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In re Application of MobiTV

May 11, 2010

IN RE APPLICATION OF MOBITV, INC.
RELATED TO UNITED STATES OF AMERICA, PLAINTIFF,
v.
AMERICAN SOCIETY OF COMPOSERS, AUTHORS, AND PUBLISHERS, DEFENDANT.



The opinion of the court was delivered by: Denise Cote, District Judge

REDACTED OPINION AND ORDER

Table of Contents

INTRODUCTION.................................................. 2

FINDINGS OF FACT.............................................. 8

I. ASCAP and Its Two Competitors........................... 8

II. The Cable Television Industry.......................... 10

III. The Creation of a Television Program................... 16

IV. The Music Video Business and NDMAs..................... 18

V. Mobi................................................... 20

A. Early Years and Growth................................. 21

B. Mobi's Product Lineup.................................. 23

C. The Economics of Mobi's Business....................... 28

D. Mobi's SESAC License: Its First PRO License............ 33

VI. ASCAP Licenses......................................... 34

A. ASCAP's Post-Turner Licenses........................... 34

B. The Terms of the Post-Turner Licenses.................. 36

C. Application of the Post-Turner Licenses to Wireless Distribution Systems................................... 40

D. ASCAP Licenses with Cable System Operators............. 44

E. Audio-Only Programming................................. 45

CONCLUSIONS OF LAW........................................... 46

I. The Non-Dramatic Performance Right..................... 47

II. The Consent Decree..................................... 49

A. Origins of the Consent Decree.......................... 49

B. The 1990s Turner Litigation............................ 51

C. The Negotiation of AFJ2's TTTA License Provision....... 53

D. Other Provisions of AFJ2............................... 57

III. Fair Market Value...................................... 59

A. Music Choice: Retail or Wholesale Price as a Superior Indicator of Fair Market Value?........................ 61

B. AOL Rate Court Ruling.................................. 67

IV. A Reasonable Rate...................................... 68

A. ASCAP Rate Proposal.................................... 70

B. Mobi's Fee Proposal.................................... 90

C. Adoption of a Reasonable Rate.......................... 94

CONCLUSION.................................................. 115

INTRODUCTION

It is hard to overstate the importance of music in most of our lives. Every concert we attend, every song we listen to, virtually every entertainment we enjoy reinforces that lesson. The task at hand is to determine the fair market value of a blanket license for the public performance of music. The challenges of that task include discerning a rate that will give composers an economic incentive to keep enriching our lives with music, that avoids compensating composers for contributions made by others either to the creative work or to the delivery of that work to the public, and that does not create distorting incentives in the marketplace that will improperly affect the choices made by composers, inventors, investors, consumers and other economic players.

This Opinion addresses these decades-old issues in the context of a relatively new phenomenon: the delivery of television programming to mobile telephones ("handsets"), an innovation made possible by the digital revolution. MobiTV ("Mobi") is a middleman between the cable television networks that create programming and the wireless carriers to which consumers subscribe to obtain wireless service on their handsets. Mobi does principally three things: it provides the back-end technology that permits television program content to be delivered seamlessly to handsets, it licenses cable television program content from the networks and provides it to the wireless carriers, and it programs music video channels that it provides to wireless carriers.

Mobi has asked for a through-to-the-audience ("TTTA") license from the American Society of Composers, Authors and Publishers ("ASCAP"), an organization representing almost half of American composers and music publishers in their negotiations of public performance rights, to cover the programming content that Mobi provides to wireless carriers. The parties have been unable to reach agreement on the terms of a TTTA license, and, pursuant to an antitrust consent judgment, they now request that this Court set a rate for that license. The parties dispute, among other things, whether the revenue base for the calculated fee should be the retail revenue received by the wireless carriers or the amounts Mobi pays to content providers, and the rates that should be applied to that revenue base. Their fee proposals differ by tens of millions of dollars.

