Full opinion text
OPINION AND ORDER DENISE COTE, District Judge: Table of Contents INTRODUCTION...............................................................518 FINDINGS OF FACT...........................................................520 A. ASCAP..............................................................520 B. DMX................................................................520 C. ASCAP’s Blanket Licenses -with the Baekground/Foreground Music Industry...........................................................522 1. The 1987 and 1994 Form License Agreements.........................522 2. Post-1999 Litigation Over a Per-Segment License.....................523 3. 2005 Muzak Agreement............................................524 4. 2010 Music Choice Agreement......................................525 5. 2009 PlayNetwork Agreement ......................................526 6. 2009 Trusonic Memorandum of Understanding........................527 D. Competitive Environment in the Baekground/Foreground Music Services Industry...................................................527 E. DMX’s Direct License Program.........................................528 1. Key Terms of the MCCL...........................................529 2. The MCCL Program from 2006 to 2010 ..............................532 3. Renewals of MCCLs...............................................532 4. Refusals to Renew MCCLs.........................................533 5. DMX’s Outreach to “Major” Publishers The Sony MCCL...............533 6. DMX’s Negotiations with Other Major Music Publishers ...............535 F. DMX’s Application for an ASCAP Blanket License........................535 G. DMX’S Application for a BMI Blanket License ...........................535 CONCLUSIONS OF LAW.......................................................536 A. The Governing Law...................................................536 B. ASCAP’s Rate Proposals...............................................539 1. ASCAP’s First Proposal A Flat Fee Blanket License...................539 2. ASCAP’s Alternative Proposal A Blanket License with a Static Carve-Out .....................................................541 C. DMX’s Proposal......................................................547 1. The Unbundled Music Fee..........................................548 2. The Floor Fee....................................................548 3. The Blanket Fee Sum of the Floor Fee and the Unbundled Music Fee............................................................549 4. The Structure of the DMX Proposal is Reasonable and the Benchmarks that DMX Proposes are Appropriate...................549 CONCLUSION.................................................................552 INTRODUCTION DMX, Inc. (formerly known as THP Capstar Acquisition Corp.) (“DMX”), a leading background and foreground (“BG/FG”) music service provider, has asked the American Society of Composers, Authors and Publishers (“ASCAP”), a membership organization representing almost half of American composers and music publishers in their negotiations of public performance rights, for a license. DMX seeks a through-to-the-audience blanket license adjusted to reflect the many licenses DMX has already obtained directly from music publishers and the many more it intends to obtain. The par- ties have been unable to reach agreement on the terms of such a license, and, pursuant to an antitrust consent judgment, AS-CAP now requests that this Court set a rate for the license. The parties agree that, at least in theory, such a license — a blanket license with “carve-outs” for DMX’s direct licensing program — is permitted by the consent judgment under which ASCAP operates. They dispute, however, the extent to which such a license is “reasonable” and whether ASCAP may reasonably respond to a request for a blanket license with carve-outs with a proposal for a blanket license that does not account for a music user’s direct license agreements with ASCAP publishers. Additionally, the parties’ dispute what the appropriate benchmark agreements are for determining a reasonable license fee, and what rate is indicated by those past agreements. On July 25, 2006, ASCAP applied to this Court to set a reasonable rate. A bench trial was held from November 15 to 23, 2010, to determine a reasonable rate pursuant to DMX’s application to ASCAP for a license and ASCAP’s application to this Court. This Opinion constitutes the Court’s findings of fact and conclusions of law following that trial. The factual findings are principally set forth in the first section of this Opinion, but appear as well in the final section. With the parties’ consent, the trial was conducted in accordance with the Court’s Individual Practices. On September 10, the direct testimony of the witnesses was presented through affidavit and submitted with the joint pretrial order, along with the parties’ trial exhibits and proposed findings of fact and conclusions of law. ASCAP presented affidavits constituting the direct testimony of two of its employees and one expert. Its employee-witnesses were Vincent Candilora, Director of Licensing, and Dr. Peter M. Boyle, Chief Economist (“Boyle”). ASCAP’s expert was Dr. William H. Greene (“Greene”), an economist. DMX presented affidavits constituting the direct testimony of three of its employees, a consultant, and two experts. The DMX employees were Timothy J. Seaton, Chief Operating Officer (“Seaton”), L. Barry Knittel, Senior Vice President of Business Affairs Worldwide (“Knittel”), and Shalonn Hilburn, Manager