Statutory Webcasters Have Far Greater Ability to Steer Than Do Interactive Services

Considerable evidence shows that webcasters have a far greater ability to adjust the mix of music they play in response to differences in the royalty rates charged by different record companies than do interactive services.

The Copyright Royalty Judges have previously considered how interactive services and webcasters differ in this respect, stating:

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The market elasticity of demand is always lower than the firm-specific elasticity of demand (unless the firm in question is the sole supplier in the market). Since lower elasticities lead to higher prices, this corresponds to the fact that a cartel will charge higher prices than will emerge from competition.

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Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, 8th Ed., 2013, p. 370 (emphasis in original,

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The major difference between the two markets is the role of the ultimate consumer in selecting the sound recordings for listening. In the interactive market (as the adjective connotes), the ultimate consumer essentially decides which sound recordings he or she will receive. By contrast, in the noninteractive market (as the adjective again connotes), the consumer plays a more passive role, and the webcaster offers the consumer music that the webcaster anticipates the listener might enjoy (much like radio).65

Common sense suggests that webcasting services have more control over the sound recordings that the consumer receives, and thus have a greater ability to steer, than interactive services. The evidence indeed supports this conclusion.

Regarding statutory webcasters, there is very strong empirical evidence that Pandora and iHeartMedia have a substantial ability to steer in response to differences in the royalty rates charged by different record companies. Indeed, both have done so. I understand that Pandora is currently boosting plays of labels that are party to the Merlin Agreement by 66 Furthermore, the steering experiments that Pandora ran under my direction demonstrated that Pandora would face no meaningful adverse commercial consequences from increasing or

decreasing performances of each of the major record companies by 67 Likewise, for the 27 independent labels with which iHeartMedia has direct license agreements,

iHeartMedia has increased performances on its standard and custom webcast stations by approximately on average.68

In addition, Pandora has a much smaller library of music than do the interactive services. Pandora’s library is about songs, while Spotify’s library is about

This large difference reflects the fact that Pandora chooses which songs to serve to its users, while Spotify attracts listeners in significant part by offering them access to all the songs they might want to hear.

Regarding interactive services, no evidence that I have seen indicates that they have anywhere near the same ability to influence the mix of music that their listeners receive, or the same incentive to alter that mix in response to differences in the royalty rates charged by different record companies.

In fact, the available evidence is to the contrary. For example, when analyzing the UMG/EMI merger, Professor Rubinfeld

. He told the FTC that

. This would not be the case if the interactive services had any significant ability to steer. Professor Rubinfeld further explained that

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Web III Remand, at 23115 (footnote omitted).

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Rebuttal Testimony of Michael Herring, February 20, 2015 (Herring Rebuttal Testimony), ¶ 50.

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Shapiro Direct Testimony, pp. 39-40 and Appendix F.

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Fischel and Lichtman Amended Direct Testimony, ¶ 64.

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Information from Pandora and SNDEX0004091, at 100 (SNL Kagan, “Economics of Mobile Music,” 2014).

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Mr. Harrison of Universal indicated that

The terms of the agreements signed between the major record companies and the leading interactive services further limit the already modest ability of interactive services to steer. This is done through what I refer to as

Furthermore, as part of my research to compare the ability of interactive services vs. statutory webcasters to steer, I interviewed a former executive from Google Play and Rhapsody who stated clearly that

To further investigate the extent to which interactive services steer in response to price

differences, I studied how Spotify responded during periods of time when the three major record labels were not all charging Spotify the same price for their music. To perform this study, I used Professor Rubinfeld’s dataset containing monthly information on the royalty rate structure, royalty payments, and the label shares of Spotify performances from June 2013 through May 2014. I looked at Spotify because it is far larger than the other interactive services – it accounts

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“Streaming services hold some bargaining power due to their ability to help win back or retain some customers who might otherwise use piracy.” Pandora Exhibit 19, at 970.

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Harrison Deposition Testimony, p. 99.

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See, e.g., SNDEX0055378 at 408-9 and 428 (Spotify-Sony Agreement, effective date July 1, 2013); SNDEX0056333 at 363, 370 and 382-6 (Spotify-UMG Agreement, commencement date September 1, 2013); SNDEX0056080 at 098-9 and 116-8 (Spotify-Warner Music Group (“WMG”) Agreement, effective date December 1, 2013); SNDEX0024401 at 421-2 and 437 (Rhapsody-Sony Agreement, effective date April 1, 2010);

SNDEX0021721 at 761 and 771-2 (Microsoft-UMG Agreement, effective date September 19, 2012); SNDEX0018846 at 860 (Google-WMG Agreement, effective date November 8, 2013).

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When Professor Rubinfeld was asked at his deposition

.” Rubinfeld Deposition Testimony, p. 43.

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for 79 percent of the performances that took place on products with interactive functionality, according to Professor Rubinfeld’s data.76

I found

. The results of this study are reported in Table 1.

The stands in marked contrast to the

demonstrated substantial ability and incentive of Pandora and iHeartMedia to steer in response to price differences.

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SNDEX0051684_RESTRICTED.XLSX (Rubinfeld Work Papers), “All Data” tab. Because of its size relative to the other interactive services, Spotify’s price elasticity of demand will largely determine the overall elasticity of demand among interactive services.

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In fact, the data indicate that,

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3. Any Interactive Benchmark Requires a Large Downward Steering