ASCAP applied to the Court to set a reasonable rate on May 5, 2008.*fn1 A bench trial was held from April 12 to 26, 2010, to determine a reasonable rate pursuant to Mobi's license application to ASCAP and ASCAP's application to this Court. This Opinion constitutes the Court's findings of fact and conclusions of law following that trial. The factual findings are principally set forth in the first section of this Opinion, but appear as well in the final section.

With the parties' consent, the trial was conducted in accordance with the Court's Individual Practices. On March 18, the direct testimony of the witnesses was presented through affidavit and submitted with the joint pretrial order, along with the parties' trial exhibits and proposed findings of fact and conclusions of law.

ASCAP presented affidavits constituting the direct testimony from four of its employees, two experts and two composers. Its employee-witnesses were Christopher Amenita, Senior Vice President for Broadcast Operations and New Media Licensing ("Amenita"); Matthew DeFilippis, Vice President of the New Media and Technology Department ("DeFilippis"); Dr. Peter M. Boyle, Chief Economist ("Boyle"); and Ray Schwind, Vice President and Director of Broadcast Licensing ("Schwind"). ASCAP's two experts were Dr. Jennifer Vanderhart, an economist ("Vanderhart"), and Cliff Petrovsky, who reported on his observations about Mobi's programming ("Petrovsky").*fn2 The two composers were David Vanacore ("Vanacore") and David Wolfert ("Wolfert"), each of whom is an accomplished composer of music for television programming.

Mobi presented affidavits constituting the direct testimony from five of its current or former employees and three experts. The Mobi employees were Raymond DeRenzo, Chief Marketing Officer ("DeRenzo"); Terri Falcone, Vice President of Finance and Controller ("Falcone"); Carl Ghoreichi, Principal Research Analyst ("Ghoreichi"); Andrew Missan, currently Vice President and General Counsel of Bytemobile, Inc. and Vice President and General Counsel for Mobi from May 2005 until April 2008 ("Missan"); and Paul Scanlan, Co-Founder and President of Mobi ("Scanlan"). Mobi's experts were Dr. Roger Noll, an economist ("Noll"); Larry Gerbrandt, an expert on the cable and satellite industries ("Gerbrandt"); and Paul Vidich, an expert on the history, production, and licensing of music videos ("Vidich").*fn3

All of the parties' witnesses appeared at trial and were available for cross-examination with the exception of Wolfert.

In addition, the parties designated deposition testimony from many of the trial witnesses and nineteen additional witnesses. The additional witnesses for whom ASCAP offered deposition testimony were Jeff Bartee, Mobi's Vice President of Content; Kevin Grant, Mobi's Vice President of Sales; Ellen McDonald, Mobi's General Counsel; Sarah Walter, Mobi's Senior Director of Financial Planning and Analysis; William Colitre, an attorney and Director of Business and Legal Affairs of Music Reports, Inc. ("MRI"); Mark Nagel, Manager of Music Products for AT&T Mobility LLC; and Suzanne Hellwig, a Director of Marketing Management for AT&T. The additional witnesses for whom Mobi offered deposition testimony were Vincent Candilora, ASCAP's Senior Vice President of Licensing; Kevin Gage, ASCAP's Senior Vice President for Strategic Planning and Digital Development; John LoFrumento, ASCAP's chief executive officer; Julie Peng, ASCAP's Manager of New Media Licensing; Richard Conlon, the Vice President of New Media and Strategic Development at Broadcast Music, Inc. ("BMI"); Mark Eisenberg, Executive Vice President, Global Digital Business Group, and head of Business and Legal Affairs at Sony Music Entertainment; and Elliott Peters, head of Digital Legal Affairs at Warner Music Group. The parties each offered designated deposition testimony of John Siu, Vice President of Accounting for U.S. Networks for Discovery Communications, Inc.; Jeff Klaumann, TV Product Manager at Sprint Nextel Corporation; Christopher Lamb, Product Manager for Music Services and Video Services at Verizon Wireless; Patricia Bowes, Marketing Director for AT&T Mobility; and Brandon Shaw, Senior Product Manager of Music Products at AT&T Mobility.