of Select Music Design. DMX’s consultant was Ronald H. Gertz (“Gertz”), Chairman of Music Reports, Inc. (“MRI”). DMX’s experts were Dr. Adam B. Jaffe, an economist (“Jaffe”), and Dr. Amy Candell, a consulting economist (“Candell”). All of the parties’ witnesses appeared at trial and were available for cross-examination. In addition, the parties designated deposition testimony from eleven witnesses. The additional witnesses for whom AS-CAP offered deposition testimony were Edward Arrow, Vice President of Copyright at Universal Music Publishing Group (“Universal”); Helene Blue, President and sole full-time employee of Helene Blue Music; Philip Ciadella, Senior Vice President of Administration and Licensing at Cherry Lane Music Publishing (“Cherry Lane”); Alan Furst, Senior Vice President of Content for DMX; Benjamin Hanson, currently an attorney for Harden Healthcare Services and General Counsel for DMX Holdings, Inc. from June 2005 until September 2008; David Hirshland, President of Bug Music, Inc.; Jonas Kant, Senior Vice President of Business and Legal Affairs for Sony/ATV Music Publishing (“Sony”); Sindee Levin (“Levin”), music publisher and owner of the American Mechanical Rights Agency, Inc.; and Brian Roberts, Chief Financial Officer for Warner/Chappell Music Publishing (“Warner/Chappel”). The additional witnesses for whom DMX offered deposition testimony were John LoFrumento, ASCAP’s Chief Executive Officer; Robert Candela, ASCAP’s Chief Financial Officer; and Richard Reimer, ASCAP’s Senior Vice President of Legal Services. FINDINGS OF FACT A. ASCAP Created in 1914, ASCAP is an unincorporated membership and performing rights organization (“PRO”) controlled by composers and music publishers. ASCAP currently has approximately 400,000 United States members. ASCAP members grant ASCAP a nonexclusive right to license the public performance right to their musical compositions. There are millions of musical compositions in ASCAP’s unique repertory. ASCAP licenses its members’ music to a wide variety of music users, including BG/FG music services. ASCAP’s ability to collectively license the performing rights to its members’ compositions gives the organization market power when negotiating with music users. In an effort to police ASCAP’s exercise of this power, the Department of Justice (“DOJ”) sued ASCAP in 1941 for alleged violations of the Sherman Antitrust Act. This lawsuit resulted in a consent decree that has constrained ASCAP’s operations. United States v. ASCAP, 1940A13 Trade Cas. (CCH) ¶ 56, 104, § 11(1) (S.D.N.Y. 1941). The ASCAP consent decree has been updated on two occasions. United States v. ASCAP, 1950 Trade Cas. (CCH), ¶ 62,595 (S.D.N.Y.1950) (“Amended Final Judgment” or “AFJ”); United States v. ASCAP, 2001-2 Trade Cases (CCH) ¶ 73,-474 (S.D.N.Y.2001) (“AFJ2”). The most recent version of the decree — AFJ2—took effect on June 11, 2001. AFJ2, 2001-2 Trade Cases (CCH) ¶ 73,474. B. DMX DMX is one of five leading competitors in the BG/FG music industry, each of which services more than 10,000 locations. Generally, BG/FG music service businesses provide their clients with pre-programmed music for use in a variety of business establishments, from restaurants and hotels to offices and retail stores. The right to publicly perform musical works is a part of the service that BG/FG companies provide to clients. DMX was formed June 3, 2005, when DMX Holdings, Inc. purchased assets out of the bankruptcy estate of Maxide Acquisition, Inc. and its subsidiaries. Approximately half of the customer locations serviced by DMX are associated with businesses that control more than 100 locations. DMX’s customers vary in size, from national chains like Saks Fifth Avenue, Sheraton, and Olive Garden to single-location businesses. In 2005, DMX served approximately 84,000 locations. This number had dropped to 70,000 locations by late 2009, but recently rose to approximately 95,000 after DMX entered into an agreement with DIRECTV, Inc. (“DIRECTV”) to take over the audio channels that are provided as part of DIRECTV’S commercial satellite television service. In any given year, DMX delivers approximately 150,000 musical compositions to its customers. These works are owned or controlled by more than 14,000 different publishers. From 2005 to 2009, ASCAP works constituted approximately 48% of all of the musical works that DMX transmitted or delivered to its clients. DMX provides music programming to its customers through either an “off-premise” or “on-premise” delivery mechanism. Off-premise delivery involves the transmission of music to customers via direct broadcast satellite (“DBS”). A satellite dish installed at each business establishment is connected to a proprietary DMX receiver that receives the broadcast signal and transmits it through the establishment’s sound system. Businesses that subscribe to DMX through its “on-premise” delivery service are given a proprietary DMX playback device that is installed at the customer location. This device is updated either through the delivery of physical media, such as a CD or DVD, or through a network connection. DMX’s customers are fairly evenly divided between DBS and on-premise delivery mechanisms. On-premise and off-premise DMX customers have access to a large array of programming. The off-premise service consists of 111 different audio channels that vary in terms of genre and style. Approximately half of the 52,000 off-premise customers receive all of the available channels. The other half only receives 84 channels as part of DMX’s delivery to