The parties assert that the benchmarks that are adverse to their positions are compromised by the fact that they were set in the “shadow” of the statutory rate. See, e.g., Rubinfeld CWDT ¶¶ 80-85 (statutory rate as a shadow pushing rates down); Talley WRT at 46;; Shapiro WDT at 36 (statutory rate as a shadow pulling rates up); 5/15/15 Tr. 3993-94 (Lichtman); Fischel (same).There are essentially two types of statutory shadows noted by the parties.
The first purported shadow is cast by the existing statutory rate, whether set in a CRB proceeding or through the parties’ WSA settlements. As an initial matter, the Judges find that any such “shadows” that could have been cast by existing statutory rates did not meaningfully affect the effective steered rates in the Pandora/Merlin Agreement or the IHeart/Warner
Agreement. As discussed herein, those rates are below the otherwise applicable statutory rates, and it would be irrational for a licensor to accept a rate below the statutory rate when it could have rejected the direct deal and enjoyed the higher statutory rate. Also, the supposed shadow of the existing rate is less relevant to the subscription-based benchmark proffered by
SoundExchange, because it is based on benchmarks that are at a further remove from the statutory license. Rubinfeld CWDT ¶ 18.
Dr. Shapiro argues that the statutory shadow not only exceeds the marketplace rate, but also acts like a “focal point,” or “magnet,” pulling a freely negotiated rate higher than it would be in the absence of the statutory shadow. Shapiro WDT at 36-37. However, neither Dr. Shapiro nor any other expert provides a sufficiently detailed explanation as to how the statutory rate would pull up a below-statute consensual rate that is otherwise mutually beneficial. Rather, the experts who advance this variant of the shadow argument simply note the existence of a “focal point,” “magnet” or “anchor” theory in the economic literature and then posit that such an effect is present in the noninteractive market—without making a sufficient connection between theory and evidence. Indeed, Dr. Shapiro candidly acknowledged that the focal
point/magnet/anchor hypothesis is not an “ironclad” economic law. Id. at 37, n. 65. In sum, the Judges do not credit this conjecture as sufficient to affect their determination of the rate in this proceeding.
On behalf of SoundExchange, Dr. Talley asserts that the existing statutory rate casts a shadow so dark as to obscure entirely evidence of consensual transactions that would have been consummated in the noninteractive space, but for the statutory rate. More particularly, Dr. Talley notes that any pairing of willing licensors and licensees (“dyads” in Dr. Talley’s parlance) in which the licensee’s WTP was greater than the statutory rate, and greater than or equal to a licensor’s “willingness to accept” (WTA) (also above the statutory rate), would not consummate an agreement at a consensual rate, because the buyer would always default to the lower statutory rate. SX Ex. 19 at 58 (Talley WRT) (Concluding “in an economic environment most relevant to this setting, a statutory licensing option can crowd out negotiated transactions for relatively high- valuing buyer-seller dyads while not affecting other, low-valuing dyads. … [T]his crowding out phenomenon can generate downward statistical bias, leaving behind only a subset of negotiated
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deals involving buyers and sellers whose valuations … reflect[] prices which serve as poor benchmarks for estimating the price [to which] willing buyers and sellers would agree.)62
The Services counter that, although the logic of Dr. Talley’s point may be correct, Dr. Talley’s analysis is purely theoretical and he did not examine the evidence to determine whether his analysis was supported by the facts. In particular, the Services criticize Dr. Talley’s
“shadow” argument because he assumes that the “missing dyads” would reflect a significantly different WTP and WTA than those of the parties who entered into agreements (e.g., the Pandora/Merlin dyad and the iHeart/Warner dyad). See, e.g., Pandora RPFF 96-103 (and citations to the record therein). Dr. Talley counters, quite correctly, that the very point of his analysis is that no negotiations or agreements for above-statutory rates would exist because the parties would not waste their time engaging in bargaining that was made moot by the statutory rate. Id. at 6032-34.
Dr. Talley suggests though that Dr. Rubinfeld’s interactive benchmark may approximate the “unseen” noninteractive transactions because it is affected less by the shadow of the statutory rate. Id. at 6036. However, that argument fails to note the fundamental distinction in Dr.
Rubinfeld’s benchmark—that it pertains to an upstream market for interactive licensees in which upstream demand is derived from downstream consumers who have a positive WTP for
streaming services. The “missing dyads,” so to speak, would be those in the upstream noninteractive market in which the “missing” agreements would reflect only the downstream demand of listeners to free-to-the-listener ad-supported platforms, not those dyads identified by Dr. Rubinfeld in the subscription market.63
Relatedly, the Services also criticize Dr. Talley’s argument because it fails to note the potential steering, “competitive dynamics” or other interactions that would cause dyads to cluster closely. 5/19/15 Tr. 4660-61 (Shapiro).
