to allow the use of proxy data 
to distribute royalties in certain circumstances in which adequate 
reports of use are not available. SX PFFCL ]] 1695-1705. The Judges are

[[Page 59588]]

not persuaded by SoundExchange's arguments or evidence in favor of the 
particular proposal to allow proxy distribution. The Judges observe 
that SoundExchange points to prior authorizations allowing proxy 
distributions which were granted through rulemaking authority as 
opposed to determinations of rates and terms. The Judges also observe 
SoundExchange's citations to the new provisions of section 114(g)(7). 
The Judges again note the pending rulemaking and the Judges' intent to 
refresh the record on the subjects of that rulemaking. See Docket No. 
14-CRB-0005 RM.

I. Definition of Performance

    Google proposes that the Judges delete text from definition of 
Performance setting out that an example of a performance is ``the 
delivery of any portion of a single track from a compact disc to one 
listener.'' Google Proposed Rates and Terms at 3. SoundExchange opposes 
deletion of the text, urging that the entirety of the definition is 
necessary to know what the sound recording unit is that must be 
counted, especially for particular types of recordings such as 
Classical music tracks. SX PFFCL ]] 1706-1709. The entirety of the 
record is persuasive to the Judges that the entirety of the definition 
should be maintained. The Judges, therefore, reject Google's proposal.

IX. Royalty Rates Determined by the Judges

A. Annual Price Level Adjustments to Statutory Royalty Rates

    In Web IV, the Judges set statutory rates for the first year of the 
rate term (2016) and specified that the rates would be adjusted 
annually for the reminder of the rate term to reflect cumulative 
changes in the CPI-U from a base level set in November 2015. See Web 
IV, 81 FR at 26404; 37 CFR 380.10(c). The Judges effectively broke with 
their practice in Web II and Web III of specifying annual increases, 
relying on Professor Shapiro's Web IV testimony that ``a regulatory 
provision requiring an annual price level adjustment is preferable to 
an implicit or explicit prediction of future inflation (or 
deflation).'' Web IV, 81 FR at 26404. With the exception of the NAB, 
all of the participants' rate proposals would continue the practice 
established in Web IV of making annual price level adjustments based on 
the CPI-U. See SoundExchange Rate Proposal at 2-3; Sirius XM and 
Pandora Second Amended Proposed Rates and Terms at 1; Google Proposed 
Rates and Terms at 4; NRBNMLC Amended Proposed Rates and Terms ex. A at 
9 (Alternative 1).
    The NAB opposes price level increases to the statutory rates. See 
NAB PFFCL ]] 207-208. The NAB bases its proposal to eliminate price 
level increases on a discussion in Dr. Leonard's written testimony:

    [A]s an economic matter, any yearly increase in the statutory 
rate should be tied to the increase in prices in a narrower 
industry--e.g., music services and the royalties paid by such 
services. Prices in other industries reflected in the CPI may be 
driven by economic factors that play no role in the music industry. 
Conversely music prices may be driven by economic factors that play 
no role in other industries. For either reason the general CPI may 
have low correlation with prices in the music industry.

Leonard WDT ] 119 (emphasis added). Dr. Leonard then argues that a 
review of prices in the music industry ``suggests little, if any, 
change in recent years.'' Id. ] 120. Dr. Leonard notes that the retail 
price for subscription streaming services has remained the same or 
declined over the past several years, implying that per subscriber 
royalties (which are generally calculated as a percentage of the 
subscription price) have also stayed constant or declined. See id. He 
also states that ``the per-play royalty for sound recording rights for 
ad-supported Spotify was lower in the first quarter of 2019 as compared 
to 2018.'' Id.
    The NAB states that SoundExchange's proposal is based on testimony 
from Mr. Orszag that assumes ``that revenue can be expected to increase 
over time at least at the rate of inflation.'' NAB PFFCL ] 208 (quoting 
Orszag WDT ] 82 n.118). The NAB argues that Mr. Orszag ``did not 
distinguish between subscription and advertising revenues, did not 
analyze whether services' revenues per-play have actually increased at 
the rate of inflation, and did not analyze whether simulcasters 
revenues per simulcast play have actually increased at the rate of 
inflation.'' Id.
    In support of inflation-based price level increases, SoundExchange 
cites testimony from Professor Shapiro and Mr. Orszag supporting 
inflation-indexed rates. See SX RPFFCL (to NAB) ] 208 (citing Shapiro 
WDT at 4; Orszag WRT ] 138; Peterson WDT ] 14 (``The recommended per-
play rate could be escalated for inflation as measured by the consumer 
price index (CPI).''); Willig WDT ] 55 (deriving average rates for 
five-year period, then using discount rate equal to rate of inflation 
to compute 2021 rate)).
    SoundExchange argues that Professor Leonard's analysis of pricing 
is inadequate because of its reliance on subscription pricing in a 
market that is dominated by ad-supported services, and because his 
perception of the trend for effective per-play royalty rates for ad 
supported services is based on inadequate data. See SX RPFFCL (to NAB) 
] 207. As to the latter point, SoundExchange also refers to Mr. 
Orszag's testimony that advertising prices are a more relevant metric 
and have increased faster than the CPI. See id. (citing Orszag WRT ] 
137).
    Finally, SoundExchange argues that ``there is no basis for singling 
out simulcasters for a special analysis of inflationary trends,'' 
noting that the NAB bears the burden of demonstrating that simulcasters 
are entitled to a differentiated rate.
    The Judges find Dr. Leonard's testimony concerning price level 
adjustments unpersuasive. Dr. Leonard's statements concerning the 
difference between general inflation and inflation in the music 
industry (e.g., ``the general CPI may have low correlation with prices 
in the music industry'') is both tentative and poorly supported by the 
market evidence he analyzes. In this regard, the Judges agree with the 
critique lodged by SoundExchange and Mr. Orszag. See SX RPFFCL (to NAB) 
] 207; Orszag WRT ] 137.
    More critically, the NAB fails to provide persuasive evidence to 
support its proposal that statutory royalty rates should remain at the 
same level throughout the rate term for all types of services. That 
proposal contains an implicit assumption that price levels will remain 
the same across the music industry over the next five years. That is 
hardly self-evident. In the absence of persuasive evidence that prices 
will remain static across the entire music industry for the next five 
years, the Judges will not presume that to be the case. The NAB has not 
presented such persuasive evidence.\356\
---------------------------------------------------------------------------

