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25394 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Rules and Regulations

(OMB) und er Executive Order 12866(Regulatory Plannin g and Review).

Execu tive Order 12988

The Department of the Interior hasconducted the reviews required bysection 3 of Executive Order 12988(Civil Justice Reform) and hasdetermin ed that, to the extent allowed

by law, this rule meets the applicablestandard s of subsections (a) and (b) ofthat section. However, these standard sare not ap plicable to the actual languageof State regulatory p rograms an dprogram amend ments since each suchprogram is drafted and p romu lgated bya specific State, not by OSM. Undersections 503 an d 505 of SMCRA (30U.S.C. 1253 and 1255) and 30 CFR730.11, 732.15, and 732.17(h)(10),decisions on p roposed State regulatoryprograms and program amend mentssubm itted by the States must be basedsolely on a determin ation of wh ether thesubm ittal is consistent with SMCRA andits implemen ting Federal regulationsand w hether the other requirements of30 CFR Parts 730, 731, and 732 havebeen met.

National Environmen tal Policy A ct

No environm ental impact statement isrequired for this ru le since section702(d) of SMCRA (30 U.S.C. 1292(d))provid es that agency decisions onprop osed State regulatory program

provisions d o not constitute majorFederal actions with in the mean ing ofsection 102(2)(C) of the Natio nalEnvironmental Policy Act (42 U.S.C.4332(2)(C)).

Paperwork Reduction A ct

This rule does not containinformation collection requiremen ts that

require approval by OMB un der thePaperwork Reduction Act (44 U.S.C.3507 et seq.).

Regulatory Flexibility A ct

The Department of the Interior hasdetermined that this rule w ill not havea significant economic imp act on asubstantial nu mber of small entitiesun der th e Regulatory Flexibility Act (5U.S.C 601 et seq.). The State submittalwh ich is the su bject of this rule is basedupon corresponding Federal regulationsfor wh ich an economic analysis wasprepared and certification made thatsuch regulations would not have a

significant econom ic effect upon asubstantial nu mber of small entities.Accordingly, this rule will ensure thatexisting requiremen ts previouslyprom ulgated by OSM will beimp lemented by th e State. In making thedetermination as to w hether this rulewou ld have a significant economicimpact, the Department relied u pon thedata and assump tions for thecorrespond ing Federal regulations.

Unfunded Mandates

OSM has determin ed and certifiespursuant to the Unfunded Mand atesReform Act (2 U.S.C. 1502 et seq.) thatthis rule w ill not imp ose a cost of $100million or more in any given year onlocal, state, or tribal governments orprivate entities.

List of S ubjects in 30 CFR Part 918

Intergovernmen tal relations, Surfacemining, Underground mining.

Dated: April 28, 1997.

Brent Wahlquist,

Regional Director, Mid-Continent RegionalCoordinating Center.

For the reasons set out in thepreamble, 30 CFR Part 918 is amend edas set forth below:

PART 918LOUISIANA

1. The auth ority citation for Part 918continu es to read as follows:

Authority: 30 U.S.C. 1201 et seq.

2. Section 918.15 is amen ded in thetable by add ing a new entry inchro no logical order by Date of finalpublication to read as follows:

918.15 Approval of Louisiana regulatoryprogram amendments.

* * * * *

Original amendment submissiondate

Date of final publication Citation/description

* * * * * * * *October 24, 1997 ........................... May 8, 1998 ................................... Sections 105.; 2537.A.11.; 2725.A., A.2., A.3., A.3.a., C.1., F;

2907.C.5.; 3705.A.2., A.2a., A.2.b.; 3711.A., B.1. through B.6.;3717.A., A.2., A.3.; 4501.A.3., A.4.; 5333.A.1. through A.13.;5411.A.; 5413.A.; 5503.A.2.; 5507.A.4.; 6507.A.2.; 6913 .B.;6915.B.1.; 6917.A.; 7105.C.

[FR Doc. 9812249 Filed 5798; 8:45 am]

BILLING CODE 431005M

LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 260

[Docket No. 965 CARP DSTRA]

Determination of Reasonable Ratesand Terms for the Digital Performanceof Sound Recordings

AGENCY: Copyrigh t Office, Library ofCongress.

ACTION: Final rule and ord er.

SUMMARY: The Librarian of Congress,up on recomm end ation of the Register of

Copyrights, is annou ncing thedetermin ation of the reasonable ratesand term s for the compu lsory licenseperm itting certain d igital performancesof sound recordings.

EFFECTIVE DATE: May 8, 1998.

ADDRESS(ES): The full text of the pu blic

version of th e Copyright ArbitrationRoyalty Panels report to th e Librarian ofCongress is available for inspection an dcopying during normal working hoursin th e Office of the General Counsel,James Mad ison Build ing, Room LM403, First and Indep endence Avenue,SE., Washin gton, DC, 20540.

FOR FURTHER INFORMATION CONTACT:David O. Carson, General Coun sel, orTanya Sand ros, Attorney Advisor,Copyright Arbitration Royalty Panel(CARP), PO Box 70977, Southwest

Station, Washington, D.C. 20024.Telephon e (202) 7078380. Telefax:(202) 7078366.

SUPPLEMENTARY INFORMATION:

I. Background

The Digital Performance Right inSoun d Recordings Act of 1995(DPRSRA), Public Law 10439, 10 9 Stat.336, amended section 106 of theCopyright Act, title 17 of the Un itedStates Code, to give sound recordingcopyright own ers an exclusive right,subject to certain limitations, to p erformpu blicly soun d recordings by digitalaud io transmission s. 17 U.S.C. 114. Thebill affords certain d igital transm ission


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25395Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Rules and Regulations

1 (7) The sound recording performan cecomplement is the transmission during any 3-hourperiod, on a particular channel used by atransmitting entity, of no more than

(A) 3 different selections of sound recordingsfrom any one phonorecord lawfully distributed forpublic performance or sale in the United States, ifno more th an 2 su ch selections are transmittedconsecutively; or

(B) 4 different selections of soun d record ings

(i) By the sam e featured record ing artist; or

(ii) From any set or compilation of phonorecordslawfully distributed together as a unit for publicperformance or sale in th e United States, if no morethan th ree such selections are transmittedconsecutively: Provided, That the transmission ofselections in excess of the numerical limitsprovided for in clauses (A) and (B) from multip lephonorecords shall nonetheless qualify as a soundrecording performance complement if theprogramming of the mu ltiple phonorecords was notwillfully intended to avoid the num ericallimitations prescribed in such clauses.

17 U .S.C. 114(j)(7).2See Notice of Proposed Rulem aking, 61 FR

22004 (May 13, 1996); Notice of ProposedRulemaking, 62 FR 34035 (June 24, 1997).

services a comp ulsory license toperform digital soun d recordin gspu blicly. The pu rpose of the bill is toprovide copyright holders of soundrecordings with th e ability to control thedistribution of their prod uct by digitaltransmissions, without h ampering thearrival of new tech nologies, and withou timposing new and u nreasonable

burdens on radio and televisionbroad casters. S. Rep. No. 104128 , at15 (1995).

All non-exempt d igital subscriptiontransmission services are eligible for thestatutory license, provid ed that they arenon-interactive and comply with theterms of the license. The statute requiresthat th e service not violate the soun drecording performance comp lement, 1

not pu blish in advance a schedule of theprogrammin g to be performed, not causeany receiving device to switch from oneprogram channel to another, include ineach transmission certain identifying

information encoded in each soundrecording, pay the royalty fees andcomp ly with the associated terms, andcomply with any recordkeepingrequirements promulgated by theCopyright Office. 2 17 U .S.C.114(d)(2)(A)(E) and 114(f)(2)(5).

The reasonable terms and rates of thesection 114 statutory license aredetermined by voluntary negotiationsamon g the parties and, wh ere necessary,compulsory arbitration condu cted und erchapter 8 of the Copyright Act, title 17.17 U.S.C. 114(f).

II. The CARP Proceeding To Set

Reasonable Rates and Terms

On December 1, 1995, the Librarian ofCongress (Librarian) in itiated th estatutorily mandated six month

negotiation period within 30 d ays of theenactmen t of the DPRSRA, pu rsuan t tosection 114(f)(1) of the Copyrigh t Act,with th e pu blication of a noticeinitiating the volun tary negotiationprocess for determinin g reasonableterms and rates of royalty payments. See60 FR 61655 (December 1, 1995). In thenotice, the Library instructed th ose

parties with a significant interest in theestablishment of the reasonable termsand rates for the section 114 license tofile a petition with the Copyright Officeno later than Au gust 1, 1996, in theevent that the interested parties wereun able to negotiate an agreement. Id.

Accordingly, the Recording Indu stryAssociation of America (RIAA) filed apetition w ith th e Copyright Office inwh ich it asked th e Office to initiate anarbitration proceeding pursuant tochap ter 8 of the Copyright Act. Aftermaking a determination that thepetitioner RIAA had a significant

interest in the prop osed CARPproceedin g, the Librarian pu blished anotice setting the schedu le for the 45-day precon troversy discovery periodand an noun cing the date for theinitiation of the 180-day arbitrationperiod. 61 FR 40464 (August 2, 1996).The exchange of documents d uring theprecontroversy discovery period did notproceed smoothly, requirin g the Officeto reschedu le portions of the discoveryperiod an d vacate the sched uled d ate forthe in itiation of the CARP. See Order inDocket No. 96 5 CARP DSTRA(September 18, 1996); Order in Docket

No. 965 CARP DSTRA (Novem ber 27,1996). The Librarian annou nced th einitiation of the 180-day arbitrationperiod following the conclusion of thediscovery period and the resolution ofall pend ing motions. 62 FR 29742 (Jun e2, 1997).

Th e Parties

There are four parties to thisproceedin g: three digital audiosubscription services (the Services) andthe Recording Indu stry Association ofAmer ica (RIAA).

1. The Recording Indu stry Associationof America, Inc. (RIAA)RIAArepresents a collective, consisting ofmore than 275 record labels, establishedfor the express pu rpose of adm inisteringthe rights of these sound recordingcopyright own ers. RIAA represents th einterests of its members wh o are thecopyright own ers of more than 90% ofall legitimate sound recordings sold inthe United States. Record comp aniesown th e copyrights in the soundrecordings.

