Consequences of Exceeding the Threshold

SoundExchange proposes that a noncommercial webcaster’s transmissions beyond the 159,140 ATH threshold should no longer enjoy a reduced royalty rate. The NRBNMLC proposes that a reduced royalty rate – structured in $200 increments for each 876,000 ATH annually – should apply to transmissions beyond the threshold.

a. The NRBNMLC’s Proposal

The Judges explained in Web II that the threshold on the noncommercial webcasting rate serves as a “proxy that aims to capture the characteristics that delineate the noncommercial submarket.”  Web II Remand, 72 Fed. Reg. at 24099. As discussed in section V.B.1, the Judges do this to assure that the submarket for noncommercial webcasters does not converge or overlap with the submarket for commercial webcasters. SoundExchange’s proposal is consistent with this rationale; the NRBNMLC’s is not. Not only would the NRBNMLC’s proposal grant substantially reduced rates to large noncommercial webcasters whose operations compete with commercial webcasters’, but the effective rate for such large noncommercial webcasters would actually decline as they grow larger due to the effect of the proposed $1,500 cap on royalties. The NRBNMLC offers no economic rationale for this result. See Lys WRT, at ¶¶ 256-257.

The NRBNMLC does not address this issue directly. Instead, the NRBNMLC argues that its proposed “tiered and capped flat rate structure” is what a willing buyer and a willing seller would agree to in an effectively competitive market (i.e., a market rate). See NRBNMLC PFF, at ¶80. The NRBNMLC cited the testimony of its two witnesses as establishing the need of noncommercial webcasters for rates that are affordable and predictable. NRBNMLC Ex. 7011 ¶¶ 25-27 (Henes WDT), 30; Emert WDT, at ¶¶ 31-32, 34-37, 41. The fatal flaw in this argument is that it is unsupported by any marketplace evidence and any evidence of sellers who would be

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The NRBNMLC candidly admits that it does not know the extent to which noncommercial webcasters impose listener caps, noting that “[t]here is no way of knowing exactly how many Noncommercial entities have done this ….” NRBNMLC PFF at ¶ 23. This statement is only partially correct: the NRBNMLC could have surveyed its members or the broader noncommercial webcaster community. While such a survey may not have provided a definitive answer for the entire population of noncommercial webcasters, it would have revealed far more about the current state of affairs across the noncommercial webcasting market than the hearsay testimony of these two witnesses.

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willing to accept the NRBNMLC’s proposed structure. Mr. Henes and Mr. Emert may be willing, even eager to license music on this basis, but their testimony tells the Judges nothing about the sellers’ side of the equation. As discussed in greater detail in the following paragraphs, none of the marketplace evidence that the NRBNMLC cites pertains to a rate structure remotely similar to the one proposed by the NRBNMLC.

As additional evidence to support their argument that a “tiered and capped flat rate structure” is a market rate, the NRBNMLC cites the SoundExchange/CBI settlement agreement, the SoundExchange/NPR settlement agreement, the rates established for musical works under 17 U.S.C. § 118, and the position taken by SoundExchange on legislation to create a public

performance right for sound recordings that covers transmissions over terrestrial radio. Id. The Judges reach different conclusions based on this evidence.

The SoundExchange/CBI settlement agreement imposes a flat $500 fee on NEWs that transmit up to 159,140 ATH per month. Any NEW that exceeds that threshold loses its eligibility to operate under the settlement, and thus becomes subject to the CRB rate for

noncommercial webcasters for the remainder of the year.210 The NRBNMLC concludes that “no usage fees apply under the agreement” for a NEW that exceeds the threshold, and cites the agreement as support for a flat-rate structure with no usage fees. NRBNMLC PFF, at ¶ 93. The NRBNMLC’s interpretation of the agreement is not credible. The parties’ decision not to specify usage fees in the agreement does not mean that they contemplated that a NEW that exceeded the ATH threshold would not pay any usage fees. The existing CRB rates provide for usage fees above 159,140 ATH, and CBI could reasonably assume that SoundExchange’s rate proposal (filed with the Judges on the same day as the proposed settlement) would also contain usage fees. At most, the omission of usage fees from the agreement reflected the parties’ decision not to resolve the issue of what rates would apply beyond the threshold, and to leave it for the Judges to determine in the proceeding.

The NRBNMLC is correct in pointing out that the SoundExchange/NPR settlement agreement imposes a flat royalty rate with no additional usage fee. However, the

SoundExchange/NPR settlement differs so fundamentally in so many ways from what the NRBNMLC is proposing that it cannot serve as a support for that proposal. The

SoundExchange/NPR settlement entails a single annual payment by a single payer (CPB), in advance, to cover over 500 NPR member radio stations. 80 Fed. Reg. at 59590-91. The stations include a range of formats, some of which entail very limited use of recorded music. Unlike the NRBNMLC’s rate proposal, the settlement does not include tiered payments above the flat royalty rate, but does include a cap on the aggregate amount of recorded music that may be performed. NPR consolidates the reports of use for all of the stations covered by the agreement. The NRBNMLC’s proposal does not provide for consolidated reports of use. On the whole, the terms of the SoundExchange/NPR agreement provide SoundExchange with significant

benefits—reduced risk of nonpayment; protection against large numbers of uncompensated

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The NEW may operate under the settlement in the following year, provided it takes affirmative steps (e.g., imposes listening caps) to ensure that it will not exceed the threshold again.

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performances; reduced costs of processing usage data—that the NRBNMLC proposal does not. To pluck out a single element of the deal, the flat royalty rate, and cite it as support for the NRBNMLC rate proposal simply lacks credibility.