    \356\ If the NAB had presented evidence of some other index that 
it demonstrated was more closely aligned with price changes in the 
music services, the Judges could have considered such an index as an 
alternative to the CPI-U. However, the NAB did not present such 
evidence, leaving the Judges with a choice between a five-year 
freeze on the statutory rates or an extension tied to a reasonable 
index. The Judges find that rates adjusted based on the CPI-U are 
clearly preferable to rates that are frozen arbitrarily for the 
duration of the five-year rate term.
---------------------------------------------------------------------------

    The Judges find a price level adjustment based on changes to the 
CPI-U to be supported by the testimony of economists who testified on 
behalf of SoundExchange and the Services. Moreover, the Judges find 
changes in the CPI-U to be a reasonable proxy for

[[Page 59589]]

measuring changes in price levels in the relevant industries.\357\
---------------------------------------------------------------------------

    \357\ The Judges note that when rates in a voluntary settlement 
must be extended beyond the term of a settlement to cover the period 
of a statutory rate term, Congress has instructed the Judges to 
adjust those rates ``to reflect national monetary inflation during 
the additional period the rates remain in effect.'' 17 U.S.C. 805. 
The Judges view this as support for the proposition that national 
inflation rates are a reasonable proxy for price changes in the 
relevant industries.
---------------------------------------------------------------------------

    Consequently, the Judges will set statutory rates for the year 2021 
and index those rates for inflation over the remainder of the rate term 
using 2020 as the base year. Specifically, for the years 2022 through 
2025, the rates shall be adjusted to reflect any inflation or 
deflation, as measured by changes in the Consumer Price Index for All 
Urban Consumers (U.S. City Average, all items) (CPI-U) announced by BLS 
in November of the immediately preceding year, as described in the 
regulations set forth in this Determination.

B. Minimum Fee

    In accordance with the Judges' analysis, supra, section VI.C, the 
annual minimum fee applicable to commercial webcasters shall be $1,000 
per channel or station, subject to an annual cap of $100,000 per 
licensee. The minimum fee shall be non-refundable, but shall be 
credited against usage fees.
    The annual minimum fee applicable to noncommercial webcasters 
(other than those covered by SoundExchange's settlements with CBI and 
NPR/CPB), shall be $1,000 per channel or station. The minimum fee shall 
be non-refundable, and shall cover usage up to 159,140 ATH per month.

C. Commercial Rates

1. Commercial Subscription Rates
    In accordance with the Judges' analysis supra, section IV, the 
royalty rate for noninteractive subscription services is $0.0026 per 
play. In computing this rate, the Judges take note that Professor 
Shapiro and Mr. Orszag agree that the benchmark rate needs to be 
adjusted to reflect the actual increase in the CPI-U for 2020 because 
the economic data on which they rely is current only into 2019. See 
Shapiro WDT at 2 (recommending 2019 as the applicable base year to 
measure price level changes in 2020); Orszag WDT ] 82 n.118. 
(requesting that the Judges follow their procedure in the prior 
webcasting rate proceeding, see Web IV, 81 FR at 26405, where the 
Judges adjusted a steering-based benchmark rate to reflect actual 
inflation in the year prior to the first year of the new rate period 
(i.e., 2015 for the 2016-2020 rate period)). Applying this approach, 
the Judges note that in 2020, the CPI-U increased by 1.4%. https://www.bls.gov/opub/ted/2021/consumer-price-index-2020-in-review.htm 
(accessed June 10, 2021). Applying a 1.4% adjustment to the $0.0026 
rate increases the rate to $0.0026364 which, when rounded, remains at 
$0.0026 for 2021.\358\
---------------------------------------------------------------------------