2. Digital Cable Radio Associates(DCR)A digital au dio service

established in the United States in 1987by the Jerrold Commu nications Divisionof General Instrumen t Corporation.Current partners include Warner Music,Sony Corporation, EMI, Time Warn erCable, Continental Cablevision, ComcastCable, Cox Cable, and Adelphia Cable.

3. Digital Music Exp ress, Inc.

(DMX)A digital music subscriptionservice established in 1986 asInternational Cablecasting Techn ologies,Inc. In 1997, DMX merged into TCIMusic, Inc., a publicly traded comp anywith ap proximately 80% of its sharesheld by TCI, Inc.

4. Muzak, L.P.With roots datingback to 1922, Mu zak is Am ericas oldestbackground music provider forbusinesses. In the 1920s and 1930s,Muzak was part of the consumer m usicmarket un til driven out of that marketby the growing pop ularity of radio.Muzak remained ou t of the market until

March, 1996, wh en it began provid ing27 chann els of digital mu sic und er thenam e DiSHCD, as part o f Echos tarssatellite-based DiSH Network.

Th e Position of the Parties at the

Com m encem ent of the Proceeding

RIAA, representin g the in terests of thesound recording copyright ow ners,requested a royalty rate set at 41.5% ofa Services gross revenues resulting fromU.S. residential subscribers, or in som ecircumstances, a flat rate min imum fee.Report of the Copyright Arbitration

Royalty Panel (Report) 33. RIAA alsoagreed to be nam ed the sin gle entity tocollect, administer, and d istribute theroyalty fees. Report 184. RIAAproposed add itional terms concerningthe timin g of paymen ts, statements ofaccounts, retention of records, andaud its. Report 33.

The three digital audio subscriptionservices requested a royalty rate rangingfrom a low of 0.5% to a high of 2.0%of gross revenu es resulting from U.S.residential subscribers, andunanimously opposed a flat rateminimum fee. Report 3436, 172.

The Services proposed that a singleprivate entity or a governmen t agency benamed for purposes of administering theroyalty fees, but prop osed subm ittingpaymen ts on a quarterly basis ratherthan a m onthly basis. Report 184185. In ad dition, the Services proposedterms concerning recordkeeping andaud its, confidentiality of businessrecords, and paym ent terms fordistributing license fees amon g featuredartists and nonfeatured musicians andvocalists.


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3 (1) to make determinations concerning theadjustmen t of reasonable copyright royalty rates asprovided in sections 114, 115, and 116, and to makedeterminations as to reasonable terms and rates ofroyalty payments as provided in section 118. Therates applicable under section 114, 115, and 116shall be calculated to achieve the followingobjectives:

(A) To maximize th e availability of creative worksto the public;

(B) To afford th e copyright ow ner a fair retu rn forhis creative work and the copyright user a fairincome un der existing economic conditions;

(C) To reflect the relative roles of the cop yrightowner and the copyright user in the product madeavailable to the public with respect to relativecreative contribution, technological contribution,capital investment, cost, risk, and contribution tothe open ing of new markets for creative expressionand m edia for their commun ication;

(D) To minimize any disruptive impact on thestructure of the industries involved and ongenerally prevailing industry practices.

17 U .S.C. 801(b)(1).

4 The Kagan stud y was prep ared by Paul KaganAssociates, a media research company that tracksand p ublishes financial data concerning the med iaand entertainment ind ustries.

5 Wilkofsky Gruen Associates is an econom icconsulting firm that specializes in thecommunications and entertainment ind ustries.

Th e Panels Determ ination of aReasonable Rate

The Panel evaluated the four statutoryobjectives, 3 and their component p arts,in light of the evidence and d eterminedthat the digital audio subscriptionservices should pay a royalty fee of 5%of gross revenues resu lting from U.S.

residential subscribers. Report 196,200. This rate represents the midpoin tof the range of possible license rates thatthe Panel considered appropriate (butnot the mid poin t of the partiesprop osals). The Panel further conclud edthat there was no reason to imp ose amin imum license fee on the Services atthis poin t, and con sequently, it rejectedRIAAs prop osal to set a minim um feebased on a flat rate. Report 204.

In making this determination, thePanel followed th e preceden t set inprior rate adjustmen t proceedingscond ucted by the former CopyrightRoyalty Tribun al and other CARP

pan els which , as a first step, determineda range of possib le rates afterconsiderin g different proposed ratesbased on n egotiated licenses oranalogous marketplace mod els. Report 123. See also, 1980 Adjustment of theRoyalty Rate for Coin-Op eratedPhon orecord Players, 46 FR 884(Janu ary 5, 1981), and the 1997 RateAdjustmen t of the Satellite CarrierCompu lsory License Fees, 62 FR 55742(October 28, 1997). Each p arty offeringa bench mark rate conten ds that th erate it offers represents the cost forsimilar produ cts in analogous markets.

The Panel considered three benchmarks,weighing each in light of the recordevidence to determine w hether theproposed models shed light on how themarketplace would value a performancelicense in sound recordings. Once thePanel identified the useful mod els, itused th e correspon din g rate information

to craft a range of potential royalty ratesfor the section 114 license, then ch osethe rate within the range which wou ldfurther th e stated statutory objectives.

RIAA and the Services proposed ratesbased on three distinct marketplacemod els in which rates are set througharms-length negotiations. Report 124.

The Services proposed two benchmarksfor consideration by the Panel:Negotiated license fees for a sou ndrecording performance right and th elicense fees the Services pay th eperforming rights organizations for useof the un derlying mu sical works. RIAApu t forth a single model for the Panelsconsideration: Cable television n etworklicense fees. The Panel found theServices mod els helpful in setting therate for the digital performance right,but rejected the RIAA model for thereasons stated herein.

Both RIAA and the Services seemed

to agree that the best p roxy forreasonable compensation is amarketplace rate. The Panel, however,noted that the DPRSRA instructs theCARP to set reason able rates, whichneed not be the same as rates set in amarketplace un constrained by acomp ulsory license. In su pp ort of itsinterpretation, the Panel cited thestatutory factors which m ust beconsidered in setting the rate. SeeReport 10, 124.

The Panels Evaluation of the RIAABenchmark

The benchmark proposed by therecording ind ustry analogizes the cost ofprogrammin g for cable televisionnetw orks with the cost of procu ring theright to perform the soun d recordin gs.The analogy, how ever, did n otwithstand scrutiny by the Panel, whichreasonably found th at the cabletelevision n etwork license fees mod eldid not represent rates for an analogousproduct in a comparable marketplace.Its conclusion rested on a nu mber offindings which described analyticaldeficiencies in the tw o stud ies offeredin sup port of the 41.5% p roposed

royalty rate. Report 126150.The RIAA model prop osed usin g the

pu rchase price of programming for cabletelevision n etworks to determine theprice the Services would p ay for theright to pu blicly perform soun drecordings, if negotiated in a freemarket. RIAAs Proposed Findin gs ofFact and Conclusions of Law (PF) 62;RIAA Proposed Conclusions (PC) 18.RIAA presented tw o studies thatillustrate the amoun t of mon ey cabletelevision n etworks pay for their

programmin g: (1) The Kagan stud y,4 an d(2) the Wilkofsky Gruen Associates 5

study. RIAA Exhibits (Exs.) 14 and 15,respectively. Both stu dies argued th atthe an alogy between cable televisionnetworks an d the d igital audio serviceswas apt because the digital audioservices and th e cable televisionnetworks comp ete head-to-head for

carriage on cable and DBS systems, andfor consum er time and discretionaryincome. Report 130.

The Kagan stud y analyzed dataconcerning the revenues andprogrammin g expenses of 31 basic cabletelevision n etworks from the 198596period. It concluded th at a cabletelevision n etwork spen ds, on average,app roximately 40% of its gross revenuesfor program min g. RIAA Exhibit (Ex.) 14at 7. The Panel, however, discoun tedthe 40% figure because it representedthe costs of license fees to all cop yrightowners, and it included the costs of

programmin g du ring the start-up years,wh en a new cable television networkmay pay more than 100% of itsrevenues in programmin g costs. Report

127, 129, 149. Failure to adjust forthese factors made it imp ossible for thePanel to assess the costs for the right topublicly perform the sound recordingsapart from the costs of the othercopyrighted works wh ich make up theprogram.

Their second study, prepared byWilkofsky Gruen Associates (WGA),analyzed only cable movie networksbecause Wilkofsky, the exp ert for the

study, claimed that the pricingcharacteristics and dyn amics of thecable movie networks were comparablein three fund amental ways: The lack ofcommercials, the generation of revenuesthrough subscriptions, and th e pu rchaseof programm ing from third p arties.Wilkofsky Written Direct Testimony(W.D.T.) at 35. This stud y conclu dedthat the cable movie networks pay aweighted average of 41.5 % of theirrevenues for programming that theyacquire from outside sources and byanalogy, the Services should p ay thesame.Id. at 3.

The Panel rejected the conclu sion ofthe WGA study because it ignored thefollowin g fun dam ental differences inmarket deman d and cost characteristicsbetween the cable movie networks andthe d igital aud io services. Report

133145.


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1. The study provided n o evidence toshow th at any of the movie networksdirectly compete with digital aud ioservices. In fact, when peop le watch amovie, they devote their entire attentionto the film for a period of time, andgenerally, do n ot repeat the experiencewith th e same movie. On the otherhan d, subscribers to digital audio

services choose to listen to the samemu sic again and again w hile engaged inother activities. In other w ords, thesubscriber chooses each service fordifferent reasons, and therefore, they d onot represent choices in the samemarket. Report 143, citing RosenthalWritten Rubuttal Testimony (W.R.T). at13, Transcript (Tr). 1251 (Rubin stein).

