La fenomenología como fundamento paradigmático.

Professor Rubinfeld and I agree that the statutory license places a ceiling on what statutory webcasters will pay to record companies.102 Therefore, whenever we see a direct license signed in the shadow of the statutory license, the effective rate will be no higher than the statutory rate. On this much we agree.

But now let us consider how to interpret the rate we see in a direct license signed in the shadow of the statutory license. To illustrate, suppose the statutory rate is $0.0014 per play and we see a direct license with a statutory webcaster negotiated at the lower rate of $0.0012 per play.

101

Rubinfeld Direct Testimony, ¶ 24.

102

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What, if anything, does this direct license tell us about the competitive rate, i.e., the rate that these two parties would have negotiated in the absence of the statutory rate in a workably competitive market? 103 Professor Rubinfeld urges us to give little weight to the $0.0012 rate, since it was negotiated in the shadow of the $0.0014 statutory rate. This is incorrect.

We know that both the record company and the webcaster prefer the $0.0012 rate to the $0.0014 statutory rate. After all, both had to agree to the $0.0012 rate, otherwise the $0.0014 rate would have prevailed. The webcaster naturally likes the lower rate, since buyers always like lower prices. Why does the record company also like the lower rate? The only possible reason is that the lower rate induces the webcaster to play more of this record company’s music, e.g., by steering toward this record company’s music.

Now let us ask what rate these same two parties would have negotiated in the absence of any statutory license. In a workably competitive market with normal demand conditions and with no obstacles to direct contracting, we can conclude that these two parties would negotiate a rate of

less than $0.0014 per play in the absence of any statutory license.104 In other words, we can conclude that the statutory rate is above the competitive rate, i.e., the rate that these two parties would negotiate in the hypothetical statutory market.105

Professor Rubinfeld comes close to recognizing this critically important principle. He states: If existing statutory rates were “too high” – i.e., above the level which would maximize the joint profits of rights holders and webcasting services qualifying for the statutory license – both rights holders and services would have an incentive to voluntarily agree to lower rates. However, if [statutory] rates were “too low,” no such negotiation would be expected to occur, since buyers could exploit the compulsory nature of the statutory license.106

However, when he actually sees rights holders and webcasting services negotiating rates below the statutory rate, he fails to draw the proper inference: that the statutory rate is too high, i.e., above the competitive rate.

103

I use the term “competitive rates” to refer to the royalty rates that would arise in the hypothetical statutory market in which there is no statutory license. Professor Rubinfeld uses the term “market rates” to refer to these same rates.

104

A sufficient condition on demand is that the webcaster’s demand for music from this record company exhibit declining marginal revenue. This is a standard condition used by economists when estimating demand functions. An even more easily satisfied, but still sufficient, condition on demand is that the record company’s revenue function be single-peaked. I prove this proposition in Appendix C.

105

Professor Rubinfeld emphasizes that the presence of the statutory rate makes a bargaining impasse less painful for the webcaster, since it can still play the record company’s music by paying the statutory rate. He neglects to

point out that the presence of the statutory license also makes a bargaining impasse less painful for the record

company, because the record company’s music will still be played by the webcaster and generate licensing revenue. In terms of Nash Bargaining, the presence of the statutory license makes each party’s “threat point” less painful. My analysis here shows that the presence of the statutory license cannot cause the record company to offer a rate below the statutory rate unless the record company would also offer a rate below the statutory rate in an unregulated market.

106

Rubinfeld Direct Testimony, ¶ 166. Professor Rubinfeld makes the same point at paragraph 90: “I note also that if the statutory rate is too high – i.e., exceeds the ‘market rates’ that would be voluntarily negotiated between willing parties in the absence of the statutory license – then licensees and licensors have a joint incentive to renegotiate.”

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What does all of this tell us about the webcaster benchmark? Professor Rubinfeld and I agree that licenses negotiated in the shadow of the statutory license are pulled toward the statutory rate, since that is the rate that would prevail in the event of a bargaining impasse. Therefore, since the statutory rate has been set too high, i.e., above the competitive rate, it will pull up the negotiated rates from the competitive rate toward the statutory rate.107 As a consequence, the webcaster benchmark will be somewhere in between the competitive rate and the statutory rate. This relationship is shown in Figure 7.