    \358\ The $0.0026 rate is also supported by the Judges' finding 
that Professor Willig's Shapley Model-derived rates serve only as 
limited guideposts, indicating that effectively competitive rates 
generated via a Shapley Value Model would be less than $0.0028 per 
play for subscription services. When ``the Judges are confronted 
with evidence that, standing alone, is not itself wholly sufficient, 
they may rely on that evidence ``to guide the determination,'' i.e., 
by using it as a ``guide post'' when considering the application of 
more compelling evidence. SDARS II, 78 FR at 23063, 23066 (emphasis 
added).
---------------------------------------------------------------------------

2. Commercial Nonsubscription Rates
    Having found the weighted consideration of Mr. Orszag's and 
Professor Shapiro's benchmark model analyses for the ad-supported 
market yielded a rate of $0.0023 per play, and Dr. Peterson's benchmark 
model analysis for the ad-supported market yielded a rate of $0.0021 
per play, the Judges conclude that the more granular, label-specific, 
analysis and application of adjustments to account for funneling/
conversion in Dr. Peterson's benchmark analysis lends greater weight to 
the $0.0021 per-play rate. The Judges apply the same methodology for 
adjusting this ad-supported rate as they applied in the immediately 
preceding paragraph for the subscription rate, and for the same 
reasons. Here too, the 1.4% increase in the CPI-U does not increase the 
statutory rate set by the Judges, i.e., it increases the rate to 
$0.0021294 which, when rounded, remains at $0.0021.\359\ The Judges 
note that this conclusion is also supported by the limited guideposts 
yielded by Professor Willig's Shapley Model-derived rates, as adjusted 
by the Judges, which indicate that effectively competitive rates would 
be less than $0.0023 for ad-supported services. For these reasons, and 
in accordance with the Judges' analysis supra, section IV, the royalty 
rate for ad-supported, or commercial nonsubscription, services is 
$0.0021 per play.
---------------------------------------------------------------------------

    \359\ No other party that addressed the ad-supported rate issue 
objected to the Judges making the same CPI-U adjustment, to bring 
older economic data more current, as the Judges did in Web IV.
---------------------------------------------------------------------------

3. Ephemeral Recording Rate
    In accordance with the Judges' analysis supra, section VII, the 
royalty rate for ephemeral recordings under 17 U.S.C. 112(e) applicable 
to commercial webcasters shall be included within, and constitute 5% 
of, the royalties such webcasters pay for performances of sound 
recordings under section 114 of the Act.

D. Noncommercial Rates

1. NPR-CPB/SoundExchange Settlement
    The Judges have previously adopted the settlement agreement between 
SoundExchange, on one hand, and National Public Radio and the 
Corporation for Public Broadcasting, on the other, for simulcast 
transmissions by public radio stations. See Digital Performance Right 
in Sound Recordings and Ephemeral Recordings, Final Rule, 85 FR 11857 
(Feb. 28, 2020). The rates and terms governing transmissions and 
ephemeral recordings by the entities that are covered by that 
settlement agreement for the period 2021-2025 shall be as set forth in 
the agreement and codified at 37 CFR 380.30-380.32 (subpart D).
2. CBI/SoundExchange Settlement
    The Judges have previously adopted the settlement agreement between 
SoundExchange, and College Broadcasters, Inc., for transmissions by 
Noncommercial Educational Webcasters (NEWs). See Digital Performance 
Right in Sound Recordings and Ephemeral Recordings, Final Rule, 85 FR 
12745 (Mar. 4, 2020). The rates and terms governing transmissions and 
ephemeral recordings by NEWs for the period 2021-2025 shall be as set 
forth in the agreement and codified at 37 CFR 380.20-380.22 (subpart 
C).
3. All Other Noncommercial Webcasters
    In accordance with the Judges' analysis supra, section V.B, the 
royalty rate for webcast transmissions by all other noncommercial 
webcasters during the 2021-2025 rate period shall be $1000 annually for 
each station or channel for all webcast transmissions totaling not more 
than 159,140 Aggregate Tuning Hours (ATH) in a month, for each year in 
the rate term. In addition, if, in any month, a noncommercial webcaster 
makes total transmissions in excess of 159,140 ATH on any individual 
channel or station, the noncommercial webcaster shall pay per-
performance royalty fees for the transmissions it makes on that channel 
or station in excess of 159,140 ATH at the rate of $0.0021 per 
performance, as adjusted annually upward or downward to reflect changes 
in the CPI-U from the CPI-U published by BLS in November 2020.

