E1LFPAN1 1 1 Trial 2 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------x 3 IN RE PETITION OF PANDORA MEDIA, INC. 4 ------------------------------------x 5 Related to 6 UNITED STATES OF AMERICA, 7 Plaintiff, 8 9 10 v. 41 CV 1395 (DLC) AMERICAN SOCIETY OF COMPOSERS, AUTHORS AND PUBLISHERS, 11 12 12 CV 8035 (DLC) Defendant. ------------------------------------x New York, N.Y. January 21, 2014 9:30 a.m. 13 14 15 16 17 18 Before: HON. DENISE COTE, District Judge 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 Trial 1 2 3 4 5 6 7 APPEARANCES KING & SPALDING LLP Attorneys for Petitioner Pandora Media, Inc. BY: KENNETH L. STEINTHAL JEFFREY SEDDON MARY KATHERINE BATES JOSEPH WETZEL -ANDNORTON ROSE FULBRIGHT LLP BY: MARC B. COLLIER 10 PAUL WEISS RIFKIND WHARTON & GARRISON LLP Attorneys for ASCAP BY: JAY COHEN ERIC STONE AMY ELLYN GOLD DARREN W. JOHNSON ALSO PRESENT: 11 RICHARD H. REIMER, ASCAP 8 9 12 13 14 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 2 E1LFPAN1 3 Trial 1 (Case called) 2 (In open court) 3 THE COURT: 4 THE DEPUTY CLERK: Good morning, everyone. The matter of in re: 5 Pandora Media Inc. 6 your appearance for the record. 7 MR. STEINTHAL: Petition of 8 Counsel for the petitioner, please state Kenneth Steinthal, Joseph Wetzel, Katie Bates, Jeff Seddon from King and Spaulding. 9 MR. COLLIER: Mark Collier, Fulbright and Jaworski. 10 MR. HARRISON: 11 THE COURT: Thank you. 12 MR. COHEN: Good morning, your Honor. Chris Harrison, Pandora. Jay Cohen from 13 Paul Weiss for ASCAP, with Eric Stone, Darren Johnson and Amy 14 Gold for ASCAP. 15 THE COURT: Good morning. Give me just one second 16 here to get all the technology up and running. So thank you so 17 much for your participation in the final pretrial conference 18 last week and again for the submission of your papers. 19 hopefully be a little smoother in operating our systems as the 20 trial goes on, but we'll see. 21 We'll I have approved the proposed redactions and issued an 22 order which will be docketed today and as a result you may file 23 in their proposed redacted form the submissions associated with 24 this trial. 25 I want to say a couple of things in that regard. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 4 Trial 1 Thank you for narrowing your proposed redactions and working so 2 cooperatively with each other and third parties to do so. 3 I did not want to suggest my approval is a finding that similar 4 redactions will be permitted for trial testimony or for 5 exhibits received at trial. 6 seek access to any of the redacted material I'll feel free to 7 separately review the redactions. 8 9 But And certainly should a third party I have a request of the parties. I think it would be helpful to me for you to create a chart which probably contains 10 entirely uncontroversial matters and let me describe the kind 11 of chart I'm thinking of. 12 rights like the public performance right, mechanical rights, 13 synch rights, lyrics rights, grand performance rights and 14 dramatic public performance rights all of which are referred to 15 in your papers and any other rights that you're going to be 16 discussing with me in one way or another in this trial and then 17 along the column headers you'd give the statutory or other 18 reference to where that right can be identified in the law, the 19 source for the right. 20 layman's description of what the right is. 21 header is the original owner's right or the original owner of 22 the right. 23 rights, of course, they are conveyed to others customarily, and 24 so the next column is -- I'm not suggesting here something 25 other than information you have at your fingertips so if this Down the column would list various Another potential column header is a Another column It's my understanding with respect to some of these SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 5 Trial 1 is more complicated forget this column heading, but generally 2 speaking who controls those rights through a license. 3 the last column, well, not the last, which kinds of users need 4 a license for those rights and what is the process for setting 5 the licensing fee. 6 entity or just negotiations between or among the parties. 7 Thank you. And then For instance, a rate court or some other 8 So we just heard from computer systems. 9 log-in problem is because they're having problems, so I'm 10 11 Part of the hopeful that that won't interfere in the coming days. I thought I might give you rulings on the motions in 12 limine before we begin,and I'd start with rulings on the 13 motions in limine that Pandora has made with respect to ASCAP's 14 witnesses. 15 first one -- and I should say with respect to all three of 16 these motions in limine I will be denying the motion. 17 There are three that are still being pressed. The With respect to the Ashenfelter testimony, there are 18 principally two grounds asserted. 19 that focus on the fact that Dr. Ashenfelter relied 20 significantly if not entirely on an analysis of feature music 21 and I find the arguments that Pandora is making go to the 22 weight and can be part of its cross-examination. 23 the weight of the expert testimony. 24 25 One is a set of arguments It goes to The second principal argument is a series of arguments that relate to Dr. Ashenfelter's reliance on certain material SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 6 Trial 1 from ASCAP, its quarterly detail files and Pandora argues, 2 among other things, that it didn't have access to the data on 3 which Dr. Ashenfelter relied as he -- and I use this term 4 loosely, massaged that data, and complains that in his 5 deposition testimony Dr. Ashenfelter was unable to answer or 6 respond to certain precise questions that were put to him by 7 Pandora's counsel. 8 sufficiently disclosed and that the deposition testimony was 9 sufficiently responsive. 10 I find that the methodology was The second motion in limine goes to the expert 11 testimony offered by Flynn and this was offered in the context 12 of arguments about whether Pandora's service is similar or not 13 to broadcast radio stations. 14 the broadcasting and media field and is presenting an 15 understanding of prevailing trends. 16 therefore I find that expert is qualified to give the opinions 17 offered in the direct testimony. 18 Flynn has more than 25 years in One of the -- and One of the complaints that Pandora makes is that the 19 expert uses the terms "interactive" and "non-interactive" in a 20 way that is inconsistent with the legal definitions of those 21 terms and indeed in certain context with ASCAP's own use of 22 these terms in its licensing. 23 offered to argue that the legal definition and other contexts 24 of those terms should be other than as it is found in those 25 contexts. This expert testimony is not This testimony is offered to tease out the features SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 7 Trial 1 of Pandora that the expert believes distinguish its services 2 from the RMLC licensees, and I will receive it. 3 I've been thinking myself about a term that I could 4 use that wouldn't create this kind of difficulty. I haven't 5 settled on a final term but I'm thinking of the term 6 "responsive" as opposed to "interactive." 7 terms I'm thinking about. 8 counsel to suggest to me a term that would adequately convey 9 what Pandora does and yet not enter into unnecessarily this There are other In any event, I'm anxious for 10 debate which is really I think a side show about whether it's 11 interactive or not because of the confusion one can create if 12 you loosely use the term "interactive" in this context when it 13 has a very defined meaning in a different legal context. 14 Another argument that's made about the Flynn testimony 15 is that Flynn's definition of the radio industry is an 16 arbitrary one. 17 testimony. 18 This expert has presented sufficient evidence in direct 19 testimony to support a view that it's a standard use for this 20 witness. 21 I don't find that this defeats admission of the How arbitrary it is can be subject to examination. Another series of arguments has to do with the 22 expert's reliance on statistics from I Heart Radio's customized 23 stations and it's an argument about that information being 24 without foundation. 25 testimony, so that argument is moot. It's not being relied upon in this direct SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 8 1 Trial And finally, there's a general argument that the 2 testimony is not helpful because it's simply a vehicle to place 3 hearsay testimony into evidence and of course that is an 4 improper use of expert testimony. 5 evidence and articles to which Flynn is pointing are the kinds 6 that this person uses from day-to-day in working in this field 7 and it's being appropriately used. 8 9 But I find that the kinds of I should have begun by providing the parties with the standard I will use in evaluating the admission of expert 10 testimony. Obviously, I'm looking at Rule 702 in particular 11 and to some extent 703 as well of the Federal Rules of 12 Evidence. 13 in insuring that expert testimony satisfies the requirements of 14 these rules. 15 Court's inquiry entails a preliminary assessment of whether the 16 reasoning or methodology underlying the testimony is 17 scientifically valid and if whether that reasoning or 18 methodology properly can be applied to the facts in issue. 19 U.S. Food service, 729 F.3d at 129. 20 exclude expert testimony if it is speculative or conjectural or 21 based on assumptions that are so unrealistic or contradictory 22 as to suggest bad faith. 23 Moreover, in order to be admissible an expert opinion requires 24 some explanation as to how the expert came to a conclusion and 25 the methodologies are evidence that substantiate the The law assigns district courts a gatekeeping rule United States v. Farhane, 634 F.3d at 168. A A trial judge should Zerenga, 571 F.3d at 213 to 14. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 9 Trial 1 conclusion. Riegel 451 F.3d at 127. An explanation is 2 necessary because when an expert opinion is based on data, a 3 methodology or studies that are simply inadequate to support 4 the conclusions reached Daubert and Rule 702 mandate the 5 exclusion of that unreliable opinion testimony. 6 F.3d at 255. 7 testimony provide assistance to the trier of fact beyond that 8 afforded by the arguments of counsel. 9 Finally, expert testimony may not usurp the role of the fact Ruggiero, 424 Furthermore, Rule 702 requires that expert Chin, 685 F.3d at 161. 10 finder in applying the law to the facts before it. 11 192 F.3d at 289. 12 Lumpkin, As I mentioned, I'm also aware of the requirements of 13 Rule 703. 14 based on inadmissible evidence including hearsay if experts in 15 the field reasonably rely on such evidence in forming their 16 opinions. 17 however, simply transmit that hearsay to the fact finder, ibid. 18 Moreover an expert must analyze the source materials and not 19 simply repeat their contents. 20 inquiry is flexible and district courts enjoy considerable 21 discretion in deciding on the admissibility of expert 22 testimony. 23 Williams, 506 F.3d at 160 to 61. 24 25 Under that rule experts can testify to opinions Mejia, 545 F.3d at 197. The expert may not, Ibid at 198. The Daubert Food Service, 729 F.3d at 130 and United States v. Let me turn to the arguments with respect to Pandora's motion concerning testimony from ASCAP expert Murphy. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Pandora E1LFPAN1 10 Trial 1 makes a series of attacks on Murphy's opinions, all of which it 2 may explore on cross-examination and probe the weight of the 3 testimony. 4 Murphy's analysis fails to consider critical facts including -- 5 and this is not an exhaustive list -- one, the non-competitive 6 world within which public performance rights are negotiated; 7 two, the circumstances in which Pandora had to negotiate with 8 withdrawing publishers and, three, the publisher's actual 9 relationship with ASCAP and the implications for those -- the Among other things, Pandora argues that Professor 10 implications that stem from those relationships. 11 argues that Professor Murphy failed to conduct any study or 12 analysis to test his theoretical assertions against the facts 13 that exist on the ground in this industry or marketplace. 14 don't find that any of these objections make Professor Murphy's 15 use of his economic model inadmissible or make admissible the 16 other opinions he offers in his testimony but it will 17 definitely be part of my analysis about the weight to give such 18 analyses. 19 Pandora also I Let me turn to ASCAP's motion in limine with respect 20 to Pandora's witnesses. 21 those with respect to Marx and Rosenblatt. 22 in part the motion addressed to Noll and McIntyre and I'm going 23 to be granting the motion with respect to Pandora's acquisition 24 of a radio station. 25 There are four. I'm going to deny I will be granting The testimony offered by Marx is essentially a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 11 Trial 1 refutation of the analysis offered by ASCAP's expert witness 2 Murphy and it's principally used that testimony by Marx as a 3 critique of Murphy's analysis. 4 for Pandora's summation arguments or what I expect to hear on 5 summation regarding the appropriate benchmarks here, but 6 nonetheless it does contain some analysis that is premised on 7 principles of economics and I find that ASCAP may use its 8 cross-examination to explore any perceived deficiencies from 9 the Marx testimony. 10 To some extent it's a vehicle The testimony offered by Rosenblatt is principally 11 offered to refute the ASCAP testimony from Flynn. The 12 arguments that are made with respect to this testimony include 13 the following: 14 the deposition testimony that Rosenblatt gave that in essence 15 sapped any value from the testimony given by Rosenblatt that 16 Pandora, quote-unquote, "is radio." 17 relies as well on documents from Pandora's own files. 18 also argues that Rosenblatt is simply keying the definitions 19 for purposes of this case, that Rosenblatt is not an expert on 20 radio and is simply a media consultant with limited radio 21 experience. 22 data to support Rosenblatt's opinion and that two studies 23 should be excluded; one is a study about UK listening habits 24 that's no longer being offered and therefore that argument is 25 moot. That there were a number of concessions made in And in this context ASCAP ASCAP It argues in addition that there's insufficient The other is a study about auto drivers' habits in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 12 Trial 1 southeastern United States cities that concerns their practices 2 in switching radio stations while driving their cars and it's 3 contained in JX 105 and relied on at paragraph 116. 4 looked at and read with some care JX 105. 5 argument that's made is much of the testimony is historical 6 data and discussion that's irrelevant. 7 is sufficiently qualified in this field to give expert 8 testimony about the issues covered in his direct testimony. 9 find that he may properly rely on JX 105 and the rest of the 10 11 I've And then the last I find that Rosenblatt I arguments can be explored on cross. Let's turn to the third motion in limine made by ASCAP 12 against Pandora's witnesses. This third motion addresses 13 testimony given by two witnesses, Noll and McIntyre, and it's 14 made in part by indication of Rule 403. 15 testimony from these two witnesses simply duplicates testimony 16 already given by Marx and Rosenblatt for ASCAP, that there were 17 two rounds of expert reports in this case, an opening and a 18 rebuttal round, and when Pandora offered the testimony from 19 Noll and McIntyre for the first time on rebuttal that was 20 duplicative and unfair in a variety of ways. 21 that is, ASCAP also argues that the testimony from these two 22 witnesses is not truly rebuttal testimony. 23 deny the motion with respect to Noll. 24 rebut Professor Murphy's model with a new expert. 25 think it would have been fair for me to conclude based on what ASCAP argues that It also argues, So I'm going to I think it is fair to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 I don't E1LFPAN1 13 Trial 1 I read in the motions in limine that Pandora was in a position 2 to anticipate Murphy's model such that it could have put in 3 with opening expert testimony a significant critique and 4 therefore while I understand its making a critique through two 5 witnesses the fact that it chose a new expert to make that 6 critique in a rebuttal I think is appropriate. 7 I don't find Pandora's use of McIntyre, however, will 8 survive using the same analysis. I think that the issues to be 9 addressed here, whether Pandora's service is sufficiently 10 comparable to broadcast radio, to say that Pandora is radio is 11 something that everybody anticipated and Pandora did anticipate 12 and presented testimony on that score in its opening expert 13 report. 14 survive as appropriate true rebuttal. 15 So to the extent McIntyre survives at all it must McIntyre's direct testimony is 25 pages long. Three 16 pages are addressed to qualifications and background. So 17 that's that. 18 I'm about to say. 19 what is true rebuttal and unique to McIntyre here. 20 to give you some assistance that I'm probably going to think 21 that you should eliminate all but five of the pages that have 22 substantive testimony. 23 listing of five pages to give the parties a signal so your 24 discussions here cannot consume an enormous amount of time. 25 gives Pandora an opportunity to identify any appropriate I don't think that's impacted in any way by what I think that Pandora should try to identify I'm going I'm hoping by this fairly arbitrary SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 It E1LFPAN1 14 Trial 1 rebuttal testimony so I'm not suggesting a new affidavit. 2 suggesting striking all but eight pages, the three pages which 3 are the qualifications and background and something like five 4 pages more. 5 ASCAP by Friday. 6 I'll hear you Monday if there are any remaining disputes. 7 I'm And I'd like Pandora to present that proposal to Parties can discuss it over the weekend. Going to the fourth and last motion in limine, this 8 has to do with Pandora's acquisition of a radio station, KXMZ 9 in South Dakota. I don't understand that that radio station 10 has yet been acquired. It's subject to FCC approval, that is, 11 the acquisition is subject to FCC approval and Pandora 12 represents that in the event it's dissatisfied with the rate 13 court determination here, and of course my hope is that either 14 both parties -- I won't complete that sentence. 15 is that both parties will feel they got a fair opportunity to 16 present their arguments and a reasoned judgment and explanation 17 such that they obviously if they are dissatisfied have an 18 opportunity to test my decision through appeal. My hope here 19 But in any event, it represents that if it is 20 dissatisfied and if it succeeds in acquiring this radio station 21 it will apply to this Court to be governed by the RMLC. 22 that day arrive I'd be happy to receive that application, and 23 so I'm going to grant this motion in limine to exclude evidence 24 and argument about the potential effect of that potential 25 acquisition on this rate court proceeding. Should And I urge this SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 15 Trial 1 party to discuss the specifics of how that ruling may affect 2 their presentation of arguments and evidence. 3 Now, it had been my goal to do all of that, of course, 4 at our final pretrial conference. 5 able to do that, but those are the rulings and so we're now at 6 a position, I believe, yes to formally begin this trial. 7 I apologize that I was not I want to tell counsel that I have thought about the 8 Section 114 and Rule 408 settlement discussion issues and I 9 don't think I need to share that analysis of the law with you 10 right now, but at the appropriate point when you think it will 11 help in your planning and presentation feel free to raise those 12 issues with me. 13 So, counsel, I think we had talked about time limits 14 and so we're going to move to opening statements and, counsel, 15 have you agreed on a timekeeper or would you like me to do 16 that? 17 MR. COHEN: Your Honor, if you would. 18 THE COURT: Great. Happy to. So I'm going to have 19 ASCAP go first with respect to opening and it will go last with 20 respect to summation, since it bears the burden of proof in a 21 significant way in this rate court proceeding to establish the 22 reasonableness of its proposed fee, at least as a starting 23 point. 24 Mr. Cohen. 25 MR. COHEN: Your Honor, we have some demonstratives SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 16 Trial 1 we're going to put up on the screen but if it's helpful for the 2 Court I have a bound copy for you and for your clerk. 3 THE COURT: Thank you. 4 MR. COHEN: Mr. Steinthal has a copy as well. 5 May it please the Court. Your Honor, I represent 6 ASCAP and the many thousands of songwriters, composers and 7 music publishers who create the music that forms the lifeblood 8 of Pandora's internet music streaming service. 9 rate court, which is expensive and protracted for ASCAP, as it We're here in 10 is for Pandora, because this matter is of overwhelming 11 importance to ASCAP's members. 12 the fact that Pandora is the largest, I'm going to suggest the 13 term customized internet radio service in the country. 14 professes to have more than 200 million registered users and 15 more than 70 million active listeners, each of whom, and this 16 is the customization, each of whom has the ability to create 17 personalized stations based on their own listening preferences 18 and tastes. 19 for billions, of hours per year and Pandora claims to have more 20 than a 70 percent market share of internet radio, more than 21 double the share of the next 19 competitors involved. 22 service with a market cap approaching $7 billion and annual 23 revenues moving steadily through the hundreds of millions and 24 projected publicly by many analysts to approach a billion 25 dollars by the end of its license period. The significance drives from It Pandora's listeners consume tens of billions, B It's a And that revenue, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 17 Opening - Mr. Cohen 1 your Honor, we believe it generates is generated by programming 2 that contains virtually nothing other than music. 3 wall music with a tiny piece of comedy, almost half of which 4 has been written by ASCAP songwriters and composers. 5 It's wall to That's why from the perspective of ASCAP's members 6 it's particularly important to get the right rate for Pandora, 7 and when I say the right rate I mean obtain a competitive 8 market rate for the music that's fueling Pandora's success. 9 We're not here, as Pandora has suggested throughout its papers, 10 in some kind of discriminatory witch hunt for Pandora to try to 11 extract super competitive rates. 12 competitive market rates. 13 We're here only to seek Now, your Honor, I've tried to divide this opening 14 into five parts. I hope it's logical. First, I want to go 15 through the principles which I think are well known to the 16 Court and not much in dispute that govern the determination of 17 a reasonable fee. 18 reasonable fees. 19 have time today to deal with all -- but with the principal 20 criticisms of ASCAP's benchmarks by Pandora. 21 discuss Pandora's argument that it's similarly situated to the 22 RMLC stations that took an ASCAP license and, lastly, I want to 23 suggest to the Court that if the RMLC rate has any relevance at 24 all it has to be adjusted for differences in music intensity 25 between the RMLC licenses and Pandora. Second, I want to lay out our proposal for Third, I want to deal with some -- I don't I then want to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 1 18 Opening - Mr. Cohen So, your Honor, if I could move to the first, please, 2 the applicable principles of rate setting. There are sharp 3 disputes, as your Honor is aware, between the parties on the 4 rates in this case but I think there's very broad agreement on 5 the basic principles that should govern this Court's 6 determination. 