FINDINGS OF FACT

I. ASCAP and Its Two Competitors

ASCAP is almost a century old; it was formed in 1914. It is an unincorporated membership association and performing rights organization created and controlled by music composers, writers, and publishers. It has about 380,000 members and its repertory contains over 8.5 million copyrighted musical works. The members grant ASCAP the non-exclusive right to license non-dramatic public performances of their music. ASCAP's board of directors is composed of writers and music publishers.

ASCAP operates under a consent decree first issued in 1941. The current consent decree, issued in 2001, will be described in some detail below. Among other things, the current consent decree regulates the terms on which ASCAP may offer music users a blanket license to publicly perform music from the ASCAP repertory.

A blanket license is a license that gives the music user the right to perform all of the works in the repertory of a performing rights organization ("PRO") such as ASCAP, the fee for which does not vary depending on how much of the music from the repertory the user actually uses. ASCAP negotiates with and collects license fees from entities that perform music publicly. ASCAP then distributes the collected royalties to its members based on a system of performance surveys and credits. Among other things, ASCAP aims to pay the money collected from one medium to the members whose works are performed in that medium.*fn4

ASCAP competes with two other United States PROs: Broadcast Music, Inc. ("BMI") and SESAC, Inc. ("SESAC"), each of whom also offers blanket licenses. PROs and their ability to grant blanket licenses covering a large number of compositions create significant economies of scale in negotiating a license and in policing the marketplace to prevent infringement of copyright rights. BMI, which is slightly smaller than ASCAP, operates under a consent decree that is similar to the one that governs ASCAP's licenses. See United States v. BMI (In re Application of Music Choice), 316 F.3d 189, 190 (2d Cir. 2003) ("Music Choice II").

SESAC does not publicly report its revenue or compositions, but is understood to hold a share of the total number of musical compositions in the single digit range. SESAC is an invitation- only membership organization, aggressively courts composers it identifies as creating "high value," and is not subject to a consent decree.

II. The Cable Television Industry

Because the content at issue here is largely cable television programming, and because the rates at which ASCAP licenses the public performance of music over cable television networks are integral to the proposals made by both ASCAP and Mobi in this trial, it is essential to understand the cable television industry. Commercial television was launched in the United States in the late 1940s. Cable television's roots can be traced back almost that far -- to the early 1950s -- although it took another twenty years for cable television to emerge in the form we recognize today.

In 1972, Home Box Office or HBO, a national cable network, was launched. With the launch of a new generation of geostationary satellites in 1976, television programming could be delivered nationally without leasing telephone lines and there was an explosion in the number of cable programming networks, including the founding of ESPN and CNN.

There are two major categories of cable programming*fn5: (1) channels made available to cable subscribers on a bundled basis or "basic networks;" and (2) networks sold à la carte for a separate subscription fee, or "pay" and "premium" channels. Basic networks usually carry advertising, while most premium channels do not. Advertising revenue for basic cable networks comes from minutes that are reserved or available for commercials or "avails" each hour, a few minutes of which are reserved for local advertising. The portion not reserved for local avails can be sold to national advertisers or used for internal program promotions or public service announcements.

The content assembled by networks is distributed by cable, satellite, telephone lines, and more recently and of special importance in this case, by wireless distributors and operators.*fn6

Cable operators receive programming from cable networks via satellite systems and then transmit the signals through the cable network that passes to the households in its franchised region.*fn7 Similarly, satellite systems allow individual subscribers to view hundreds of cable program channels using receiving dishes and are particularly important in sparsely populated areas. More recently, telephone companies, such as AT&T and Verizon, have entered the television delivery business and deliver programming in a number of ways, one example being IPTV, which is Internet Protocol Television. Very recently, in October 2009, United States broadcasters adopted a standard for mobile television service. As of now, about seventy television stations have announced that they will be offering service that conforms to that standard.