[[Page 59590]]

4. Ephemeral Recording Rate
    The royalty rate for ephemeral recordings under 17 U.S.C. 112(e) 
applicable to noncommercial webcasters shall be the same as the rate 
applicable to commercial webcasters; that is, royalties for ephemeral 
recordings shall be included within, and constitute 5% of, the 
royalties such webcasters pay for performances of sound recordings 
under section 114 of the Act.

X. Conclusion

    On the basis of the foregoing, the Judges propound the rates and 
terms described in this Determination. No participant having filed a 
timely petition for rehearing, the Judges have made no substantive 
alterations to the body of the Initial Determination. However, in 
accordance with the Judges' Order Granting Motion to Conform 
Regulations to Determination (Jun. 30, 2021), the Judges have modified 
the regulatory provisions in Exhibit A to add provisions concerning the 
use of account numbers that had been omitted from the provisions 
attached to the Initial Determination as the result of a clerical 
error. In addition, the Judges have corrected a clerical error in the 
heading to section VIII.E, supra, and various typographical, 
grammatical, citation, and punctuation errors throughout the 
Determination. The Register of Copyrights may review the Judges' 
Determination for legal error in resolving a material issue of 
substantive law under title 17, United States Code. The Librarian shall 
cause the Judges' Determination, and any correction thereto by the 
Register, to be published in the Federal Register no later than the 
conclusion of the 60-day review period.

    Dated: July 22, 2021.
Jesse M. Feder,
Chief Copyright Royalty Judge.
Steve Ruwe,
Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.

List of Subjects in 37 CFR Part 380

    Copyright, Sound recordings.

Final Regulations

    In consideration of the foregoing, the Copyright Royalty Judges 
amend part 380 of title 37 of the Code of Federal Regulations as 
follows:

PART 380--RATES AND TERMS FOR TRANSMISSIONS BY ELIGIBLE 
NONSUBSCRIPTION SERVICES AND NEW SUBSCRIPTION SERVICES AND FOR THE 
MAKING OF EPHEMERAL REPRODUCTIONS TO FACILITATE THOSE TRANSMISSIONS

0
1. The authority citation for part 380 continues to read as follows:

    Authority: 17 U.S.C. 112(e), 114(f), 804(b)(3).


0
2. Revise subpart A to read as follows:

Subpart A--Regulations of General Application

Sec.
380.1 Scope and compliance.
380.2 Making payment of royalty fees.
380.3 Delivering statements of account.
380.4 Distributing royalty fees.
380.5 Handling Confidential Information.
380.6 Auditing payments and distributions.
380.7 Definitions.


Sec.  380.1  Scope and compliance.

    (a) Scope. Subparts A and B of this part codify rates and terms of 
royalty payments for the public performance of sound recordings in 
certain digital transmissions by certain Licensees in accordance with 
the applicable provisions of 17 U.S.C. 114 and for the making of 
Ephemeral Recordings by those Licensees in accordance with the 
provisions of 17 U.S.C. 112(e), during the period January 1, 2021, 
through December 31, 2025.
    (b) Limited application of terms and definitions. The terms and 
definitions in subpart A of this part apply only to subpart B of this 
part, except as expressly adopted and applied in subpart C or subpart D 
of this part.
    (c) Legal compliance. Licensees relying upon the statutory licenses 
set forth in 17 U.S.C. 112(e) and 114 must comply with the requirements 
of this part and any other applicable regulations.
    (d) Voluntary agreements. Notwithstanding the royalty rates and 
terms established in any subparts of this part, the rates and terms of 
any license agreements entered into by Copyright Owners and Licensees 
may apply in lieu of these rates and terms.


Sec.  380.2  Making payment of royalty fees.

    (a) Payment to the Collective. A Licensee must make the royalty 
payments due under this part to SoundExchange, Inc., which is the 
Collective designated by the Copyright Royalty Board to collect and 
distribute royalties under this part.
    (b) Monthly payments. A Licensee must make royalty payments on a 
monthly basis. Payments are due on or before the 45th day after the end 
of the month in which the Licensee made Eligible Transmissions.
    (c) Minimum payments. A Licensee must make any minimum annual 
payments due under subpart B of this part by January 31 of the 
applicable license year. A Licensee that as of January 31 of any year 
has not made any eligible nonsubscription transmissions, noninteractive 
digital audio transmissions as part of a new subscription service, or 
Ephemeral Recordings pursuant to the licenses in 17 U.S.C. 114 and/or 
17 U.S.C. 112(e), but that begins making such transmissions after that 
date must make any payment due by the 45th day after the end of the 
month in which the Licensee commences making such transmissions.
    (d) Late fees. A Licensee must pay a late fee for each payment and 
each Statement of Account that the Collective receives after the due 
date. The late fee is 1.5% (or the highest lawful rate, whichever is 
lower) of the late payment amount per month. The late fee for a late 
Statement of Account is 1.5% of the payment amount associated with the 
Statement of Account. Late fees accrue from the due date until the date 
that the Collective receives the late payment or late Statement of 
Account.
    (1) Waiver of late fees. The Collective may waive or lower late 
fees for immaterial or inadvertent failures of a Licensee to make a 
timely payment or submit a timely Statement of Account.
    (2) Notice regarding noncompliant Statements of Account. If it is 
reasonably evident to the Collective that a timely-provided Statement 
of Account is materially noncompliant, the Collective must notify the 
Licensee within 90 days of discovery of the noncompliance.
    (e) Use of account numbers. If the Collective notifies a Licensee 
of an account number to be used to identify its royalty payments for a 
particular service offering, the Licensee must include that account 
number on its check or check stub for any payment for that service 
offering made by check, in the identifying information for any payment 
for that service offering made by electronic transfer, in its 
statements of account for that service offering under Sec.  380.4, and 
in the transmittal of its Reports of Use for that service offering 
under Sec.  370.4 of this chapter.