2. The cable movie networks comp eteagainst other cable and broadcaststations for exclusive rights to motionpictures. Exclusive rights are h ighlyprized, and consequently, command apremium price, but they are not

imp licated in the market for digitalaudio transmissions. Consequently, thePanel foun d th at RIAAs failure to adjustfor this aspect grossly overstated th evalue of programmin g costs in its cablemovie network analogy. Report 137142.

3. The Panel furth er discounted th eanalogy because RIAA ignored th eprom otional benefit that flows to therecord companies from the constantairplay of their sound recordings. Report

144145. See also d iscussion infra.

The Panels Determination ofReasonable T erms

In add ition to establishing areasonable rate for the soun d recordin gperformance license, the Panel mustalso establish reasonable terms forimp lementing the license. The SenateCommittee Report makes clear thatterms inclu de such details as howpayments are to be made, when, andother accounting matters. S. Rep. No.104128 , at 30 (1995).

RIAA and th e Services proposedspecific terms con cerning min imal fees,paym ent sched ules, late fees, statementsof accoun t, and aud its. From these, thePanel adop ted the following terms:

1. RIAA shall h ave sole responsibilityfor the distribution of the royalty fees toall copyright holders. Report 184,205.

2. The license fee paymen ts shall bedue on the twentieth d ay after the endof each mon th, beginn ing with themonth succeeding the month in whichthe royalty fees are set. Report 185,206.

3. The Services shall make backpayments over a 30-month period. Thefirst back paym ent, 1/30th of the total

arrearage, shall be d elayed for sixmonths. Report 187, 206(a).

4. A Service shall be subject tocopyright liability if it fails to maketimely p ayments. Liability for copyrightinfringement shall on ly come about forknowing and willful acts whichmaterially breach the statutory licenseterms. Report 188, 206(b).

5. A late fee of 1.5% per m onth or thehighest lawful rate, whichever is lower,will be imposed from the d ue d ate untilpayment is received. Report 189,206(a).

6. Services shall submit mon thlystatements of accounts and p ayment toRIAA. Only information to verify theroyalty payments need be provided onthe mon thly statements of account.Report 190, 205, 207.

7. Safeguards mu st be established toprotect against disclosure ofconfidential financial and businessinformation, which includes the amoun t

of the royalty paymen t. Access to thisinformation shall be limited toemp loyees of RIAA, wh o are notemp loyees or officers of the copyrightown ers or the recordin g artists, for thepu rpose of performing their assigneddu ties du ring the ordinary course ofemployment, and to independ entaud itors acting on behalf of RIAA.Report 191, 208.

8. The digital audio services shallmaintain accurate records on mattersdirectly related to the paym ent of thelicense fees for a p eriod of three years.Report 192, 209.

9. Interested parties may cond uct only

one au dit of a digital audio servicedu ring any given year. Report 193,210(c).

Interested parties mu st file a Noticeof Intent to Condu ct an Audit with theCopyright Office. Such n otice shall bepu blished in the Federal Register.Report 193, 210(a)(b).

RIAA mu st retain an au ditorsreport for a period of three years. Report

193, 210(d). An aud it, including und erlying

paperwork, which was performed in theordin ary course of business according togenerally accepted aud iting stand ards

by an ind ependent au ditor, may serve asan au dit for all interested parties. Report 194, 210(e).

Interested parties shall pay for thecost of the audit, unless an indep endentaud itor concludes that there was anun derp ayment of five (5) percent ormore. Report 195, 210(f).

The Panel ch ose not to ad opt RIAAsminimu m fee proposal and th e Servicesproposed p ayment schedule for thedistribution of royalties to the featuredartists and the n onfeatured mu siciansand vocalists. The Panel found th at the

timing of paym ents to the performingartists was not w ithin th e scope of theproceedin g. Report 204; Report at 56n.21.

The Panels Evaluation of the RIAAProposal To Ad opt a Minimum Fee

RIAA prop osed the im position of aminim um fee as a means to insure a fair

return to the copyright owners in lightof business practices that might erodethe value of the statutory license fee.RIAA PF 126147. Specifically,RIAA sought a min imu m fee tominim ize the effect of discounts orcredits, to address shifts in businessmod els, and to avoid dilu ting the valueof the sound recording when aud iodigital services add new ch ann els totheir offerings.Id. The Panel ultimatelyrejected this suggestion because it foun dthat the rationale for a minimu m fee wasbased on unsu pported speculation aboutthe busin ess structure of the Services.

Report 204.III. The Parties Reaction to theDetermination of the Panel

The regulations governing th e CARPproceedin gs allow p arties to filepetitions to mod ify or set aside thedetermin ation of the Panel within 14days of its filing date. The petition m uststate the reasons for the petition,includ ing relevant references to theparties prop osed find ings of fact andconclusion s of law. Parties who w ish tofile replies to a petition m ay do sowithin 14 days of the filing of suchpetitio n. See 37 CFR 251.55(a), (b).

Accordingly, on December 12, 1997,RIAA filed a Petitio n to Reject th eReport of th e CARP (Petition ),contend ing that the Panel acted bothcontrary to the Copyright Act andarbitrarily in reachin g its determin ation.In its petition, RIAA requests theLibrarian to set aside th e Panelsdetermin ation and set a new rate thatshould n ot be less than d ouble theServices 19962001 paym ents for thepublic performance of the underlyingmusical works.

RIAA contend s that th e Panelsdetermin ation was arbitrary and

contrary to law for the followingreasons:1. The Panel disregarded preceden t

set by th e former Copyright RoyaltyTribunal (CRT or Tribunal) in app lyingthe statutory criteria for determin ing areasonable rate for the p ublicperformance right. Petition at 6, 1415.

2. The Panel used the rates set in acorporate partnership agreement as abenchm ark for establishing the newcompu lsory license rate. This wasinappropriate because the publicperformance in sound recordings


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license agreement w as not n egotiatedind epen den tly, but as part of a largercomp lex agreement. Id. at 2027.

3. When the Services publiclyperform a sound record ing, two groupsof copyright own ers receive royalties:The copyright own ers in the un derlyingmu sical works, and for the first time, therecord companies and performers. The

Panel determined that the recordcompanies and performers were notentitled to m ore royalties for theirpublic performance right than thosereceived by the copyright own ers in theunderlying musical works for the publicperformance of th eir works. RIAAcontends that CRT precedent supports adetermin ation that just the reverse istrue.Id. at 1415.

4. The compu lsory license allows theServices to perform sound recordingspu blicly withou t infringing copyrightprior to th e setting of the royalty rate,so long as th e Services agree to pay their

accumu lated royalty obligation once therates are determined. The Pan el createda payment schedu le that allows theServices to pay th ese fees over a th reeyear period. RIAA contend s that thispaym ent schedu le is contrary to law. Id.at 7 n.1.

5. RIAA also conten ds th at the CARPfailed to provide a reasoned exp lanationfor prop er review, made conclu sionsinconsistent w ith its find ings, mad efindin gs without record su pport, andfailed to make findings in sup port ofconclusions.Id. at 2.

RIAA, however, d oes not suggest that

the Librarian disregard all the findin gsof the Panel. Instead, it recommen dsadop ting the Panels app roach todetermin e a reasonable rateprovid edthat the Librarian makes the necessaryadjustmen ts to accoun t for theprecedent and considerations that thePane l ignored . Petition at 5152. RIAAfurther allows that the Librarian neednot consider the cable networkbenchm ark in its analysis, since thePanels analysis of the remainin gbenchmarks supports an upwardadjustmen t of the 5% rate of grossrevenues set by the CARP. Petition at 52n.9.

On December 29, 1997, in respon se tothe RIAA petition to reject the CARPreport, the Services filed a reply toRIAAs Petition to Reject the CARPReport (Reply to Petition). The cru x ofthe Services argument in su pp ort ofadop ting the Panels report is that[w]hen examin ed as a w hole, thePanels Report is emin ently reasonableand amply sup ported by the record.Reply to Petition at 12. Specificarguments of the Services in sup port ofthe Panels report are discussed below

in con junction w ith RIAAs argumentsto reject the rep ort.

IV. The Librarians Scope of Review ofthe Panels Report

The Copyright Royalty Tribun alReform Act of 1993 (the Reform Act),Public Law 103198, 107 Stat. 2304,created a un ique system of review of a

CARPs determination. Typically, anarbitrators d ecision is n ot reviewable,but th e Reform Act created two layers ofreview that result in final orders: theLibrarian of Congress (Librarian) and theUnited States Court of App eals for theDistrict of Columbia Circuit. Section802(f) of title 17 directs th e Librarianeither to accept the decision of theCARP or to reject it. If the Librarianrejects it, he mu st substitute his owndetermin ation after full examin ation ofthe record created in the arbitrationpr oceed ing. 17 U.S.C. 802(f). If theLibrarian accepts it, then the

determin ation of the CARP becomes thedetermin ation of the Librarian. In eithercase, through issuance of th e LibrariansOrder, it is his decision that w ill besubject to review by the Court ofAp peals. 17 U.S.C. 802(g).

The review p rocess has beenthoroughly discussed in priorrecommen dations of the Register ofCopyrights (Register) concerning rateadjustments and royalty distributionproceedin gs. Nevertheless, thediscussion m erits repetition because ofits importan ce in reviewin g each CARPdecision.

Section 802(f) of the Copyright Act

directs that the Librarian shall adop t therep ort of the CARP un less the Librarianfinds that the d etermination is arbitraryor contrary to the applicable provisionsof this title. Neither t he Reform Act n orits legislative history ind icates what ismean t sp ecifically by arbitrary, bu tthere is no reason to conclud e that theuse of the term is any d ifferent from thearbitrary standard described in theAdm inistrative Procedure Act (APA), 5U.S.C. 706(2)(A).