7 devised from the consent degree in your Honor's prior rulings 8 in Mobi and DMX and we'll go through them quickly for context 9 first. There are a number of core principles that were Pandora, of course, has the right to apply to this 10 Court for the determination of a reasonable fee and that's your 11 Honor's task in this proceeding. 12 bear the burden of proof to establish the reasonableness of our 13 fee proposal. 14 will discharge in the course of this trial. 15 comes from Mobi, in determining the reasonableness of a 16 licensing fee the Court's job is to make a determination of a 17 fair market value, the price that a willing buyer and a willing 18 seller would agree to in an arm's length transaction, and, 19 lastly, and one that's of great significance in this case, 20 something that your Honor observed in DMX, since the task is to 21 come up not just with a willing buyer and willing seller rate 22 but the rate that the applicant would pay in a competitive 23 market, the Court is handicapped by the fact that there's no 24 actual evidence of competitive pricing in most rate court 25 cases. Second, in this proceeding we That's a burden that we take on that we think we Third, and this SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 1 19 Opening - Mr. Cohen Your Honor, as I turn to our proposal, what makes this 2 case different than most of those rate court proceedings is 3 that here we have direct evidence of competitive pricing for 4 the rights in question. 5 competitive benchmarks, licenses that Pandora has entered into 6 with three music publishers, EMI, Sony ATV and Universal Music 7 in 2012 and 2013. 8 is that the licenses entered into by Pandora are transactions 9 between a willing buyer and a willing seller and that those And that's because we have true We believe that what the evidence will show 10 transactions constitute the best evidence of what Pandora would 11 pay for music performing rights in a competitive market. 12 our proposal, I think, although there is a lot of paper in this 13 case, is pretty simple. 14 So It's follow the market. We have a proposal for the five-year period with 15 differing rates that are based on principally the direct 16 licenses entered into by Pandora are not because of competitive 17 issues and the restrictions consistent with the redactions. 18 I'm not going to talk about the specific rates and the specific 19 deals, but our principle is that those rates coupled with some 20 other market benchmarks that I'm going to discuss support a 21 reasonable rate of 1.85 percent for the first two years of the 22 license, 2.5 percent for 2013 and 3 percent for '14 and '15. 23 Again, if you go to the next slide, Bill, we believe 24 what the evidence will show, and, again, I've omitted the 25 numbers because of confidentiality, is that ASCAP's proposal SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 20 Opening - Mr. Cohen 1 follows the market, it follows the trend in the market of 2 increasing prices for music performance rights in a competitive 3 market and I'll talk about why in a moment. 4 explainer of that trend will be Professor Murphy who, of 5 course, your Honor knows from prior trials. 6 that the ASCAP proposal reflects the developing competitive 7 market in which the demand and competition for music 8 performance rights is increasing in value. 9 Murphy's opinion is supported not only by Pandora's own deals, The principal He will testify Now, Professor 10 those three direct deals, but two other sets of competitive 11 benchmarks. 12 were signed in June of 2013. 13 entered into a series of agreements in June of 2013 with Sony, 14 EMI, Universal, Warner Chapel, BMG and indeed ASCAP and BMI 15 themselves. 16 out in our pretrial submissions and although they are not 17 agreements between Pandora and music publishers and ASCAP they 18 are useful as benchmarks because they're agreements for the 19 same rights entered into by a customized internet radio 20 service, that's Pandora's closest competitor. 21 The first comes from the Apple agreements that Apple's new iTunes Radio service The rates in those agreements are of course set Now, there's not going to be a dispute in this trial I 22 believe that Apple's iTunes Radio is similarly situated to 23 Pandora for the purposes of this Court's task of setting a 24 reasonable fee. 25 experience on both an advertising and ad-free basis, as does It offers users a personalized internet radio SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 21 Opening - Mr. Cohen 1 Pandora and Pandora understood even before the launch of iTunes 2 Radio, which it tracked very closely, that Apple's iTunes 3 service could well be Pandora's most formidable and closest 4 competitor. 5 Here's what Mr. Westergren had to say. He's the 6 founder of Pandora and he'll testify at this trial. This 7 question was asked at his deposition prior to the launch of 8 Apple in September. 9 "Q. Do you expect the Apple product to be more competitive 10 with Pandora than any existing online radio service that's 11 available today? 12 "A. 13 rates that were paid by Apple we believe demonstrate the 14 reasonableness of ASCAP's fee proposal. 15 That's my expectation, yes." And he was right. So the Now, the reasonableness of our proposal we also 16 believe is supported by Pandora's licenses with SESAC. We're 17 relying for an economic underpinning in this case on Professor 18 Murphy again who will explain that an agreement between Pandora 19 and SESAC, SESAC not being subject to an antitrust consent 20 decree, is a competitive benchmark because it transacts freely 21 in the marketplace. 22 underscored by the fact that Pandora has willingly renewed its 23 SESAC license year after year at increasing rates. 24 course, your Honor, I'm mindful of what you had to say about 25 SESAC in the Mobi opinion and certainly our view of that is That point, your Honor, we believe was SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Now, of E1LFPAN1 22 Opening - Mr. Cohen 1 that the circumstances that led to you reject SESAC in Mobi, 2 the threat of a copyright infringement suit and an agreement 3 signed under that threat are not present here. 4 no testimony at this trial that anyone approached Pandora on 5 behalf of SESAC threatening to bring a copyright case if an 6 agreement was not signed. 7 with the numbers removed to protect SESAC's confidentiality, 8 when you adjust the SESAC rates for ASCAP's market share since 9 there's a significant difference in market share those rates 10 There will be And as we see in slide 13, again are essentially spot on with ASCAP's rate court proposal. 11 Now, Professor Murphy will provide a detailed economic 12 framework for why ASCAP's proposal is consistent with what 13 would be expected in a competitive market. 14 detail in his testimony, the economic principles that talk 15 about why these benchmarks are in fact competitive market 16 agreements, why the fact that your Honor ruled on summary 17 judgment that these agreements, the direct license agreements 18 violated the consent decree, do not affect the utility of those 19 benchmarks as a matter of economics and he proposes a model of 20 competitive pricing of music performance rights that we believe 21 explain why the benchmark deals are at rates in excess of what 22 ASCAP previously charged and was able to obtain from Pandora 23 and at rates in excess of the rates obtained by ASCAP from the 24 RMLC. 25 actual mathematical model that predicts what would happen in a He lays it out in Unlike Pandora's two economists, Professor Murphy has an SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 23 Opening - Mr. Cohen 1 competitive market. 2 technical appendix I admit is complicated. 3 to go through it with him, but it is complicated. 4 basic principles of the model are pretty straightforward and 5 really boil down to two fundamental points that can be explored 6 with him at his testimony. 7 The model that he sets out in his We'll have a chance I think the First, the increasing rates for custom music services, 8 personalized music services such as Pandora are driven by 9 Pandora's demand for variety. Services like Pandora, in 10 contrast to traditional radio, need to provide a vast variety 11 of music to satisfy the personal preferences of their 12 70 million active listeners, each of whom influences the 13 selection of his or her music by what Pandora calls seeding, 14 thumbing up, thumbing down to shape the listening experience. 15 Essentially users get a chance to either start with a song or 16 start with a genre or start with an artist and then influence 17 what comes next, influence what comes next by giving direction 18 to Pandora's music genome protect which is a computerized 19 algorithm about the type of music he or she would like to hear. 20 If we go to the next slide. This really demonstrates 21 the point. This comes from what Pandora calls the spin 22 diversity study. 23 shows, it's right out of the Pandora document minus the 24 numbers, is the enormous diversity of music played on Pandora 25 as opposed to direct terrestrial radio. I've taken this slide out. What this slide There are by SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 Opening - Mr. Cohen 24 1 significant large factors the depth of music played by Pandora 2 each day, each week, each month is significantly greater than 3 on broadcast radio and they need to do that to provide the 4 personalized listening experience that is the hallmark of 5 Pandora's service. 6 So that's Murphy's first basic principle. His second basic principle which he will testify to 7 that comes from his model is that Pandora's operating in a 8 rapidly evolving marketplace in which there is increased 9 competition among services that are music users such as Pandora 10 for listeners. 11 this increased demand for music and the increased competition 12 among music users would lead in a competitive market to an 13 increase in price. 14 What Professor Murphy will testify to is that Now, his model was not developed for the purpose of 15 litigation. It's grounded in core principles of economics and 16 Pandora's principal criticism of that model, that it's too 17 divorced from reality to be useful, really misses the key 18 point. 19 truly competitive market would predict for performing rights, 20 whereas the actual market, for instance dominated by ASCAP and 21 BMI and a group of other rights resources, so the utility of 22 Professor Murphy's model, like any model, is not its literal 23 application but the fact it predicts what would happen in a 24 competitive market, which of course is the Court's task in this 25 rate court proceeding. It's divorced from reality because it models what a And what it predicts is what happened, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 Opening - Mr. Cohen 25 1 that in 2012 and 2013 transacting outside of the consent 2 decree, Pandora entered into agreements at rates that were 3 higher than the pre-existing ASCAP rates and while Pandora has 4 now employed two economists, Professor Marx and Professor Noll, 5 they're both eminent economists, to attack Professor Murphy, 6 who I think they will concede is an eminent economist, the fact 7 of the matter is he is the only economist who will present a 8 true economic mathematical model to the Court for its 9 consideration. 10 Now, most of my time will be spent with dealing with 11 the criticisms that Pandora has lobbed in at this market 12 analysis because I think our proposal is straightforward and 13 their criticisms are many. 14 with the question the Court raised at the pretrial conference 15 which is how do we deal with the Mobi decision in the context 16 of this rate setting. 17 the Mobi decision that the 2.5 percent rate was a wholesale 18 rate rather than a retail rate, I think that's quite clear, and 19 it's true that your Honor observed in the Mobi decision that 20 the Music Choice rate was applied to wholesale revenues 21 received by Music Choice and there's no doubt that your Honor 22 concluded that a 2.25 rate applied to retail in Mobi would have 23 yielded a fee that was not reasonable, but, your Honor, I can't 24 tell you what you were thinking about when you wrote those 25 words, but what I read from the opinion was that it was not the Before I do that, I do want to deal As your Honor knows, you made clear in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 26 Opening - Mr. Cohen 1 wholesale versus retail issue of rate that governed your 2 Honor's decision, but what governed your Honor's decision was 3 the fact that the retail base that was being argued for there, 4 which was well in excess of the applicant's actual revenues 5 would have made the application of a 2.5 percent rate or your 6 Honor ultimately concluded any reasonable rate to that large 7 revenue base simply not reasonable. 8 Now, there is more to this story of Music Choice 9 because there is an important decision handed down by the 10 Second Circuit subsequent to Mobi and that's the RealNetworks 11 decision and the Second Circuit handed down RealNetworks four 12 or five months after your Honor's Mobi decision and we know the 13 Court looked at Mobi because it cited the Mobi decision for a 14 different purpose. 15 16 17 THE COURT: I read RealNetworks this morning just to ground myself in Second Circuit law. MR. COHEN: So did I, your Honor. And RealNetworks I 18 think is a particularly important case for this proceeding if 19 we're thinking about the Music Choice rate and that's because 20 the Second Circuit expressly endorsed the application of the 21 2.5 percent Music Choice rate to the retail, not the wholesale, 22 to the retail revenue base of all audio services holding -- 23 let's look at that holding, it's quite important. 24 holding with respect to Yahoo! from page 81 of the Second 25 Circuit's opinion, 627 F.3d. This is a "We conclude that the royalty SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN1 27 Opening - Mr. Cohen 1 rate agreed to by Music Choice provides strong support for 2 applying a 2.5 percent royalty rate to those Yahoo! sites and 3 services that provide access to music channels organized around 4 music genre similar to those on Music Choice. 5 provides a basis for a 2.5 percent royalty rate or higher, for 6 Yahoo! sites and services that permit an interactive music 7 experience" -- there's that "interactive" word -- "in which the 8 user may control the selection of music he is hearing, for 9 example, if a user tunes into a more customized station" -- Additionally, it 10 that's Pandora -- "or uses Yahoo! search to listen to songs on 11 demand," which is not Pandora. 12 2.5 percent or higher. 13 Now, what does Pandora say about this decision in its 14 brief? It says, and I'm quoting from page 47 of their 15 opposition brief, "The record in the RealNetworks case did not 16 focus on the wholesale/retail revenue base issue." 17 with all due respect, that's just not true. 18 true. 19 Court at the appropriate time. 20 contentions specifically argue the retail-wholesale point. 21 Steinthal's post trial contentions on behalf of RealNetworks 22 said at paragraph 124 0and one of the reasons why Judge Connor 23 should not apply the 2.5 percent Music Choice rate to 24 RealNetworks is that it was an apples and orange comparison 25 because of the retail versus wholesale distinction and the Your Honor, It's just not First, we'll be happy to hand the documents up to the The applicant's post trial SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Mr. E1LFPAN1 28 Opening - Mr. Cohen 1 point was pressed in the Second Circuit as well. Real's brief, 2 and quoting from footnote 30 of Real's opening brief, which 3 we'll be happy to provide to the Court said, quote, "The 4 District Court failed to take into consideration the 5 2.5 percent rate of Music Choice was a percent of wholesale 6 rate." 7 and squarely before the Circuit which nonetheless concluded 8 that with respect to services operated by Yahoo! and 9 RealNetworks, including a service you're going to hear about The issue was therefore squarely before Judge Connor 10 Launchcast which was an early version of a personalized radio 11 service like Pandora, that a rate of 2.5 percent was applicable 12 and appropriate for a retail base. 13 (Continued next page) 14 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 Opening - Mr. Cohen 1 29 Of course, the Second Circuit reversed Judge Conner, 2 as we are aware. 3 criticism was not of the 2.5 percent rate, but applying that 4 rate to a revenue base that didn't include all audio streaming 5 services. 6 A fair reading of the Second Circuit was Your Honor, there is rate court jurisprudence from the 7 Second Circuit that supports the application of the music 8 choice rate, and with all due respect, I don't read the Mobi 9 case being irreconcilably inconsistent with what the Second 10 Circuit said a few months later. 11 Go to the next slide, please. 12 Let me turn to Pandora's criticisms and try to go 13 through the principal ones. 14 Pandora that lay out their criticisms. 15 expeditiously as I can. 16 There is 180 pages of briefs by I'll try to do it as The first point that I think is really critical is 17 that Pandora does not actually disagree that all of the 18 competitive benchmarks relied upon by ASCAP are inapposite. 19 Pandora does not dispute that direct licenses it entered into 20 with music publishers can be appropriate benchmarks for this 21 Court. 22 Professor Noll for the proposition that one of the three 23 licenses we cite, BEMI license is a competitive benchmark, and 24 here is what Professor Noll says in his written testimony, at 25 Page 30. To the contrary, it argues specifically and relies on SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 30 Opening - Mr. Cohen Based on the details of the negotiations and without 2 telling with EMI, I agree with professor, I agree with 3 Professor Murphy that the direct license with EMI is a valid 4 competitive benchmark. 5 Now, Pandora will spend a large part of this trial 6 trying to explain why the EMI agreement is a good benchmark for 7 this Court to employ and the Sony and Universal agreements are 8 not. 9 offered, but I think they fundamentally boil down to this. 10 There are many, many, many reasons that have been What Pandora is saying, and what I will address next, 11 it was forced into deals with Universal and Sony, withdrew in 12 violation of the consent degree under the compendium amendments 13 and both failed to provide Pandora with the repertoire 14 information it needed to give it an option of taking down the 15 service, and lacking that option, faced ruinous copyright 16 infringement. 17 I think that is the essence of their argument. I 18 think what we will show your Honor at the trial, the evidence 19 is completely inconsistent with their argument. 20 Turn to the next slide. 21 The first thing that is actually striking is the focus 22 for a minute on components of their argument and see how it 23 stacks up between EMI, Sony and Universal because there is no 24 dispute that all three publishers affected the new media 25 withdrawals from ASCAP from the compendium rule changes. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 In E1LJPAN2 31 Opening - Mr. Cohen 1 fact, EMI, the testimony will show, was the precipitating 2 publisher in the amendment of those changes. 3 There is testimony from Pandora's experts about 4 influence of those withdrawal publishers on the board of ASCAP. 5 Each of the chief executive officers testifying for EMI, 6 testifying by deposition, Mr. Bandier for Sony testifying by 7 deposition, and Mr. Horowitz at Universal testifying live, each 8 was a member of the ASCAP board at the time of the withdrawal. 9 10 Were there lists of works provided? There were no 11 lists of works provided for Sony. 12 Universal, but Pandora says they did not get a list, they 13 negotiated without a list of works. 14 15 THE COURT: We have a dispute as to They have a list, but the confidentiality agreement? 16 MR. COHEN: 17 purpose. 18 They couldn't use it for that list of works. 19 Exactly. Exactly. The EMI agreement was negotiated without a Would Pandora be an infringer if they didn't enter 20 into a deal with these publishers? 21 for each. 22 that has been advanced for why Sony and Universal are not 23 market benchmarks could be advanced with respect to EMI, but 24 Pandora embraces EMI's competitive benchmark. 25 The answer is clearly yes What we say to your Honor is each of the arguments Why is that? I think the answer again is back with SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 32 Opening - Mr. Cohen 1 Professor Noll. 2 details of the negotiation and outcome with EMI, the argument 3 that is being made by Pandora, which I respectfully suggest is 4 completely circular, is if I don't have the information, if I 5 am going to face infringement, if the publisher withdrew in 6 violation of the consent decree, but they gave me a rate that 7 was low enough, it is a market benchmark. 8 9 If we focus on his language, based on the That is completely circular. circular. It is completely We don't determine the market benchmark according to 10 Pandora's experts by the rate that they arrived at, but by the 11 tenor and indicia of negotiations which were the same with 12 respect to each of these. 13 So what I would urge your Honor to think about is that 14 once that Pandora has conceded that EMI is a market benchmark, 15 it leads directly to the conclusion that that is true for Sony 16 and Universal as well because the circumstances really weren't 17 any different. 18 Let me deal with the details of those circumstances 19 for a few minutes if I may. 20 they weren't provided with a repertoire information. 21 what the evidence shows about Sony in the Fall of 2012. 22 Their principal argument is that Here is What it shows -- and this testimony will come through 23 the testimony of Mr. Rosenbloum, who negotiated the deal with 24 outside counsel for Pandora, and we say for a moment there is 25 no, there is no written direct testimony of Mr. Rosenbloum. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 Opening - Mr. Cohen 33 1 Mr. Steinthal had to subpoena him. 2 on his case, he is a partner of Greenberg Traurig, and we will 3 cross him. 4 testimony of Mr. Brodsky, the head of business affairs at Sony. 5 He will call Mr. Rosenbloum Mr. Rosenbloum has been deposed, and through the Here is what happened. It is really not in dispute. 6 Pandora learned that Sony intended to withdraw from ASCAP at 7 the end of 2012 and learned that in late September of 2012. 8 What the evidence will show, and we know this from Mr. 9 Rosenbloum's actual time records which will come into evidence, 10 the discussions with Sony began immediately, the first week in 11 October. 12 A month later, a month later -- next slide, please -- 13 Pandora lobbed in a request asking for electric listing of the 14 Sony/ATV and EMI repertoire which they said if they would meet 15 in the event they were going to take down the service, and the 16 next time they asked for that data, which they now say was 17 critical to them was December 17th, two weeks before the end of 18 the year, three days before they did a deal with Sony, after 19 term sheets had been exchanged, and what is the significance of 20 that December 17th date? 21 It was too late, too late for Pandora to actually take 22 down the works of Sony if it actually intended to do that, and 23 we know that from the testimony of Mr. Conrad, who is the chief 24 technology officer of Pandora. 