Sec.  380.3  Delivering statements of account.

    (a) Statements of Account. Any payment due under this part must be 
accompanied by a corresponding Statement of Account that must contain 
the following information:

[[Page 59591]]

    (1) Such information as is necessary to calculate the accompanying 
royalty payment;
    (2) The name, address, business title, telephone number, facsimile 
number (if any), electronic mail address (if any) and other contact 
information of the person to be contacted for information or questions 
concerning the content of the Statement of Account;
    (3) The account number assigned to the Licensee by the Collective 
for the relevant service offering (if the Licensee has been notified of 
such account number by the Collective);
    (4) The signature of:
    (i) The Licensee or a duly authorized agent of Licensee;
    (ii) A partner or delegate if the Licensee is a partnership; or
    (iii) An officer of the corporation if the Licensee is a 
corporation.
    (5) The printed or typewritten name of the person signing the 
Statement of Account;
    (6) If the Licensee is a partnership or corporation, the title or 
official position held in the partnership or corporation by the person 
signing the Statement of Account;
    (7) A certification of the capacity of the person signing;
    (8) The date of signature; and
    (9) An attestation to the following effect: I, the undersigned 
owner/officer/partner/agent of the Licensee have examined this 
Statement of Account and hereby state that it is true, accurate, and 
complete to my knowledge after reasonable due diligence and that it 
fairly presents, in all material respects, the liabilities of the 
Licensee pursuant to 17 U.S.C. 112(e) and 114 and applicable 
regulations adopted under those sections.
    (b) Certification. Licensee's Chief Financial Officer or, if 
Licensee does not have a Chief Financial Officer, a person authorized 
to sign Statements of Account for the Licensee must submit a signed 
certification on an annual basis attesting that Licensee's royalty 
statements for the prior year represent a true and accurate 
determination of the royalties due and that any method of allocation 
employed by Licensee was applied in good faith and in accordance with 
U.S. GAAP.


Sec.  380.4  Distributing royalty fees.

    (a) Distribution of royalties. (1) The Collective must promptly 
distribute royalties received from Licensees to Copyright Owners and 
Performers that are entitled thereto, or to their designated agents. 
The Collective shall only be responsible for making distributions to 
those who provide the Collective with information as is necessary to 
identify and pay the correct recipient. The Collective must distribute 
royalties on a basis that values all performances by a Licensee equally 
based upon the information provided under the Reports of Use 
requirements for Licensees pursuant to Sec.  370.4 of this chapter and 
this subpart.
    (2) The Collective must use its best efforts to identify and locate 
copyright owners and featured artists in order to distribute royalties 
payable to them under sec. 112(e) or 114(d)(2) of title 17, United 
States Code, or both. Such efforts must include, but not be limited to, 
searches in Copyright Office public records and published directories 
of sound recording copyright owners.
    (b) Unclaimed funds. If the Collective is unable to identify or 
locate a Copyright Owner or Performer who is entitled to receive a 
royalty distribution under this part, the Collective must retain the 
required payment in a segregated trust account for a period of three 
years from the date of the first distribution of royalties from the 
relevant payment by a Licensee. No claim to distribution shall be valid 
after the expiration of the three-year period. After expiration of this 
period, the Collective may apply the unclaimed funds to offset any 
costs deductible under 17 U.S.C. 114(g)(3).
    (c) Retention of records. Licensees and the Collective shall keep 
books and records relating to payments and distributions of royalties 
for a period of not less than the prior three calendar years.
    (d) Designation of the Collective. (1) The Judges designate 
SoundExchange, Inc., as the Collective to receive Statements of Account 
and royalty payments from Licensees and to distribute royalty payments 
to each Copyright Owner and Performer (or their respective designated 
agents) entitled to receive royalties under 17 U.S.C. 112(e) or 114(g).
    (2) If SoundExchange, Inc. should dissolve or cease to be governed 
by a board consisting of equal numbers of representatives of Copyright 
Owners and Performers, then it shall be replaced for the applicable 
royalty term by a successor Collective according to the following 
procedure:
    (i) The nine Copyright Owner representatives and the nine Performer 
representatives on the SoundExchange board as of the last day preceding 
SoundExchange's cessation or dissolution shall vote by a majority to 
recommend that the Copyright Royalty Judges designate a successor and 
must file a petition with the Copyright Royalty Judges requesting that 
the Judges designate the named successor and setting forth the reasons 
therefor.
    (ii) Within 30 days of receiving the petition, the Copyright 
Royalty Judges must issue an order designating the recommended 
Collective, unless the Judges find good cause not to make and publish 
the designation in the Federal Register.