Review of the case law app lying theAPA arbitrary stand ard r eveals sixfactors or circumstan ces und er which a

court is likely to find that an agencyacted arbitrarily. An agency action isgenerally considered to be arbitrarywhen:

1. It relies on factors that Congress didnot intend it to consider;

2. It fails to consider entirely animp ortant aspect of the problem th at itwas solving;

3. It offers an explanation for itsdecision that run s counter to theevidence p resented before it;

4. It issues a d ecision that is soimp lausible that it cannot be explained

as a prod uct of agency exp ertise or adifference of viewp oint;

5. It fails to examine the d ata andarticulate a satisfactory exp lanation forits action in clud ing a rationalconn ection between the facts foun d andthe choice mad e; and

6. Its action entails the un explaineddiscrimin ation or disparate treatment of

similarly situated parties.Motor Vehicle Mfrs. A ssn. S tate Farm

Mutual Auto. Insurance Co., 463 U.S. 29(1983);

Celcom Com m unications Corp. v.FCC, 789 F.2d 67 (D.C. Cir. 1986);

Airmark Corp. v. FAA, 758 F.2d 685(D.C. Cir. 1985).

Given these guidelin es fordetermining when a determination isarbitrary, prio r d ecision s of theDistrict of Columbia Circuit reviewin gthe d eterminations of the former CRThave been consulted . The decisions ofthe Tribunal were reviewed un der thearbitrary and capricious standard of 5U.S.C. 706(2)(A) which, as noted above,app ears to be app licable to theLibrarians review of the CARPsdecision.

Review of jud icial decisions regardingTribunal actions reveals a consistenttheme: while the Tribun al was granteda relatively w ide zone ofreasonableness, it was requ ired toarticulate clearly the rationale for itsaward of royalties to each claimant. See

National A ssn of Broadcasters v.Copyright Royalty Tribunal, 772 F.2d922 (D.C. Cir. 1985), cert. denied, 475U.S. 1035 (1986) (NAB v. CRT);

Christian Broadcastin g Networkv.Copyright Royalty Tribunal, 720 F.2d1295 (D.C. Cir. 1983) (Christian

Broadcasting v. CRT);National CableTelevision Assn v. Copyright RoyaltyTribunal, 689 F.2d 1077 (D.C. Cir. 1982)(NCTA v. CRT);Recording Indus. Assnof Am erica v. Copyright RoyaltyTribunal, 662 F.2d 1 (D.C. Cir. 1981)(RIAA v. CRT). As the D.C. Circu itsuccinctly noted:

We wish to emph asize * * * that preciselybecause of the techn ical and d iscretionarynature of the Tribunals work, we mustespecially insist that it weigh all the relevant

considerations and that it set out itsconclusions in a form that permits us todetermine wh ether it has exercised itsresponsibilities lawfully * * *.

Christian Broadcastin g v. CRT, 720 F.2dat 1319 (D.C. Cir. 1983), qu otin gNCTAv. CRT, 689 F.2d at 1091 (D.C. Cir.1982).

Because th e Librarian is reviewin g theCARP decision un der the samearbitrary standard used by the courtsto review the Tribunal, he mu st bepresented by the CARP with a rationalanalysis of its d ecision, setting forth


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6 In reviewing how the Tribunal analyzed thestatutory criteria, the cour t noted th at otherstatutory criteria invite the Tribu nal to exercise alegislative discretion in determining copyrightpolicy in order to achieve an equitable division ofmusic ind ustry profits between the copyrightowners and users.Id. at 8.

specific find ings of fact and conclusion sof law. This requirem ent of every CARPreport is confirmed by the legislativehistory to the Reform Act wh ich notesthat a clear report setting forth thepan els reasoning and findin gs willgreatly assist th e Librarian of Congress.H.R. Rep. No. 103 286, at 13 (1993).This goal cann ot be reached by

attempt(ing) to distinguish app arentlyinconsistent awards with simp le,un differentiated allusions to a 10,000page record . Christian Broadcastin g v.CRT, 720 F.2d at 1319.

It is the task of the Register to reviewthe report and make herrecommen dation to the Librarian as towh ether it is arbitrary or contrary to theprovisions of the Copyright Act and, ifso, whether, and in what mann er, theLibrarian shou ld substitute his owndetermination. 17 U.S.C. 802(f).

V. Review and Recommendation of theRegister of Copyrights

The law gives the Register theresponsibility to review the CARP reportand m ake recommend ations to theLibrarian wh ether to adop t or reject thePanels determin ation. In doin g so, shereviews the Panels report, the partiespost-panel motions, and th e recordevidence.

After carefully reviewing the Panelsreport and the record in this proceeding,the Register finds that th e Panelsadop tion of the DCR negotiated licensefee as the starting point for making itsdetermin ation is arbitrary. Thisconclusion compels th e Register to set

aside the Pan els final determinationand reevaluate the record evidencebefore making a recommend ation to theLibrarian.

Section 802(f) states that (i)f theLibrarian rejects the d etermination ofthe arbitration pan el, the Librarian shall,before the end of that 60-day p eriod,and after full examination of the recordcreated in the arbitration proceeding,issue an order setting the royalty fee ordistribution of fees, as the case may be.During that 60-day p eriod, the Registerreviewed the Panels report and mad e arecommen dation to the Librarian n ot to

accept the Pan els report, for the reason scited herein. The Librarian accepted thisrecommendation, and on January 27,1998, issued an order stating that thePanels report was still un der review.See Ord er, Docket No. 965 CARPDSTRA (Janu ary 27, 19 98).

The full review of the Register and hercorresponding recommend ations ispresented herein. Within the limitedscope of the Librarians review of thisproceedin g, the Librarian w ill notsecond guess a CARPs balance an dconsideration of the evidence, un less its

decision ru ns comp letely counter to theevidence presented to it. RateAdjustmen t for the Satellite CarrierCompu lsory License, 62 FR 55757(1997), citing 61 FR 55663 (October 28,1996) (Distribution of 1990, 1991 and1992 Cable Royalties). Accordingly, theRegister accepts the Panels weighing ofthe evidence and will not question

findings and conclusions w hich p roceeddirectly from the arbitratorsconsideration of factual evidence.

The Register also ad opts th e Panelsapp roach in setting reasonable rates andterms for the digital performance licensein sound recordings pursuant to 17U.S.C. 114(f)(2), but s ets asid e tho sefindings and conclusions that arearbitrary or contrary to law.

a. Method ology for Makin g RateDetermin ation

Use of a Marketplace Stand ard inSetting the Royalty Rate

The stand ard for setting the royaltyrate for the performan ce of a soun drecording by a digital aud io subscriptionservice is not fair market value,although CARPs and the CopyrightRoyalty Tribunal (CRT or Tribunal) inprior rate adjustment proceedings u ndersections 115 and 116 consideredcomp arable rates negotiated und ermarketplace conditions when makingtheir determinations.

In light of this p ractice, the Pan elfollowed th e same approach establishedin prior rate adjustment proceedin gsconducted by the Tribunal and the

CARPs in makin g its determin ation.Namely, the Panel considered th eparties presentations of d ifferent ratesnegotiated in comparable marketplacetransactions and first determinedwhether the p roposed models mirroredthe poten tial market transactions whichwou ld take place to set rates for thedigital performan ce of soun d recordin gs.Report 123. These benchmarks werethen evaluated in light of the statutoryobjectives to determin e a reasonableroyalty rate.Id.

The Panel noted th at RIAA and theServices seem to agree th at the best

proxy for reasonable compen sation is tolook to marketp lace rates. Report 124.The p arties also agreed that th e ratesshou ld be based on gross revenues andfurther agreed on th e definition ofgross reven ues. Report 125; RIAAPF 55; Services Join t Reply to RIAAsProposed Fin din gs of Fact andConclusions of Law (Services RF) 51.

While the Panel agreed with theparties on these two points, it noted thatthe statute requires the Panel to adoptreasonable rates and term s, and thatreasonable rates and terms are not

synonymous with marketplace rates.Report 124. Unlike a marketplace ratewh ich represents the negotiated price awilling buyer w ill pay a w illing seller,see Rate Ad justment for th e SatelliteCarrier Compu lsory License, 62 FR55742 (1997) (app lying a fair marketstandard , as set forth at 17 U.S.C.119(c)(3)(D), in settin g royalty r ates for

the retransm ission of broadcast signalsby satellite carriers), reasonable rates aredetermined based on policyconsiderations. See RIAA v. CRT, 662F.2d 1.6 Congress granted th e recordcompan ies a limited performance rightin soun d recordin gs in order to provid e[them] with the ability to control thedistribution of their prod uct by digitaltransmissions, but it did so with th eunderstanding that the emergence ofnew technologies would not behamp ered. S. Rep. No. 104128, at 15(1995). Consequently, Congressspecified that the terms were to be

reasonable and calculated to achieve thefollowing four specific policy objectives:

1. To maximize th e availability ofcreative works to the p ublic;

2. To afford the cop yright owner a fairreturn for his creative work and thecopyright user a fair income un derexisting economic cond itions;

3. To reflect the relative roles of thecopyright ow ner and the copyright u serin the prod uct mad e available to thepu blic with resp ect to relative creativecontribution, techn ologicalcontribution, capital investmen t, cost,risk, and con tribution to the openin g of

new markets for creative expression andmedia for their comm un ication; and4. To minimize any disruptive impact

on the structure of the indu striesinvolved and on generally prevailingindustry practices. 17 U.S.C. 114(f)(2)and 801(b)(1).

RIAA takes exception to thisinterpretation and argues that the Panelfailed to follow CRT precedent thatinterpreted the Section 801(b)(1)factors as requ iring it to establish amarket rate. Petition at 33. In sup portof its position, RIAA relies up on th e1982 CRT rate adjustment p roceeding todetermin e reasonable rates and terms forthe statutory noncommercialbroadcasting license, 17 U.S.C. 118,wh ere the CRT stated:

The Tribunal has consistently held that theCopyright Act does not contem plate theTribunal establishing rates below th e


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7 RIAA strongly disagrees with the CARPsconclusion that the Services should devote asmaller percen tage of their revenu es to license feesthan do other cable networks. While the range ofpercentages is large, there are no cable netw orksthat consistently spend as little as 5 percent.Nevertheless, RIAA has not challenged the CARPsdecision to reject the cable n etwork analogy.Petition at 52 n.9 (citations omitted). Furthermore,RIAA did not raise any ch allenge to the Panelsdecision not to grant a m inimum fee.

reasonable market value of the copyrightedworks subject to a compulsory license.