25 he was questioned about how much time he would have needed once He will testify at trial, and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 34 Opening - Mr. Cohen 1 he had the repertoire information from Sony to take down the 2 repertoire, he said I would have asked for a month, a month 3 from the time that you received the list of songs? 4 Yes. There was no prefatory work done at Pandora to take 5 down the repertoire of Sony. 6 was an e-mail lobbed in at the last minute to remind Sony that 7 Pandora didn't have to do a deal presumably to try to get a 8 better deal; in other words, the hallmark of a classic 9 negotiation. 10 There was a negotiating ploy, it Now, the story of Pandora and Universal with respect 11 to the repertoire, if anything, is worse for Pandora. 12 Horowitz will testify, he reached out to advise Pandora that it 13 was withdrawing as of July 1, 2013 back in early February, five 14 months in advance of the day of withdrawal. 15 As Mr. In April, as your Honor observed, the list was 16 actually supplied, and we will have a disagreement at this 17 trial that your Honor will ultimately resolve as to whether or 18 not that list could have been used by Pandora for the purpose 19 of taking down Sony's repertoire. 20 Here is where there is no dispute again. Pandora did 21 nothing. 22 testify, there will not be a single document introduced into 23 evidence to show that Pandora took the first step to take down 24 Universal repertoire. 25 There is not going to be a single person who will It didn't happen. It didn't happen. Whatever their understanding was of that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 35 Opening - Mr. Cohen 1 confidentiality agreement and what you're certainly not going 2 to see is an e-mail or a letter in May or June of 2013 to 3 Universal saying hey, we have this list, we don't like your 4 rate. 5 that purpose? 6 from doing that. 7 didn't happen. We think we want to take you down. 8 9 Can we use it for We're concerned the confidentiality prevents us You're not going to see that evidence. It The reason why Pandora took no steps in reality to take down Sony and Universal is that it makes total sense in 10 the context of Pandora's business model. 11 alluded to this in the beginning -- the entire business case of 12 Pandora, the foundation on which this very, very successful 13 service has been built is based on providing a personalized 14 listening experience to users and allowing them to shape the 15 music they're going to hear by giving individual feedback. 16 The entire -- and I Now, to do that, to Pandora's credit, they've curated 17 a group of more than 1 million songs, including the songs of 18 each of the major publishers, but the ability to deliver that 19 broad group of songs, Professor Murphy refers to as variety, it 20 is central to the Pandora experience. 21 What Pandora -- next slide, please -- here is what 22 they say. On their website and the Music Genome Project is 23 their proprietary algorithm for giving feedback to users in 24 determining what is played. 25 updated on a continual basis with the latest releases, emerging The Music Genome Project, it is SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 2 36 Opening - Mr. Cohen artists, and an ever-deepening collection of catalog titles. That can't be done without access to the most catalogs 3 and music, most important catalogs and music in the country. 4 That is precisely why Pandora told this Court in its rate court 5 petition -- next slide, please -- Paragraph 21, at a time prior 6 to the December judgment and prior to your Honor's ruling, here 7 is what they said: 8 9 As a practical matter, Pandora cannot effectively operate the kind of comprehensive internet radio service which 10 it currently delivers to its end users without access to the 11 huge catalogs of EMI and Sony. 12 The same would apply to Universal with equal force 13 which is now the second largest music publisher. 14 evidence will show, your Honor, is that Pandora never intended 15 to take down Sony and Universal. 16 or didn't have had nothing to do with the deals that it struck. 17 It struck the best deals it could for music that it needed and 18 wanted in a competitive environment, and those are market 19 benchmarks. 20 What the Whatever information it had Let me just deal as quickly as I can with some of 21 their other arguments. 22 there is an argument that is advanced that these deals were 23 done in haste, it was too much time pressure on Pandora to 24 actually conduct a real market negotiation. 25 I have said there are many. First The evidence is really just doesn't support it. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Let E1LJPAN2 37 Opening - Mr. Cohen 1 me start with Universal. 2 five months before the withdrawal date, and the memos and notes 3 that will be introduced at trial, back-and-forth between 4 Pandora and Mr. Rosenbloum and Universal will show the parties 5 spoke at least a dozen times about a deal in the five-month 6 period. 7 As I said, the negotiations began Importantly, the evidence will show the reason why the 8 deal wasn't done until the last day. The deal with Pandora was 9 actually signed on July 1, the date of Universal's effective 10 withdrawal. 11 dropped out of the negotiations with Universal while it pursued 12 summary judgment in this Court, that motion being filed in 13 June. 14 It wasn't done because Pandora had actually Here is what the e-mail said. What you will hear from 15 Mr. Horowitz, and what you will see from the evidence, is a 16 series of e-mails from Universal in June of 2013 imploring 17 Pandora to respond to Universal's request to license them. 18 haven't heard anything. We're disappointed that Pandora has 19 chosen not to respond. We were frustrated and perplexed when 20 Pandora stopped negotiating. 21 We If this deal was done in haste, it was done in haste 22 because Pandora wanted it that way. It was a timing issue of 23 their own making. 24 to Sony. 25 that Pandora had a gun to its head at the end of December, that The story is not any different with respect Again we have heard from the beginning of this case SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 38 Opening - Mr. Cohen 1 once it learned that ASCAP wasn't going to do a deal with 2 Pandora, it was forced to enter a hasty deal with Sony in 3 above-market prices. 4 That is the argument. That is not what the evidence shows. The evidence 5 shows that those negotiations began in October, that there were 6 intermittent negotiations through October and November with 7 Sony which were not pursued with any great dispatch by Pandora, 8 and, in fact, it was a deliberate strategy on the part of 9 Pandora. Next slide, please. 10 Mr. Kennedy candidly laid it out at his deposition. 11 Talking about the Fall of 2012, he testified at deposition our 12 Plan A was to complete the agreement with ASCAP. 13 was to see if we could real a deal with Sony/ATV. 14 So they pursued Plan A. Our Plan B They tried to do a deal with 15 ASCAP. 16 in earnest with Sony in mid-December, discussions that could 17 have been had in September, late September, October or 18 November, and although Sony, their Plan C, as Mr. Kennedy said, 19 was to take down Sony if the terms got unreasonable, I think we 20 can infer from the deal that they didn't do the deal they 21 struck was unreasonable but rather reasonable because again 22 they never took the first steps to taking down Sony. 23 no haste. 24 25 They slow-walked Sony and they only began discussions There was Let me deal with something of which Mr. Steinthal has talked a lot about in this case, the allegation of collusion SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 Opening - Mr. Cohen 1 among the publishers and ASCAP. 2 colorful language. 3 collusion, conspiracy, coordination. 4 39 different story. 5 There has been a lot of Maybe we'll hear some more today of The evidence tells a far First I want to strip away the most serious charge 6 because I think it has been withdrawn. There is no evidence 7 whatsoever that any publisher or ASCAP colluded on the price to 8 charge Pandora. 9 am sure she will testify again, that there was no collusion in Professor Marx has testified at deposition, I 10 the formal economic sense. What happened and was there 11 coordination which as the other charge gets made among the 12 various publishers. 13 completely uncoordinated effort among the publishers. The evidence will show this was a 14 Here is what happened. 15 In the summer of 2010, EMI advised ASCAP that it was 16 either going to resign or remove its new media rights from 17 ASCAP. 18 and say this is great, you'll pull out, we'll get higher rates, 19 the charge is that Pandora is making and we'll use those higher 20 rates. 21 ASCAP and the board didn't jump up and down immediately To the contrary, what the evidence shows is ASCAP's 22 board -- and the story will be told right right out in the 23 minutes -- moved slowly and cautiously. 24 talked to the Department of Justice and resulted in those 25 compendium changes that were resolved by the court, addressed They engaged counsel, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 40 Opening - Mr. Cohen by the court on the December summary judgment motion. 2 Then finally at the end of April 2011, seven months or 3 so after this issue was first raised, the ASCAP board 4 authorized the amendment of the compendium, and EMI withdrew 5 within a few days. 6 The withdrawal was effective May 1, 2011. Pandora says this was all part of a great plot and 7 scheme to drive prices up. 8 after EMI withdrawal -- next slide, please -- what it shows is 9 that a complete lack of coordination, a complete absence of a 10 What really happened in the time concerted plan to drive up rates. 11 What it shows, and I have left out the numbers, are 12 individual publishers acting in their own self-interest. 13 withdrew May 1, 2011 and licensed Pandora at the rate that is 14 set forth in the agreement your Honor has. 15 No other publisher withdrew in 2011. EMI No other 16 publisher withdrew in 2012. Sony withdrew as of 1-1-13, 17 licensed Pandora at the rate your Honor is aware of, and at 18 that time, a time that Pandora focuses on December of 2012, 19 three other publishers gave notice to ASCAP they intended to 20 withdraw as of July 1, 2013. 21 rules would allow them to withdraw, and Pandora says you see, 22 look at all this collusive, coordinated activity that was going 23 on. That was the earliest day ASCAP's 24 What happened? Universal did the license agreement 25 that we rely on as a benchmark. BMG withdrew. It never did a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 41 Opening - Mr. Cohen 1 license. 2 the effective date of this withdrawal, while the summary 3 judgment was pending, it allowed Pandora to continue using its 4 music without any license at all. 5 initially said it was going to withdraw. 6 with Pandora about licensing at rates that your Honor will see 7 are consistent with the rates that Pandora says are market 8 rates, and then it ultimately changed its mind and reversed its 9 decision to withdraw. 10 It never did a license with Pandora. In fact, as of And Warner Chaplain It had discussions What I think this shows, your Honor, is there was not 11 a concerted approach with respect to licensing Pandora. What 12 happened was that a number of individual publishers, and these 13 are only five of the thousands of publishers, although they're 14 all major publishers, made different decisions about whether to 15 withdraw or not to withdraw, licensed at different rates, and 16 generally acted in their own self-interest. 17 Now, there is a lot of noise in Pandora's papers as 18 well about a claim that Sony and Universal somehow prevented 19 ASCAP from completing the deal at the end of 2012, and we'll 20 deal with the 408 issues when we have to. 21 about the evidence for a moment. 22 Let's just think What the court will hear from Mr. LoFrumento, the CEO 23 of ASCAP, he didn't do the deal because he didn't like the 24 rate. 25 knuckled under to the pressure of either Sony or Universal. He will refute directly and clearly the notion he SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 42 Opening - Mr. Cohen 1 What he'll say is ultimately he made the decision on the 2 merits. 3 over the preexisting rate, it simply wasn't high enough. 4 notion he somehow took direction from board members not to do 5 that deal is argument, not evidence. 6 Although the rate that was offered was an improvement The Now, there are criticisms, of course, lodged to our 7 other benchmarks, and I think we'll deal with that at trial 8 with respect to Apple. 9 revenue base, whether it is too narrow or not. We are largely fighting about the What I'll say 10 to your Honor to think about as we approach that at trial, 11 respecting the confidentiality of those agreements, is that 12 Apple runs the iTunes radio service as a service, ads for the 13 service, a business model that is intended to generate revenue 14 and there are contractual provisions which we'll show your 15 Honor in each of those agreements that gave the publishers and 16 ASCAP some comfort that this wasn't been run as a hobby. 17 While it is true, and we concede you have to make some 18 adjustments to the revenue base to deal with this subscription 19 issue that has been raised by Pandora, we think Professor 20 Murphy's adjustments are reasonable and Pandora refuses to make 21 any adjustments at all. 22 entered into by its closest competitor in June of 2013. 23 It simply throws out agreements On SESAC, they make a range of antitrust arguments. 24 SESAC has market power. SESAC is engaged with litigation in 25 radio music licensees over its market power. Your Honor, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 43 Opening - Mr. Cohen 1 SESAC's market share is smaller than EMI's. 2 and say we did a deal with a music publisher that has a greater 3 market share that SESAC, and that's a direct license, but 4 because they want to avoid the implication of a SESAC rate, 5 they say SESAC is a monopolist even though it doesn't have a 6 consent decree. 7 They come to court In the end, all they can to is say, well, SESAC's 8 market share is really higher than you think. 9 some testimony that Mr. Kennedy will give. That is based on I don't think it is 10 supported by any documents. 11 SESAC's own view of its market share and I think it is 12 inconsistent with what your Honor had to say about SESAC's 13 market share in the Mobi decision. 14 I think it is inconsistent with If I can go to the next part of this, I want to talk 15 about the fundamental argument made by Pandora in support of 16 its rate which is that it is similarly situated to the RMLC 17 stations that entered into a deal with ASCAP in early January 18 2012. 19 first on the consent decree and the meaning of "similarly 20 situated," and here, of course, your Honor is well aware, here 21 is what it says so we have it in mind. 22 I think both parties would agree that the question turns Music users or licensees in the same industry, Section 23 2 (r) of the consent decree, that perform ASCAP music and then 24 operates similar businesses and use music in similar ways and 25 with similar frequency and then it lays out a series of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 Opening - Mr. Cohen 1 factors. 2 same industry. 3 the threshold question, in the same industry as they are and 4 44 you'll see licensees. 5 The threshold question is whether Pandora is in the It is not the dispositive question, but it is Pandora has devoted considerable effort and it has two 6 experts, as your Honor is aware, to try to persuade the court 7 there is a quote-unquote radio industry, whatever that means 8 because there is no standard definition of the radio industry. 9 What I will say is that the definition that has been 10 offered by Pandora's experts are simply made up for the 11 purposes of this litigation. 12 radio industry as they call it solely by reference to whether 13 or not there is an on demand feature available to the listener. 14 If you can select a specific song, it is not radio; if They define the quote-unquote 15 you can't, it is radio. In their view, all of the features 16 that make Pandora unique and successful have nothing to do with 17 the definition of radio. 18 They gloss over the enormous differences between the 19 product offered by the 10,000 plus radio stations that signed 20 the RMLC license and Pandora. 21 music, thumbing up, thumbing down, picking stations, picking 22 artists, invoking the Genome Project which they say is the 23 heart of their service, has nothing to do with their view of 24 whether or not this music service is radio or not radio. 25 The ability to personalize the It is the antithesis of the way they market SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 45 Opening - Mr. Cohen 1 themselves, where they say over and over again that the key 2 differentiator between traditional radio and Pandora is the 3 customized, personalized experience enjoyed by their listeners. 4 It comes out of their own documents. 5 Here is Pandora's 10 Annual Report from 2012. It is 6 the letter from Mr. Kennedy to the shareholders. On top of 7 that report, Mr. Kennedy has stepped down as the chairman, but 8 he will testify. 9 where users can interact with radio, an entirely new category. 10 They say over and over and over again is that they're Pandora has created an entirely new category 11 better than and different from radio. 12 Westergren, who is the founder, wrote this to a board member in 13 August of 2012. 14 15 16 That is why no doubt Mr. "I actually don't really think of broadcast radio as our primary competition any longer." Mr. Steinthal says these are sound bites. I would say 17 they're admissions, and they're completely consistent with 18 dozens and dozens of documents your Honor will see including 19 the next one. 20 Slide 33. Your Honor, what I have excerpted here from 21 ASCAP Exhibit 85 is a discussion from 2011 back-and-forth by 22 e-mail between three of the most senior executives at Pandora, 23 Mr. Westergren we have described, Mr. Kennedy, 24 Mr. Fleming-Wood, chief marketing officer. 25 Westergren saying this may sound offensive, but what if we It starts with Mr. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 46 Opening - Mr. Cohen 1 commission a study that asks people what is Pandora? 2 is the vast majority of people would say radio. 3 Mr. Kennedy. My guess I'm actually much less confident that 4 consumers would say radio. 5 even think about what category we're in, we're just Pandora. 6 Mr. Fleming-Wood. I actually believe that few of them I agree with Joe. I see radio as 7 an important advertising and investor story, but less so from 8 the consumer standpoint. 9 In the end, your Honor, I think what the evidence will 10 really show is, as Ms. Flynn testifies and I think Professor 11 Noll will actually concede, there is a continuum of experiences 12 here from traditional radio where one listens and doesn't 13 include the selection of music other than picking a station, 14 doesn't give any individualized feedback, a one-too many 15 experience to Pandora which goes up to the line of interactive, 16 but does not actually allow you to pick a song, but when you 17 start the station by picking a song, you are probably going to 18 hear it eventually. 19 demand services which clearly have slightly different 20 attributes. 21 Then there is on demand radio or or on To some extent this isn't radio, is it not radio is a 22 little bit of a semantic argument between dueling experts on 23 both sides. 24 similarly situated to the RMLC listeners, the vast bulk of 25 which are simply traditional radio. The real question is whether or not Pandora is SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 Opening - Mr. Cohen There we would say no. 47 What Pandora then next argues 2 is well, it is still entitled to the RMLC rate because it is 3 similarly situated to one single RMLC licensee, Clear Channel 4 iHeartRadio service. 5 And specifically because Clear Channel iHeartRadio 6 service has something called create station, which for all 7 intents and purposes is Pandora, as there are many other 8 services that have not cropped up that allow for user feedback 9 and personalization of music. 10 Now, first I have to say that the argument you can 11 simply pick one licensee, in our view, misconstrues the 12 definition of similarly situated under the consent decree. 13 Even the facts don't really support the argument. 14 First it is undisputed that the overwhelming bulk of 15 streams and listenership on iHeart, iHeartRadio, are simulcasts 16 of terrestrial radio. 17 will hear is a small fraction of what iHeart transmits both in 18 terms of hours and in terms of revenue. 19 They crate a station feature your Honor The mere fact, we would say, that iHeartRadio is able 20 to license its creative station under the RMLC license as 21 written does not make Pandora similarly situated to the RMLC 22 station as a whole. 23 our briefs, we are right in the smack of Judge Conner's 24 decision of Salem media, regarding the religious broadcasters 25 20 minutes ago. I think, your Honor, here, as we said in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 48 Opening - Mr. Cohen As Mr. Steinthal says, it is an argument advanced 2 without success by ASCAP. 3 argument that was made in the RMLC, in the religious 4 broadcasting, the Salem case, the Salem applicants were like 5 some of the RMLC applicants. 6 the RMLC applicants, they were similarly situated to the RMLC 7 purposes of record. 8 9 10 Here is what Judge Conner said. The Because they were like some of Pandora goes further. It says as long as we're similarly situated to one applicant, Clear Channel, we are similarly situated to the work. 11 Judge Conner rejected that in language that I think 12 applies here, and he says the fact that ASCAP can construct a 13 subgroup from, and I have bracketed some other language for 14 context, stations covered by the RMLC-negotiated licenses. 15 Whose music users approximate that of the median applicant does 16 not refute applicant's claim that, as to music use, the 17 applicant group is dissimilar to the RMLC group and the rest of 18 the industry. 19 What the evidence will show, your Honor, is that 20 Pandora is dissimilar, dissimilar to the RMLC stations as a 21 whole. 22 similarly situated language of the decree, and the 23 circumstances relating to the negotiation of that agreement 24 reinforced why Judge Conner would make any sense in this case. 25 In their briefs, what Pandora says you shouldn't even It does not get the rate of 1.7 on the basis of the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 49 Opening - Mr. Cohen 1 look at the circumstances surrounding the RMLC license. 2 don't really understand that, your Honor. 3 thought the guidance from this Court, which is consistent with 4 prior courts, is that in considering a benchmark, and they say 5 the one set is a benchmark, we should look at the similarity of 6 economic circumstances affecting the earlier negotiators and 7 the current litigants. 8 9 I The next slide. I And the circumstances, therefore, of the radio license are critical because they could not have been any more 10 different than those present here, and what they showed was 11 that ASCAP and the RMLC negotiated a license at a time where 12 the new media activities and revenue of the RMLC stations were, 13 in fact, very, very small. 14 been. 15 That is what ASCAP's experience has The next slide, please. In the first year of the radio license, the red, 16 taking the numbers out, but it is an accurate depiction, 17 indicates the reporting by the RMLC as to what percentage of 18 the revenues they report for fees attributable to terrestrial 19 broadcasting and what portion was attributable to new media. 