Sec.  380.5  Handling Confidential Information.

    (a) Definition. For purposes of this part, ``Confidential 
Information'' means the Statements of Account and any information 
contained therein, including the amount of royalty payments and the 
number of Performances, and any information pertaining to the 
Statements of Account reasonably designated as confidential by the 
party submitting the statement. Confidential Information does not 
include documents or information that at the time of delivery to the 
Collective is public knowledge. The party seeking information from the 
Collective based on a claim that the information sought is a matter of 
public knowledge shall have the burden of proving to the Collective 
that the requested information is in the public domain.
    (b) Use of Confidential Information. The Collective may not use any 
Confidential Information for any purpose other than royalty collection 
and distribution and activities related directly thereto.
    (c) Disclosure of Confidential Information. The Collective shall 
limit access to Confidential Information to:
    (1) Those employees, agents, consultants, and independent 
contractors of the Collective, subject to an appropriate written 
confidentiality agreement, who are engaged in the collection and 
distribution of royalty payments hereunder and activities related 
directly thereto who require access to the Confidential Information for 
the purpose of performing their duties during the ordinary course of 
their work;
    (2) A Qualified Auditor or outside counsel who is authorized to act 
on behalf of:
    (i) The Collective with respect to verification of a Licensee's 
statement of account pursuant to this part; or
    (ii) A Copyright Owner or Performer with respect to the 
verification of royalty distributions pursuant to this part;
    (3) Copyright Owners and Performers, including their designated 
agents, whose works a Licensee used under the statutory licenses set 
forth in 17 U.S.C. 112(e) and 114 by the Licensee whose Confidential 
Information is being supplied, subject to an appropriate

[[Page 59592]]

written confidentiality agreement, and including those employees, 
agents, consultants, and independent contractors of such Copyright 
Owners and Performers and their designated agents, subject to an 
appropriate written confidentiality agreement, who require access to 
the Confidential Information to perform their duties during the 
ordinary course of their work;
    (4) Attorneys and other authorized agents of parties to proceedings 
under 17 U.S.C. 8, 112, 114, acting under an appropriate protective 
order.
    (d) Safeguarding Confidential Information. The Collective and any 
person authorized to receive Confidential Information from the 
Collective must implement procedures to safeguard against unauthorized 
access to or dissemination of Confidential Information using a 
reasonable standard of care, but no less than the same degree of 
security that the recipient uses to protect its own Confidential 
Information or similarly sensitive information.


Sec.  380.6  Auditing payments and distributions.