1982 Adjustmen t of Royalty Schedulefor Use of Certain Copyrighted Works inConnection with NoncommercialBroadcasting: Terms and Rates ofRoyalty Paymen ts, 47 FR 57924(Decembe r 29, 1982). RIAA furth ercontend s that the Panel not only ignoredthe CRT precedent requ iring it to setmarketplace rates, but imp roperlyshifted the emp hasis to ensure thefinancial viability of the cop yright users.Petition at 33.

In response, the Services contend thatthe Panels analysis comports with CRTprecedent on both points, noting thatthe CRT did consid er evidence on howa proposed rate would affect the userind ustry in its p roceedings to set ratesun der sections 111 and 116. Reply toPetition at 26. For example, in th e 1980rate adjustment proceedin g to set theroyalty rate for jukebox es, the CRT

considered the evidence and foundonly that m arginal jukebox own erswou ld be threatened by th e new rate.

Id. In fact, the Tribun al stated that itwas satisfied that adequate attention(had) been given to the small operator,* * * (and adopted) an amendment tothe proposed fee schedule that wasprop osed for the benefit of such (small)operators. 1980 Adjustmen t of th eRoyalty Rate for Coin-Op eratedPhon orecord Players, 46 FR 888 (1981).

The Register find s that the Panelcorrectly analyzed how to determine areasonable rate un der section 114.

Section 801(b)(1) states that onefunction of a CARP is to determin ereasonable rates as p rovided insections 114, 115, and 116, and to makedetermin ations as to reasonable termsand rates of royalty payments asprovid ed in section 118. The p rovisionfurther states that the CARP mustdetermin e the rates un der sections 114,115, and 116 to achieve the fourstatutory objectives. The law does n otstate that th ese objectives are app licablein a rate adjustment proceedin g todetermin e rates un der sections 111 or118. Th erefore, RIAAs reliance on CRTpreceden ts for setting rates und ersection 118 is without merit.Furth ermore, the Panels analysis isconsistent with the prior CRTdetermin ations establishing rates for thesection 115 and 116 licenses.

In the 1980 jukebox rate adjustmentpro ceedin g, the CRT set the rate [o]nthe basis of the m arketplace analogiespresented during the proceeding, takingthe record as a whole, and w ith regardfor the statutory cri teria . * * * That ratetakes accoun t both of what is p aid formusic elsewhere und er similar

circumstances an d, since it is a flat rate,of the Tribun als concern for thesmaller , less profitable op erators. 46FR 889 (1981). To recognize that thisrate was not a negotiated marketplacevalue, one need only readCommissioner Jamess d issentadm onish ing the majority for setting arate on an ab ility to p ay th eory. He

characterized th e m ajoritys actions asfollows:

In essence, the majority reached aconclusion on the p remise that a true marketvalue would result in too large an increasein fees. The majority was set on course bywhat they deemed were the guidingstandards of the statute wh ich referred tominim izing the disruptive impact on theeconomic structure of the indu striesinvolved. It was the m ajority view andopinion th at a large increase in fees wouldbe oppressive to the industry and wou ldimp act on sm all operat ors.

Id. at 891 (footnote om itted).The Court of Appeals uph eld the

Tribun als app roach in its 1980 jukeboxrate adjustment p roceeding, stating that:

In its decision, the Tribunal acknowledgedthat the rate which it approved could not bedirectly linked to m arketplace parallels, butit found that such p arallels served asappropriate p oints of reference to be weighedtogether with the en tire record and th estatutory criteria. Although we agree withASCAP that the an alogous m arketplaceevidence is significant, we d o not believe thatthe Tribunal was bound by that evidence toselect a fee rate w ithin the $70$140 zonewhich, according to ASCAP, governs thiscase. The Tribunal carefully weighed theevidence derived from the marketplace

analogies and other evidence sp ecifically inlight of the four statutory criteri a of section801(b) and arrived at a royalty rate for coin-operated ph onorecord players of $50 permachine.

Am usem ent and Mu sic Operators Assnv. Copyright Royalty Tribunal, 676 F.2d1144, 1157 (7th Cir. 1982), cert. denied,459 U.S. 907 (1982) (AMOA v. CRT).The D.C. Court of Appeals en gaged in asimilar analysis when it considered theTribun als determin ation to raise theroyalty rate for making and distributingphonorecords of copyrighted musicalworks from 2 cents to 4 cents. In thatcase, the copyright own ers argued thatCongress intend ed the Tribun al to set ahigh royalty rate un der a bargainin groom theory, which w ould create a rateceiling for stimu lating futu renegotiations outside the license. TheD.C. Circuit found that w hile Congresshad con sidered this possibility, it chosenot to codify this approach, but ratherto express its will through sp ecificstatutory criteria and allow th e Tribunalto interpret and ap ply these objectivesto the record evidence in a rateadjustment proceeding.RIAA v. CRT,

662 F.2d at 89. Furthermore, the Courtascertained th at Congress did not rankthe criteria in order of importance sothat the Tribunal, and subsequently, theCARP, could :

To the extent th at the statutory objectivesdetermine a range of reasonable royalty ratesthat wou ld serve all these objectivesadequately but to differing degrees, * * *

choose among those rates, and courts arewithout auth ority to set aside the particularrate chosen by the Tribunal if it lies withina zone of reasonabl eness.

Id. at 9. See also Perm ian Basin A reaRate Cases, 390 U.S. 747, 767 (1968 );Federal Power Comm ission v. NaturalGas Pipeline Co., 315 U.S. 575, 585586(1942);Hercules, In c. v. EnvironmentalProtection Agency, 598 F.2d 91, 107(D.C. Cir. 1978).

b. Benchm arks

The Pan els Disposition of the Prop osedBenchmarks

The Register has reviewed theanalysis of the Panel an d its disp ositionof the three benchm arks and finds thatthe Panels prim ary reliance on andman ipu lation of the DCR negotiatedlicense fee was arbitrary. The Registeralso find s that the record evidence doesnot sup port the Pan els calculation of aspecific range of fees for the p ublicperformance of the musicalcompositions. These flaws compel theRegister to reexamine the recordevidence and p ropose a rate based onher analysis while providin g deference,wh ere approp riate, to the find ings of the

Panel.The Register, how ever, did not

evaluate furth er the record evidenceconcernin g either the cable televisionnetwork fee or the proposed m inimumfee in h er deliberations to determine theapp ropriate rate because no p arty to theproceedin g challenged either of thesefindin gs or continued to rely upon thesematters in presen ting its argum ents tothe Librarian.7 Therefore, the Registerforgoes a review of the Panels analysisin these areas. This does n ot mean,how ever, that the Register and theLibrarian will always forego an

ind epend ent review of a Panels actions.See, e.g. Distribution of th e 1992, 1993,and 1994 Mu sical Works Fund s, 62 FR6558 (February 12, 1997)


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8Negotiated license fees and certain businessinformation, which the Register has consideredthroughout her review, are not being published inthe Registers review because th e information issubject to a protective order. See Order Docket No.965 CARP DSTRA (September 18, 1996).

9Sony Music and Warner Music signed apartnersh ip agreement w ith DCR in January 1993.A third record com pany, EMI, joined thepartnership in April 1994, under substantially thesame terms. Report 164.

10Associate Professor of Comm unication s Studiesat Northwestern University and Director ofNorthwesterns program in TelecommunicationsStudies, Management, and Policy.

11 Senior Vice-President of Strategic Plannin g andBusiness Development at Warner Music Group anda mem ber of the Board of Directors of Digital CableRadio Associates.

12 President and Chief Executive Officer of DigitalCable Radio Associates.

13 Senior Vice-President an d Chief FinancialOfficer of Digital Cable Radio Associates.

14 A vice-president at the economic consultingfirm of Charles River Associates, Inc.

(recommending an up ward adjustmentto one partys award, although n o partymad e a request for the adjustmen t); RateAdjustmen t for the Satellite CarrierCompu lsory License, 62 FR 55742(1997) (recomm end ing the adop tion of azero rate for local retransmission ofnetwork signals to unservedhouseholds).

The Pan els Adop tion of the DCRNegotiated License Fee and itsSubsequen t Manipu lations of This Rateto Establish a Range of Potential RoyaltyRates w as Arbitrary 8

The Panel found that the digitalperformance license negotiated as partof a larger partnersh ip agreementbetween DCR and its two recordcompany partners, Warner Music andSony Music, was a useful benchm ark fordetermin ing the section 114 royalty feebecause it p rovided a usefulpreceden t, although there w ere

problems w ith usin g the rate for thislicense fee since only 60% of theind ustry engaged in th e negotiationssetting the rate.9 Report 166, 200. Toaddress this problem the panel adjustedthe figure u pw ard to reach a base ratefigure arguably app licable to 100% ofthe recording industry market.Id. Th ePanel then doubled this num ber toaccount for the statutory provisionwhich requires an equal distribution ofthe royalties collected pursu ant to thecomp ulsory license between th e recordcomp anies and the recordin g artists.Id.;also 17 U.S.C. 114(g). While recognizin gthat a pu re dou bling of the base rate wasinappropriate, the Panel determinedthat th ese man ipu lations of a freelynegotiated rate set a reason able ran geof rates for furth er consideration in lightof the statutory criteria.Id.