Along with the evolution of technologies that distribute television programming, there have been major improvements in the quality of the television signal as well. Color television was introduced in the 1950s. More recently, digital television and high-definition television ("HDTV") have been adopted. Similarly, the quality of the audio portion of the transmission has improved. Stereo television, the addition of a second audio program (which is often a Spanish-language feed), closed captioning, and Dolby Digital 5.1 are among the principal improvements.

Despite the changes in the modes of delivering television programming, the method by which cable television networks obtain revenue has remained the same. The networks license the rights to distribute their programming through affiliation agreements with distributors under financial terms generally premised on the number of subscribers served. These affiliate fees, along with revenue from advertising, are the primary sources of revenue that cable networks use to cover their expenses of acquiring, creating and delivering programming.

Affiliate fees reflect both a cable television network's cost structure and the perceived value of its programming. For example, ESPN's popularity permits it to demand a comparatively high affiliate fee. It is noteworthy for the discussion that follows that affiliate fees are not tied to the retail prices that the cable system operator charges its subscribers. Instead, networks simply license as many distributors of their programming as they can to reach as many viewers as possible in order to maximize their return. In contrast, the retail price that a distributor charges its subscribers is based primarily on the competitive factors in that business, such as its cost of technology, service enhancements associated with the delivery platform and the composition of its channel lineups.

The invention and adoption of digital technology has had at least two significant impacts on the cable system transmission architecture: cable operators have expanded their channel capacity dramatically and subscribers have increased control over the viewing experience. Video-on-demand or VOD is an example of the latter phenomenon. In contrast to linear programming, which requires a viewer to watch a program at its scheduled time, VOD permits subscribers to select a program from a menu and pause, rewind or fast-forward.*fn8 Some cable operators also allow subscribers to watch a limited number of program episodes during a window of time after the initial airing on the cable network.

As Gerbrandt testified, despite the evolution of content delivery over a variety of distribution systems, "the viewing experience for the consumer -- watching television on a screen -- has remained fundamentally the same." And notwithstanding the evolution in delivery systems, networks typically still create and acquire content which they schedule into a linear lineup, and license third-party distributors through affiliation agreements premised on the payment of monthly per-subscriber fees to distribute that content via linear or VOD delivery methods to consumers. And despite the revolutions in the quality of the video and audio presentation of content delivered over cable television networks, the networks still derive their revenue principally from advertising revenues and from the number of subscriptions. To the extent that improvements in technology have increased the number of cable television subscribers, those improvements have been captured in the increased revenues earned by the cable networks from affiliate fees and advertising.

This revolution in digital transmission has blurred the distinctions among communications technologies and services. For example, while telephone networks were once devoted exclusively to point-to-point voice communications, and over-the-air and cable transmissions were dedicated to delivering television programs, digital technology has enabled telephone networks to support not just the traditional two-person telephone conversation, but has allowed it to deliver as well access to the internet, television programming, computing and a host of other services. Thus, wireless carriers and television stations increasingly compete in the delivery of mobile video entertainment to consumers.

With the advancements in mobile telephone technology, there has been an explosion in the number of wireless telephone subscribers. As of June 2009, it is estimated that there were over 277 million wireless telephone subscribers in the United States.*fn9 In contrast, the number of land-line telephones peaked in 2000, and has been falling ever since. Using another yardstick, the monthly minutes of use of handsets has risen from about ten billion in 1999 to almost 200 billion in 2009.

III. The Creation of a Television Program

Another component of the evidence at trial was testimony that described the creation of television programming and the role of music in that programming. Of course, each television program may be comprised of many pieces of intellectual property, from scripts to scores, and of work by many individuals, from writers, directors, actors and musicians to composers.