20 This was overwhelmingly a terrestrial deal. It was 21 driven by that. It was driven like any deal, as Mr. Candilora 22 will testify, by the economics of this transaction, and ASCAP 23 entered into unitary rate understanding that 95 percent or more 24 of the revenues over the course of that deal would be driven by 25 the terrestrial piece. There are other factors, your Honor. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 50 Opening - Mr. Cohen 1 Next slide, please. 2 This wasn't just about the rate. If we're going to 3 understand economic circumstances around the deal, the fact of 4 the matter is because of the preexisting radio deal which was a 5 flat-dollar deal, the rate had gone up, and up, and your Honor 6 dealt with that on the interim fee decision you rendered. 7 ASCAP knew to get a deal, it would have to pay a lot 8 of money back to RMLC, and it negotiated and it was critical to 9 negotiate, a five year interest rate payout which was at 10 economic significance. It negotiated on the heels of the DMX 11 decision an agreement by the RMLC they would not pursue a 12 return for this rate, a carve-out license for the five-year 13 period for the license term. 14 blanket license fees to account for otherwise licensed ASCAP 15 music and they negotiated the ad deduction taken out of trial, 16 but was an important negotiation. There will be no credit against 17 This was a deal that was about more than the 1.7 18 percent rate, and the 1.7 percent rate was fundamentally, 19 fundamentally a terrestrial deal. 20 I have one last point, your Honor. 21 MR. STEINTHAL: 22 have a lot of liquids. 23 THE COURT: I am fighting a terrible cold, and I Can we take a short break? Sure, let's take a break. 24 to hear counsel is under the weather. 25 I am very sorry We'll take a 10-minute recess. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 51 Opening - Mr. Cohen 1 (Recess) 2 THE COURT: So I know, Mr. Steinthal, that you didn't 3 want to interrupt your adversary's opening, and I appreciate 4 that, but anyone should at any time feel free to ask for a 5 break. 6 to accommodate someone's health needs. Obviously, we'll do anything we can accommodate, too, 7 So that is not an issue. 8 MR. COHEN: 9 10 Your Honor, I only have one more topic to cover, so Mr. Steinthal's break was at a perfectly appropriate time. 11 That is the question of music use. I think it goes 12 both to the question of whether or not Pandora is similarly 13 situated to the RMLC stations and also whether, if you start 14 with the RMLC benchmark as he suggests, you have to make these 15 adjustments. 16 Let me deal first with the issue of whether or not 17 Pandora is similarly situated. The answer is no. Pandora 18 plays a lot more music than radio. 19 situated is the frequency of music performances in the consent 20 decree. 21 dispute. 22 uses for purposes of paying its members. 23 to, as your Honor noted in the in limine notions with Professor 24 Ashenfelter, and although Pandora does its best to try to 25 attack Professor Ashenfelter, I would suggest in the end, in The definition of similarly The evidence on music use really should not be in It comes right out of the ASCAP survey that ASCAP It will be testified SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 52 Opening - Mr. Cohen 1 the end there is no dispute that Pandora plays more music than 2 traditional radio, and Pandora knows it. 3 Mr. Kennedy had to say. Here is what 4 Slide 34, please. 5 In May of 2013, we play about 15 songs an hour; FM 6 plays about 10 songs an hour. 7 That disparity, your Honor, follows just as a matter 8 of logic from the kind of service Pandora is. 9 wall-to-wall music. 10 11 pattern. It is There are no DJ's, no news, no weather, no They only have three minutes of ads an hour. It is inconceivable that they would have the same 12 number of songs per hour and the same music intensity as radio. 13 That moves me to the last thing I want to say before sitting 14 down and turning it over to Mr. Steinthal. 15 If you start, as he urges, with the music, the RMLC 16 benchmark, we still need to make the adjustments for music 17 intensity. 18 thought that that would not have been a subject of dispute, but 19 I was wrong because Pandora says we shouldn't make those 20 adjustments. 21 We need to make that adjustment. I think the response is: I would have A, in the consent decree, 22 Section 2 (r) which talks about the frequency of music use we 23 just discussed, and it is something your Honor discussed in 24 Mobi, in considering the three cable rates and your comments on 25 Professor Noll's testimony -- Slide 41 -- where you were SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 53 Opening - Mr. Cohen 1 summarizing his testimony, which I am sure he will affirm here, 2 that competitive prices -- search for competitive prices -- are 3 based on usage, such that fees for performance rights would be 4 higher for content that contains more music -- Footnote 58 of 5 your Honor's decision -- and that draw on 20 years of rate 6 court jurisprudence. 7 exactly in the Cap Cities litigation. Judge Conner dealt with this issue 8 We can put up the next slide, please. 9 And he said thus, on a perspective fee setting basis, 10 one who expects to use large amounts of ASCAP music may be 11 expected to accede to higher rates than those agreed to by one 12 who expects to use lesser amounts. 13 the rate-setting inquiry, we think it is appropriate to assume 14 that the value of the blanket license to a network will vary in 15 direct proportion to the amounts of music used by that network, 16 all other factors remaining equal. 17 if you start with the RMLC benchmark. 18 Thus, for the purposes of The music use has to matter In conclusion, your Honor, I think Pandora has done 19 much to try to complicate a case that we think at least is 20 relatively simple. 21 actually proposing rates that are not at the highest end of 22 those market comparables. 23 competitive benchmarks in the licenses Pandora has entered into 24 with music publishers, with SESAC, the iTunes rates that have 25 been agreed to by Pandora's closest competitors. We want to follow the market. We're We believe there are direct SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 54 Opening - Mr. Cohen While Pandora has given your Honor a whole host of 2 reasons to think about rejecting those benchmarks, in the end 3 what we believe the evidence will show is that ASCAP's rates 4 were reasonable, it supports what would be achieved in the 5 competitive marketplace and we have met our burden under AFJT, 6 proposing a competitive price. 7 THE COURT: Thank you. 8 MR. STEINTHAL: 9 Good morning, your Honor. Thank your Honor. I am here on behalf of 10 Pandora. 11 great service. 12 percent market share is because of its technology. 13 invested greatly in dollars and in staff to make the single 14 best by far internet radio service, and the internet radio 15 industry is part of the radio industry. 16 radio is distributed online as opposed to over the air. 17 I am proud to be here on behalf of Pandora. It is a It does use music, but the reason it has a 70 It has It doesn't matter that We have already dealt with that issue before your 18 Honor in Mobi TV, when ASCAP sought to justify higher rates 19 based on how the content got to the consumer rather than what 20 the content was. 21 eloquent in trying to deal. 22 his points. 23 There is a lot to say, and Mr. Cohen was very I will try to deal with a lot of The first thing I thought to myself when I got up, 24 have you ever heard the phrase ships passing in the night? 25 economists are ships passing in the night. The notion of a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Our E1LJPAN2 Opening - Mr. Steinthal 55 1 competitive market, as Dr. Murphy construes it, is a foreign 2 subject to Dr. Marx and Dr. Noll, as you'll hear, and I'll come 3 to that later. 4 The indicia of lack, lacking in a competitive market 5 that I will go into in some detail surrounding the Sony and 6 Universal deals makes it impossible for our economists to 7 endorse the notion that a marketplace that was so full of 8 imbalance of information and threats of infringement could ever 9 conceivably be a competitive market, and as I'll get into in 10 detail, it flunks the very test of what a fair market value 11 marketplace is that Dr. Murphy set forth in his original 12 testimony. 13 Now, like Mr. Cohen, I'll just set out at the 14 beginning what I am going to do. 15 a slide slow. 16 I am not going into it all on I have a few on analogue. I will talk first about the similarly situated issue 17 and why Pandora is entitled as a matter of consent decree 18 interpretation to the 1.7 percent RMLC ASCAP rate. 19 Then I'll turn to why ASCAP has not met its burden, 20 and then lastly I'll discuss once you decide ASCAP hasn't met 21 its burden, if you haven't decided we are similarly situated, 22 what the right benchmark analysis is, and in our view, that 23 benchmark analysis would start with the RMLC deal and end with 24 a range of reasonable rates that goes from 1.7 percent to 1.85 25 percent as you're familiar with the market. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN2 1 Opening - Mr. Steinthal 56 If you'll bear with me, I would like to deal with the 2 question you raised about the Mobi TV two and a half percent 3 music service rate in sequence, in the context of where that 4 argument came up in ASCAP's papers. 5 main point that Mr. Cohen did recognize, that I would argue is 6 that the Mobi TV music intensive rate at two and a half percent 7 will against a decidedly wholesale upstream revenue case, 8 revenue service provider and not the retail revenue base that 9 is typified by Pandora whose entire revenue stream is a retail 10 11 Suffice it to say that the revenue stream. Now, as a legal market, under the decree, Section 9 12 (g), ASCAP shall be required to offer a license at a comparable 13 fee to all similarly situated music users. 14 Honor, we are similarly situated to ASCAP's RMLC licensees, it 15 is game over, you wouldn't have to deal with all the other 16 arguments in the case. 17 If you find, your (Continued on next page) 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 1 57 Opening - Mr. Steinthal MR. STEINTHAL: You wouldn't have to deal with ASCAP's 2 benchmarks or our other benchmarks. 3 similarly situated, we get that rate. 4 It's game over. If we're Why is it that Pandora is similarly situated to the 5 RMLC licensees? 6 Pandora is and always has been a non-interactive radio service. 7 Now, I'll pause there. 8 radio service. 9 the way I view the world and I think the way most people view 10 the world of radio, it's either the user requests and demands 11 the music or some service programs the music. 12 music for our listeners. 13 technology, we do it with input from our users but so do a lot 14 of radio companies including a ton of radio companies that are 15 RMLC members. 16 technology has been around since the late 1990s. 17 that Pandora is fundamentally different than radio is just not 18 a credible statement. 19 Let's start with the unassailable fact that I know your Honor put out a responsive I think, you know, the way we view the world, We program the Now, we do it with the latest This is not a brand new technology. This The notion You will hear from Mr. Westgen, the founder of 20 Pandora. You'll hear from Tom Conrad, the CTO, the chief 21 technical officer. 22 works, what it does. 23 officer, will address how Pandora positioned itself in the 24 market and then Mr. Kennedy, who directed the company 25 throughout his formative years but recently retired, will also From them you'll hear how the service Simon Fleming-Wood, the chief marketing SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 1 58 Opening - Mr. Steinthal testify. 2 As I said at the outset we're proud of our technology. 3 The notion that we should be chastised as different, I thought 4 that the slide about -- I don't think we would be called radio. 5 We would be called Pandora, your Honor. 6 our brand. 7 really think of Pandora by its brand rather than the generic, 8 it falls within that. 9 That's the power of That's fantastic news for Pandora. If people But I don't think you're going to have any trouble 10 when you hear the explanations of the context in which those 11 sound bites -- I called them sound bites in our brief and I'll 12 call them sound bites here -- those sound bites when 13 contextualized about who our competition is will dramatically 14 demonstrate where we are in the market. 15 the RMLC, this is something ASCAP hates to do, it's like 16 blinders, they just focus on the over-the-air components of the 17 RMLC. 18 majority of their revenue right now is over the air, but there 19 are so many RMLC members that have internet radio, not just 20 simulcast, but we know I Heart Radio, you've heard a lot about 21 that, that's the 12 percent number right under ours in terms of 22 the market for internet radio, that is a company owned and 23 operated by Clear Channel, the largest of the over-the-air 24 broadcasters and obviously a major member of the RMLC. 25 your Honor knows from all the papers, the RMLC ASCAP deal made And when you look at I understand that from a revenue perspective the vast SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 And as E1LFPAN3 59 Opening - Mr. Steinthal 1 explicit in the side letter that went with it as well as in the 2 text of the actual agreements that Clear Channel and its I 3 Heart Radio service are covered by the RMLC deal. 4 Jay said in his opening that I Heart Radio is Pandora, just, 5 it's the same as Pandora. 6 technology. 7 all about -- and you'll see some of the articles, the Pandora 8 killer that were written about the launch of the I Heart Radio 9 service. And I think It has somewhat different It uses Echo Nest, an outside vendor, but it was Of course just like the iTunes Radio service, 10 nobody's killed Pandora. 11 what ASCAP's witnesses have said about iTunes Radio, how it was 12 going to totally change the marketplace. 13 suspected the same thing. But what you'll see, your Honor, and 14 hear is we keep going up. ITunes Radio notwithstanding. 15 would submit to you it's because we've got great technology and 16 great people. 17 Pandora continues notwithstanding And Dr. Murphy And I But in terms of the similarly situated analysis, we're 18 internet radio. We have genre-based stations like so many 19 other internet companies and we have customized radio, 20 responsive radio, personalized radio, whatever you want to call 21 it, but the bottom line is we program the stations. 22 listeners do not and there is a sea change, a huge gulf between 23 on demand and non-on demand and that gulf, your Honor, exists 24 as a matter of law, but more importantly for this case, it 25 exists within ASCAP's own licensing decisions continuously. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Our E1LFPAN3 1 Opening - Mr. Steinthal 60 Let's take a look at slide 2. 2 So here we have, your Honor, sort of a graphic that 3 lays out ASCAP's history of licensing and as you'll see, when 4 it started licensing on the internet it charged, when it 5 started licensing internet radio was 1.615 percent until 2002. 6 And your Honor will recall what that 1.615 percent relates to, 7 I'm sure. 8 fixed fee in 2004, the lump sum industry fee. 9 did, and there's no dispute about it, when internet radio That was the old RMLC rate before they went to a So what ASCAP 10 started out they applied the radio rate of 1.615 to internet 11 radio. 12 with internet radio, and you had the beginning of the on-demand 13 market. 14 Rhapsody, pure on-demand services that launched in 2002. 15 By 2002, you had much richer experience, I would say, There were a few companies like Press Play and So what does ASCAP do? They say, okay, let's create a 16 bifurcated rate structure because on demand is more valuable. 17 The economist Dr. Marx will talk about why it's more valuable 18 in the sense that there's lesser opportunity to substitute as a 19 service. 20 the world's music on demand and I want to listen to the Beatles 21 and I can't get it or I want to listen to whoever your favored 22 band might be at a given point, you can't substitute away. 23 When you're a service like Pandora and there is no 24 understanding that you will ever get a given song at a given 25 time, you have the ability to substitute away and that ability If I'm paying 10 or $15 a month, your Honor, to get SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 61 Opening - Mr. Steinthal 1 to substitute in your playlist generation creates from an 2 economic perspective a basis for there being a lower rate for 3 non-interactive radio than for an on-demand service. 4 also issues of substitution. 5 people are getting whatever they want whenever they want it 6 they're not going to buy albums, any more so there has to be a 7 higher rate for the lessening of the royalties that go to 8 publishers and the record companies. 9 of a bifurcated rate and, your Honor, it's never changed. There are There are concerns that when So there's a long history 10 Since 2002 that bifurcated rate structure for non-interactive 11 at 1.85 and interactive at 3.0, that's ASCAP's form license 12 that has been in existence and is still available today. 13 as you will hear, Pandora was licensed on the form 14 non-interactive license. 15 terminated the agreement over an issue that related to -- you 16 read it in the papers and all, there's an alternative minimum 17 fee based on sessions and the way ASCAP calculates sessions was 18 problematic to Pandora and they hadn't been calculating it on 19 that basis and then in 2010 they realized that, uh-oh, if we 20 have to pay them on a sessions basis let's get out of this. 21 But from the perspective of was ASCAP happy to get the payments 22 that Pandora was making at 1.85 percent from 2005 until 2010? 23 You bet they were happy. 24 extolling the virtues of Pandora as a new media client. 25 frankly, Pandora was a willing buyer at 1.85 during that time And And throughout, until Pandora You'll see evidence where they're SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 And, E1LFPAN3 62 Opening - Mr. Steinthal 1 period and the only reason it became an unwilling buyer at 1.85 2 was because its chief competition got 1.7. 3 So when Clear Channel, our biggest competitor, gets 4 1.7, we say, hey, wait a minute, we're entitled to not be 5 treated -- whether it's discriminatorily or unfairly, whatever 6 the right word is, the bottom line is when your competitors are 7 getting a better rate and you feel your operating services that 8 are identical in the case of I Heart Radio and comparable in 9 the case of broadcast over the air stations and they're all 10 subject to the same 1.7 rate, that's what caused Pandora to say 11 we should get that 1.7 rate. 12 But when we talk about -- and we'll come back to this 13 at the end, we talk about what's the range of reasonable rates. 14 At the end of the day it's between 1.7 and 1.85. 15 we're similarly situated. 16 minute, but in terms of getting way ahead of ourselves and 17 putting everything in a package and telling you what the end of 18 the story is, it's 1.7 to 1.85. 19 just because ASCAP willingly licensed us at 1.85 for all that 20 time, you'll hear from Mr. DeFilippis, and it's actually in 21 that little blurb on the graph that when ASCAP adopted the 22 1.85 percent rate and they bumped it up from 1.615, the 23 pre-existing internet radio rate. 24 there was an increasing amount of music that was being both 25 offered by services and consumed by their customers. We believe I'm going to argue that point in a Why 1.85, your Honor? Why did they do it? Not SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Because So all E1LFPAN3 63 Opening - Mr. Steinthal 1 this stuff you're hearing about this music use adjustment, if 2 you adopt the RMLC deal, they already did it. 3 adjustment back in 2002 and they carried it forward since then 4 at a 1.85 rate that incorporates the very music you suggested 5 that they claim is warranted as a bump-up from a broadcast 6 radio benchmark. 7 They made the So I think it's helpful to have that overlay and I was 8 surprised that Mr. Cohen didn't go at all into the history of 9 ASCAP's licensing here, but I guess because of the absolutely 10 continuous manner in which ASCAP had licensed internet radio 11 it's not something ASCAP wants to really promote here. 12 trying, your Honor, to break away from more than a decade of 13 licensing at either 1.85 or 1.7 and they're trying to get us up 14 to 3 percent by the end of this license term and that spike, as 15 you'll hear, your Honor, there's no economic justification for 16 it whatsoever. 17 we got to get somebody in here to justify the rate increase 18 that we're demanding, and I'm going to get into in a moment 19 what I think the record will reflect is what the true 20 motivation for this rate increase is, and it's not based on 21 economic principles. 22 They're Dr. Murphy's testimony is absolutely post hoc Now, as your Honor knows from both of our briefs, 23 there are three components of a similarly situated analysis. 24 Are the licensees involved in the same industry? 25 operate similar businesses and do they perform ASCAP music and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Do they E1LFPAN3 64 Opening - Mr. Steinthal 1 use music in similar ways and with similar treatments? 2 first two issues are hardly worth expending time. 3 testimony of Pandora's fact witnesses and its expert witnesses, 4 including Mr. McIntyre in five pages will demonstrate that 5 there's not any credible argument that we are not in the same 6 industry as the RMLC entities, nor is there any credible 7 argument that we don't operate similar businesses. We do. 8 There's not -- there's just no question about it. The fact 9 that we have personalization as well as regular old genre-based 10 stations, your Honor, you will see in the evidence that there's 11 been personalized radio for 15 years now and guess what? 12 always been licensed by ASCAP at that 1.85 rate, just like any 13 other genre-based internet radio service. 14 The The It's Now, ASCAP's primary attack regarding our similarly 15 situated argument concerns whether Pandora uses music in 16 similar ways and with similar treatments compared, of course, 17 to the RMLC licensees. 18 again, can't be credibly disputed. 19 licensees that have genre-based offerings on the internet and 20 personalized radio offerings, and as our testimony will be, 21 including our experts, will make very clear the industry, your 22 Honor, is what I described at the very outset. 23 programming the radio stream? 24 service? 25 even over-the-air radio stations are using various engines and That we use music in similar ways, There are so many RMLC Who is Is it the listener or the Mr. Rosenblatt goes on for great lengths about how SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 65 Opening - Mr. Steinthal 1 technology to architect playlists for over-the-air radio 2 stations, they're doing the same thing Pandora is doing. 3 somewhat nuanced, different way, perhaps. 4 things you can do on the internet that you can't do on 5 broadcast, but at the end of the day is it radio, are we in the 6 same industry, do we compete for the same advertising dollars? 7 Do we compete with the same auto manufacturers to get that 8 window of opportunity to be an app in a car that Buick is 9 releasing? 10 Absolutely. In a There are certain You'll hear all that testimony and it will be very, very compelling. 11 So then it really comes down and I think Mr. Cohen's 12 focus on the music use is what I expected, because that's the 13 issue. 14 about the similarly situated analysis. It's the only issue I believe that is even debatable 15 Now, I know they cited Mr. Kennedy's offhand 10 to 15, 16 their own data reflects it's 11.3 or something against 15. 