RIAA opp oses the use of thenegotiated license fee as a bench markfor setting the comp ulsory license feefor the followin g reasons: (1) It wasmerely one provision in a complextransaction involvin g eleven in terrelatedagreements, RIAA PF 92; Petition at22; Wildm an 10 W.R.T. at 1215 ;Transcript (Tr.) 221314 (Wildman); (2)the record compan ies interested in

investing in the d igital audio servicewou ld sh are the cost of a higher rate,thereby creating a strong incentive tocreate a low r ate; (3) the licen se fee wasnot for the right to perform soun drecordings pu blicly, but for theacknowled gement that a right shouldexist, RIAA PF 84; Tr. 2102 (Vidich);11

(4) the record comp anies never viewed

the established rate as preceden tial,citing the license provision that the ratewill be sup erseded if Congressestablishes a performance right in soun drecord ings, DCR Exs. 7, 8 & 15 at 9;Vidich W.R.T. at 7; Tr. 2106210 7(Vidich ); Del Beccaro 12 W.D.T. at 9, an dthe m ost favored n ations clause, DCRExs. 7, 8 & 15 at 6; (5) the recordcomp anies did n ot enjoy the degree ofleverage in setting the rate that th eServices imply in th eir proposedfindings; (6) the fee did n ot represent anind ustry-wide agreemen t on the value ofthe p erformance right; instead, only

three record compan ies, collectivelyrespon sible for only about 35% of thesoun d recordings performed by DCR,negotiated the rate s, RIAAs Reply toProposed Findings and Conclusions ofLaw (RIAA RPF) 39; Tr. 1014(McCarthy); 13 and (7) the DCR digitalperformance license d iffered insignificant ways from th e statutorylicense. For examp le, the DCR licenserequires the comp any to pay royaltieson its revenues from internationalsources which are not recoverable underthe DPRSRA, RIAA PF 83; Tr. 965 (DelBeccaro); Tr. 1014 (McCarthy); Tr. 2137(Vidich), and it did n ot contemplate a

distribution of a portion of the royaltiesto recording artists as required un derthe new law, RIAA PF 82.

In respon se, the Services assert thatthe Pan el did not rely on the DCRlicense rate in isolation, and argue thatits determination was informed bytestimony from the parties whoparticipated in the negotiations. Replyto Petition at 20. More specifically, theServices argue that th e inclusion of theperformance license with in a larger,comp lex commercial agreement makesit more m eaningful, because DCR didnot pu rchase a license for the pu blic

performance of sound recordings.Rather, in exchange for a partnershipagreemen t, DCR acknow ledged that th eright shou ld exist for a particular rate.The Services neglect, however, todiscuss w hy this observation is

importan t in their initial findings.Services RF 7577. Later, the Servicesargue that the Pan els decision to u sethe DCR license fee as an ap prop riatebenchm ark rested on a weighing of theevidence and invoke the Panelsdiscretion to evaluate the testimony an dfashion its d ecision accordingly. Replyto Petition at 2021. The Services,

however, fail to address RIAAsadditional concerns about thenegotiated license, except to n ote thatthe partner record compan ies neveroperated a joint advertising venture n ortook advantage of the provision s wh ichgave them som e measure of control overprogramming. Services RF 8081.

While the Register agrees with theServices that the Pan el carefullyconsidered th e rationale for and th ecircumstances surround ing thenegotiations setting the DCR licenserate, she finds th e Panels adoption ofthis benchmark and its subsequent

adjustmen ts arbitrary. In th e firstinstance, the benchm ark offered by theServices cannot represent a license fora right to perform soun d recordin gs,because no su ch legal right existed atthe time of the n egotiations.Woodbury 14 W.D.T. at 12; RIAA PF 84; Tr. 2102 (Vidich ). DCR allowe d th at,in fact, it did not n egotiate for aperformance license in soundrecordings; and in stead, characterizedthe transaction as selling to its recordcompany partners the recognition theysought that the right existed for aparticular rate. Services PF 102. Toun derscore this distinction , DCR

insisted on a clause which stated thatthe United States law did n ot requireDCR to pay a fee or ro yalty for thepublic performance of any soundrecording, even th ough DCR agreed, aspart of a complex comm ercialtransaction, to pay its partner recordcompan ies what it calls a pu blicperformance license fee. Services PF

111, 136. An article in the pressannoun cing the deal echoed thisdistinction. It noted that not only d idthe transaction allow DCR use of therecord comp anies repertoire, it alsorequired DCR to sup port a performan ce

right in sou nd recordings. DCR Ex. 27(Paul Verna, Tim e Warner Breaks N ewCable Ground; Enters Cable RadioVenture With Sony, Billboard, Feb. 6,1996, at 1).

Consequently, th e Register rejects thePanels prem ise that the rate set for anonexistent right wou ld representaccurately the value of the performanceright once it came into existence,especially where the parties


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15

For example, in resolving a dispute betweenASCAP and Showtime/The Movie Channel, Inc.over the fee for a blanket license, th e South ernDistrict Court of New York stated that:

it is fair to assume th at in any negotiation thatencompasses as many disparate issues as do theguild agreements, the n egotiators will agree totradeoffs, among the various negotiated item s, ...The process of negotiation is thus likely to yield acomplex pattern of results, most of which wouldhave been different if the individual issue had beennegotiated entirely separately from the others.Accordingly, plucking one term out of the contractis likely to yield a fairly arbitrary result.

ASCAP v. Showtime/The Movie Channel, Inc.,publish ed at 912 F.2d 572, 590 (S.D.N.Y. Dec. 20,1989) (Civ. No. 1395 (WCC) (footnote omitted).

16 This is not to say that in any case in which aCARP relied on a li cense fee that was p art of a largeragreement containing a number of provisionsunrelated to the license fee, such reliance wouldnecessarily be arbitrary. But in light of the otherdeficiencies in the CARPs reliance on the DCRlicense, discussed herein, and especially in light ofthe fact that th e license fee was for the exercise ofa nonexisten t right, the Register is compelled toconclud e that in this case, the CARPs reliance onthe DCR license fee as its exclusive bench mark w asarbitrary.

17 DCR entered in to a performan ce license w iththree record companies that representapproximately 60% of all recorded music sold inthe Un ited States. Services RF at 2.

18 Section 802(c), of the Copyright Act, directs theCARP to act on th e basis of a fully docu men tedwritten record , prior decisions of the CopyrightRoyalty Tribunal, prior copyright arbitration panel

determinations, and rulings by the Librarian ofCongress und er section 801(c).19 For example, if th e DCR license fee had been

5% of gross receipts (equaling $100,000) and 40%of the sound recordings on DCRs playlist w ereowned by DCRs record comp any partn ers, thenDCR would pay 40% of the license fees ($40,000)on a prorata basis to these partners. The remaining60% ($60,000) represents the valu e of the digitalperformance of works owned by non-partnershiprecord companies performed during the relevanttime perioda sum that DCR would not actuallypay under the terms of its license agreement.

The 5% license fee value does not represent theactual value of the negotiated fee because thisinformation is su bject to a protective order. See n.8supra.

acknowled ge that the agreementencompassed more than the pu rportedvalue of the coveted right, nam ely therecognition from th e aud io service thata performance right in soun d recordingsshould exist. RIAA PF 9495; Tr.220912 (Wildman ); Wildm an W.R.T. at912. Arguably, that recognition wasmore valuable consideration to the

record comp anies than th e license feeitself.

The conclu sion that th e DCR licensefee may serve as the benchm ark forsetting the section 114 rates isund ermined further by the very natureof the partnership agreement. All partiesagree that the agreement concernin g theperformance right was merely one ofeleven interdependent co-equalagreements w hich together constitutedthe partn ership agreement between DCRand th e record compan ies. Such strongties between provisions in a negotiateddocu men t raise the question of how

mu ch give-and -take occurred innegotiating th e final terms. Courtsrecognize that comp lex transactionsencourage tradeoffs amon g the variousprovisions and lead to results that mostlikely differ from those that w ouldresult from a separately negotiatedtransaction.15 While DCR freely en teredinto the partnership agreement, therecord contains no eviden ce that itwou ld have freely entered into aseparate performance license for soundrecordings. To the contrary, theServices own witness ad mits that it isun likely that a stand -alone performancelicense would h ave been n egotiated.

Woodbu ry W.D.T. at 15. Accord ingly,the Register conclud es that it wasarbitrary for the Pan el to rely on a singleprovision extracted from a complexagreement where the evidencedemonstrates that the provision wouldnot exist but for the en tire agreement.Und er similar circumstances, theSouth ern District Court of New Yorkfound that plu cking one term out of thecontract is likely to yield a fairlyarbitrary result.Am erican Society ofCom posers Au thors and Publishers v.Showtim e/T he Movie Chann el, Inc.

(ASCAP), pu blished at 912 F.2d 572,590 (S.D.N.Y. December 2 0, 1989) (No.1395 (WCC)) (rejecting pro po sal to relyup on p rovisions in guild agreementconcerning payment of revenues wheresuch provisions w ere part of a set ofterms governing compen sation, benefits,and working conditions). 16

Another problem with adopting the

DCR license fee is th at it is not anind ustry-wide agreemen t, but rather theprod uct of negotiations among onlythree record compan ies, wh ich togetheraccount for approximately 35% of thesoun d recordin gs performed by DCR.RIAA PF 82; RIAA RPF 39. Thearbitrators un derstood the limitednatu re of the negotiations and mad e anadjustmen t to the license fee based onthe mistaken assump tion that the DCRlicense fee represented th e value of thesound recordings owned by the threerecord compan ies party to theagreement, which purp ortedly

represented 60% of the record ind ustry.Report 166, 200. This assump tionarose from a statement m ade by theServices in the sum mary statementcontained in th e Services joint reply toRIAAs p roposed findings.17 Th estatement, however, has no support inthe record . See Petition at 21 n .3; Replyto Petition at 2122. Consequen tly, thePanels up ward ad justment of the basefigure on the m erits of this assertion w asarbitrary.

This is not to say that the fact that theDCR license fee was negotiated withcompanies owning rights to only 35% ofthe relevant works rend ers that license

fee irrelevant. It is, how ever, a furtherdeficiency which in combination w iththe other deficiencies discussed h erein,rend ers the Panels reliance on the DCRlicense fee as its exclusive benchm arkinappropriate.

Furtherm ore, the Panels decision torely on the DCR license fee deviatesfrom CRT preceden t wh ere that agencyrefused to adopt, as an industry-widerate, a set of rates negotiated by onlycertain of the affected p arties as part ofa general understanding involvingissues in add ition to the rate ofcomp ensation. Use of Certain

Copyrighted Works in Conn ection withNoncomm ercial Broadcasting, 43 FR25068 (Jun e 8, 1978). While no Pan elneed slavishly adh ere to the pastpractices of the CRT, it must articulatea reasoned exp lanation for its deviationfrom past preceden t. Distribution of1990, 1991, and 1992 Cable Royalties,61 FR 55653, 55659 (October 28, 1996 ).