The musical works rate under the section 118 statutory license suffers from a similar lack of comparability to the rates the Judges must set in this proceeding. Rates under section 118 are in a different market, with different sellers and for different copyrighted works. The NRBNMLC has presented no evidence to demonstrate how a rate structure in that market, and with those sellers, reflects what a willing buyer and a willing seller would agree to in the sound recordings market.

Finally, SoundExchange’s position on legislation has little or no bearing on what

constitutes a market rate. The compromises and tradeoffs that parties are prepared to make in the legislative arena have only the remotest resemblance to the give and take of the marketplace. The record industry does not currently enjoy any legal right with respect to the transmission of its sound recordings over terrestrial radio. There is no basis for the Judges to conclude that what the industry may be willing to accept in legislation that establishes such a right is the same as what it would bargain for in an arms-length transaction against the backdrop of an existing statutory right of remuneration.

b. SoundExchange’s Proposal

Although SoundExchange’s proposal to impose commercial rates above the 159,140 ATH threshold is consistent with the Judge’s rationale for limiting the applicability of noncommercial rates, the NRBNMLC levels multiple criticisms against it. These include:

 SoundExchange’s entire rate proposal for noncommercial webcasters lacks evidentiary support;

 The specific usage rates that SoundExchange proposes are “inappropriate for commercial webcasters and even more inappropriate for noncommercial webcasters”; and

 The fact that few noncommercial webcasters have paid usage fees confirms that the proposed fees are unreasonable.

NRBNMLC PFF, at ¶ 113.

i. Evidentiary Support (or Lack thereof) for SoundExchange’s Rate Proposal

As Professor Rubinfeld readily conceded, there are no current marketplace benchmarks from which to derive SoundExchange’s entire rate proposal for noncommercial webcasters. Rubinfeld CWDT, at ¶¶ 33, 246. The only contemporary agreements in evidence that cover noncommercial webcasters are the two settlement agreements between SoundExchange, on the one hand, and CBI and NPR, respectively, on the other hand. As discussed in the preceding section, there are a number of elements of the SoundExchange/NPR agreement that render it a poor benchmark for setting noncommercial rates generally. The SoundExchange/CBI agreement lends support for some elements of SoundExchange’s rate proposal (e.g., a flat $500 rate for noncommercial webcasters that transmit up to 159,140 ATH), but not for the proposed rate for usage beyond the ATH threshold.

That does not mean, however, that SoundExchange’s rate proposal is entirely without evidentiary support. As discussed, supra section V.B.1, expert economic testimony supports

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treating transmissions by noncommercial webcasters above a certain ATH threshold the same as transmissions by commercial webcasters. This is what the SoundExchange proposal seeks to achieve. The rates that SoundExchange proposes for transmissions above the ATH threshold are the same that SoundExchange proposes for commercial webcasters.

ii. Inappropriateness of Specific Usage Rates Proposed by SoundExchange

The NRBNMLC pursues two lines of attack against the specific usage rates that SoundExchange proposes. The first, concerning Professor Rubinfeld’s interactive benchmark analysis, essentially repeats the licensee services’ criticisms of SoundExchange’s proposal for commercial webcasting rates. See NRBNMLC PFF, at ¶ 122. The Judges discuss those arguments supra, section I.A.3. The Judges, in fact, do not adopt the specific rates that SoundExchange proposes, precisely because they find SoundExchange’s benchmark analysis lacking in certain respects. Rather, the Judges adopt the same rates for transmissions in excess of the 159,140 ATH threshold by noncommercial webcasters as they do for commercial webcasters. The second line of attack is that Professor Rubinfeld’s benchmark analysis is inapplicable to noncommercial webcasters because none of the licensees under any of the benchmark

agreements were noncommercial webcasters. Id. at ¶ 123. As discussed, supra section V.B.1, 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.

iii. Small Number of Noncommercial Webcasters Paying Usage Fees Confirms that the Fees are Excessive

The NRBNMLC notes that few noncommercial webcasters pay usage fees and, of those that do, most pay a lower settlement rate in lieu of the rates set by the Judges for commercial webcasters. NRBNMLC PFF ¶ 131. Based on this evidence, the NRBNMLC concludes that the commercial webcaster rates are excessive, and that noncommercial webcasters are imposing listener caps or taking other affirmative steps to avoid paying them.

Of the 3,917 documented payments by noncommercial webcasters between 2010 and 2014, 112 included payments for usage above the ATH threshold. NAB Ex. 4141; NAB Ex. 4149. Of these, 13 were at the commercial rate determined by the Judges and 99 were at a lower rate established under a WSA settlement.211 Id.; see also 5/6/15/15 Tr. at 2099-100 (Rubinfeld) (25-30 noncommercial licensees pay lower rates under settlement agreements).

These facts do no support the NRBNMLC’s conclusions. In itself, the fact that more than 97% of noncommercial webcaster payments do not include usage fees could just as easily

support the conclusion that the vast majority of noncommercial webcasters – like the

noncommercial webcasters that testified in this proceeding – operate well below the 159,140

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The noncommercial webcasters’ WSA settlement agreement is “nonprecedential.” The Judges are not permitted to take into account the rate structure, fees, terms and conditions of that agreement in setting rates in this proceeding. 17 U.S.C. § 114(f)(5)(C).

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ATH threshold. Without evidence that a substantial number of noncommercial webcasters are operating near the threshold, or are imposing listening caps, the Judges cannot conclude that the threshold operates as a significant constraint or that the usage fees are excessive.

The evidence that most noncommercial webcasters that paid usage fees did so under an alternative rate structure also does not support the NRBNMLC’s conclusions. These webcasters made a rational choice to pay an available lower rate. That tells the Judges nothing about their willingness to pay the higher statutory rate in the absence of settlement. Conversely, though, it strongly suggests that nearly all of the webcasters that opted for the statutory rate structure or the NEW settlement expected that they would not exceed the threshold.