17 it is what it is, but it's one thing that's happening, your 18 Honor, is it's diminishing. 19 some things that are happening at Pandora, two things that 20 affect music use. 21 audience we're able to sell more ads. 22 reacts to audience. 23 THE COURT: 24 25 Why is it diminishing? So There are One is as we've gotten a bigger and bigger You know, the ad market This is a very sad piece of news for a lot of folks. MR. STEINTHAL: It's only because we are able once SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 66 Opening - Mr. Steinthal 1 we've grown our audience we can sell more ads so you're going 2 to have more in-stream ad units per hour and therefore less 3 music per hour. 4 another. 5 saying comedy programming takes up a lot, but I'll say this, 6 it's a heck of a lot more than Pandora Premiers. 7 service where for up-and-coming artists we have an arrangement 8 with their labels to provide on-demand access before certain 9 songs are released. Those two things are directly related to one And then there's the comedy programming. I'm not That's the Your Honor, the notion that this makes us 10 a hybrid service, this is a promotional thing we do with 11 labels. 12 for a week at a time. 13 case. 14 when it comes to us because the label is anxious to have us 15 perform a promotional bit for them. 16 not here to get a rate set for that little tiny piece of what 17 we offer that's on demand. 18 It involves I think 400 or so songs and we have them And guess what? It's not part of this We get all the composition performance rights cleared We're not a hybrid. We're So back to the music use differential, which is where 19 it's all about. We think the figure is somewhat exaggerated 20 because what ASCAP is counting is just the songs per hour. 21 there are songs in ads and this is where we get a break. 22 we have less ads per hour, they have a lot more ads per hour. 23 If you count the songs that are in the commercials, that's 24 going to close the gap. 25 know that ASCAP chides us for it every now and then, but it was But When And there's also, your Honor, and I SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 67 Opening - Mr. Steinthal 1 interesting that their composer, Brett James, does exactly what 2 everybody else does as he testified in his deposition, which is 3 when an ad comes on in your car he changes the station. 4 you look at music consumption across the RMLC, there's no 5 question that the music consumed per hour is greater than 11.3. 6 No question whatsoever. 7 but I know it's more than 11.3 per hour because people 8 unequivocally when non-music programming comes in and they want 9 to listen to music, in their car in particular, they change the So if I can't tell you what exactly it is, 10 station. 11 narrowed when you get to consider these other issues. 12 And so the gap that they make so much of becomes Now, there's also the fact that the RMLC universe 13 consists of radio stations -- music format radio stations that 14 have 6.6 songs per hour up to more than 20 songs per hour. 15 it's not as if there's a specific profile that has to be met to 16 be eligible for the RMLC rate. 17 thought Mr. Cohen's point about Dr. Noll's testimony about 18 music use being an important issue in setting fees, well, 19 Dr. Noll's point is, yeah, at a certain level it is, like, 20 let's look at cable where we have a .1375 rate for news and 21 sports, a .375 rate for the vast swath of general entertainment 22 and a .9 rate for music video channels. 23 composition of the channels that are within the general 24 entertainment category you've got channels that are documentary 25 driven, you've got channels that are much more music intensive So It covers a wide gap and I If you look at the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 68 Opening - Mr. Steinthal 1 than others. 2 parameters in determining whether the rate should be X or Y for 3 a certain category of music user, but the RMLC has already done 4 that. 5 It's just -- yes, you have to look at general The RMLC deal covers 6.6 to 20. 6 11.3. 7 situated, even if you accept their numbers. 8 think their numbers once you consider all the evidence and look 9 at consumption shrink and the gap is much less than the 3.5 10 Our average is 15. Okay, the average is It doesn't make us not similarly And as I said I songs per hour, whatever it is that ASCAP is saying it is. 11 Let's talk about Salem Media. I don't know, your 12 Honor, whether you've spent a lot of time on Salem Media yet. 13 It is a curious case in the sense that the entity arguing for 14 similarly situated treatment was ASCAP. 15 holding of the case is similarly situated is a sword for a 16 licensee but can't be used as a sword by ASCAP. 17 the core principle. 18 broadcasters into a deal that the religious broadcasters didn't 19 like. 20 broadcasters were interested in per program licenses and the 21 RMLC hadn't spent any time on that at all. 22 that's just context. 23 should or shouldn't be deemed similarly situated it makes it 24 pretty clear that ASCAP's argument that the median was the 25 right way of approaching this is wrong. I think the core I think that's ASCAP was trying to rope the religious And one of the fundamental things is that the religious Now, your Honor, When you read the arguments about what In other words, you SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 69 Opening - Mr. Steinthal 1 don't have to be at the median or the average to be similarly 2 situated. 3 it's probably dicta, to be fair, for both of us, but the dicta 4 suggests strongly that -- and you'll see the language, if 5 you're in the range of the benchmark license -- if the 6 applicant licensee has music use that is within the range of 7 licensees covered by the benchmark license, that's enough. 8 We're right smack in that range, your Honor. 9 are within that range. What the decision says, and I think, your Honor, No question. We And so if you construe Salem Media like 10 we do, all you need to find is that we're in the range. 11 it's even better, your Honor, for us in the sense that the RMLC 12 deal is really two licenses. 13 there's an individual station license. 14 outline so I can't tell you what the exhibit numbers are, but 15 there are two different licenses. 16 says that if you own one or more commercial radio stations then 17 you can make new media transmissions unrelated to those 18 stations that you own and pay for them under the group license. 19 Maybe this is one that I should go to my notes and read to you 20 from. 21 And There's a group license and Group license agreement: I've just abandoned my The group license basically It enables, quote, "an 22 entity that owns one or more commercial radio stations," 23 unquote, to make, quote, "new media transmissions," unquote, 24 via entities that are, quote, "not otherwise licensed by any 25 station licensed under the radio station license agreement." SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 1 70 Opening - Mr. Steinthal So basically you're able if you're Clear Channel and 2 you operate I Heart Radio you can have your I Heart Radio 3 company operate under the group agreement and then all your 4 individual stations operate under the individual station 5 agreements. 6 has one, universal licensees, it's one, it's Clear Channel for 7 I Heart Radio. 8 the entities under the station agreement because we're within 9 the range, we satisfy the other two requirements easy. And you know what, your Honor, the group license So while we submit we are similarly situated to We 10 satisfy we're using music similarly easy. 11 fight over the volume of our music use. 12 range under Salem Media. 13 the station agreement, but by God we are definitely similarly 14 situated to the entire universe of licensees operating under 15 the group licenses. 16 Radio is us. 17 agreement. 18 either way. 19 We had this big We claim we're in the We're similarly situated even under And Mr. Cohen said it again. I Heart They're the only licensee under the group It's game over. We are similarly situated under And, your Honor, ASCAP seems to suggest that this is 20 some awful result, how could you possibly allow this to happen. 21 Your Honor, if Clear Channel bought Pandora tomorrow there is 22 not a shadow of a doubt that it could put Pandora's streams 23 under that group license just like I Heart Radio is. 24 no limit on how many new media transmissions you can make. 25 There's no limit on how much money you can make from new media SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 There is E1LFPAN3 71 Opening - Mr. Steinthal 1 transmissions under the group agreement. Not a leg to stand on 2 if Clear Channel bought Pandora or CBS bought Pandora and just 3 put them under the group agreement. 4 logical -- and I'm fighting against them on this because 5 they're so upset -- but it's so plain from the language of the 6 agreement. 7 what's the right benchmark, but I can do it now too. So it's an entirely And I'm going to come to this in the context of 8 Mr. Cohen makes the argument about, well, it was never 9 intended that the RMLC agreement would cover this situation and 10 he suggests our invocation of the parol evidence rule is kind 11 of hypocritical because we always talked about the context in 12 which a negotiation occurred when we're talking about Sony and 13 Universal, but this is a totally different situation. 14 we're talking about whether an agreement is reached in a 15 competitive marketplace you have to look at the market and see 16 what the indicia of competitiveness is. 17 the Sony or Universal case that the agreements don't mean what 18 they are. 19 agreements. 20 mean what it says. 21 arguing, hey, wait a minute, we can't let this happen. 22 never intended for the group license to cover this situation. 23 We never intended that there would be that many new media 24 transmissions by any RMLC licensee. 25 says. The terms are what they are. When We're not arguing in We entered into those We're not trying to argue that any term doesn't That's what they're arguing. They're We But that's not what it And the parol evidence rule is absolutely applicable SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 72 Opening - Mr. Steinthal 1 here. 2 introduce evidence of intent that would be contrary to the 3 terms of the agreement. 4 There is no ambiguity. What they're trying to do is That can't happen. Your Honor, we had this dispute in MobiTV. Dr. Boyle 5 tried to say, well, Judge we didn't intend for Mobi to be 6 covered by the granted rights and your Honor properly, in our 7 view of course, agreed with us that the parol evidence rule 8 barred that kind of evidence. 9 evidence of intent to contradict the unambiguous language of an If you're trying to introduce 10 agreement it doesn't come in. 11 colorful brackets to the written direct testimony what 12 objections we have to certain testimony and we've objected 13 across the board when any of ASCAP's witnesses start talking 14 about the intention of the parties about -- in terms of the 15 RMLC agreement and that new media transmissions by Pandora 16 wouldn't be covered. 17 And so we made it clear in our But the bottom line, your Honor, I think I've hit most 18 of the things that I've actually written out to make sure I 19 would cover. 20 similarly situated is the music use one. 21 past all of the, frankly, I think nonsense about that we're not 22 in the same industry. 23 examine our people and understand that when they're sending 24 e-mails back and forth and you're only seeing part of the 25 e-mails and they're talking about competition in general, it The only real argument ASCAP advances on I think you'll get We are and you'll get a chance to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 73 Opening - Mr. Steinthal 1 will all be very clear that none of that detracts from who we 2 are and what we do. 3 that under Salem and under an interpretation of the actual RMLC 4 agreements -- and I think the acquisition point makes it easy 5 to see how strong the argument is. 6 radio station. 7 that. 8 that agreement could absolutely buy us and we would be paying 9 under that. And on this music use issue, I just think We don't have to go buy a I know that's out of the case. My point is very different. I understand My point is that parties to And once you find that, once you see that that's 10 an outcome that is entirely logical and within the contours of 11 the RMLC ASCAP agreement, how can we not be similarly situated? 12 We have to be. 13 to the same result by saying it's the best benchmark and not 14 even tackle the similarly situated point and just say the RMLC 15 agreement is the best benchmark, therefore, we win on that 16 basis, but that would require you to go through all of 17 Dr. Murphy's arguments and whatnot which I'm not going to go 18 through right now, but there you go. 19 I would note this. Part of me would suggest to you, you could get Looking at some of my notes from 20 what Mr. Cohen said. You know, you talk about us being 21 similarly situated to iTunes Radio, we're going to deal with 22 the iTunes Radio benchmark in due course, but I found it 23 somewhat ironic that he equates us with iTunes Radio which of 24 course is just a little sliver, tiny sliver of Apple and yet 25 what we're saying is we're similarly situated to I Heart Radio. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 74 Opening - Mr. Steinthal 1 It's spot on what we do and as part of an entity that is 2 entirely in the radio business. 3 Should your Honor get past the similarly situated 4 issue, then there's the question of evaluating ASCAP fees. 5 Obviously the burden is on ASCAP. 6 rate court provision was designed to ensure against excessive 7 fee demands from ASCAP. 8 automatically obtain a license upon request so that licensees 9 can't be effectively compelled to take a license, lest they 10 risk infringement exposure and it provides for the right to 11 seek a judicial remedy from this Court to set a fee. 12 the privilege of appearing before the ASCAP rate court on a 13 number of occasions and this case is truly unique, perhaps the 14 most unique of any that I've been involved with and 15 important -- as Mr. Cohen says it's important to him, important 16 to his client, it's important to us. 17 here reflects transparent, unabashed acts by the largest 18 publishers in the world who sit on ASCAP's board and represent 19 due to the accumulation of catalogs and copyrights that they've 20 made over half of ASCAP's repertoire. 21 Sony and Universal, each of which control more than a million 22 compositions. 23 with ASCAP's management and with the overt blessing of ASCAP's 24 chairman, Paul Williams, took deliberate steps seeking to 25 circumvent this Court's rate setting authority via The law is pretty clear the It allows users like Pandora to I've had The evidentiary record I speak, of course, of The evidence shows that these publishers working SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 Opening - Mr. Steinthal 1 orchestrating and seeking to implement partial withdrawals 2 designed to enable publishers to achieve the benefits of 3 collective licensing of all the works in the ASCAP repertoire 4 including those of the partially withdrawn publishers for 5 motion purposes, your Honor, while permitting limited 6 withdrawals as to a targeted group of new media services, 7 75 Pandora in particular. 8 9 The partial withdrawals are really a euphemism, your Honor, for a plan to deny to those services the automatic 10 licenses and rate court protections of the ASCAP consent 11 decree. 12 media performance rights prices in a categorically contrived 13 marketplace. 14 their activities which ASCAP as publishers don't really 15 contest. 16 documents abundantly cited in our brief reveal the publishers 17 and ASCAP's chairman admit that the plan was to allow the 18 publishers to evade the Court's oversight and to raise new 19 media performing rights prices above the levels that they 20 expected they could ever achieve in this court. 21 22 It was part of a not-very-secret plan to raise new This is plain from the following elements of As the direct testimony and deposition testimony and THE COURT: Now, obviously EMI, Sony, Universal have the right to withdraw completely from a PRO. 23 MR. STEINTHAL: 24 THE COURT: 25 But they didn't. No, but if they did withdraw completely they'd be withdrawing not just vis-a-vis Pandora, but all music SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 76 Opening - Mr. Steinthal 1 users, public performance licenses, so they'd have to think 2 through and manage in some way the licensing with respect to 3 every user of their music that needs such a license, which is, 4 of course, lots of licensing negotiations, and then the 5 administration of those licenses. 6 and then negotiated a fee with Pandora in the context of 7 deciding they were going to run independent of ASCAP this whole 8 licensing program, would that be in your view a fair market 9 rate or at least a potential benchmark? 10 MR. STEINTHAL: But assuming they did that I think, your Honor, you'd be walking 11 down a path that -- it reminds me of what's going on with SESAC 12 right now. 13 some point when you get an aggregation of copyright rights as 14 large as they have there is the possibility of behavior that 15 could subject you to an antitrust inference. 16 you act. 17 Universal and Sony are much bigger than SESAC. At It depends on how I'm going to get to the whole point Mr. Cohen raises 18 about are we just liking EMI because we like the result. No, 19 it has to do with the fact that and, again, I don't want to get 20 ahead of myself, ASCAP obviously has market power, it's been 21 stated in the Second Circuit again and again. 22 come to you, your Honor? 23 thousands of licenses. 24 all the time. 25 power may or may not do that. How many cases One out of every hundreds of ASCAP doesn't abuse its market power A publisher with the ability to exercise market EMI did not do that. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 You'll E1LFPAN3 77 Opening - Mr. Steinthal 1 hear from Dr. Noll, that the reason he isn't troubled by the 2 EMI deal is because of a series of events that occurred that 3 made it clear, the indicia of that negotiation did not reflect 4 the abuse and exploitation of market power and information 5 asymmetry that absolutely characterized the Sony negotiations 6 and the Universal negotiations. 7 I'm not here as an antitrust lawyer to analyze when you get so 8 big if you're Sony or Universal that maybe you should have the 9 Department of Justice looking at things and consent decrees and 10 all that kind of stuff. 11 Now, hypothetical, your Honor, That's not today's argument. We're here because they want the benefits of 12 collective licensing. Clearly, they'd rather be partially out 13 and what they did here -- and the quotes are vivid. 14 publisher witnesses repeatedly complained that they were being, 15 quote, "constrained by the consent decree," unquote, from 16 getting the prices they want. 17 ASCAP said, we're going to work beyond the limits of the 18 consent decree. 19 resulting in greater income. 20 market price which will give us bargaining power in the rate 21 court. The Paul Williams, the chairman of The intention is to make better deals Publishers will set a higher 22 This is all orchestrated. 23 THE COURT: I guess my point was slightly different. 24 If they withdrew entirely and set up their own independent 25 negotiating mechanism with these thousands upon thousands of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 78 Opening - Mr. Steinthal 1 music users and the back office operation to support the 2 receipt of income and potentially the distribution that they 3 would need to make pursuant to contract rights, potentially, 4 it's in that context that one could evaluate a rate negotiated 5 with Pandora. 6 wasn't really going there directly, but that is the kind of 7 negotiating circumstance that is a potential benchmark, unlike 8 the partial withdrawal negotiation without taking with it all 9 the burden of the separate negotiations with thousands and 10 11 It may or may not have antitrust issues. I thousands of music users, etc. to replicate what ASCAP does. MR. STEINTHAL: Let me address your question in a 12 somewhat different way and focus on what happened here, 13 frankly, whether it's partial or full, this issue is an issue 14 that's unique to the time period. 15 Your Honor, we've been operating as an industry for 16 decades with blanket licenses, Pandora since it was born. 17 Nobody needs to know whether you have a blanket license from 18 ASCAP, BMI, and you've got a million bus tracks on your Officer 19 you don't need to know and therefore you don't have the 20 information. 21 world started today what would be so harmful if an individual 22 publisher said to Pandora, look, I'm out of ASCAP you want my 23 repertoire, pay me X. 24 takedown problem, the circumstance would be a lot different. 25 If your question is more hypothetical, if the Your Honor, if we didn't have the What is hugely important here and Dr. Murphy never SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 Opening - Mr. Steinthal 1 addresses this, is that this is not a negotiation like the 2 hypothetical I just said. 3 away. 4 79 stuck on your server, you're fine. In that hypothetical you can walk If you don't want to pay Sony X and you don't have Sony 5 THE COURT: I understand that, and I don't mean to cut 6 you off and I'll just give it one more try. Why is the 7 negotiation with, and I'm just using Universal as an example, a 8 fair benchmark to use when the partial withdrawal meant that 9 Universal could escape the full consequences of a decision to 10 withdraw? 11 partial withdrawal and therefore didn't have all the burdens on 12 it economically and in other, I guess economically is what's 13 important. 14 It was able to negotiate from the stance of a Economically of a full withdrawal. MR. STEINTHAL: Is the question why isn't the specific 15 set of circumstances or why is it possible that under a partial 16 withdrawal scenario there could be a negotiation that's a 17 benchmark? 18 I guess I'm not following your Honor's question. THE COURT: Let me think about a better way to put it 19 to both counsel later on. 20 conversation. 21 22 Sorry for the interruption. MR. STEINTHAL: Dr. Marx has addressed this, I believe, and I'm sorry I'm not fully grasping your question. 23 THE COURT: 24 MR. STEINTHAL: 25 It's the beginning of a Not your fault. All right. I think where I was, your Honor, was trying to summarize the evidence of what happened. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 80 Opening - Mr. Steinthal 1 I read you some of the quotes. There's no question that the 2 publishers and ASCAP's chairman admitted that the overall 3 purpose here was to use the elevated prices that would be 4 secured by the withdrawing publishers to raise the price and 5 then come to this Court and use those manufactured benchmarks 6 to try to raise the rate. 7 That's exactly what the plan was. 8 shroud their action under the guise of direct licenses. 9 are not the kind of direct licenses that you had before you in There's no dispute about that. The publishers tried to These 10 DMX where the licensee had a true alternative. And the 11 evidence also demonstrates, your Honor that these so-called 12 direct licenses were effectively shams. 13 administer the direct licenses. 14 happening was taking selected rights away from ASCAP's 15 licensing authority under the notion that this Court wouldn't 16 be able to set a rate and protect the licensee, get the higher 17 rate and then march back in. 18 perspective the absolute clarity that this was not about 19 competition was when we asked Paul Williams at his deposition 20 well, did you ever consider for the catalog that hadn't been 21 withdrawn negotiating over price so you could drive greater 22 volume at a price somewhat under the level that the withdrawing 23 publishers were charging? 