Otherwise, its actions m ay be construedas arbitrary or contrary to law.18

The Register also finds th at even if the60% figure had record sup port, it wouldbe arbitrary to ad just a n egotiatedlicense fee that purp orts to represent themarket value of the d igital performanceright in sound recordings. Under thelicense agreement, DCR agreed to pay apercentage of its gross revenu es for theright to perform sound recordingsdigitally, but on ly a p ortion of these feeswere p aid to each of DCRs three rec ordcompany partners, allocated on thebasis of the DCR playlist.19 Tr. 212324

(Vidich); Services PF 111. Therefore,the license feeto the extent th at it wasa license feealready accoun ted for allcopyright fees owed to th e recordindustry, and it was inappropriate forthe Panel to make any furtheradjustmen t. The Services seem to realizethe Panels error in this respect and notethat the Panel was un der n o obligationto make an up ward adjustment, sincethe license fee reflected th e value of thesound recording and not the sum of thepercentage amount each partn er recordcompan y negotiated for use of its works.Reply to Petition at 22.

Furth ermore, the Register find s that

the Panels conclusion th at the DCRlicense fee provid es a useful p recedentfor setting a royalty rate in thisproceedin g was arbitrary. Report 200.The only sup port for this finding wasWoodbu rys testimon y that the tradearticle ann oun cing the deal betweenDCR and its new record comp anypartners, Sony and Warner, illustratedits preceden tial value, at least for therecord comp anies. Woodbury W.D.T. at


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20 An attorney wi th the law firm of Berliner,Corcoran & Rowe, L.L.P., in Washington, D.C., whorepresents recording artists, writers, productioncompanies, record companies, and m ultimediacompanies.

21 An economic consultant with the firm of BarryM. Massarsky Consulting, Inc.

22 The Services pay an interim rate set in 1989 toASCAP for the performance of the mu sical worksin i ts repertoire. Tr. 1029 (McCarthy); Tr. 1656(Massarsky). DCR also pays an interim rate to BMI.These rate disputes are currently the subject ofadjudication before the rate court in th e South ernDistrict of New York. Services RF 5253; 100105. Pendin g the outcom e of the rate cases, DCR hasagreed to pay BMI the same cont ractual rate thatDMX pays for the musical w orks performancelicense. Tr. 1653 (Massarsky).

23 CRT and judicial precedent supports thePanels premise that ASCAP usually receivesslightly higher royalty fees for the publicperformance of its works th an does BMI. InAm erican Society of Composers, Authors, andPublishers v. Showtime/The Movie Channel, 912F.2d 563 (2nd Cir. 1990), the court affirmed th e ratecourt d ecision th at a blanket license rate for useof ASCAP works shou ld be set slightly higher th an

the rate the cable n etwork pays for a BMI license.This result reflected the agreed up on 5545 ratiothat ASCAP and BMI adopted in dividing theirshare of the royalties for compu lsory licenses paidby cable system operators for retransmissions ofbroadcast signals. See also 1978 Cable RoyaltyDistribution Determin ation, 45 FR 63026 (Sept. 23,1980) (CRT determin ed th at of the 4.5% royaltyshare awarded to the mu sic claimants group in the1978 cable distribution proceeding, ASCAP wouldreceive 54%, BMI, 43%, and SESAC, 3% of theroyalties.); 1987 Cable Royalty DistributionProceeding, 55 FR 11988 (March 30, 1990) (CRTagain adjusted the distribution percentages for cableroyalties so that ASCAP received a 58% sh are of thedisputed royalties and BMI received the remaining42% share).

16. Mr. Woodburys statements on thepreceden tial value of the agreement,how ever, are full of qualifications, andhe read ily acknowled ged that asuccessful negotiation may h averequired th at Warner and Sonycomp ensate Music Choice for includ ingthe performance rights payments as partof the partnersh ip agreement. The effect

of this compen sation may haverestrained Warner and Sony in theircho ice of a higher fee level.Id.

In addition, the p artnershipagreement itself fails to sup port th ePanels findin g. It inclu des m aterialredacted su bject to the protective order,DCR Exs. 7, 8 & 15 at 6, and aprovision th at the rate will besup erseded if Congress establishes aperformance right in sound recordings.DCR Exs. 7, 8, & 15 at 9. Vidich W.R.T.at 7; Tr. 21062107 (Vidich ); DelBeccaro W.D.T. at 9. Because th epartnership agreement included

language that un dermined an ypreceden tial value of the digitalperformance license included therein,the Register finds that th e Panelsreliance on the DCR license fee aspreceden t was an arbitrary action. See

Motor Vehicle Mfrs. A ssn v. State FarmMutual Auto. Insurance Co., 463 U.S. 29(1983) (agency action is arbitrary w herethe agency offers an explanation for itsdecision that run s counter to the recordevidence).

In setting a range of possible rates forthe section 114 license, the Panel mad efurther adjustmen ts to the base figure toaccount for the payments to the

recording artists. Und er the DPRSRA,recording artists are entitled to h alf ofthe royalties collected und er thecompulsory license. 17 U.S.C. 114(g).RIAA argues th at the DCR license feemu st be adjusted to accoun t for thisprovision in th e law that entitlesrecording artists to a share of theroyalties, because the record comp anieswere un der no obligation to share theroyalties. RIAA RPF 40; Petition at 28.RIAA also argued for additional up wardadjustmen ts of the benchm ark tocomp ensate the record companies forcertain d ifferences between the DCR

license and the compulsory license,includ ing compensation for loss ofroyalties generated from foreign andcommercial subscribers, and loss ofrevenue d ue to a shift in how theServices offer their prod uct tosubscribers.

RIAA anchors its argum ents for theserequested ad justments on thepresumption that the responsibility ofthe Pan el was to determin e the royalty[rate] that would be produ ced throu ghfree market negotiations, absent th ecomp ulsory license. RIAA RPF 41.

This presump tion, however,misrepresen ts the Panels duty, wh ich isto establish reasonable rates and term s.See discussion supra concerning the useof a marketplace stand ard in setting theroyalty rate. While RIAA may h ave areasonable expectation that a Panelwould make appropriate adjustments toa marketplace benchmark that the Panel

adop ts for further consideration in lightof the statutory objectives, and that isnot to say that the requ estedadjustmen ts are app ropriate, there is no

justification for makin g the adjustmen tswhere the benchm ark value does notfulfill that fun ction. Therefore, havingfound that the DCR license fee does notrepresent the m arketplace value ofsoun d recordin gs, the Register need notconsider further arguments on adjustingthe rate.

For the reasons cited above, theRegister find s that the Panel wasarbitrary in relying on the DCR license

fee for the p urp ose of establishing anaccurate evaluation of the marketplacevalue for the p erformance right.

The Panels Determination of a SpecificRange of Fees for the Pu blicPerformance of the MusicalCompositions Was Arbitrary

The Services pay separate license feesto Broadca st Mus ic, Inc. (BMI), theAmerican Society of Composers,Auth ors, and Pu blishers (ASCAP), andSESAC, Inc. for the pu blic performanceof the un derlying musical works in thesoun d recordin gs. The Servicesintroduced evidence on what they pay

the p erforming rights organizations forthe pu blic performan ce of the mu sicalworks to illustrate the indu stry practicethat licensing rates ordin arily paid inthe recording and music industries forthe u se of copyrighted works are far lessthan 41.5% , and generally are withinthe low single digit range for use ofcopyrighted mu sic and soundrecordings. Rosenthal 20 W.R.T. at 3;Tr. 1646, 166970, 1674 (Massarsky).21

Using the license fees DMX andDCR 22 pay for the right to p erform

mu sical comp ositions in the BMI andSESAC repertories and th e anticipatedpaymen ts that ASCAP will receive up onresolution of a rate dispute betweenitself and the Services, and not th einterim rates that the Services currentlypay ASCAP, wh ich are usually lowerthan th e final determin ation of the ratecourt, the Panel set an u pp er limit on

the value of the p erformance right forthe mu sical comp ositions. Report

167(B)(G). In making thisdetermin ation, the Panel acceptedMassarskys testimon y th at ASCAPlicense fees are generally greater th an,but at least n o less than , BMI licensefees, and made its calculationsaccordingly. Report 167(E); see alsoRIAA PF 106108.23 In addition tosetting an upp er limit on th e amount theServices wou ld pay for theseperformance licenses, the Panelann oun ced a lower limit for thisbenchmark but provided n o discussion

on h ow it arrived at this figure.RIAA accep ts the Pan elsdetermination for an up per limitvaluation for the p erforman ce right inmu sical works, but challenges thePanels determin ation of the lower limitof this value. Petition at 1620. RIAAcontend s that because the Panel hadactual figures upon wh ich to base itscalculation, it was arbitrary to set alower limit.Id. at 17.

From an examin ation of the record,the Register cann ot determine how thePanel derived th e lower limit figure, butshe has iden tified at least one way th atthe Panel could have settled up on the

lower figure. It entails the u se of theinterim rates which th e Services payASCAP currently, instead of relying ona figure equ al to or greater than th e ratepaid to BMI. Tr. 1669 (Massarsky), Tr.10281029 (McCarthy). Use of such anapp roach, however, is expressly


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24 A Panel is free to reject a proposed bench markthat does not reflect accurately the characteristicsand d ynamics of the industries subject to theproposed rate. See e.g., Use of Certain CopyrightedWorks in Connection with NoncommercialBroadcasting, 43 FR 2506869 (1978) (CRT foundvoluntary license between BMI, Inc. and the publicbroadcasters, Public Broadcasting System andNational Public Radio, of no assistance in settingrate for use of ASCAP repertoire); Adjustment of th eRoyalty Rate for Cable Systems; FederalCommun ications Commission s Deregulation of theCable Industry, 47 FR 52146 (November 12, 1982).