commercial establishments through DIRECTV. A small number of customers receive packages of two, six, or ten channels. DMX does not track which channels its off-premise customers actually play, but it does keep a list of every song that it broadcasts and the number of times that any given song is transmitted on each channel in any given period. On-premise customers have access to 157 programs. The on-premise and off-premise versions of the same program have between 90% and 95% of the tracks in common. But, because recorded music must be physically delivered to on-premise establishments, these customers are required to select a smaller number of programs — usually ten — for physical delivery. Customers receive updated playlists for their selected programs every thirty to ninety days. DMX tracks which songs are included on each program’s playlist and the number of locations that request each program. It does not keep records of how often customers play any given program or how often they repeat a particular song. DMX provides two categories of services to its customers: Select and Signature. Select customers receive all or some number of the various channels discussed above — these channels are organized by category, i.e. by genre, era, or a particular “lifestyle.” All Select customers are given the same playlist, either via DBS or some form of physical media. Signature customers, however, receive programs that are specifically designed for them by DMX personnel. These programs are delivered almost exclusively via on-premise media. In 2008, approximately 30% of DMX’s customers received the Signature service, but this number has since declined. C. ASCAP’s Blanket Licenses with the Background/Foreground Music Industry 1. The 1987 and 1994 Form License Agreements Prior to 2000, ASCAP licensed the entire BG/FG music industry under two form licenses. From January 1, 1987 through December 31, 1991, ASCAP offered a form license (the “1987 Form License”) to publicly perform ASCAP works by means of a BG/FG music service at the premise of the licensee’s subscribers. The 1987 Form License distinguished among three types of businesses that use BG/FG music services. The annual fee for a license to provide BG/FG music to retail businesses-known as “5A” locations— ranged from $38.50 per location in 1987 to $44.50 per location in 1991. Licenses for non-retail locations, such as offices, hospitals, or universities, ranged from 4.5% to 5% of the BG/FG music service’s “gross billings” for these customers. Finally, for establishments that use “commercial announcements” in addition to the BG/FG music service, the license went from an annual rate of $50.40 “per floor” in 1987 to $59.40 per floor in 1991. The latter two categories were known as '5B" and “5C” locations, respectively. After the 1987 Form Agreement expired on January 1, 1992, the major BG/FG music service providers continued to be licensed by ASCAP and paid, on an interim basis, the rate applicable to them in December 1991 under the 1987 Form Agreement. From June 1, 1994 until May 31, 1999, ASCAP offered a second form agreement (the “1994 Form Agreement”) to BG/FG music service providers. All major BG/FG music service providers signed this agreement, including the two companies that became modern-day DMX. This agreement paralleled the 1987 Form Agreement in structure, but provided for an increase in license rates: the annual rate for 5A retail establishments started at $46.25 per location in 1994 and rose to $49.50 per establishment by 1999; a license for 5B non-retail locations cost 5% of gross billings for each location; and, the annual cost of a license for a 5C establishment with “commercial announcements” began at $61.68 per floor in 1994 and climbed to $66.00 per floor in 1999. When the 1994 Form Agreement expired on June 1, 1999, all major BG/FG music service providers continued to operate under an ASCAP blanket license and paid interim fees at the rates that were applicable in May 1999. 2. Post-1999 Litigation Over a Per-Segment License Efforts to reach a third form license agreement with leading members of the BG/FG music industry failed. In early 2003, ASCAP filed an application with the rate court for a determination of a reasonable fee as to the predecessor in interest to DMX — DMX Music, Inc. — and one if its principal competitors, Muzak. United States v. ASCAP (In re Application of Muzak, LLC), 309 F.Supp.2d 566, 570 (S.D.N.Y.2004) (‘‘Muzak /”). During that litigation, DMX Music, Inc. and Muzak indicated their desire to obtain a “per-segment” license from ASCAP, with each segment defined as a particular music publisher’s catalog. Id. They sought to have their payments to ASCAP measured by the “degree to which [they] rely on an ASCAP blanket license, as opposed to direct licensing arrangements with ASCAP members.” Id. ASCAP refused to quote a fee for such a license, arguing that it was a form of license that it was not obligated to provide under AFJ2. Id. at 571. In March 2004, the rate court held that a music catalog “does not involve the user’s performance of music and therefore is not a ‘segment’ under the relevant clauses” of AFJ2. Id. at 572. Muzak I went on to hold, however, that “the ‘per segment’ licens[e] provision[ ]” of AFJ2 “do[es] not preclude the issuance of a blanket license with a fee structure that reflects applicants’ previous direct licensing arrangements.” Id. at 580. The Honorable William C. Conner, who previously served as the ASCAP rate court judge, concluded that the Second Circuit’s decision in United States