24 "Did you ever consider that ASCAP could charge a lower price 25 and try to get more people to use the works left in ASCAP ASCAP was going to The only thing that was really And from a competition And the answer -- the question was: SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 1 81 Opening - Mr. Steinthal rather than have users use the higher priced EMI repertoire?" 2 "Answer: 3 In other words, it was all about raising the rates. 4 Never once did that occur to me." It was not about competition. 5 Now, your Honor saw through the partial withdrawal 6 scheme and you determined that it was invalid and status quo 7 was restored. 8 relies predominantly on the fruits of this very consent decree 9 violation as it's rooted in the deals extracted by the Yet ASCAP's proposed model for rate setting 10 withdrawing publishers. 11 proposition that ASCAP should benefit from the fruits of a 12 consent decree violation that it and its members perpetrated to 13 raise the new media performance rights rates, as they seem to 14 do here using benchmarks that would not even exist but for the 15 consent decree violation. 16 It is an unprecedented and dubious Now, I think it's helpful to look at what evidence 17 there is as to why this happened. 18 on that chart when we looked at a very consistent pattern of 19 licensing for internet radio at 1.85 percent, what happened 20 here that all of a sudden changed everything? 21 22 23 What was the motive? What Just catching up because I covered a lot off the outline. Was there any change in Pandora's service, your Honor, 24 that warranted the sought-after spike in fees? None at all. 25 As I mentioned before, if anything with more ads per hour and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 82 Opening - Mr. Steinthal 1 more comedy there's less music per hour. What, then, could it 2 have been? 3 comes down to a matter of resentment or envy, as the case may 4 be, of certain publisher executives sitting on ASCAP's boards 5 with the rates that their brethren, often affiliated companies 6 with a common parent as in the case of Sony and Universal, were 7 generating in fees for the digital radio performances under the 8 compulsory license for sound recording performance under 9 Section 114. The trial record actually answers the question. It Your Honor, this goes to the grid or chart that 10 you were asking about. 11 mid-1990s the Digital Performing Right and Sound Recordings Act 12 was passed and for the first time there was a limited 13 performance right and sound recordings, limited meaning to 14 digital audio transmissions. 15 general performance right recognized under U.S. law for the 16 performance of a sound recording, only digital audio 17 performances as of the mid-'90s are subject to that obligation. 18 And the law created a compulsory license for non-interactive 19 digital audio transmission. 20 As your Honor may recall in the There is not a comprehensive or Now, what we've heard a lot about in the papers and in 21 the affidavits of ASCAP's publishers is that the major 22 publisher members sitting on ASCAP's board, Mr. Bandier, 23 Mr. Brodsky -- Mr. Brodsky is not on the board but he reports 24 to Mr. Bandier, and Mr. Bandier and Mr. Horowitz, they were 25 fuming about this disparity between what the sound recording SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 83 Opening - Mr. Steinthal 1 owners were getting under the compulsory license rate for sound 2 recording performances, which was set on a per-play rate basis 3 and started generating as the consequence a fee equivalent to 4 over 50 percent of Pandora's revenues. 5 public disclosure. 6 That's part of their Now, there are several ironies here. First of all, 7 there's no disparity that way on the publishing side. On the 8 publishing side there's a huge disparity in favor of 9 Mr. Bandier and Mr. Horowitz because the sound recording owners 10 were collecting zero for performances on broadcast radio, 11 over-the-air radio, and let's assume we have a $14 billion 12 radio industry, your Honor, which is pretty much what it is 13 annually, at 1.7 percent revenue, that generates over 14 $225 million a year in ASCAP royalties for public performance 15 of compositions. 16 have a 225 million to zero disparity in their favor. 17 why you don't hear about complaints from these publishers about 18 the 1.7 percent rate. 19 So in one area of their lives the publishers That's But increasingly what the documents show is an 20 irrational -- not an economically principled but an irrational 21 feeling that if the record companies are getting that much 22 money we have to get more. 23 economics, your Honor, and that's what caused this whole mess 24 is this feeling about the disparity. 25 It's not based in anything in Now, the irony, another irony here is why does the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 84 Opening - Mr. Steinthal 1 disparity exist. The sound recording owners argued to the 2 Copyright Royalty Board that their rights and their industry 3 are fundamentally different than publishing. 4 convinced the CRB that sound recording royalties should be 5 rewarded more highly than composition performance royalty. 6 not here to say it's right or it's wrong, but the interesting 7 thing is that the sound recording companies argued that these 8 publishers were in a different industry and the value of their 9 works was much less. And they I'm So the disparity exists thanks to their 10 brethren making arguments that the CRB adopted so there's this 11 disparity on the sound recording side. 12 But, your Honor, that disparity is not an economic 13 basis to change the world that we've been living in over the 14 last decade. 15 show that is the single driving force as to why the publishers 16 wanted to partially withdraw and raise the roof on prices and 17 then come back into the rate court and try to raise the rates 18 through those ill-gotten, in our view, benchmarks. And yet that is the reason. The evidence will 19 Dr. Murphy is here after the fact, post hoc, to come 20 up with some economic theories to support what the publishers 21 have brought. 22 Now, let's turn to the Sony and Universal deals. The 23 experts in the case agree that fair market value requires that 24 a willing and unrelated buyer would agree to buy and a willing 25 and unrelated seller would agree to sell when neither party is SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 85 Opening - Mr. Steinthal 1 compelled to act and when both parties have reasonable 2 knowledge of the relevant available information. 3 quoting from the textbook that Dr. Murphy uses as well which 4 goes on to say, and I quote, "neither party being compelled to 5 act suggests a time frame context, that is, the time frame for 6 the parties to identify and negotiate with each other is such 7 that whatever it happens to be it does not affect the price at 8 which a transaction would take place." 9 definition also indicates the importance of the availability of 10 information, that is value is based on the information set that 11 is assumed to contain all relevant and available information. 12 And I'm And it adds, the The trial evidence has demonstrated that under this 13 definition ASCAP has not carried its burden to demonstrate that 14 the Sony and Universal benchmark agreements upon which its 15 proposal is based qualify as fair market transactions. 16 fail because these agreements are riddled with information 17 asymmetries, as Pandora did not have sufficient information or 18 ability to effectuate a takedown of Sony's or UMPG, which left 19 Pandora effectively to walk away without doing a deal. 20 transaction was characterized by an artificial set of time 21 constraints imposed by the withdrawing publishers such that 22 Pandora would have faced huge copyright infringement exposure 23 if it did not conclude a deal within a constraining time 24 period. 25 compelled Pandora to transact. Again, these are the factors which effectively SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 They Each E1LFPAN3 1 Opening - Mr. Steinthal 86 And I come back, your Honor, to the different set of 2 circumstances in the world starting today. If it was a 3 negotiation between a publisher and Pandora and it was a 4 question of am I going to add your work to my million plus 5 repertoire that's already embedded on the server, then we 6 wouldn't be compelled to act. 7 that with a million different songs in the system already and 8 the looming threat of copyright infringement, if we don't 9 either do a deal by January 1 or take down all the content, if What creates the problem here is 10 that's conceivable, you have to transact. That's what makes it 11 unique. 12 hypothetical world of atomistic competitors. 13 here about a circumstance where without the information 14 necessary to enable a choice there is a direct cost to failing 15 to do a deal. 16 cost in failing to do a deal because if I don't do the deal I 17 incur hundreds of millions of dollars of infringement risk. 18 That's why this circumstance is different than the normal sort 19 of start the world from today on day one and have a 20 negotiation. 21 not do the deal without a risk of huge infringement exposure, 22 then the deal that flows, if it flows, I would argue is a fine 23 benchmark. 24 compelled to act because the risk of infringement damages is so 25 great, that's what renders this a non-competitive marketplace. That's what separates it from Dr. Murphy's That's the way I would put it. We're talking There's a direct If you can walk away, if you have the ability to But when you don't have that choice, when you are SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 1 87 Opening - Mr. Steinthal THE COURT: To return, to try to restate, to what I 2 was trying to get to before, if the publisher at that moment 3 understood it in this negotiation with you its only option was 4 complete withdrawal or no withdrawal? 5 negotiation the publisher understood that you, Pandora, would 6 have to have the enormous complication in your life of removing 7 whatever percentage of your repertoire it is from the servers, 8 but it would have the complication if it didn't reach an 9 agreement with you, having to completely withdraw from ASCAP So if in that 10 and put all its music users on notice that if they played any 11 of their music they would be infringing and therefore the risk 12 that they'd, all of their music would disappear from the 13 marketplace overnight? 14 MR. STEINTHAL: I guess, your Honor, I don't see where 15 the risk is to them. It's their choice. They can walk away. 16 They can make a decision that does not result in a direct cost 17 to them. 18 failure to do a deal doesn't put them at risk. They can choose to go down one path or another. 19 THE COURT: Okay. 20 MR. STEINTHAL: The I hear you. And we're talking, in particular 21 there's no risk of a partial withdrawal, absolutely no risk 22 because your Honor knows the rules of the game under partial 23 withdrawals, you can go right back in. 24 I said it's like ships passing in the night. 25 fine in his world. So I think, that's why Dr. Murphy is He's fine with the characteristics of a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 88 Opening - Mr. Steinthal 1 benchmark market where the seller has over a million 2 compositions. 3 information. 4 can avoid giving the information I get greater leverage and any 5 self-respecting profit-maximizing entity that can get leverage, 6 fine. 7 He's fine having the information. 8 test, all relevant and available information, it's there. 9 available to the seller. He's actually fine with not providing Basically justifies it and says, well, jeez, if I So he's fine, a million compositions, huge market share. So when we talk about that It's He's, fine, saying don't give it to 10 him and he's fine even with leveraging the infringement risk in 11 order to drive up the price. 12 starts out with this hypothetical atomistic competition concept 13 and therefore is unaffected by the very elements of this very 14 negotiation with flunked the test. 15 available information that is plainly relevant and it's not 16 being provided to both parties. 17 doesn't. 18 So to him it's just, again, he His test. There's One party has it and the other There's compulsion to act. THE COURT: But your point, if I understand it, is you 19 have these arguments, factual arguments about not being 20 provided with the information you sought or not having it 21 available for your use. 22 if you had the information it would be extraordinarily 23 disruptive to your business to remove the repertoire. 24 25 MR. STEINTHAL: But your point is also separately even No question. But the reality is we never had the good fortune to try to make that choice because SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 89 Opening - Mr. Steinthal 1 we never had the information in a position where we were able 2 to use it to consider a takedown. 3 your Honor, when you have a publisher that's so big, then the 4 choice is either a takedown or, not a shutdown -- if you can 5 take it down, the choice is taking it down or harming your 6 business. 7 different levels of bad choices here, all of which in our view 8 are not indicia of a competitive market. 9 But you're absolutely right, Maybe not gutting it, but harming it. THE COURT: So you have On the other hand, if Pandora is a very 10 successful system of distribution of repertoire, then a 11 publisher wants them available to them. 12 MR. STEINTHAL: I think, your Honor, it goes back to 13 my hypothetical. 14 PRO's around for a century and I think it is the hundredth 15 anniversary of ASCAP this year, if we didn't have that then you 16 would be closer to the world of actual competition. 17 problem is we're not in that world right now and this, what 18 Dr. Murphy never grapples with is the direct cost of failing to 19 do a deal. 20 If the world started today, if we didn't have But the One of the absolutely undeniable elements of his test 21 is no compelling to act. When there is a direct cost of 22 infringement litigation and exposure if you don't do the deal, 23 that's compulsion to act. 24 have a choice. 25 competitive market. You have to transact. Or shut down your business. You don't That's not a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 90 1 Opening - Mr. Steinthal Now, Dr. Murphy comes up with these really trite 2 examples. So he goes into, for example, in terms of 3 information, we don't need perfect information. 4 sack of oranges I don't have to smell and taste every one of 5 them to know what the value of the sack is. 6 buying example. 7 seller and a buyer, so he says but it doesn't make the 8 negotiation not a competitive one. 9 your Honor, the easy example is this. When I buy a And then the house There was never perfect information between a In both of those examples, You can walk away. 10 There's no direct cost in failing to do the deal. 11 problem. 12 cost of failing to do a deal and in both of these circumstances 13 there was that direct cost. 14 That's the The compulsion to act is equivalent to the direct Now, let me deal with the EMI situation for a minute. 15 They make so much of it as if we're trying to just take the 16 ones we like and not the ones we don't. 17 entities with market power can either choose to exercise it or 18 not. 19 entities that had indicated that they were going to withdraw 20 and then they didn't, or they did and they didn't try to put 21 Pandora in the circumstances that Sony and Universal did. 22 actually helps us, your Honor. 23 EMI, we did do a deal -- EMI made it very clear. 24 reasons, Mr. Faxon's reasons for exiting ASCAP were concern and 25 frustrations with the inefficiencies of ASCAP, with some of As I mentioned before, Mr. Cohen actually mentioned Warner Chapel and BMG and That It shows you that it's not just SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Their E1LFPAN3 91 Opening - Mr. Steinthal 1 their licensing policies. So that's what motivated him. He 2 made it very clear, the testimony is very, very clear that 3 there was a deal reached on economic terms almost immediately 4 after the parties started negotiating. 5 for catalog data? 6 the EMI withdrawal happened after the withdrawal had taken 7 place. 8 information to take it down when they announced the withdrawal 9 had already occurred. Why didn't we ask them Because, your Honor, the announcement about There was no opportunity to ask for the catalog And then it's clear from the testimony 10 that EMI said, look, we're perfectly prepared to honor the same 11 rate you have with ASCAP. 12 rate here and put Pandora in that position of a direct cost 13 associated with the failure to act. 14 So there was no effort to raise the What Dr. Noll says is if you look at the indicia of 15 that negotiation it does not show indicia of a non-competitive 16 marketplace because there was no effort to take advantage of 17 the market power that EMI may very well have had. 18 put BMG and Warner in that very same bucket. 19 what Sony and Universal did. 20 And I would They didn't do Now, in our view, if you'll look at the very test that 21 Dr. Murphy sets out to availability of information, compulsion 22 to act, etc., and you apply it to any given market set, 23 negotiation by negotiation, you have to do it negotiation by 24 negotiation. 25 Dr. Noll and Dr. Marx will explain why. Sony and Universal's negotiations flunk the test. Dr. Murphy will try to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN3 92 Opening - Mr. Steinthal 1 explain to you in hypothetical terms why that's not the case. 2 But I'm going to let the experts deal with his hypothetical 3 ideas more than me, and I'm going to focus now briefly on the 4 facts pertaining to the Sony and Universal negotiations. 5 looked at your watch. 6 7 THE COURT: We're quarter to one. You We're going to break for lunch if that's okay, counsel? 8 MR. STEINTHAL: 9 THE COURT: That's fine. And we'll start again at 2:00. 10 (Luncheon recess) 11 (Continued next page) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Thank you. E1LJPAN4 93 Opening - Mr. Steinthal 1 AFTERNOON SESSION 2 2:00 pm 3 (Trial resumes) 4 (In open court) 5 THE COURT: 6 So, counsel, I have a question for you. Please be seated. The 7 courthouse is apparently going to close at 3:00 o'clock, and I 8 need to know, and you can consult with each other, whether you 9 wish to continue past 3:00, till 5:00 or not. 10 Why don't you consult and give me one answer. 11 need to know if you have different positions. 12 I don't Different positions is we stop at 3:00. 13 (Off-the-record discussion) 14 MR. COHEN: 5:00, your Honor. 15 THE COURT: We'll make an effort to see if we can find 16 a court reporter, and Ms. Rojas will report as soon as possible 17 whether or not we're able to find a court reporter who can stay 18 till 5:00. 19 know. 20 As soon as she knows, I'll know, and then you'll MR. COHEN: Could I just ask, if the courthouse is 21 closed tomorrow, when do they typically post that? 22 typical time? 23 THE COURT: There is. 24 here. 25 whatever counsel want to do. It will be posted. I am able to continue with the trial. Is there a I will be I will do If counsel want to have a recess SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 94 Opening - Mr. Steinthal 1 day, that is fine with me, and if you want to continue with the 2 trial, that is fine with me. 3 whether we can get a court reporter from 3:00 to 5:00 today, 4 but also whether we can get one tomorrow. 5 6 MR. COHEN: like. Ms. Rojas will not only find out We are balancing witnesses' travel and the We'll fill you in when we can. 7 (Off-the-record discussion) 8 THE COURT: 9 I won't impose anyone to stay. going to order a court reporter to stay. If someone is able to 10 conveniently, then great. 11 court reporters in this district are so helpful and 12 service-oriented that I would not impose upon any of them 13 individually in the midst of a snowstorm. 14 MR. STEINTHAL: 16 I apologize. I understand the Mr. Steinthal. 15 If not, great. I am not Your Honor. I think my congestion is getting to me 17 and I apologize for not getting your question. 18 to look at the transcript and I would like to try to, after 19 having confused what you were asking me, I think -- 20 THE COURT: I had a chance I actually, my staff thought I put it very 21 clearly when I put it at lunch today to them, so I wish I had a 22 court reporter with me then. 23 24 25 MR. STEINTHAL: I could read it back to you. I am the one that is apologizing. I just didn't hear it right. In any event, I think on the issue that you raised, we SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 95 Opening - Mr. Steinthal 1 agree that there is a significant difference between a 2 negotiation of partially-withdrawing publisher and a 3 fully-withdrawing publisher. 4 publisher faces no real risk, gets to take advantage of the 5 circumstances we complained about, while escaping the risks 6 that a fully-withdrawing publisher would face and that your 7 Honor built into the question and I just wasn't understanding 8 where you were going. 9 The partially-withdrawing The fully-withdrawing publisher would face its own set 10 of risks that your Honor identified, but I want to be clear -- 11 and I think I tried to answer this part of it -- I am not 12 prepared to say that every deal done with a fully-withdrawing 13 publisher and a licensee like Pandora would be a competitive 14 market outcome. 15 render a transaction with a fully-withdrawing publisher not 16 competitive, but to be sure, the partially-withdrawing 17 publisher situation, there is not that same set of risks that a 18 fully-withdrawing publisher would face. 19 what you were asking. 20 There still may be circumstances that would I hope that addresses I covered a lot of territory this morning, going in a 21 lot of different directions and not on script. 22 back to script for a couple of things to make sure I cover 23 them. 24 25 I want to come Mr. Cohen talked about the negotiations with Sony and Universal factually, so I want to talk a little bit about the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 96 Opening - Mr. Steinthal 1 record and what you're going to hear with respect to the Sony 2 and Universal negotiations other than what I already talked 3 about, which is the overarching intent and plan that we believe 4 the evidence reflects. 5 Pandora did what it could to defend itself against 6 what it perceived to be a decidedly stacked deck of cards, your 7 Honor. 8 sent Mr. Brodsky the e-mail. 9 noted that I give the -- the e-mail says given the On November 1, Pandora outside counsel, Mr. Rosenbloum, Mr. Cohen talked about it. It 10 uncertainties around Sony/ATV and EMI's position with respect 11 to webcasting rates, Pandora has decided that it needs to be 12 prepared to take down all Sony ATV and EMI content in the event 13 we are unable to agree on rates by the end of the year. 14 That was sent on November 1st, just weeks after Sony 15 announced they were withdrawing. 16 testifying a lot, as Mr. Cohen advised, we issued a trial 17 subpoena to him after Mr. Brodsky put in his written direct 18 testimony. 19 Mr. Rosenbloum will be You will hear, your Honor, that this was not the only 20 time he discussed with Mr. Brodsky the need for Sony data 21 identifying the to be withdrawn catalog. 22 Brodsky, disputes that neither Sony nor ASCAP after Pandora 23 asked ASCAP to ever provide this data to Pandora. 24 thus, was prevented from doing whatever it might conceivably 25 have been able to do to identify and remove Sony songs from the No one, not even Mr. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Pandora, E1LJPAN4 1 97 Opening - Mr. Steinthal Music Genome Project. 2 What does Mr. Brodsky say? He totally belittles the 3 request. 