25 A country music artist who h as recorded 14albums, including five number one songs.

disavowed by two of the Services ownexpert witn esses who agree that it isinapp ropriate to rely on interim rates todetermin e competitive market rates.Woodbury W.R.T. at 19 n.70; Tr. 27102711 (Woodbury); Tr. 1029 (McCarthy).The Register concurs with thesewitnessess assertions, and thereforerejects any figure wh ich uses an interim

rate in calculating a value w hen specificevidence exists in the recorddiscounting this methodology andnothing supp orts its use.

Nor could the Panel consider just theindividual license fees which theServices pay to a single performingrights organization in setting the lowerlimit, having rejected a similar argumen twh en the Services initially proposedmaking this comparison. Report 168.A single license fee covers only thosemusical works und er the control of theindividual performing rightsorganization granting the license.

Therefore, a Service must obtain ablan ket license from every p erformin grights organization in ord er to have thefreedom to play virtually any musicalcomp osition withou t infringing itscopyright. Hence, the total valueattached to the p erforman ce of theund erlying musical works would be thesum of the license fees paid to each ofthe p erformin g rights organizations, justas the value of the d igital performanceright in sound recordings would be thefees paid to all record com pan ies. SeeReport 168.

The Register perceives no rationalconn ection between th e Panels factual

conclusion s and its decision to set alower limit for this benchm ark. Wherethe record provid es clear evidence ofwh at the Services actually pay for theperformance licenses, and th e witnessesagree that the interim rates w hich arecurrently being paid represent deminimis value for these licenses, thePanel need not look beyond thisinformation to determine the value ofthe benchm ark. For the reasonsdiscussed above, the Register does n otconsider th e Panels lower limit on th eperformance license fees for mu sicalcompositions w hen proposing a royalty

rate for the section 114 license.Use of Benchmarks App roximatingMarketplace Value in Setting theSection 114 Rate

A benchm ark is a marketplace pointof reference, and as su ch, it need n ot beperfect in ord er to be considered in arate setting proceeding. In the 1980 rateadjustmen t proceedin g for coin-operatedphon orecord p layers, the Tribunalconsidered different marketplacemodels and found that each analogy haddistinguish ing characteristics, but

nevertheless considered them inconjun ction w ith the record evidenceand the statutory objectives. 1980Adjustmen t of the Royalty Rate for Coin-Operated Ph onorecord Players, 46 FR884, 888 (1981) (While acknowledgingthat our rate cannot be directly linkedto marketplace parallels, we find thatthey serve as an app ropriate benchm ark

to be weighed together with th e entirerecord an d the statu tory criteria). TheU.S. Court of Ap peals for the SeventhCircuit approved th e Tribunalsapp roach, stating that:

We think that the Tribunal could properlytake cognizance of the marketplace analogieswhile ap praising them to reflect thedifferences in both the respective markets(e.g., with respect to volume and ind ustrystructure) and th e regulatory environment. Itis quite appropriate and normal in thisadmin istrative rate determination p rocess tofind distinguishing features among variousanalogous situations affecting the weight andappropriate thrust of evidence rather than its

admissibility. No authority cited by AMOAwould require the Tribunal to reject theASCAP/SESAC analogies. Comp arable rateanalogies have been repeatedly end orsed asappropriate ratemaking devices.

AMOA v. CRT, 676 F.2d at 1157. Seealso San Antonio v. United States, 631F.2d 831, 836 37 (D.C. Cir. 1980),clarified, 655 F.2d 1341 (D.C. Cir. 1981);

Burlington N orthern, Inc. v. UnitedStates, 555 F.2d 637, 64143 (8th Cir.1977).

When setting the rates for thestatutory performance license in soun drecordings, the benchmarks are merelythe starting poin t for establishin g an

app ropriate rate. The decidin g bodyuses the appropriate marketplaceanalogies,24 in conjunction w ith recordevidence, and w ith regard for thestatutory criteria, to set a reasonablerate.

In this p roceeding, the Register findsthat both the n egotiated DCR license feeand the marketplace license fee for theperformance of the musical works areuseful at least in circumscribing thepossible range of values un derconsideration for the statutoryperformance license in soundrecordings. While the DCR license fee

pu rports to represent a negotiated valuefor a right to w hich, by law , the record

compan ies were not entitled (inadd ition to the recognition th at the rightshou ld exist), the Register acknow ledgesthat the value of the DCR licenseprovid es minimal information as to thevalue of the performance rightultimately granted in the DPRSRA,although it does provide some guidancefor assessing the prop osed rate. See

Adjustmen t of Royalty Payable Und erCompu lsory License for Making andDistributing Ph onorecords; Rates andAdjustment of Rates (115 RateAdjustmen t Proceeding), 46 FR 10466,10483 (Feb. 3, 1981) (We find that th eforeign exp erience is relevantbecauseit provides one measure of whethercopyright owners in the United Statesare bein g afforded a fair return ).

On the other han d, the secondreference p ointthe negotiated licensefees for the performance of mu sicembodied in the soun d recordingsoffers specific information on wh at the

Services actually pay for the already-established performance right of onecomponent of the soun d recording. ThePanel recognized th is reference p ointsusefulness and used it to further supportits choice of a royalty rate. Report 201.The question, how ever, is wheth er thisreference poin t is determinative of themarketplace value of the performanceright in sound recordings; and , as thePanel determined, the an swer is no.Report 169, 201.

Initially, neither th e Services norRIAA placed mu ch weight on thismarketplace reference p oint, althoughRIAA has con sistently argued that the

value of the performan ce right in sou ndrecordings is greater than the value ofthe performance right in the un derlyingmu sical works. RIAA RPF 16, Petitionat 1016. On the on e hand , the Servicesargue that the musical composition isthe key to a su ccessful recordin g,Services RF 1012, citing Tr. 1664(Massarsky), and on th e other hand ,RIAA conten ds th at a song lacks feelingun til the recording artist breathes lifeinto the son g. Morris 25 W.D.T. at 12;Petition at 1213. Because neither sid epresented conclusive evidence on thispoin t, the Panel observed only th at both

groups are parents of the music.Report 169.

RIAA faults th e Panel for its lack ofdiscussion on the question of wh oserights in the ph onorecord are morevaluable. Petition at 1016. Wh ile theRegister agrees that the Pan el did notmake sp ecific citations to recordevidence, its finding that [t]here wasinsufficient an d con flicting evidence tomake a determination that the


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26 Interested parties are free to negotiate a ratebelow the statutory rate for the mechanical licenseand often do. Tr. 1660 (Massarsky).

27 Even if there was som e value to thecomparison , RIAA does not appear to factor into itscalculations the value of the sound recordings inthose phonorecords that do not show a profit.According to the record , approxim ately 85 percentof all sound recordings do not recoup the costs thatare spent to make and to market those recordings.Indeed, over two-thirds of all sound recordings sellless than 1,000 copies. Report 105.

performers and record companiesdeserve a larger percentage from theServices than granted to the m usicworks, was su pp orted by th e recordevidence. Report 169.

To make its poin t, RIAA presented ananalysis of revenues from record sales insup port of its argum ent that themarketplace values the contributions of

the record companies and th eperforming artists more than it valuesthe contribution s of the copyrightowners in the mu sical compositions.RIAAs PF 112120; Petition at 1016. This evidence show ed that copyrightown ers of the mu sical compositionreceive between 520% of the wh olesaleprice for the soun d recordin gs based onsales of CDs and cassette tapesapp roximately 5% from the averagewh olesale price for an average CD and12% from an average cassette.26 RIAAPF 115, 119. Recording artists, on theother han d, receive 710% of the

average w holesale price for a typical CDand 1520% for a typical cassette,leaving app roximately between 5688%of the revenues from sales for the recordcompanies. RIAA PF 116.

The Services disagreed with RIAAsinterpretation of the marketplace data,contend ing that the reason the (r)ecordcomp anies receive a bigger p ercentageof revenu es from the sale of soun drecordings (is) because they have abigger monetary investmen t in therecord prod uction costs, as well as theleverage to min imize the royalties paidto songwriters, mu sic publishers, andrecording artists. Services RF 118

120. They also oppose RIAAsimplication that the record companiesshou ld receive more value from theperformance right in sound recordingsthan the songwriters receive for asimilar right because the recordcomp anies garner more revenu e fromthe use of the mechan ical license thando the songwriters and composers.

The Services accurately note that themechan ical license and th e digitalperformance license represent d ifferentand d istinct rights to the copyrightholders und er the law, and they makeno attemp t to tie the value of the rights

associated with th e mechanical licenseto the value of the d igital performanceright, a right newly recognized w ith thepass age of the DPRSRA. Even RIAA, th eprop onen t of the assertion, fails toexplain w hy the relative value of themechan ical license to the variousowners and users has any application tothe d etermination of the value of adigital performance license in soun d

recordings. Consequen tly, wh ere noclear nexus exists between the valu es ofdifferent rights, the mod el serves nopractical purpose in computing thevalue of the d igital performance right.

Hence, RIAAs conten tion th at thedata sup ports its assertion that themarketplace places a higher value onthe contribu tions of the recordcomp anies and th e recording artists inthe creation of the ph onorecord fails,because it does not discu ss theconstrainin g effect the m echanicallicense has on the copyright owners insetting a value on th eir reprodu ctionand distribution right. Recordcompanies pay the copyright owners ofthe musical compositions no more thanthe statutory rate for the right toreproduce and distribute the mu sicalcomposition in a phon orecord. Therecord comp any then, in turn, sells theph onorecord at a fair market price.Because both group s do not sh are equal

pow er to set rates in an u nfetteredmarketplace, it is unreasonable tocomp are the value of the reprod uctionand d istribution right of mu sicalcomp ositionsa rate set by thegovernment at a level to achieve certainstatutory goalswith the revenu esflowing to record compan ies from aprice set in the m arketplace accordin g tothe laws of supp ly and demand , andthen to d eclare that the marketplacevalues the sound recording more thanthe u nderlying musical composition.Consequently, RIAAs eviden ce shed sno light on th e relative value of the

sound recording performance right andthe mu sical works performance right.27

In add ition to the foregoingdiscussion , the Regi

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