v. BMI (In re Application of AEI Music Network), 275 F.3d 168 (2d Cir.2001) (“AEI”), which interpreted the consent decree under which ASCAP’s principal competitor BMI operates, did not “preclude the issuance of blanket licenses with reasonable fees that reflect direct licensing arrangements previously entered into by applicants.” Muzak I, 309 F.Supp.2d at 578. Since the operative provisions in the BMI consent decree were identical to provisions in AFJ2, Judge Conner opined that the existence of ... direct licensing arrangements may and will be considered by this Court in a rate court proceeding under AFJ2 section IX in determining whether ASCAP has met its burden of proving the reasonableness of the blanket license fee it seeks or, in the event that ASCAP fails to meet that burden, in the Court’s calculation of a reasonable fee based on all the evidence. Id. at 581 (emphasis supplied). None of the parties to the proceedings before Judge Conner appealed his decision. A few months later, in July 2004, Judge Conner clarified that Muzak I did not “contemplate a blanket license fee mechanism that provides credits or discounts for direct licensing arrangements that applicants may enter.” United States v. AS-CAP (In re Application of Muzak, LLC), 323 F.Supp.2d 588, 590 (S.D.N.Y.2004) {“Muzak II ”). Instead, the rate court was only required to consider those direct licenses that were “already in existence at the time of trial in determining a reasonable blanket licensing fee.” Id. In the aftermath of that rate court litigation, ASCAP and Muzak settled their disputes and entered into a licensing agreement. DMX Music, Inc. filed for bankruptcy. During the proceedings that produced the Muzak I and Muzak II decisions, ASCAP had signed letter agreements with two other major DMX competitors — Music Choice and PlayNetwork — in which the parties agreed to interim fees and ASCAP promised to offer them a license on the same terms ultimately given to Muzak and DMX Music, Inc. 8. 2005 Muzak Agreement ASCAP relies principally on its 2005 agreement with Muzak, concluded in the wake of the Muzak rate court proceedings, as the most appropriate benchmark for constructing a blanket license for DMX. Muzak, founded in 1934, is the largest BG/FG music service provider in the United States. On January 14, 2005, ASCAP and Muzak entered into a blanket license for the period January 1, 2005 through December 31, 2009 (the “Muzak Agreement”). In exchange for this license, Muzak agreed to pay ASCAP a flat fee of [REDACTED] per year for each of the five years of the license term, regardless of whether the number of subscribers to the service decreased. As the agreement explains, “Muzak assume[d] all risks associated with the possibility of [a] declining subscriber count[ ].” The agreement indicates that as of October 31, 2004, Muzak had no more than [REDACTED] locations. A public performance fee of [REDACTED] for [REDACTED] locations yields an effective rate of $41.21 per location — roughly a 16% drop from the $49.50 rate that the BG/FG industry had paid for 5A locations since the final year of the 1994 Form Agreement. The Muzak Agreement also regulated the fee in the event that Muzak increased its subscriber base. The parties agreed that the annual fee would not increase unless the number of Muzak locations increased at a rate exceeding 8% per year. Specifically, for each of the locations in excess of the number of locations that would have equaled 8% of the prior year’s total number of locations, Muzak agreed to pay ASCAP an additional annual fee of $41 per location. If over the course of the license term Muzak increased its locations each year at a rate of just 8% per year, by the final year of the license term, the effective per location rate would have dropped as low as $28.05 per location. Under that same scenario, the average fee for the five year period would have been $32.52. As the terms of the Muzak Agreement reflect, Muzak expected that it would continue to expand its business, as it had been doing during the first years of the new century. For its part, ASCAP also anticipated that Muzak’s business would continue to grow. When ASCAP entered the Muzak Agreement, it expected that it would become the template for final fees for the BG/FG music services industry, including for several large competitors of Muzak that ASCAP expected would grow significantly in the coming years. Consequently, as of early 2005, ASCAP agreed to a license that it expected to result in a declining per location rate for the five year period ending in 2009. ASCAP and Muzak also addressed both the interim license fees that Muzak owed ASCAP from 1999 — that is, the period that followed the expiration of the 1994 Form Agreement — and an outstanding audit dispute between the parties. According to the Muzak Agreement, the interim fees that Muzak had already paid to ASCAP during this period were considered final. With respect to the audit dispute, Muzak agreed to pay ASCAP [REDACTED] to settle a [REDACTED] claim brought by ASCAP for the period beginning December 2002 and ending March 2004. This settlement amount was not allocated to any particular year within the settlement period. If these two settlements are considered part of a single transaction with the Muzak Agreement — as the contracts and circumstances suggest they should— they also reflect that ASCAP and Muzak agreed to an effective per location rate of substantially less than $41.21. But, the Muzak business did not grow. To the contrary, Muzak decreased in size, reaching a low of [REDACTED] locations in 2009. On April 24, 2009, ASCAP agreed to reduce Muzak’s annual fee to [REDACTED], in light of Muzak’s then-pending bankruptcy. Since the expiration of the Muzak Agreement on December 31, 2009, Muzak has been paying ASCAP an interim flat fee of [REDACTED] per year, subject to retroactive adjustment when the parties reach an agreement as to final fees. 4. 