4 that Sony never once provided a response to Pandora for seven 5 weeks between Mr. Rosenbloum's November 1 e-mail and late 6 December. 7 information was based on a phone call to Mr. Rosenbloum in late 8 December, in which he was advised there was no need for 9 Sony/ATV to provide such a list of works because we were very 10 In so doing, your Honor, he utterly ignores the fact Then he testifies his failure to provide the close to finalizing a deal. 11 I am sure your Honor looks forward to hearing from 12 both Mr. Brodsky and Mr. Rosenbloum in court on this issue. 13 certainly do. 14 and sought this data for two reasons: 15 I You'll hear also that Pandora genuinely wanted One, to gird for a potential take-down if it got the 16 data. 17 but also the testimony will be very clear that the second 18 reason they wanted the data was to evaluate Sony's demand for 19 non-approvable advance, an issue you will hear from both 20 Mr. Kennedy and Mr. Rosenbloum, was something that Pandora was 21 not in a position to evaluate without information about the 22 works Sony was planning to withdraw and then directly license 23 to Pandora. 24 25 That is what was alluded to in the e-mail on November 1, What is truly most amazing about this, and there is no one disputing this, the data was just sitting there the whole SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 98 Opening - Mr. Steinthal 1 time. ASCAP's compendium has a whole process in Section 112 2 (4) that requires ASCAP, upon receipt of a notice of 3 withdrawal, to prepare a list of works that ASCAP understands 4 to be the subject of the withdrawal. 5 procedure to deal with any errors or omissions that the 6 withdrawing publisher may wish to note in the initial list it 7 gets from ASCAP. 8 9 It then provides for a There is a whole procedure for it. Your Honor, by the time Pandora asked for this information on November 1st, both ASCAP and Mr. Brodsky had in 10 their possession this very list. 11 ASCAP was that the list as is could have been delivered to 12 Pandora within 24 hours were it only to get the go-ahead from 13 Sony to do so. 14 The deposition testimony from ASCAP never received the go-ahead. We cited much of the internal back-and-forth on this 15 in our briefs. My favorite and let's go to the slide on this, 16 it is Slide 7. My favorite is the following exchange between 17 Mr. DeFilippis and Mr. Reimer of ASCAP on December 19th, 2013. 18 PX 193. 19 why didn't Sony provide the list to Pandora? 20 response: You see the question being asked by Mr. DeFilippis, Mr. Reimer's Ask me tomorrow. 21 Mr. DeFilippis, right. With drink in hand. 22 And the inference here is just incredible. 23 was sitting there, your Honor, and nobody was willing to give 24 it to Pandora. 25 Pandora is only one of the many things that makes the This data Now, the refusal to provide this information to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 Opening - Mr. Steinthal 99 1 circumstances surrounding the Sony-Pandora benchmark setting 2 the competitive market rate. 3 Mr. Cohen doesn't want me to talk about collusion, so I'll talk 4 about coordination. 5 that the circumstances surrounding this negotiation were 6 anything but a free market. 7 The evidence of coordination, and We don't have to prove collusion to prove The evidence of coordination among ASCAP and 8 withdrawing publisher sitting on ASCAP's board is cause for 9 great concern. We already spoke about the overall plan behind 10 the limited publisher withdrawal designed to raise prices and 11 manufacture benchmarks. 12 demonstrate at length how ASCAP's withdrawing publisher members 13 communicated with one another to disrupt Pandora's ongoing 14 negotiations with ASCAP during the Fall of 2012. Separately, our submissions 15 Those negotiations concerned a license that would have 16 been would have included the content of publishers that had not 17 yet withdrawn as of December 31, 2012, including Sony and UMPG, 18 Universal. 19 Mr. LoFrumento, publisher board members never get involved in 20 ASCAP negotiations. 21 that reflect directly meddling on the part of Mr. Horowitz from 22 Universal to seek to convince Mr. LoFrumento not to do the 23 contemplated deal with Pandora, e-mails that were sent just 24 days before Mr. Horowitz announced that Universal would be 25 partially withdrawing from ASCAP which, of course, would enable Despite the testimony in his deposition from You have seen our citations to e-mails SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 Opening - Mr. Steinthal 100 1 him to force Pandora into the same box that Pandora was facing 2 with Sony. 3 Mr. Horowitz thought it appropriate to communicate to 4 other venture publishers on ASCAP's board his e-mails to 5 Mr. LoFrumento, urging ASCAP not to do the contemplated deal 6 with Pandora. 7 for two weeks, only advising Pandora it would not proceed on 8 December 14th, leaving Pandora pretty much in the lurch 9 relative to Sony only days before Sony representatives were 10 11 ASCAP then sat on the ASCAP-Pandora term sheet leaving for the holidays. Just to make things more colorful, the testimony is 12 that Sony, while this all was unfolding and when Sony got wind 13 of the possibility that ASCAP might do a deal with Pandora 14 before year-end, Sony threatened to sue ASCAP if it did so. 15 Then within weeks of the New Year, after the 16 Sony-Pandora deal got struck just before the end of the year, 17 Sony leaked the results of the negotiation. 18 press it achieved 25 percent rate increase over the prior PRO 19 fee levels. It leaked to the 20 No one from Sony acknowledges being the source, your 21 Honor, but with the stories about the leak under a picture of 22 Mr. Bandier smoking his trademark cigar and under a caption of 23 an article saying Martin Bandier knew is quite reasonable the 24 Pandora deal, can there really be any doubt who communicated to 25 his fellow publishers what the new rate was that he achieved? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 1 Opening - Mr. Steinthal 101 Our economic experts, Dr. Noll and Marx, will testify 2 that these are decidedly not the workings of a competitive 3 marketplace. 4 where absent a deal Pandora would risk catastrophic 5 infringement exposure, that itself renders the negotiate 6 ill-suited as a benchmark. 7 The information imbalance in the marketplace The evidence that Pandora was effectively compelled to 8 transact is overwhelming. 9 burden of demonstrating otherwise. 10 Certainly ASCAP has not carried its This is compounded by the evidence of coordination I just went through. 11 Faced with this evidence that the Sony-Pandora 12 negotiations flunked the very tests that Dr. Murphy articulated 13 for competitive market environment, ASCAP and Dr. Murphy 14 started grasping for straws. 15 concept of Pandora using information it may have received from 16 a company called Lyric Find, which is a company that supplies 17 lyric information that Pandora uses for whatever songs it can 18 to scroll all the songs they're playing. 19 First they talked about the The notion that the data Pandora gets from Lyric Find 20 would have been a work-around from the actual data from Sony is 21 crazy. 22 Dr. Murphy recognized. 23 or warranted to be accurate, and there are serious questions in 24 all events as to whether Pandora would have been permitted to 25 use the data for the purpose of taking down content. The data is not available for all songs and that even The data is decidedly not represented SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 1 Opening - Mr. Steinthal 102 ASCAP also now conjures up the notion that Pandora 2 could have secured publishing information from the websites of 3 Sony and Universal, but this information is not complete and is 4 searchable only if you know what title or artist or writer 5 you're looking for. 6 obtain a comprehensive list of works owned by any given 7 publisher. 8 information obviously does not constitute evidence sufficient 9 for ASCAP to carry its burden that all relevant information was 10 The availability of this sort of partial publisher made available for the buyer and seller here. 11 12 It decidedly does not permit anyone to Let me address briefly the Universal-Pandora negotiation. 13 THE COURT: Before you do that, let's just say that 14 you had been timely provided by this information, say, in early 15 November. 16 symmetry, then the negotiation would have resulted in a 17 reliable benchmark? 18 Is it your position if there was no information MR. STEINTHAL: I don't think I can answer that in a 19 vacuum. 20 time constraints involved, there are risks associated to 21 Pandora's business. 22 been a competitive market negotiation. 23 I think even if we had perfect information, there are I am not prepared to say it would have I think for sure Pandora would have had some degree of 24 better leverage, your Honor, in that it may have had a greater 25 opportunity to consider alternatives, but without knowing SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 103 Opening - Mr. Steinthal 1 exactly what the data is and how much time it would have taken 2 in order to effectuate a take-down, and not knowing exactly 3 what the harm to the company would be in terms of an immediate, 4 short-term loss of the repertoire of a given publisher, it 5 would have certainly made the circumstances less heinous than 6 they were, but I don't think I can answer the question. 7 I assume Dr. Noll and Dr. Marx will have their views 8 as to exactly how that would change the equation, if at all, 9 but I am not prepared to say it would solve the problem. It 10 certainly would have changed the circumstances a little bit and 11 made the circumstances less heinous. 12 Now, in terms of the Universal negotiation, as I said, 13 this suffers from all of the flaws of the Sony-Pandora 14 negotiation and one major additional flaw that is quite 15 significant. 16 infringement exposure issues, there is a bit of a curve ball 17 here since some information was sent by Universal about their 18 catalog, but your Honor appears to be up to speed from the 19 papers as to the dispute about whether Pandora was free to use 20 the data in order to effectuate a take-down of Universal 21 content. 22 The time constraint issues, the risk of Pandora certainly understood the terms of the NDA that 23 were insisted upon by Universal to prevent it from doing so, 24 and I am sure you'll hear from Mr. Kennedy on that issue, and I 25 believe you will find that, in fact, Pandora was rightful in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 104 Opening - Mr. Steinthal 1 its understanding that it did not have the right to use the 2 data to take down the Universal content. 3 That said, the terms of the Universal deal are wholly 4 contingent, and our experts make clear that when you have a 5 circumstance where the fee is contingent on, in this case, your 6 Honor's decision on our pending summary judgment motion, and 7 the agreement was if that motion was granted, we would not have 8 to pay the rate that was set forth in the agreement, well, that 9 totally undermines the agreement as a valid benchmark at the 10 rate that was conditional, especially when Pandora's view was 11 that it hoped and expected that it would not have to pay the 12 rate that it conditionally agreed to pay in order to get over 13 the hurdle for the term starting July 1. 14 So the economists again will address why, under 15 circumstances where you have such a conditional agreement, it 16 is not a good benchmark. 17 As far as Mr. Cohen's talking about the delays in the 18 negotiations with Universal, you'll hear from Mr. Kennedy on 19 that. 20 in the case, preparing summary judgment motion. 21 the dates when people got in touch with each other are what 22 they are, but the agreement itself is not the kind of agreement 23 that the economists feel is worthy of being used as a benchmark 24 for rate setting under the circumstances where it is so, so 25 contingent in the first place. Pandora was litigating against ASCAP, getting discovery SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 I think that E1LJPAN4 1 105 Opening - Mr. Steinthal Now, I talked about some of Dr. Murphy's theoretical 2 responses, and I am going to leave the rest of the responses to 3 Dr. Murphy, to Dr. Marx and Dr. Noll. 4 Now let's turn to the Apple deal that are put up by 5 Dr. Murphy as a fall-back, so to speak, for rate setting. 6 Apple deals, your Honor, are no less the product of these 7 decree violations than are the Pandora. 8 context of withdrawing publishers telling Apple that their sole 9 way to get licensed was via licensing directly from them, as 10 11 The They were done in the they have withdrawn that works from ASCAP. Obviously, Apple also did a deal with ASCAP that is 12 relied upon by ASCAP. 13 there were time constraints associated with those negotiations 14 insofar as Apple was rolling out a new product and was under 15 the gun to get the product launched by the time of the 16 developers' conference in June of 2013 where it intended to 17 market and promote its brand new product. 18 There are, as the record will show, More fundamentally, the reason why the Apple deal just 19 can't be used as a benchmark here is that the buyer in that 20 situation is just fundamentally non-comparable to Pandora. 21 Murphy agrees that Pandora and Apple are different, and he 22 concedes he lacks the information necessary to attempt to do an 23 accurate adjustment of Apple's license terms to account for 24 such differences. 25 Why don't we put up Slide 9. On Slide 9 we have a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 Dr. E1LJPAN4 106 Opening - Mr. Steinthal 1 pictorial of the various devices and products that we're able 2 to pick up on Apple's website, indicative of what Apple -- just 3 some of the things that Apple sells. 4 Dr. Marx will lay out, and identify the several 5 complementary sources of revenue that Apple derives from its 6 iTunes radio service such as increased profits and revenues 7 associated with the sales of hardware, sales of subscriptions 8 to the preexisting iTunes subscription service and sales of 9 downloads. 10 The iTunes match service is a service where you pay 11 something between 20 and $25.00 a year for a subscription, and 12 it enables you to move to the Cloud all of the music that you 13 own and you purchase from the iTunes store, and you can stream 14 to yourself or download to yourself from the Cloud the music 15 that you own. 16 That is a subscription service, and the reason it is 17 so important is one of the features of the deal between Apple 18 and the publishers and Apple and ASCAP is that, and I won't get 19 into any of the details of these deals, but one feature is 20 simply that Apple is able to make the iTunes radio service 21 available ad free to the iTunes master subscribers. 22 have a situation where this is an advertisers' supported 23 service. So you All of the millions of iTunes match -- 24 MR. COHEN: Your Honor, if I may? 25 I actually think we are straying into the protective SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 107 Opening - Mr. Steinthal 1 order. 2 are public. 3 Steinthal will strive not to do that. 4 didn't talk about it in the opening. 5 sitting in the room, I have obligations under the protective 6 order. 7 That is up to your Honor, but I don't think these terms It is out of the ASCAP agreement. MR. STEINTHAL: I know Mr. There is a reason why I I am concerned, just I didn't realize that particular 8 feature would fall in that. 9 this point other than to say, your Honor, our papers go on at 10 great length about how there are revenues and profits derived 11 by Apple for the complementary music products and hardware 12 products that Apple sells independent of iTunes radio, and the 13 percentage of revenue deals that they have done do not tap into 14 all of the values that are obtained by Apple for these 15 complementary revenue streams. 16 I will just leave it alone from What the economist will say is if you're deriving 17 revenue and profit for all of these non-iTunes radio features, 18 but the revenues that are being generated for those other 19 features within the Apple ecosystem, if they're not part of the 20 revenue base, then unless you pay a higher percentage on that 21 circumscribed revenue base, then the deal is not going to be 22 comparable. 23 So what you have here is a situation with Pandora's 24 stand-alone pure play. 25 product. All of our revenue is from the radio When we pay a percentage of revenue, it is for the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 108 Opening - Mr. Steinthal 1 radio. 2 get extra value from being able to provide the Pandora service 3 without getting revenue to other parts of the ecosystem. 4 even Dr. Murphy recognizes that's a fundamental difference. 5 You have to make an adjustment, ane he concedes he doesn't have 6 the data to make an accurate adjustment. 7 We don't get extra value from selling iPods, we don't So I would point to you, your Honor, we are not 8 comparable in the first place because of the fundamentally 9 different businesses. 10 We are a pure play. ITunes radio is a knit within the Apple ecosystem. 11 In that situation, we are not comparable, and in all 12 events we don't have the data necessary to do any meaningful 13 adjustment, to take the percentage of revenue deal that Apple 14 did which applies to a circumscribed refuse now base relative 15 to the benefits that Apple gets and adjust it. 16 have the data to do that. 17 18 19 THE COURT: counsel. We just don't I am going to interrupt you one second, So I stopped the clock. It is important to me that I get all the information 20 from you that I need to make the right decision, so whatever 21 confidentiality agreements might be in play here are not going 22 to determine what you say to me as a general proposition. 23 is important both sides hear that be as wise as I can in making 24 my decision, and I can't do that without you providing me with 25 information I need to accomplish that objective. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 It That said, E1LJPAN4 109 Opening - Mr. Steinthal 1 there is lots of confidential information that is irrelevant to 2 my task and that everybody agrees is. 3 that in the record. 4 So we don't need to put There might be information that one of you thinks is 5 relevant and the other one thinks isn't, and then you should 6 discuss that. 7 process in which I can resolve that. 8 that both of you think is relevant and are happy to get to me 9 without any restrictions, that is -- and we'll talk about If there is a disagreement, we'll think about a There may be information 10 restrictions in a moment, how to get me information with 11 appropriate restrictions, but that you are conscious that some 12 third party considers confidential. 13 Well, they have a right to be heard, we all agree, so 14 that their rights can be protected in this proceeding, so I am 15 going to trust you. 16 continue to alert those third parties when there's a potential 17 you may be using information they consider confidential in this 18 proceeding. 19 third party or one of you thinks is confidential, but at least 20 one of you thinks I should get? 21 You have been, and I trust you will So how do you get me information that either a There is a possibility of presenting it in the robing 22 room with a sealed transcript. There is a possibility of 23 examining a witness in a closed courtroom with public excluded. 24 In both those situations, I consider those extremes. 25 need to make particularized findings to justify closing a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 I would E1LJPAN4 1 110 Opening - Mr. Steinthal courtroom during a trial. 2 When it comes to a document, it is a little easier to 3 manage. 4 individualized inquiry whether the portion of the document or 5 the entirety of the document should be sealed, and if I do 6 that, I can receive that document. 7 You can get me the document. I can make that So I think we're in agreement here. I just didn't -- 8 and I appreciate counsel handling these matters sensitively so 9 that hopefully I'll get all the information and the entire 10 11 trial will be an open courtroom. Ultimately the law does permit me to get information I 12 need and still protect parties' very genuine rights. I just 13 have to make the correct findings and make sure I am focusing 14 carefully on them. Thank you. 15 You may resume, Mr. Steinthal. 16 MR. STEINTHAL: Your Honor, let me speak now to the 17 other fall-back benchmark of Dr. Murphy, the SESAC agreement. 18 Your Honor objected to the SESAC agreement as potential 19 benchmarket in Mobi TV. 20 of final fee determination with ASCAP, and with good reason. 21 It has never been adopted as a court As Dr. Noll will testify it is the very unknown nature 22 of what comprises the SESAC repertoire, that information 23 asymmetry yet again coupled with the thrust of infringement for 24 companies like Pandora if they don't take a SESAC license. 25 You don't have to be threatened to overtly, your SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 111 Opening - Mr. Steinthal 1 Honor, to know that if you don't do a deal, where you don't 2 have the requisite information to take down the SESAC 3 repertoire, you don't have to be overtly threatened to know 4 that there is a risk of infringement. 5 market power and renders Pandora's SESAC fee an ill-suited 6 benchmark for arriving at a competitive market fee. 7 secrecy with which SESAC guards the size of its market share 8 and competition of its repertoire is manifest. 9 All of this gives SESAC The Requests for this information at SESAC's deposition in 10 this case were met with objection after objection, as SESAC 11 counsel argued that this is competitive sensitive information 12 that could end up in the hands of attorneys tasked with 13 negotiating against SESAC for their clients. 14 Perish the thought to SESAC that a music user might 15 have insight into the composition and actual market share of 16 the SESAC repertoire. 17 available on ASCAP's website and other websites suggestion is 18 nonsense. 19 first inputting the name of a song or writer to see if the song 20 is in SESAC's repertoire. 21 generate any sort of comprehensive list of what songs actually 22 comprise the SESAC repertoire, and the SESAC website expressly 23 disclaims the accuracy of the information in all events. 24 25 ASCAP's suggestion this information is Again you can only search on a song-by-song basis by You can't use it as a resource to Dr. Marx in her testimony cautioned against reliance on SESAC as a benchmark for the additional reasons that even if SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 Opening - Mr. Steinthal 112 1 the SESAC and Pandora license were negotiated under competitive 2 market conditions, which is not the case, as she said the SESAC 3 repertoire differs substantially from ASCAP in size and 4 composition. 5 differences in the SESAC and ASCAP repertoires and the 6 differences are not amenable to adjustment under circumstances 7 where huge differences in the size and market share of SESAC 8 versus ASCAP make any small variation into a large 9 differential. 10 There is no way to adjust for the qualitative What I mean by that, if SESAC's market share ticks up 11 by two percent relative to the assumed amount, you can have a 12 fundamentally different outcome because of that huge delta 13 between the SESAC repertoire and the ASCAP repertoire. 14 Now, since the final briefing and the direct testimony 15 submitted in December, your Honor, we have actually gotten the 16 benefit of a ruling in one of the pending antitrust lawsuits 17 against SESAC brought by the RMLC. 18 has seen it. I don't know if your Honor We are going to pass it up. 19 THE COURT: 20 (Off-the-record discussion) 21 THE COURT: 22 today. Excuse me one second. It appears we can continue until 5:00 Ms. Rojas, is that right? 