On balance, the Judges find Dr. Talley’s criticism, albeit rational and hypothetically correct, too untethered from the facts to be predictive or useful in adjusting for the supposed shadow of the existing statutory rate. The Services’ criticisms are likewise speculative, but that simply underscores the factual indeterminacy of Dr. Talley’s argument. Further, Dr. Talley’s point appears to be a back-door way to question both the applicability of the benchmarks in the noninteractive market, as well as the benchmarking process itself. However, the Judges have found that the Pandora/Merlin Agreement and the iHeart/Warner Agreement to be sufficiently representative benchmarks (and have found that Dr. Rubinfeld’s benchmark analysis is likewise representative) in particular segments of the statutory market. This segmented analysis
62
For example, assume the statutory rate was $.0010. If a licensor had a WTA of $0.0015 and a licensee had a WTP of $0.0020, then in the absence of a statutory rate, these parties would strike a deal between $0.0015 and $0.0020. However, with the statutory rate at $0.0010, the licensee would not negotiate, but would default to the lower statutory rate. Dr. Talley describes such a foreclosed agreement as having been obscured by the shadow of the statutory rate.
63
This important distinction between listeners based on their differentiated WTP is discussed in greater detail infra
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strengthens the representativeness of the benchmarks and weakens the speculative argument that “missing dyads” might tell a different story.
The second shadow identified by the parties is cast by the statutory rate yet to be established in this proceeding. The record is replete with evidence that the parties entered into various transactions with the knowledge, if not the intent, that such agreements could be used as evidentiary benchmarks in this proceeding. See SX PFF ¶¶ 567-570 (and citations to the record therein regarding the Pandora/Merlin Agreement); IHM PFF ¶¶ 359-362 (and citations to the record therein regarding Apple’s agreements with the Majors); NAB PFF ¶¶ 456-458. Of course, a proposed benchmark is not disqualified because a contracting party wanted it to be a benchmark. Such a desire would apply to otherwise proper benchmarks as it would to dubious benchmarks. The Judges analyze the proposed benchmarks based on the overall factual merits attendant to their formation and applicability, not based upon the parties’ hopes or
manipulations. If a benchmark is deficient in some manner, the adversarial process of this proceeding allows the parties to expose those deficiencies.
The Judges agree with a particular criticism made by iHeart of the shadow argument asserted by SoundExchange: in the absence of the statutory shadow, the antitrust policy toward the noninteractive streaming market could well be different. Cf. 141 Cong. Rec. S. 11,962-63 (daily ed. Aug. 8, 1995) (Letter from Assistant Attorney General Andrew Fois to Hon. Patrick Leahy, July 21, 1995, noting that any noncompetitive rates created by the existence of only a single collective could be corrected by the “rate panel.”). Although that comment was made in connection with the potential anticompetitive consequence of a single collective, it suggests to the Judges that the so-called “shadow” of the statutory rate offsets any potential device that would cause rates to deviate from an “effectively competitive” level.64
Thus, to the extent the “shadow of antitrust law” has receded, it was counterbalanced by the “shadow of the statutory rate.” Accordingly, the presence of the so-called statutory shadow appears to reflect a trade-off and a second-best solution, rather than a distortion of an effectively competitive marketplace.
Additionally, the Judges’ consideration of the Pandora/Merlin Agreement and the iHeart/Warner Agreement as appropriate benchmarks for the ad-supported (free-to-the-listener) market obviates the supposed “shadow” problem. In both benchmarks, the rate is below the otherwise applicable statutory rates. The statutory rates did not cast a shadow that negatively affected the licensors in those agreements because (as noted infra) they voluntarily agreed to rates below the applicable statutory rates (in exchange for the steering of more plays), rather than defaulting to the higher statutory rate.
Further, in the subscription market the Judges have adopted the SoundExchange
benchmark approach, which analogizes between the interactive and noninteractive markets. As Dr. Rubinfeld testified, the interactive contracts on which he relied for his subscription-based
64
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benchmark “minimize[] the effect of the statutory shadow” because the interactive services cannot default to the statutory rate. Rubinfeld CWDT ¶ 18.
Finally, the Judges emphasize that they find the “shadow” criticism to be both nihilistic and self-contradictory. If the “shadow” infects all benchmarks so as to disqualify that method of rate-setting, then the parties would need to adjust or abandon their benchmarking strategies and develop new bases for analysis. That could mean the wholesale abandonment of benchmarking, to be replaced by a valuation approach yet to be applied and accepted in these proceedings.65
F. The Legal Issue of Whether Effective Competition is a Required Element of the