2010 Music Choice Agreement Although it is not nearly as large as Muzak, Music Choice is another leader in the BG/FG music services industry. It provides its services through cable and satellite television systems. In December 2004, Music Choice served [REDACTED] locations and by the end of 2009, it provided music to [REDACTED] establishments. Like Muzak, from 1994 until 1999, Music Choice operated under ASCAP’s 1994 Form Agreement. During the Muzak proceedings, Music Choice and ASCAP entered into a letter agreement dated May 15, 2003, which provided that Music Choice would be “bound” by all license terms that ASCAP, Muzak, and DMX Music, Inc. agreed upon or that were determined by the rate court. After the Muzak Agreement was executed in 2005, Music Choice and ASCAP engaged in negotiations over the application of the Muzak Agreement to their relationship. ASCAP initially offered a license at a rate of $46.00 per location, and then a rate of $41.21 per location. Music Choice rejected both proposals. The parties also disputed how the 8% organic growth provision in the Muzak Agreement should be applied to Music Choice. The effective per location rate would have been $35.71 under ASCAP’s interpretation of the growth provision and only $28.79 if Music Choice’s construction were adopted. Unlike Muzak, at the time Music Choice was negotiating its final license fee with AS-CAP it knew how its business had grown. Consequently, there was no uncertainty as to the extent to which Music Choice would increase its number of customer locations during the license period. As the negotiations reached an impasse, Music Choice stopped paying interim fees, asserting that it had overpaid ASCAP in prior years. Thus, from July 2008 until September 2009, it made no payments to ASCAP. On May 21, 2010, ASCAP and Music Choice settled their outstanding fee disputes for the prior decade by adopting a final fee (the “2010 Music Choice Agreement”). As is true with most settlements, this agreement was a compromise. Music Choice paid ASCAP [REDACTED] beyond the interim fees it had already paid “in full and final settlement of all claims either party shall have or may have against the other ... for additional license fees or other amounts owed to ASCAP for the Music Choice Service for all periods through December 31, 2009.” The parties in this rate court proceeding contest the effective rate that can be fairly attributed to the settlement of the Music Choice fee dispute covering the ten and a half year period between June 1, 1999 and December 31, 2009. DMX calculates an effective rate of either $29.89 for the most recent five year period, or $34.60 per location for the entire ten year period. While ASCAP calculated an effective rate of $40.36, it did not show that that figure was based on any sound methodology. In sum, in 2010, at a point in time when ASCAP and Music Choice knew precisely how Music Choice’s business had expanded in recent years, the parties agreed to settle their fee dispute for a per location rate significantly below $41.21. 5. 2009 PlayNetwork Agreement PlayNetwork is another leader in the BG/FG music services industry. It grew from 12,184 locations in December 2004, to 49,110 in 2009. Its major customers include chains such as Starbucks. On August 14, 1998, PlayNetwork signed a 1994 Form Agreement, granting PlayNetwork a blanket license from its creation in 1996 through May 31, 1999. When this license expired, PlayNetwork agreed to pay ASCAP interim fees on the basis of the rates that applied to it in May 1999 under the 1994 Form Agreement. Like Music Choice, on May 15, 2003, Play-Network signed a letter agreement with ASCAP stating that it would be bound by the terms of the agreement that ASCAP reached in its then-ongoing rate dispute with Muzak and DMX Music, Inc. On May 8, 2009, ASCAP and PlayNetwork entered into an agreement (the “2009 PlayNetwork Agreement”) to resolve their disputes for the period 1999 through 2009. It provided that interim fees paid between 1999 and 2004 would “be deemed to be final license fees.” During this time frame, PlayNetwork served on average, approximately 5,000 locations. ASCAP calculates that this settlement for the fíve- and-a-half year period is equivalent to a per location rate of $49.43. The 2009 Play-Network Agreement also provided that for the period beginning January 1, 2005 and ending December 31, 2009, PlayNetwork would pay a license fee at a rate of $41.21 per location. Thus, the 2009 PlayNetwork Agreement is a recent license agreement with a major BG/FG music service provider, albeit one about half of DMX’s size, that adopts a $41.21 rate. 6. 