Recorded Music Licensed to
A. Interactive Services and Statutory Webcasters are Not Especially Close Substitutes
Professor Rubinfeld argues that “there has been a substantial convergence in functionality and the ways in which consumers engage with non-interactive and interactive services. As a result, consumers are likely to view alternative services as relatively close substitutes for each other.”134 He then relies on this asserted “convergence” to justify his use of the interactive benchmark.135 Professor Rubinfeld’s “convergence” theory essentially boils down to a claim that interactive services and webcasting services are “relatively close substitutes” within the downstream market to provide music to listeners – the market that is depicted in my Figure 1.
However, Professor Rubinfeld has not offered even the most rudimentary analysis of the
downstream market to provide music to listeners to support his conclusion about “convergence.” Nowhere in his Direct Testimony is there anything like my Figures 2 and 3, showing market shares in the downstream market to provide music to listeners. Nor does Professor Rubinfeld provide any empirical evidence of the type that economists would normally rely on to show that interactive services and webcasters are “reasonably close substitutes,” namely, evidence that significant numbers of listeners substitute between these two ways of getting music in response to small changes in their relative price or quality. As I discuss below, the evidence is to the contrary.
1. Professor Rubinfeld’s “Convergence” Claim is Unconvincing
Professor Rubinfeld develops his “convergence” claim in paragraphs 52-74 of his Direct Testimony in a subsection entitled “Interactive and non-interactive services are converging.” Rather than look at market shares and actual substitution patterns, as an economist normally would, Professor Rubinfeld bases his “convergence” claim on four points – that interactive and non-interactive services have increasingly similar functionality, that both service types are ubiquitous, that consumer pricing for these services has become increasingly similar over time, and that both service types offer subscription and ad-supported products.136
While comparing the characteristics of interactive services and webcasting services is of some interest and relevance, it is not a reliable or accepted method for evaluating consumer
substitution patterns in markets for differentiated products. The most glaring error in Professor Rubinfeld’s analysis is his complete failure to account for the wide variety of other sources of music that are found in the downstream market to provide music to listeners.
In fact, Professor Rubinfeld’s own tests, if applied to other sources of music that compete in the downstream market to provide music to listeners, would identify a type of music consumption that is a closer substitute to statutory webcasters than are the interactive services – namely,
134
Rubinfeld Direct Testimony, ¶ 21.
135
Rubinfeld Direct Testimony, ¶ 21. He relies on “convergence” to support his statement here that “when compared to the alternatives, the interactive agreements offer the most comparable set of benchmarks for this proceeding.” He states that “convergence” is an “important factor” that he considered in selected his proposed rate. Rubinfeld Direct Testimony, ¶¶ 142, 145.
136
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terrestrial radio. Regarding functionality, both terrestrial radio and statutory webcasters are lean- back, while interactive services are lean-forward. Both terrestrial radio and statutory webcasters have made efforts to be ubiquitous and are indeed very widely available – both are far more popular than are the interactive services. The pricing of webcasting services and terrestrial radio is very similar: both are free for the vast majority of listeners. Despite these similarities,
Professor Rubinfeld gave little to no consideration to terrestrial radio, and instead limited his analysis to a narrow and artificial comparison of statutory webcasters to interactive services.
2. Webcasting and Terrestrial Radio are Close Substitutes
When one looks at the relevant evidence, it becomes clear that terrestrial radio is a far closer substitute for statutory webcasters than are interactive services. Consumer surveys indicate that far more of the time consumers spend listening to webcasting displaces terrestrial radio listening than displaces listening to interactive services. Some 23 percent of consumers report that the time they spend listening to Pandora is mostly replacing time they used to spend listening to terrestrial radio, compared with only 1 percent who say they have mostly shifted their time from an on-demand service like Spotify or Rhapsody.137 Likewise, 26 percent of consumers report that the time they spend listening to other non-interactive services is mostly replacing time they used to spend listening to terrestrial radio, compared with only 2 percent who say they have mostly shifted their time from an on-demand service like Spotify or Rhapsody.138
These powerful findings reflect two critical facts that Professor Rubinfeld overlooks or
downplays: (a) terrestrial radio is the dominant form of listening, as shown in Figures 2 and 3, and (b) webcasting and terrestrial radio are both forms of “lean-back” listening, meaning that the listener does not select the individual songs to be played and can take a far more passive role in the music experience. In contrast, interactive services offer more of a “lean-forward”
experience.
There are, of course, some similarities between interactive services and webcasting, and they compete against each other to some degree, but not nearly to the extent that SoundExchange and Professor Rubinfeld claim. The evidence indicates, as I discuss in detail in Section 12.D.2, that terrestrial radio is a closer substitute for webcasting than are interactive services, using the
normal metric employed by economists, i.e., the number of listener hours that would shift to each alternative if webcasting became slightly more expensive or less attractive.139
137
Written Rebuttal Testimony of Larry Rosin, p. 12 and Figure 11. The base for this question was respondents who had listened to Pandora during the last month. Among these Pandora listeners, 46 percent reported that their
listening time on Pandora was mostly new listening time not taken from other sources of audio listening.
138
Written Rebuttal Testimony of Larry Rosin, pp. 12-13 and Figure 12. The base for this question was respondents who had listened to online music services other than Pandora in the last week. Among these respondents, 46 percent reported that their listening time on other non-interactive services was mostly new listening time not taken from other sources of audio listening.
139
To assess the proximity of competition between one product and another, economists typically look at the diversion ratio: the share of the unit sales lost by one product, when its price goes up, that shifts to the other product. The Horizontal Merger Guidelines issue by the U.S. Department of Justice and the Federal Trade Commission place considerable weight on diversion ratios. “In some cases, the Agencies may seek to quantify the extent of direct competition between a product sold by one merging firm and a second product sold by the other merging firm by estimating the diversion ratio from the first product to the second product. The diversion ratio is the fraction of unit
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Professor Rubinfeld virtually ignores terrestrial radio as a source of music. This is a glaring omission, given the dominant position of terrestrial in the market to provide music to listeners. As shown in Figures 2 and 3, terrestrial radio is far and away the most popular way for
Americans to get their music, overall and when they access rather than own the music. No discussion of consumer substitution patterns regarding recorded music that ignores terrestrial radio can be reliable.
3. Interactive Subscription Services Have Limited Appeal
Another reason why interactive services are not an especially close substitute for statutory webcasting services is that relatively few people are willing to pay $9.99 per month for an on- demand music service. As reported in the Rebuttal Testimony of Larry Rosin, among users of Pandora and other non-interactive services who do not subscribe to Spotify Premium, 88 percent report that they are not at all likely, or not very likely, to pay $9.99 per month for an on-demand service. Even at $4.99 per month, 70 percent give these responses, and only 9 percent say that it is very likely that they would subscribe.140 These results are very consistent with Pandora’s own plans to continue to grow its free, advertising-supported service by displacing terrestrial radio and expanding total listening hours.