9. Actividades extras realizadas
9.3. Acompañamiento al control y monitoreo de la PTAP del San Isidro de Chichimene
In a further effort to demonstrate that interactive services and statutory webcasters are “relatively close substitutes,” Professor Rubinfeld asserts that “the decline in interactive [royalty] rates can be attributed to the increasing competition posed by non-interactive services.”141 He further notes that a “decline in rates for interactive services is expected and consistent with the increasing convergence between interactive and non-interactive services.”
Professor Rubinfeld cites no evidence in support of these propositions. He simply infers this relationship based on his theory of “convergence.” I now show that his inference here is factually false. This is further evidence demonstrating the factual inaccuracy of his “convergence” theory.
UMG documents directly contradict Professor Rubinfeld’s assertion on this point. These documents clearly indicate that
sales lost by the first product due to an increase in its price that would be diverted to the second product.” U.S.
Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, August 2010, p. 21, available
at http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf. Economists also use the cross-elasticity of demand to measure the proximity of two differentiated products; there is a simple arithmetic relationship between the two concepts. See Gregory J. Werden, “Demand Elasticities in Antitrust Analysis,” Table 5, “Alternative Measures for
Ranking Substitutes, j, of Base Product i,” 66 Antitrust Law Journal 363 at 405. For free products, the analogous
concept to the diversion ratio is the share of units lost by one product, when its quality goes down, that shifts to the other product.
140
Written Rebuttal Testimony of Larry Rosin, p. 10 and Figures 6 and 7.
141
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.142 Notably, in filings in relation to the UMG-EMI merger,
Nowhere do these documents suggest that the reduction in interactive service royalty rates had anything to do with competition from statutory webcasters.
10.SoundExchange’s “Convergence” Claim, Even if True, Would Not Justify
Use of the Interactive Benchmark
As noted above, Professor Rubinfeld’s theory of convergence is wholly unsupported and is belied by the record evidence. That said, even if there were some merit to this theory of “convergence,” it would be unhelpful since it is disconnected from the relevant benchmarking exercise. Professor Rubinfeld’s notion of “convergence” is a statement about consumer
substitution patterns in the downstream market to provide music to listeners. Even if interactive services and webcasting services were close substitutes downstream, that would not imply that they are “similar buyers” in their respective upstream markets for the licensing of recorded music, or that the royalty rates as a percentage of retail price should be equivalent.
As best I can tell, Professor Rubinfeld is suggesting, or perhaps assuming, just that: that if two services are close substitutes downstream, then they should pay the same rates for the rights to perform recorded music, even though they acquire those rights in two separate upstream markets.145
This argument is without merit. In fact, we need look no farther than this very industry to see that this argument is flawed. If close downstream competition implied equal input prices, then the royalty rates for webcasters should be zero, since webcasters compete far more closely with terrestrial radio than they do with interactive services, and terrestrial radio pays nothing for recorded music. That is to say, the webcaster royalty rate would be pulled towards zero in the same way that Professor Rubinfeld suggests interactive rates are pulled toward the statutory rate. Professor Rubinfeld’s “convergence” argument is not only flawed; it is dangerous. As I
discussed at some length above, the upstream market for the licensing of recorded music to interactive services is not workably competitive. The prices in that market are above the monopoly level, which in turn is above the competitive level, as shown in Figure 6.
142
Since interactive services have very little ability to steer, the primary economic force controlling a major record company’s royalty rate to interactive services comes from the fear that higher royalty rates will be passed through in the form of higher subscription prices, which will reduce demand for the service and hence the number of
performances of this record company’s music. Competition from piracy increases the elasticity of demand for interactive services and thus puts some downward pressure on the royalty rates charged to interactive services. None of this, however, alters the fact that royalty rates arising with multiple “must have” record companies are higher than the monopoly level.
143
Pandora Exhibit 18, at 982-3.
144
Pandora Exhibit 18, at 987.
145
Mr. Wheeler’s Direct Testimony suffers from this fallacy. He states at paragraph 36: “Many people do not understand the difference between say, Pandora and Spotify, they are just listening to music. With this in mind, I would expect that a negotiating framework for webcasting would largely approximate the on-demand service framework I identified above.”
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Professor Rubinfeld invokes “convergence” to justify using those inflated prices as a benchmark for the statutory market. Under the banner of “convergence,” Professor Rubinfeld is effectively asking the Copyright Royalty Judges to replicate and extend the excessive royalty rates from the interactive services market – where competition is manifestly not working – into the market for the licensing of recorded music to statutory webcasters. Doing so would make a mockery of the requirement that the statutory rates reflect market outcomes that would emerge under conditions of effective competition.
11.SoundExchange’s “Preservation of Revenues” Argument is Disconnected
from the Willing Buyer/Willing Seller Standard
In a final effort to support its proposal to further increase rates, SoundExchange has portrayed the statutory webcasters as the primary reason for the decline in physical and digital album sales – a decline that has resulted in reduced record label revenues.146 As a result, SoundExchange, through its industry witnesses, emphasizes the “need” for record companies to secure higher royalty rates from statutory webcasters in order to make up for these lost revenues.147 I refer to this theme as SoundExchange’s “preservation of revenues” argument.