    (a) General. This section prescribes procedures by which any entity 
entitled to receive payment or distribution of royalties may verify 
payments or distributions by auditing the payor or distributor. The 
Collective may audit a Licensee's payments of royalties to the 
Collective, and a Copyright Owner or Performer may audit the 
Collective's distributions of royalties to the owner or performer. 
Nothing in this section shall preclude a verifying entity and the payor 
or distributor from agreeing to verification methods in addition to or 
different from those set forth in this section.
    (b) Frequency of auditing. The verifying entity may conduct an 
audit of each licensee only once a year for any or all of the prior 
three calendar years. A verifying entity may not audit records for any 
calendar year more than once.
    (c) Notice of intent to audit. The verifying entity must file with 
the Copyright Royalty Judges a notice of intent to audit the payor or 
distributor, which notice the Judges must publish in the Federal 
Register within 30 days of the filing of the notice. Simultaneously 
with the filing of the notice, the verifying entity must deliver a copy 
to the payor or distributor.
    (d) The audit. The audit must be conducted during regular business 
hours by a Qualified Auditor who is not retained on a contingency fee 
basis and is identified in the notice. The auditor shall determine the 
accuracy of royalty payments or distributions, including whether an 
underpayment or overpayment of royalties was made. An audit of books 
and records, including underlying paperwork, performed in the ordinary 
course of business according to generally accepted auditing standards 
by a Qualified Auditor, shall serve as an acceptable verification 
procedure for all parties with respect to the information that is 
within the scope of the audit.
    (e) Access to third-party records for audit purposes. The payor or 
distributor must use commercially reasonable efforts to obtain or to 
provide access to any relevant books and records maintained by third 
parties for the purpose of the audit.
    (f) Duty of auditor to consult. The auditor must produce a written 
report to the verifying entity. Before rendering the report, unless the 
auditor has a reasonable basis to suspect fraud on the part of the 
payor or distributor, the disclosure of which would, in the reasonable 
opinion of the auditor, prejudice any investigation of the suspected 
fraud, the auditor must review tentative written findings of the audit 
with the appropriate agent or employee of the payor or distributor in 
order to remedy any factual errors and clarify any issues relating to 
the audit; Provided that an appropriate agent or employee of the payor 
or distributor reasonably cooperates with the auditor to remedy 
promptly any factual errors or clarify any issues raised by the audit. 
The auditor must include in the written report information concerning 
the cooperation or the lack thereof of the employee or agent.
    (g) Audit results; underpayment or overpayment of royalties. If the 
auditor determines the payor or distributor underpaid royalties, the 
payor or distributor shall remit the amount of any underpayment 
determined by the auditor to the verifying entity, together with 
interest at the rate specified in Sec.  380.2(d). In the absence of 
mutually-agreed payment terms, which may, but need not, include 
installment payments, the payor or distributor shall remit promptly to 
the verifying entity the entire amount of the underpayment determined 
by the auditor. If the auditor determines the payor or distributor 
overpaid royalties, however, the verifying entity shall not be required 
to remit the amount of any overpayment to the payor or distributor, and 
the payor or distributor shall not seek by any means to recoup, offset, 
or take a credit for the overpayment, unless the payor or distributor 
and the verifying entity have agreed otherwise.
    (h) Paying the costs of the audit. The verifying entity must pay 
the cost of the verification procedure, unless the auditor determines 
that there was a net underpayment (i.e., underpayments less any 
overpayments) of 10% or more, in which case the payor or distributor 
must bear the reasonable costs of the verification procedure, in 
addition to paying or distributing the amount of any underpayment.
    (i) Retention of audit report. The verifying party must retain the 
report of the audit for a period of not less than three years from the 
date of issuance.


Sec.  380.7  Definitions.

    For purposes of this part, the following definitions apply:
    Aggregate Tuning Hours (ATH) means the total hours of programming 
that the Licensee has transmitted during the relevant period to all 
listeners within the United States from all channels and stations that 
provide audio programming consisting, in whole or in part, of eligible 
nonsubscription transmissions or noninteractive digital audio 
transmissions as part of a new subscription service, less the actual 
running time of any sound recordings for which the Licensee has 
obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do not 
require a license under title 17, United States Code. By way of 
example, if a service transmitted one hour of programming containing 
Performances to 10 listeners, the service's ATH would equal 10 hours. 
If three minutes of that hour consisted of transmission of a directly-
licensed recording, the service's ATH would equal nine hours and 30 
minutes (three minutes times 10 listeners creates a deduction of 30 
minutes). As an additional example, if one listener listened to a 
service for 10 hours (and none of the recordings transmitted during 
that time was directly licensed), the service's ATH would equal 10 
hours.
    Collective means the collection and distribution organization that 
is designated by the Copyright Royalty Judges, and which, for the 
current rate period, is SoundExchange, Inc.
    Commercial Webcaster means a Licensee, other than a Noncommercial 
Webcaster, Noncommercial Educational Webcaster, or Public Broadcaster, 
that makes Ephemeral Recordings and eligible digital audio 
transmissions of sound recordings pursuant to the statutory licenses 
under 17 U.S.C. 112(e) and 114(d)(2).
    Copyright Owners means sound recording copyright owners, and rights 
owners under 17 U.S.C. 1401(l)(2), who are entitled to royalty payments 
made under this part pursuant to the statutory licenses under 17 U.S.C. 
112(e) and 114.
    Digital audio transmission has the same meaning as in 17 U.S.C. 
114(j).

[[Page 59593]]