2009 Trusonic Memorandum of Understanding Trusonic is the smallest of the BG/FG music service companies that have more than 10,000 customer locations. While in 2004, it delivered music to only 2,259 locations, by 2009, this number had grown to 11,487. Trusonic has several large chain accounts, such as Toys “R” Us and Crate & Barrel. Trusonic differs from its competitors in the BG/FG service industry in that certain Trusonic customers only receive music from publishers who have entered into direct licensing agreements with Trusonic. On January 29, 2003, Trusonic and AS-CAP entered into an interim license agreement under which Trusonic agreed to pay ASCAP the May 1999 rates under the 1994 Form Agreement. In a letter dated November 13, 2006, ASCAP notified Trusonic of an audit finding that Trusonic was almost $1.1 million behind in its fee payments. Trusonic disputed the amount it owed ASCAP. On March 24, 2009, the parties executed a memorandum of understanding (“MOU”) to resolve their dispute regarding the 2003 through 2007 period and to provide a framework within which to negotiate a license for the period beginning January 2008 and ending December 2012. The MOU set a final fee for the period from February 1, 2003 through December 31, 2007, at $500,000 over the amount Trusonic had already paid ASCAP. For the 2008 through 2012 period, Trusonic agreed to pay ASCAP at an annual rate of $45 per location, but only for those establishments that play ASCAP music that is not otherwise licensed. In other words, Trusonic will not pay ASCAP anything for locations that only play music within the ASCAP repertory that Trusonic has directly licensed from publishers, or that play no ASCAP music. The MOU further provides that the parties “will negotiate in good faith and execute a license agreement” for this latter period, but they have not yet done so pending the outcome of this rate court proceeding. ASCAP tracks the number of Trusonic premises that play ASCAP music which is not directly licensed, but it does not know the total number of Trusonic locations. Consequently, it is impossible to calculate the actual per location rate that Trusonic is paying ASCAP. Presumably, this rate is less than $41.21, since during the negotiations preceding the adoption of the $45 rate, Trusonic rejected ASCAP’s proposal that it pay $41.21 for all locations. D. Competitive Environment in the Background/Foreground Music Services Industry In addition to DMX’s established competitors, new forms of competition have emerged in the BG/FG music services industry. “Music consultants” including Activate, Audiostiles, Gray V, and Music Styling, have replaced traditional BG/FG music service providers by using iPods or other storage and playback devices to create music playlists that are customized for particular applications. Similarly, business owners are increasingly using their own music storage devices to create their own playlists. Even more recently, Internet-based commercial streaming services have begun to enter the market. This increase in competition has affected the fee that DMX can charge its customers as well as its revenue. Both have declined. In the roughly two year period between July 2008 and September 2010, the rates DMX charges its customers have declined by 25%. In the five year period since June 2005, DMX’s average per-customer recurring monthly revenue has declined from approximately $57 in June 2005 to $36-a 37% decrease. Recently, DMX successfully bid for a contract with a retailer with 900 locations. It offered its BG/FG music service, including installation of new equipment, at a rate of $24.75 per location per month. E. DMX’s Direct License Program In early 2006, DMX began an initiative to secure the right to publicly perform musical compositions directly from music publishers. In so doing, DMX sought to reap the benefits of Muzak I’s holding that ASCAP is required to offer music users blanket licenses with carve-outs. The fees that DMX pays to the three PROs — AS-CAP, BMI, and SESAC — for blanket through-to-the-listener licenses constitute one of DMX’s largest costs of sale and DMX is hoping to reduce those costs as it confronts declining per location revenues in an increasingly competitive market. Because DMX’s programs are designed around music genres or themes, it is largely liberated from the need to provide its customers with any particular song. As a result, DMX is able to construct programs that rely heavily on music covered by its direct licenses without adversely affecting the quality of the programming. As of the time of trial, DMX had executed more than 850 direct licenses that accounted for roughly 30% of its programming. In January 2006, DMX engaged MRI, a company specializing in high-volume music license administration, to assist in the design and implementation of the direct licensing campaign. MRI was created in 1989 to help radio and television broadcasters take advantage of the per-program license available under the PRO consent decrees. To that end, MRI developed systems for tracking the broadcasting of television programs, analyzing their music content for PRO-affiliated compositions, and preparing music usage reports for the PROs on behalf of per-program licensees. More recently, MRI has capitalized on its expertise in the licensing and administration of music rights by marketing its services as an experienced negotiator of direct licensing agreements. Because it is important to MRI that it maintain good relationships with music publishers, MRI developed a DMX proposal that it believed would be credible and well received by the music publishing community. Initially, MRI conducted a “feasibility study,” which analyzed one month of DMX data to identify those publishers whose works DMX played most frequently. DMX and MRI then developed a “Music Composition Catalog License” (“MCCL”)' — -a generic direct license agreement that was intended to be readily acceptable to a wide range of publishers, without the need for extensive, individual negotiations. MRI tried to include provisions in the MCCL that would be