In the next Section, I show that SoundExchange’s “preservation of revenues” argument is based on a false factual premise. In this Section, I explain why, even if it were the case that statutory webcasters were causing a net decline in record label revenues, there is no sound economic rationale supporting the notion that the statutory rates should be set at a level to make the record companies whole.148
The record company witnesses make clear that their goal is to prevent their revenue from falling, and that they are seeking higher statutory rates to achieve this goal. While such aspirations may be understandable in an industry that has experienced a large decline in revenue as a result of piracy, technological change, and shifting consumer tastes, these aspirations are entirely
disconnected from the willing buyer/willing seller standard that all parties agree should be used
146
See, e.g., Rubinfeld ¶ 46 (“As technology has evolved, consumers have changed their music consumption behavior. Physical sales of music through CDs have dramatically fallen, being replaced to a significant degree by digital downloads and even more so by streaming.”); Harrison Written Direct Testimony ¶ 11 (“[T]he widespread access to such streaming music services has helped to accelerate the decline in purchases of permanent
downloads.”).
147
See, e.g., Harrison Direct Testimony, ¶ 12 (“Going forward, we will not be able to rely on revenues from the sale of permanent downloads or CDs. Thus, revenues obtained from streaming services will need to increase to ensure Universal receives a fair return on its investment in the creation of music. This is not only fair, it is sound economics.”); Kooker Direct Testimony, p. 10 (“At the same time that our revenues have been shrinking, music consumption has been expanding dramatically. More people are listening to more music now than ever before. But the people who invest in finding talent and bringing new musical works to market are not realizing the benefits of this increased consumption. The challenge, to which I return below, is to remedy this extreme imbalance in the digital world.”); Wheeler Direct Testimony, ¶ 39 (“there is a need for an escalating rate [paid by statutory
webcasters] because increasingly, webcasting revenue will represent core revenue to our business and therefore have to support the core costs of our business as other streams of revenue decline.”).
148
The Copyright Royalty Judges have stated previously that the statutory rates should be set using the willing
buyer/willing seller approach, not to provide a pre-specified rate of return to market participants. Web III Remand,
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to set the statutory rates. Technological change and shifting consumer tastes, combined with competition, often cause the revenue of individual companies, and even entire industries, to decline. This is simply a result of normal economic forces at work.
The implicit assumption behind SoundExchange’s “preservation of revenues” argument is that record company revenues would not decline in a workably competitive and unregulated market. But there is no economic basis for making such an assumption. For starters, revenues normally decline in a competitive market when costs decline, as low-cost methods of production expand and competition drives down prices. As UMG has observed,
.149
In addition, there is no economic principle indicating that the revenues of sellers are protected, especially in a market experiencing technological change and shifting consumer tastes. To the contrary, in a workably competitive market, as technology shifts and as the preference of buyers evolve, competition often drives down industry revenues. This frequently happens, for example, if the new technology sharpens competition among the suppliers. The Internet is famous for this. Amazon exemplifies how online distribution can shake up entire industries and squeeze margins, but this phenomenon is far larger than Amazon. Suppliers in such industries understandably may
hope to prevent their revenue from falling, but the market very often has other ideas. In fact, as demonstrated in Sections 12.A and 12.B, in this very industry, record company revenues declined sharply after 1999 due to market forces driven by changes in technology and consumer tastes.
In any event, SoundExchange’s “preservation of revenue” argument is entirely divorced from the benchmarking exercise that Professor Rubinfeld and I agree should be used to determine the statutory rates for 2016-2020 under the willing buyer/willing seller standard. The rates that the labels would like to charge (whether to preserve some historical revenue level or otherwise) is irrelevant to the rate-setting exercise. The proper question is what rates would emerge in a workably competitive market, with the record companies competing against each other for market share among webcasters. The whole point of competition is that it forces suppliers to set prices lower than they would like to charge if they could dictate price, i.e., lower than the
monopoly (or cartel) price.
In Section 5.A.1, I explained how competition among record companies to have their music played by statutory webcasters, who can and will steer in response to price differences, forces royalty rates down to competitive levels. As in many other industries, competition leads to lower prices, and this can reduce the revenues of suppliers. Falling prices are especially likely if
competition is intensifying. In Section 8.C, I observed that competition is beginning to emerge in the statutory market.
In the end, the best way to determine the rates that the record companies would charge
webcasters in a workably competitive market is not to look at the rates that the record companies would like to charge to preserve any particular level of revenue. Rather, one should look at the rates that they actually do charge webcasters when they compete for market share. Fortunately, we have direct evidence on precisely that point, namely, the royalty rates associated with the licenses signed by Pandora and iHeartMedia, i.e., the webcasting benchmark licenses.
149
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