Generally, program content contributors are compensated with up-front fees and with a percentage of revenue received by the owner of the audiovisual work from the exploitation of the program, including through returns in syndication or re-run markets. These creative contributors do not customarily receive compensation tied to the advertising or affiliate license fee revenues that cable television networks generate or to the down-the-line revenues that cable operators or satellite or telephone companies generate from subscriptions to their television distribution services. Moreover, the compensation to the contributors generally does not vary based on the technical means by which the program content reaches the consumer.*fn10

Vanacore, one of the two main composers for the television show Survivor, and a contributor to many other successful television shows, testified about his experience in composing music for a television program or series. Generally, he is hired on a composer-for-hire basis, which means that he does not own the musical work that he creates. To compensate him for his work, he is paid something "up front," which may be a relatively small payment, and is granted back what he characterizes as "the 'writer's share' of the publishing rights, including, most significantly, the right to collect public performance royalties directly" from the PRO of his choice.*fn11 This gives him the right to a 50% share of public performance royalties for compositions for which he is the sole writer; the remainder goes to the music publisher. In television, the publishing company is usually owned by the program producer itself.

IV. The Music Video Business and NDMAs

Mobi distributes not only cable television programming but also procures rights to music videos and creates music video channels that it then distributes to wireless carriers. Therefore, before describing Mobi, it is useful to describe the music video business, in particular its financial structure.

Music videos are essentially short-form films. They are copyrighted works that involve video production, direction, writing, choreography and editing, as well as the acting and visual performance of the recording artist. They are designed to create a visual connection between recording artists, their songs and their fans.

The music video art form was born in the early 1980s when MTV and later other cable television channels created outlets for the broadcast of the format. One of the ground-breaking music videos was Michael Jackson's "Thriller," released in 1983. The video lasted fourteen minutes (more than twice as long as the underlying sound recording), was co-written and directed by a successful movie director, and included intricate costumes and vivid special effects. Soon thereafter, young directors were starting their careers by making music videos before moving on to direct films and television shows.

While music videos promote sales of sound recordings, the record label companies ("record labels") that produce the music videos seek an independent stream of revenue by licensing the music videos themselves. A record label's license for distribution of a music video conveys a bundle of rights, including the copyright in the integrated audiovisual work.*fn12 As part of the production process, the record label also secures and pays for any choreography and script copyright rights that may be involved. Thus, a license of a music video generally conveys not just the right to reproduce, distribute and transmit the audiovisual work, but also warrants that other rights associated with the video have been "cleared" or secured by the record company. The license also typically authorizes the reproduction and transmission of the sound recording as part of the audiovisual work.

The license for the distribution of a music video will also generally convey rights in the composition embodied in the music video. These rights include the right to reproduce the composition embodied in the music video, known as the synchronization or "sync" right. (On occasion, the license may provide that the record label has secured the sync right.) It is the custom for the record labels to secure the sync rights either directly from recording artist-songwriters incident to those artists' recording agreement with the companies or to secure them separately from music publishers.

If the record label obtains the sync right from music publishers, the record labels get either a sync license for a single composition or a catalog-wide license such as the New Digital Media Agreement ("NDMA"). NDMAs have been entered between [REDACTED]. NDMAs allow record labels to pass through certain rights in the compositions to the companies that transmit or sell the licensed products to consumers.*fn13

There is one right, though, that licenses for music videos do not convey. They do not typically convey the public performance right in the composition embodied in the music video. Frequently, the licensee must procure such rights separately. Thus, in this litigation, ASCAP seeks a fee for the public performance of music in music videos distributed by Mobi.

V. Mobi

Mobi is a privately held company located in California. It was founded in 1999 with six employees and has grown since then to employ nearly 200 individuals.*fn14

A. Early Years and Growth

Mobi concentrated in its early years on creating and then licensing technology that would allow for the efficient transfer of data across wireless networks. By 2002, Mobi shifted its business to the recreation of the cable television experience over wireless networks.

Mobi describes itself today as a leading provider and platform for content delivery over wireless networks. Mobi's technology is essentially directed to the transfer of large amounts of data in a fluid manner over wireless networks, whether Mobi has a role in assembling the content or not.*fn15 The transfer is enabled through Mobi software which was either pre-loaded in the handset or downloaded into the handset by the consumer.