familiar to music publishers in order to encourage their participation and reduce the need for lengthy negotiations. A high degree of uniformity across all direct license agreements was necessary to ensure that DMX would be able to efficiently administer its royalty obligations under each of the individual licenses. After identifying the fifty or so publishers on whose compositions DMX relied most heavily, MRI began to negotiate with them to get as many MCCLs executed as possible. Rather than targeting those publishers who would be most likely to execute an agreement, MRI first approached more sophisticated publishers, so that the form license could be modified in response to their feedback. In the course of these negotiations, MRI explained, in essence, that DMX was trying to maximize its reliance on direct licensing and minimize its reliance on the ASCAP blanket license. As a result, those publishers who gave DMX a direct license could expect that DMX would play more of their music, and those who did not could expect that DMX would play less. MRI used this simple appeal to publishers’ financial interest to get as many MCCLs executed as possible. In the course of negotiating the MCCL with the first fifty publishers and then with the next fifty or so who accounted for the largest share of DMX music, DMX occasionally agreed to alter individual provisions in the MCCL, either for a single publisher or as a change to the form MCCL. Nonetheless, the MCCL terms have remained fairly stable and the parties have identified a typical MCCL. After laying out the relevant terms of the standard MCCL, the remainder of this section describes the current state of DMX’s direct license initiative and the steps that DMX has taken to secure the participation of “major” publishers, most notably Sony. 1. Key Terms of the MCCL a. Scope of Rights Provision The MCCL provides DMX with a broader scope of rights than it would otherwise receive under an ASCAP public performance license agreement. Not only does an MCCL authorize DMX to publicly perform the musical works in a publisher’s catalog, but it also grants DMX a non-exclusive license to reproduce, distribute, and edit such works. Additionally, the MCCL extends to DMX’s delivery of music to all kinds of business establishments, including businesses that charge admission. Both ASCAP and BMI typically exclude from their form blanket licenses the right to publicly perform works in venues that charge admission. b.Twenty-Five Dollar Royalty Rate Under the MCCL, publishers receive a pro rata share of a royalty pool. This pool is calculated by multiplying the number of DMX locations by a fee of $6.25 per quarter, or $25 per year. The chairman of MRI and a DMX executive independently arrived at the $25 rate as an appropriate rate, and DMX adopted it. Gertz, a thirty-five year veteran of the music industry with an extensive background in the negotiation and administration of copyright licenses, reached the $25 rate based on his experience negotiating a similar direct-license arrangement with Sony and EMI Music Publishing (“EMI”) on behalf of Muzak. As a result of these talks, Sony and EMI had consented to a $28 per location royalty pool. These agreements were never implemented, however, because Muzak ultimately entered blanket licenses with ASCAP and BMI in 2005 that did not contain carve-out fee mechanisms. See discussion of Muzak Agreement, supra. Knittel, whose long career at ASCAP before he joined DMX’s predecessor included negotiating licenses with large industries, began his calculation with a benchmark of 2.25% of revenue. This was the rate BMI was then charging the BG/FG music services industry for off-premise delivery of music. The MCCL further provides that the royalty pool covers both the publisher’s and the composer’s rights in DMX’s use of a musical composition. Under the MCCL, only the publisher will be paid by DMX and the publisher has the duty to distribute to the composer her share of the royalty. c.Royalty Formula A publisher’s distribution from the royalty pool is calculated by multiplying the total pool by a fraction which isolates the percentage of the pool to which a publisher is entitled in a given period. The numerator of this fraction is the number of times that a particular publisher’s works were performed on DMX’s off-premise service. The denominator is the total number of performances on the off-premise service. The MCCL illustrates how this formula functions: [I]f one hundred thousand (100,000) Locations exist for the duration of a quarter, and Publisher’s pro rata share for that quarter equals one percent (1%), the Publisher will receive royalties for that quarter equal to Six Thousand Two Hundred Fifty Dollars ($6,250.00) ($6.25 x 100,000 x 1%). Finally, if a publisher owns less than the entirety of a given composition, it will only be entitled to royalties based on the percentage of the work it controls. Thus, the numerator of the above-described fraction is adjusted to reflect the publisher’s actual ownership interest in a given work. d.Performance Proxy All locations that DMX serves are taken into account when calculating the total royalty pool, however, only those locations served via off-premise DBS transmissions are considered when determining a publisher’s pro rata share of the total pool. DMX chose to use the frequency that a work is played on the off-premise channels as a proxy for the number of times a composition is played at on-premise locations because, while the two forms of service are roughly equivalent in terms of