    Eligible nonsubscription transmission has the same meaning as in 17 
U.S.C. 114(j).
    Eligible Transmission means a subscription or nonsubscription 
transmission made by a Licensee that is subject to licensing under 17 
U.S.C. 114(d)(2) and the payment of royalties under this part.
    Ephemeral recording has the same meaning as in 17 U.S.C. 112.
    Licensee means a Commercial Webcaster, a Noncommercial Webcaster, a 
Noncommercial Educational Webcaster, a Public Broadcaster, or any 
entity operating a noninteractive internet streaming service that has 
obtained a license under 17 U.S.C. 114 to make Eligible Transmissions 
and a license under 17 U.S.C. 112(e) to make Ephemeral Recordings to 
facilitate those Eligible Transmissions.
    New subscription service has the same meaning as in 17 U.S.C. 
114(j).
    Noncommercial Educational Webcaster means a Noncommercial 
Educational Webcaster under subpart C of this part.
    Noncommercial Webcaster has the same meaning as in 17 U.S.C. 
114(f)(4)(E), but excludes a Noncommercial Educational Webcaster or 
Public Broadcaster.
    Nonsubscription transmission has the same meaning as in 17 U.S.C. 
114(j).
    Payor means the entity required to make royalty payments to the 
Collective or the entity required to distribute royalty fees collected, 
depending on context. The Payor is:
    (1) A Licensee, in relation to the Collective; and
    (2) The Collective in relation to a Copyright Owner or Performer.
    Performance means each instance in which any portion of a sound 
recording is publicly performed to a listener by means of a digital 
audio transmission (e.g., the delivery of any portion of a single track 
from a compact disc to one listener), but excludes the following:
    (1) A performance of a sound recording that does not require a 
license (e.g., a sound recording that is not subject to protection 
under title 17, United States Code);
    (2) A performance of a sound recording for which the service has 
previously obtained a license from the Copyright Owner of such sound 
recording; and
    (3) An incidental performance that both:
    (i) Makes no more than incidental use of sound recordings 
including, but not limited to, brief musical transitions in and out of 
commercials or program segments, brief performances during news, talk 
and sports programming, brief background performances during disk 
jockey announcements, brief performances during commercials of sixty 
seconds or less in duration, or brief performances during sporting or 
other public events; and
    (ii) Does not contain an entire sound recording, other than ambient 
music that is background at a public event, and does not feature a 
particular sound recording of more than thirty seconds (as in the case 
of a sound recording used as a theme song).
    Performers means the independent administrators identified in 17 
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C. 
114(g)(2)(D).
    Public broadcaster means a Public Broadcaster under subpart D of 
this part.
    Qualified auditor means an independent Certified Public Accountant 
licensed in the jurisdiction where it seeks to conduct a verification.
    Subscription transmission has the same meaning as in 17 U.S.C. 
114(j).
    Transmission has the same meaning as in 17 U.S.C. 114(j)(15).

0
3. Revise subpart B to read as follows:

Subpart B--Commercial Webcasters and Noncommercial Webcasters


Sec.  380.10  Royalty fees for the public performance of sound 
recordings and the making of ephemeral recordings.

    (a) Royalty fees. For the year 2021, Licensees must pay royalty 
fees for all Eligible Transmissions of sound recordings at the 
following rates:
    (1) Commercial webcasters. $0.0026 per Performance for subscription 
services and $0.0021 per Performance for nonsubscription services.
    (2) Noncommercial webcasters. $1000 per year for each channel or 
station and $0.0021 per Performance for all digital audio transmissions 
in excess of 159,140 ATH in a month on a channel or station.
    (b) Minimum fee. Licensees must pay the Collective a minimum fee of 
$1,000 each year for each channel or station. The Collective must apply 
the fee to the Licensee's account as credit towards any additional 
royalty fees that Licensees may incur in the same year. The fee is 
payable for each individual channel and each individual station 
maintained or operated by the Licensee and making Eligible 
Transmissions during each calendar year or part of a calendar year 
during which it is a Licensee. The maximum aggregate minimum fee in any 
calendar year that a Commercial Webcaster must pay is $100,000. The 
minimum fee is nonrefundable.
    (c) Annual royalty fee adjustment. The Copyright Royalty Judges 
shall adjust the royalty fees each year to reflect any changes 
occurring in the cost of living as determined by the most recent 
Consumer Price Index for All Urban Consumers (U.S. City Average, all 
items) (CPI-U) published by the Secretary of Labor before December 1 of 
the preceding year. The calculation of the rate for each year shall be 
cumulative based on a calculation of the percentage increase in the 
CPI-U from the CPI-U published in November, 2020 (260.229) and shall be 
made according to the following formulas: For subscription 
performances, (1 + (Cy-260.229)/260.229) x $0.0026; for 
nonsubscription performances, (1 + (Cy-260.229)/260.229) x 
$0.0021; for performances by a noncommercial webcaster in excess of 
159,140 ATH per month, (1 + (Cy-260.229)/260.229) x $0.0021; 
where Cy is the CPI-U published by the Secretary of Labor 
before December 1 of the preceding year. The adjusted rate shall be 
rounded to the nearest fourth decimal place. The Judges shall publish 
notice of the adjusted fees in the Federal Register at least 25 days 
before January 1. The adjusted fees shall be effective on January 1.
    (d) Ephemeral recordings royalty fees; allocation between ephemeral 
recordings and performance royalty fees. The Collective must credit 5% 
of all royalty payments as payment for Ephemeral Recordings and credit 
the remaining 95% to section 114 royalties. All Ephemeral Recordings 
that a Licensee makes which are necessary and commercially reasonable 
for making noninteractive digital transmissions are included in the 5%.

    Dated: September 20, 2021.
Jesse M. Feder,
Chief Copyright Royalty Judge.
    Approved by:
Carla D. Hayden,
Librarian of Congress.
[FR Doc. 2021-20621 Filed 10-26-21; 8:45 am]
BILLING CODE 1410-72-P