Recorded Music Licensed to
D. The Interactivity Adjustment Contains Major Errors
Even taking Professor Rubinfeld’s “interactivity adjustment” on its own terms, he made several critical and significant errors in performing the calculations. It is my understanding that these critical errors are discussed in detail in the Written Rebuttal Testimony of Professor Michael Katz. Correcting these errors leads to a much larger interactivity adjustment and thus a much
lower implied statutory rate.
One significant flaw in Professor Rubinfeld’s “interactivity adjustment” is his failure to account for the costs incurred by streaming music services. Accounting for these costs would lead to a significantly larger “interactivity adjustment” and thus significantly lower proposed rates.97 Another large and rather obvious flaw in Professor Rubinfeld’s “interactivity adjustment” is his failure to account for advertising-supported listeners: his adjustment is entirely based on
subscription retail prices. This is a major omission. As shown in Figure 4 above, free,
advertising-supported services are far more popular than paid subscriptions, accounting for five times as many streaming performances as subscription performances.
Professor Rubinfeld acknowledges this omission, claiming that the data necessary to account for advertising-supported listeners are not available.98 First, that does not justify using subscription prices without some correction. Second, this is simply not the case. I understand that Professor Katz, in his Written Rebuttal Testimony, corrects for this omission, as well as a number of others, and recalculates Professor Rubinfeld’s “interactivity adjustment,” deriving a much larger “interactivity adjustment” and thus a much lower implied royalty rate for statutory webcasters.
96
Rubinfeld Direct Testimony, ¶ 169.
97
This flaw impacts both the per-play and percentage-of-revenue rates that Professor Rubinfeld proposes.
98
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7.
Professor Rubinfeld Offers No Justification for the Rate Increases He
Proposes from 2016 to 2020
Professor Rubinfeld proposes that the rates he calculates from his interactive benchmark be used as a starting point, with rates going up each year during the license period. The annual rate increase that Professor Rubinfeld adopts is taken from the annual percentage increase found in the Web III rates. Professor Rubinfeld offers no explanation or justification for why these rate increases – which are well in excess of the expected inflation rate – should be adopted. Perhaps even more glaring is that Professor Rubinfeld proposes increasing statutory rates over time when, as he acknowledges, the rates in the very benchmark market from which these proposed statutory rates are derived have been falling over time. Given this, one should conclude that, if anything, Professor Rubinfeld’s interactive benchmark suggests that statutory rates should fall over time, not rise.
Professor Rubinfeld attempts to defend this counter-intuitive result by claiming that it is only because of increasing competition from statutory webcasters that the rates paid by interactive services have declined. In Section 9.B, I show that this assertion is simply incorrect as a factual matter: the rates paid by interactive services have been falling as a result of competition from piracy, together with the fact that the demand for subscription music services drops off rapidly as the monthly subscription fee rises.99
Nevertheless, even if the interactive rates were being pulled down by the statutory rates (either due to downstream competition or upstream arbitrage), as Professor Rubinfeld claims, that would simply not imply that the statutory rate should rise over the 2016-2020 time period. All it would tell us is that the statutory rate serves as a magnet, pulling the interactive rates toward it. That would not tell us whether the statutory rate is too high or too low, or whether the statutory rate should rise or fall over time. In the end, Professor Rubinfeld has provided no coherent reason for the statutory rates to rise over the 2016-2020 period in the manner he proposes.
8.
Licenses with Statutory Webcasters: Accounting for the Presence of the
Statutory License
Professor Rubinfeld considered one license agreement between a record company and a statutory webcaster, the license agreement between Warner and iHeartMedia. Professor Rubinfeld states: “Although informative, ultimately the Warner-iHeartMedia agreement is a less appropriate benchmark than the Category A [interactive services] set for several reasons.”100 He then lists these three reasons.
“First, “Second,
99
Written Rebuttal Testimony of Larry Rosin, pp. 9-10 and Figures 3, 4, and 5, showing how consumer interest in a paid on-demand music service falls as the price rises from $2.99 per month to $4.99 per month and $9.99 per month.
100
Page 32 “Third,
In Section 8.A, I address Professor Rubinfeld’s first point, which concerns the shadow of the statutory license. I show that Professor Rubinfeld has made a critical error in his interpretation of the rates charged by record companies to statutory webcasters. This error inverts his results. Based on this error, Professor Rubinfeld concludes that the webcaster benchmark rates are below
the appropriate market rate. Correcting Professor Rubinfeld’s error leads to the opposite result: the webcaster benchmark rates are above the appropriate market rate. This correction is of profound importance for this proceeding: it eliminates SoundExchange’s primary objection to using the webcaster benchmark.
In Section 8.B I discuss obstacles to direct licensing to statutory webcasters. These obstacles explain why we have not yet seen more direct licenses, even though the statutory rate is above the competitive rate.
In Section 8.C I present additional evidence showing that the competitive rate is lower than the current statutory rates and very likely lower than the webcaster benchmark rates as well. This additional evidence rebuts Professor Rubinfeld’s assertion that the statutory rate is at or above the competitive rate.
In Section 8.D I address Professor Rubinfeld’s second point, which concerns . I explain that
. In dismissing this competitive behavior as a “first mover advantage” that makes the agreement between Warner and iHeartMedia “a less appropriate benchmark,” Professor Rubinfeld reveals a hostility to accounting for competition that is directly contrary to the requirement that the
hypothetical statutory market be workably competitive.
In Section 8.E I address Professor Rubinfeld’s third point regarding . I agree with the principle that can provide additional value to the record company, but
accounting for this additional value is not difficult.