23 THE CLERK: Yes, that's correct. 24 THE COURT: And we're still investigating whether we 25 have a reporter tomorrow and by what time we would know SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 1 Opening - Mr. Steinthal tomorrow morning whether we have a reporter. 2 MR. SEDDON: 3 THE COURT: 4 MR. STEINTHAL: That is all. (Pause) 5 113 May I approach, your Honor? Yes. Your Honor, this is a decision on 6 December 23, 2013 in the RMLC versus SESAC case in the Eastern 7 District of Pennsylvania on the RMLC motion for preliminary 8 injunction to enjoin SESAC from imposing additional rate 9 increases during the course of the litigation. 10 THE COURT: 11 What is it? 12 MR. STEINTHAL: 13 THE COURT: 14 15 Is this an antitrust lawsuit? Excuse me? I am sorry. I am not familiar with the litigation against SESAC. MR. STEINTHAL: There are two -- the experts have 16 talked about it -- there are two pending antitrust lawsuits 17 against SESAC, one brought by the television and music license 18 committee and one brought by the radio and music license 19 committee. 20 The RMLC brought on a motion for preliminary 21 injunction. 22 were made, and some of the findings are very spot-on the 23 subjects that we're talking about here, and we thought your 24 Honor would benefit from having a decision. 25 There was an evidentiary hearing, and findings Among other things, the report and recommendation of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 Opening - Mr. Steinthal 1 U.S. Magistrate Judge Lynne Sitarsky found as follows, your 2 Honor, first on Paragraph 28, to the subject of the website, 3 114 the same subject that ASCAP raised. 4 In theory, SESAC's website permits a station to search 5 the contents of its catalog if it is aware of the artist, 6 writer, publisher or song title. 7 not an efficient or reliable means of determining the songs in 8 the SESAC's repertoire. 9 its repertoire database is accurate. 10 In practice, this website is Indeed, SESAC essentially disclaims Later on a similar issue the court found, in Paragraph 11 46, that there was support in the record for the proposition 12 that radio stations could not turn to a substitute if SESAC 13 were to elevate its prices above the competitive level 14 precisely because turning to a substitute such as ASCAP or BMI 15 for SESAC music would require a station to stop playing SESAC 16 music, and stations could not reliably determine whether the 17 music they play was SESAC music or not. 18 The court also found, in Paragraph 29, that SESAC also 19 enforces their affiliates' rights by filing infringement suits 20 against those who use their works without a license, and that 21 it is the threat of an infringement suit that often motivates 22 radio stations to take SESAC licenses. 23 On the subject of SESAC's non-comparability with 24 ASCAP, the court noted SESAC's testimony that SESAC is more 25 selective than ASCAP. It is not open to all comers -- unlike SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 Opening - Mr. Steinthal 115 1 ASCAP -- in choosing its rights or affiliates, claiming to use 2 only those, Paragraph 24, with exceptional skill which enables 3 SESAC to pay more to their affiliates than what market 4 intelligence tells them ASCAP and BMI are paying for their 5 affiliates. 6 The court found that SESAC, in setting its fees, does 7 not consider the rates that ASCAP and BMI charge for their 8 blanket licenses. 9 that are disproportionate to the number of works that it 10 11 Paragraph 35. In fact, it charges rates licenses in comparison to ASCAP and BMI. Paragraph 61. These findings absolutely support the very reasons 12 relied upon by Dr. Noll and Dr. Marx for rejecting use of the 13 Pandora SESAC agreement as a benchmark. 14 The mystery of what it is that comprises the SESAC 15 repertoire, the infringement risk that exists of a user like 16 Pandora does not take a license, and the fundamental 17 non-comparability of SESAC and its repertoire that ASCAP and 18 its repertoire which renders fruitless any mathematical effort 19 to adjust the SESAC fee based on estimates of SESAC's and 20 ASCAP's size or market share. 21 Finally, the market share testimony provided by 22 SESAC's expert in that case is really the nail in the coffin to 23 ASCAP's attempt to rely on SESAC. 24 of Pandora's SESAC fee to arrive at a fee for ASCAP is based on 25 SESAC having an assumed and secret single digit market share ASCAP's manner of adjustment SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 116 Opening - Mr. Steinthal 1 significantly lower than the market share that SESAC actually 2 advised Pandora it had at the time of the Pandora-SESAC 3 negotiations. 4 In other words, they used a number of the single 5 digits. The testimony from Joe Kennedy is he was advised that 6 SESAC had a double digit market share, and get this, your 7 Honor, the testimony from SESAC's expert in the RMLC case 8 which, of course, is sworn testimony rather than speculation 9 and is the most current data and is applicable to the specific 10 marketplace of radio performances, is that SESAC has a 13 11 percent market share. 12 in the decision and it is a public decision. 13 THE COURT: I can say it on the record because it is So this is very interesting. I need 14 counsel to be prepared to address the extent to which I'm 15 permitted to take judicial notice of a ruling in separate 16 litigation. 17 there was this ongoing litigation, but I have not reached out 18 to get any of the rulings, get the pleadings, do anything with 19 respect to it. Of course, I've seen references to the fact that So why don't we just leave it here. 20 I am not going to consider this decision of December 21 23rd, 2013 without a brief, a short letter brief or whatever, 22 that gives me the evidentiary analysis that would make this a 23 document that I can turn to and quote from and think about in 24 any considered way. 25 MR. STEINTHAL: The last point, the testimony recorded SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LJPAN4 Opening - Mr. Steinthal 117 1 in the decision of SESAC's expert says that SESAC's radio 2 market share is 13 percent. 3 market share number, and then you give ASCAP and BMI remaining 4 87 percent, and you split it 50-50, and you do the SESAC 5 adjustment assuming the market share they testified about is 6 correct, the figure drops down to 1.51 percent. 7 If you plug in 13 percent as the (Continued on next page) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 1 118 Opening - Mr. Steinthal MR. STEINTHAL: So the number becomes actually lower 2 than the fee that we, Pandora are seeking and much lower, 3 obviously, than the fee that ASCAP is seeking and it proves as 4 I said before what Dr. Marx testified to which is when you're 5 dealing with a huge variance, a huge delta between the market 6 share of ASCAP and SESAC, if you have any adjustment, 7 especially when you're not sure what the number is and you're 8 speculating as to what the right market share is -- ASCAP 9 speculated low and it got to a number as a consequence that 10 thought it was a favorable number for it in its benchmark. 11 we used the number that Joe Kennedy was told by SESAC in those 12 negotiations the number would be much closer to our number than 13 their number and if you use SESAC's own expert's number when 14 you do the math it takes us below the 1.7 percent we received. 15 Whenever you're thinking about how to use the decision, even if 16 you don't use the decision-qua-decision, it's a great example 17 of what happens because of the uncertainty associated with the 18 SESAC market share number. 19 benchmark to use because nobody knows what that market share 20 is, and if it happens to be 13 like they're testifying, ASCAP 21 would have never offered it as benchmark. 22 THE COURT: If It's a decidedly dangerous Well, it seems to me that this may be an 23 appropriate avenue of cross-examination of certain of the 24 witnesses how it would affect their calculations and 25 understanding with respect to what the benchmark should be and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 119 Opening - Mr. Steinthal 1 whether it's appropriate. 2 is something I'll turn to without that additional authority 3 from counsel. 4 MR. STEINTHAL: But beyond that I don't think this Your Honor, let me quickly deal with 5 the other benchmarks that ASCAP has proffered outside of 6 Dr. Murphy. 7 that these are proposals that were raised in the ASCAP briefs 8 or in Mr. DeFilippis's testimony. 9 Dr. Murphy. The first is the Spotify benchmark and I would say They're not endorsed by One of them, as I said, is the on-demand service 10 Spotify. I won't go into great detail now. We in our briefs 11 talk about why an on-demand service is not a good benchmark for 12 a non-interactive service. 13 itself as we talked about this morning licensing non- 14 interactive services at much lower rate than on demand. 15 have some, frankly, almost frivolous arguments that Pandora is 16 a hybrid service like Spotify is a hybrid service because it 17 has Pandora Premier, this tiny feature. 18 taken seriously. 19 questions about getting a chart, an on-demand streaming 20 service, I think this bears spending two minutes because it's 21 harder to explain in writing. 22 has to pay a mechanical royalty for the publishing rights as 23 well as a performance royalty. 24 Copyright Law the delivery of an on-demand stream triggers a 25 mechanical licensing obligation and there's a statutory rate We have the long history of ASCAP We That really can't be There's also, your Honor, going back to your An on-demand streaming service Under Section 115 of the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 120 Opening - Mr. Steinthal 1 structure, there is litigation for the Copyright Royalty Board 2 and for the first time ever there was a rate structure 3 established in 2009 and that rate structure is very 4 interesting. 5 service you're going to pay 10-1/2 percent of your revenue, but 6 you get an offset for your public performance royalties. 7 it's an all-in 10-1/2 percent of revenue. 8 perspective if you're Spotify it doesn't matter whether you 9 agree to pay ASCAP 2-1/2 percent or 3-1/2 percent or 4 percent. It says that if you're an on-demand streaming So So from an economic 10 It's just a deduct. 11 overall obligation for your all-in mechanical and performance 12 right payment. 13 face of an objectively high demand to take ASCAP to rate court 14 or BMI to rate court as long as it's just a different sized 15 deduction. 16 why this is a decidedly bad benchmark. 17 You're still going to have the same So there's no incentive whatsoever even in the So you have that on top of everything else as to The Nokia Mix Radio benchmark offered by ASCAP suffers 18 from both the complementary revenue streams that Apple has and 19 the fact that it's an on-demand service, so it suffers from all 20 the same problems that Spotify does. Then, your Honor, there's 21 the MobiTV 2-1/2 percent music rate. At first we were somewhat 22 confused as to what it was about the rate that your Honor was 23 inquiring about. 24 Dr. Murphy. 25 revenue base involved in the MobiTV case, and if we could put This is not a benchmark endorsed by It was rejected by Dr. Marx and clearly the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 121 Opening - Mr. Steinthal 1 up slide 10, please, in MobiTV we had the classic Music Choice 2 was the provider all the way on the right. 3 by MobiTV through the mobile operators to the consumer. 4 retail amounts paid were retail amounts paid to the telephone 5 companies for receipt of a bundle and there was a lesser amount 6 of money paid to MobiTV and a still lesser amount of money paid 7 to the upstream program provider which was Music Choice. 8 2-1/2 percent rate was applied to the decidedly wholesale rate 9 revenue base and your Honor observed the 2-1/2 percent Music It was distributed The The 10 Choice rate is the current rate applied to wholesale revenues 11 in order to obtain a through to the audience license for the 12 distribution of pure music through television. 13 perspective alone a 2-1/2 percent rate is an artificially high 14 rate to apply to retail revenue. 15 From that Now, retail revenue is all we have for Pandora, 16 advertising revenue and subscription fees paid direct to us. 17 ASCAP in its brief, and Mr. DeFilippis's witness statement says 18 there's no meaningful difference between the revenue subject to 19 fee for Music Choice versus Pandora. 20 true. 21 is upstream revenue and one is retail downstream revenue. 22 question there's a difference. 23 the issue when he says that distributors of Music Choice and 24 I'm quoting him, essentially purchase a subscription to the 25 Music Choice service, and I thought maybe that's what your There's a huge difference. That, your Honor, is not Just look at the chart. One No Mr. DeFilippis seeks to confuse SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 122 Opening - Mr. Steinthal 1 Honor read and was confused about. Maybe the effort to equate 2 subscription in Mr. DeFilippis's statement against the 3 subscription -- when we use the word subscription revenue, it's 4 usually retail it's usually what the listener pays to get 5 Pandora or Spotify whatever the case may be. 6 Mr. DeFilippis is not referring to true subscription services 7 by the end consumer buying at retail. 8 payments that are being made, just another way, talking about 9 the affiliate payments that are being made by the distributor But He is talking about the 10 upstream. So there can't be any confusion about the fact that 11 our case here presents a fundamentally different revenue base 12 than MobiTV. 13 you is a different kettle of fish and I frankly didn't think 14 that's where this discussion was going and I'd be prepared to 15 address that even in a brief if your Honor wants it. 16 been intimately familiar with that case, having lived with it, 17 that case was very, very different. 18 Judge Connor had at the trial level established a, I think it 19 was a 2-1/2 percent fee, but the key in the case, your Honor, 20 was he was applying his percentage the entire revenue base of a 21 portal. 22 streaming of content. 23 that was overbroad and he came up with a music use adjustment 24 factor, the famous MUAF, and we challenged that and the Second 25 Circuit said yeah, we have to kick this back. The RealNetworks case which Mr. Cohen raised with Having That was the case where Even the parts of the portal that didn't involve the Search, autos and he recognized that And the Second SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 123 Opening - Mr. Steinthal 1 Circuit set aside the fee determination. The language that was 2 used as part of that setting aside -- first of all, it's 3 plainly dicta, and second of all, the underlying factual 4 situation was so different, so if your Honor would like us to 5 put in a brief addressing the significance of the RealNetworks 6 case and how it discusses, whether it be the language that 7 Mr. Cohen was quoting or any aspect of it that your Honor 8 wishes, we welcome that. 9 different case, had different revenue bases and it involved I just think it's a fundamentally 10 dicta that really was not addressing anything as specifically 11 applicable to the Music Choice service distributed to a 12 distributor like MobiTV as opposed to Pandora being sold 13 retail. 14 or form, and I'd be happy to, if your Honor will accept a 15 letter brief, put in a letter brief on the case. So I don't think the case hurts us in any way, shape 16 THE COURT: I'd be happy to receive one. 17 MR. STEINTHAL: Okay. I think I'm almost done because 18 everything I was going to do at the end I did at the beginning. 19 What I was going to do at the end was say having knocked out 20 hopefully ASCAP's benchmarks what do you do? 21 provide us with a reasonable fee if we're not similarly 22 situated and you reject ASCAP's fee proposal, then it's up to 23 you to find the right benchmarks to establish a rate here. 24 got way ahead of myself and I think I answered that already. 25 The best benchmark for all the reasons I argued for similarly Your Honor has to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 I E1LFPAN5 124 Opening - Mr. Steinthal 1 situated is the RMLC. To the extent there should be any music 2 adjustment that Mr. Cohen is arguing for, it should be the 3 adjustment that ASCAP made in 2002 when it bumped up the old 4 radio rate that was applied to internet radio at the beginning, 5 it bumped it up from 1.615 to 1.85 precisely to take into 6 account the greater music use that he perceived on internet 7 radio. 8 the right one. 9 to be 1.85. So the range seems to me is 1.7 to 1.85 we think 1.7 is If there's any play in that range the cap's got I say that, the EMI agreement is supportive of 10 this range of outcome. 11 it's hypocritical for us to rely on the EMI agreement while we 12 reject the Sony and Universal agreements for the very simple 13 fact that the indicia of the negotiation for the reasons I 14 mentioned before does not reflect the exploitation by EMI of 15 market power even if it had it. 16 I mentioned before that I don't think No differently than as Mr. Cohen cited BMG and Warner 17 Chapel that were going to withdraw and may have gone down the 18 same path as Sony and Universal, but they did not. 19 not exercise market power that arguably they may have been able 20 to try to do. 21 And the history of negotiations for so long had a 1.85 rate and 22 the fact that ASCAP has for so long offered and continue to 23 offer non internet radio rates at 1.85 all suggest that the 24 absolute top should be 1.85. 25 it. Sony and Universal did. They did Warner and BMG did not. I'll conclude with this part of I don't think we've seen a case, your Honor, where we have SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 125 Opening - Mr. Steinthal 1 a crossover. 2 fact, I think Dr. Murphy would say under his theory that the 3 price of a willing buyer and a willing seller would have 4 arrived at in 2011 is 1.85. 5 and 2012. 6 of revenue rate and bump up the percentage. 7 ASCAP deal that ASCAP can point to where a percentage of 8 revenue rate escalated year to year. 9 They're at 1.85 for their first two years. In They're proposing 1.85 for 2011 There's no precedent whatsoever to take percentage There's not one There's no reason for it. If Pandora is successful, if its technology continues 10 to bring in greater and greater amounts of revenue ASCAP 11 benefits from that. 12 percentage. 13 for a higher percentage also doesn't hold up, your Honor. 14 addressed this in MobiTV as well. 15 technology of a service creates a more compelling offering, 16 well, if it's compelling and people will pay more for it, ASCAP 17 gets the benefit of that. 18 to generate that additional revenue shouldn't be the subject of 19 an increase in rate because you're getting the bump up as well 20 because you're riding up with Pandora. 21 There's no need to have a greater The notion that personalization creates a benefit You To the extent that the But the incremental investments made So at the end of the day I think all of those factors 22 argue in favor of an absolute cap on the range of 23 reasonableness at 1.85 and the evidence that we'll give you I 24 think will support that. 25 everything else and thank you very much for your patience. And I apologize for my dry throat and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 E1LFPAN5 1 126 Opening - Mr. Steinthal THE COURT: Excuse me one second, counsel. So, 2 counsel, this is the situation. We do have two court reporters 3 who volunteered to come in tomorrow if the courthouse has 4 closed. 5 that you will be here because I don't want them to come in if 6 you're not going to be here. 7 recess. So I would just ask you to confirm during this break 8 THE COURT: We'll take a ten-minute (Recess) 9 Good. So, counsel, I understand that you have a 10 joint recommendation that we break for the day but proceed 11 tomorrow morning. 12 joint recommendation? 13 COUNSEL: 14 THE COURT: Am I right that I understand that is your Yes, your Honor. Good. Hopefully some very sick people can 15 get a good night's rest. 16 just fine and I want to thank the court reporters who have 17 agreed to stay today and those who will be with us tomorrow. 18 That would be very good. And that's So let's talk a little bit about logistics. I'm 19 assuming the courthouse will be closed tomorrow. We have 20 commitments from two reporters to be with us in that event. 21 know we're all planning to be here and start tomorrow morning 22 at 9:30. 23 call my chambers as soon as you know. 24 each other as well and we'll be monitoring our chambers voice 25 mail from 7:00 onwards to try to capture any messages and act I But just in case something dramatic happens, please You'll communicate with SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 127 E1LFPAN5 Opening - Mr. Steinthal 1 on them. So if we need to intercept reporters we will be able 2 to do so. 3 I think that's it. MR. COHEN: Your Honor, just because I know you're 4 trying to stay ahead of us, the weather even before this delay 5 has kind of changed our order a good deal so let me tell you 6 what I think we're going to try to do tomorrow is start with 7 Mr. Brodsky, who needs to leave to go to the Grammy's rather 8 than Mr. DeFilippis, then move to Mr. DeFilippis. 9 was unable to get into town. Mr. Horowitz He was going to testify after 10 that. 11 order on the 30th of January which is the next day that he can 12 get back which is also the day that we've agreed that 13 Mr. Rosenbloum has been subpoenaed. 14 we will keep you as up to date as we can but the witnesses are 15 doing the best they can with travel plans. 16 17 18 We have agreed that Mr. Horowitz will testify out of THE COURT: He's not out of order but So after Mr. DeFilippis we'll have Mr. LoFrumento. MR. COHEN: Yes, your Honor. 19 Mr. Kenmore. 20 Then Mr. Saltzman and will get to Mr. LoFrumento tomorrow. 21 We'll proceed in that order. THE COURT: Fine. I don't know if we Let me tell you what I've done with 22 respect to your evidentiary objections and thank you for 23 getting me this markup with these revised objections. 24 need to file as part of our trial exhibits the copy of the 25 witnesses' direct testimony that has these objections reflected SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 One, we E1LFPAN5 128 Opening - Mr. Steinthal 1 in it because they are part of the record of what objections 2 were made. 3 have more, and what I'm thinking about doing is ignoring 4 objections made to a topic heading. 5 topic headings are not testimony but simply markers that 6 counsel have inserted to help me work my way through the 7 testimony. 8 testimony it is, give you just my indications of what 9 objections are sustained and you can assume that the rest are Some witnesses have very few objections, others I'm going to assume the And I might, depending on what it is or whose 10 overruled, and I'm thinking of doing the following: 11 through all the objections with respect to the ASCAP witnesses, 12 not that I won't do it again, but I have tentative rulings and 13 I'm thinking of what I would do at the right point is give you 14 the tentative rulings for a witness and then if anybody -- 15 without oral argument, just rule, and then if anyone feels that 16 they would like me to revisit one of those rulings I'd give you 17 an opportunity and that might save us some time and so that's 18 my recommendation. 19 Good. I've gone You'll have overnight to think about it. I don't think there's anything more to do 20 today. Am I getting copies of your exhibits of the Pandora 21 opening testimony slides? 22 MR. STEINTHAL: 23 THE COURT: 24 25 Yes. Thank you. Good. See you all tomorrow at 9:30. (Adjourned to January 22, 2014 at 9:30 a.m.) SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300