Mobi also aggregates television and radio channel content from third parties, programs its own music video channels and other specialty channels, and assembles this content into a product for delivery to wireless carriers through Mobi's technology platform. As a content provider, Mobi tries to assemble a broad range of programming with a mix of brand-name content and specialty content and offer a mix of live,*fn16 clip-linear,*fn17 and VOD*fn18 content. The range of programming includes a mix of channels in categories such as news, finance, sports, music, comedy, cartoon/kids, entertainment, women and weather. News has been particularly important to Mobi, with news channels among its most frequently viewed channels.

Mobi distributed the world's first live mobile television product when it distributed programming on the Sprint network in November 2003 under the brand name MobiTV. This service delivered continuously streamed, linear television channels to handsets, including television channels such as CNBC, Discovery, College Sports Television, and MSNBC. While Mobi began by offering fewer than twenty channels in a single package, it may offer as many sixty different channels of programming in a single package today. To replicate the cable or satellite television channel guides with which consumers are generally familiar, Mobi signed a patent license agreement with Gemstar-TV Guide in 2007. By 2009, Mobi was touting that it had passed the seven million subscriber mark.

B. Mobi's Product Lineup

Mobi refers to the subscription television and radio services that it distributes through wireless carriers as "products." A product is a package of television and/or radio channels that it or the wireless carriers license from cable television networks or other content providers. The products that are branded with Mobi's name include MobiTV, MobiRadio, and MobiVJ. Other products are branded with the wireless carriers' names, for instance, Sprint TV and AT&T XM Radio.

What follows is a description of some of Mobi's products, presented roughly in the chronological order in which they appeared. Throughout its brief history, though, the majority of Mobi's revenue has been earned from products appearing on the Sprint network.

1. MobiTV

MobiTV is known as an à la carte product because subscriptions to it are sold separately by the wireless carriers and not as part of a bundle that includes other products. As of today, MobiTV includes roughly 60 television channels distributed over half a dozen or so wireless carrier networks. The channels distributed over any particular wireless carrier's network vary slightly. Some of the most-watched channels that are distributed to every wireless carrier are Animal Planet, CNBC, Discovery, The Mic HipHop, The Weather Channel, Toon World TV Classics, and V40 Top Hits.*fn19

After beginning with the distribution of MobiTV over the Sprint network in November 2003, Mobi began in January 2005 to distribute MobiTV through Cingular and the Midwest Wireless Networks in January 2005. Later in 2005, MobiTV began to be distributed over the Alltel, now Verizon, network.

2. MobiRadio

Mobi's radio product, MobiRadio, was first distributed on the Cingular wireless network in November 2005. It consisted of 40 channels of commercial-free digital music supplied by Music Choice. In July 2006, Mobi added other stations such as ESPN Radio, The NPR Program Stream, and The Weather Channel Radio Network. In late 2007, the radio channels offered by DMX, Inc. replaced the Music Choice channels.

3. Music Videos

In January 2006, Mobi began to program its own music video channels by licensing music videos from two or three of the four major record labels. In the years since then, the number of record labels supplying music videos to Mobi has decreased. Over time, Mobi has created several different music video channels which it has inserted into many of its product offerings.

4. Sprint TV

Less than a year after Sprint began to offer MobiTV to its customers, it changed the name of the product to Sprint TV. Sprint TV was launched in August 2004, and is delivered to Sprint customers as a component of a Sprint "bundle," that is, a subscription service that provides the data necessary to use the internet, text messaging, and email services, as well as the Sprint TV programming, or, for customers who have already paid for data plans, as a stand-alone product for an additional monthly subscription fee.

In May 2006, Mobi released a Spanish-language live television service called Sprint TV En Vivo. It consists of fifteen channels. As of mid-2009, this service is Mobi's fifth largest à la carte television product, measured in terms of revenues.

While Sprint relies on Mobi's back-end technological services to provide content over its wireless network, it has become less dependent on Mobi to acquire the rights to that content. After beginning to acquire a small amount of its own content in late 2005, by the Spring of 2007, Sprint had independently acquired a large ...


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