programming content, DMX has better data regarding the works played at off-premise locations. e. No Double Payment Provision A “No Double Payment” term in the MCCL provides that if a PRO (or any music collection society administering mechanical rights) makes a claim against DMX for the performance of a work that is licensed under a MCCL, DMX will not be obligated to pay the publisher if DMX “has paid” the PRO for the right to use the composition. It reads as follows: No Double Payment: Publisher acknowledges that, during the Term, Licensee may be a licensee of ASCAP, BMI, and/or SESAC (each, a “Music Collection Society”). From time to time, a Music Collection Society may make a claim against Licensee for payment of royalties for the public performance of Compositions otherwise licensed hereunder. Notwithstanding anything to the contrary in this Agreement, Licensee will have no obligation to pay Publisher with respect to the public performance rights for any Composition during any period of the Term where Licensee has paid a Music Collection Society for such rights to such Composition in such period. (Emphasis supplied.) The text of the No Double Payment provision emerged from MRI’s experience implementing per-program licenses in the television industry. In that context MRI reports performances to ASCAP and BMI on a performance-by-performance basis. At times, ASCAP and BMI will dispute that a direct license covers a particular performance, and there is a process for reconciling those disagreements. f. Most Favored Nations Clause The “Most Favored Nations” clause (“MFN”) of the MCCL assures publishers who have entered into direct license agreements with DMX that their royalty will be calculated using the same formula that DMX uses to calculate the royalties for all other publishers, i.e. that no publisher will be entitled to a greater percentage of the pool than the ratio derived by dividing the number of the directly licensed publisher’s plays by the total number of DMX performances. It reads as follows: Most Favored Nations: Licensee represents and warrants that the Royalty Formula will be the same as the Royalty Formula for calculating royalties payable to any third party music publisher or administrator (a “Competing Publisher”), under any catalog license between Licensee and any such Competing Publisher which is entered into during the Term, for the same rights, Territory, and Term as provided herein. For the avoidance of doubt, “Competing Publisher,” as used herein, will not include a Music Collection Society. ASCAP contends that the reference to “royalty formula” in the MFN provision also requires DMX to offer all licensors a comparable “royalty pool,” to wit, a share of the same pool of money created by the $25 per location rate, or that at the very least it would have been understood by publishers to include such a commitment. The text of the MCCL is less than artful with respect to this point, but there is some evidence that the MCCL’s MFN provision does not encompass the royalty pool. In response to the demands of one music publisher — Cherry Lane — DMX modified the MFN in one MCCL to provide that all publishers will be treated the same for the purposes of both the royalty formula and the per location rate, i.e., $25 per location. It is unnecessary to determine whether the MFN provision creates a contractual commitment by DMX to give every publisher a proportionate share of the $25 per location rate, however, since DMX has incorporated the $25 per location royalty rate in all of its direct license agreements to date. The scope of the MFN has particular relevance to the treatment of the advance that DMX paid to Sony, which is described below. There is little indication in the record that publishers concluded that the MFN would encompass advances paid to music publishers. Several publishers testified that they did not interpret the MFN as covering advances. 2. The MCCL Program from 2006 to 2010 In May 2006, Leiber Stoller Songs — a publisher whose song list includes, “Stand By Me,” “Spanish Harlem,” “There Goes My Baby,” “Charlie Brown,” and “Jailhouse Rock” — became the first publisher to enter into a direct licensing agreement with DMX. The three-year license term began on October 1, 2006. The Leiber-Stoller catalog has since been purchased by Sony and remains directly licensed, but pursuant to DMX’s agreement with Sony (discussed at length below). Since signing Lieber-Stoller, DMX has entered into hundreds of MCCL agreements. As of September 10, 2010, DMX had secured approximately 850 direct licenses with publishers representing a total of more than 7,000 catalogs. Many of these direct license agreements are with publishers who represent a single catalog or the works of a single songwriter. Others are signed by administrators acting on behalf of multiple music publishers. These licenses give DMX access to a diverse array of musical works that vary in terms of genre, time period, and even language. Additionally, DMX’s direct licenses extend to works that are currently being performed by popular contemporary artists, including Beyoncé, Alicia Keys, and Carrie Underwood. At the 2010 Grammy Awards, for instance, the award for “Song of the Year” went to an artist performing a composition that is directly licensed by DMX: “Single Ladies (Put a Ring On It).” 3. Renewals of MCCLs Not only has DMX been able to enter into new MCCL agreements, but it has also had significant success in renewing agreements with those publishers whose initial licenses have expired. The typical term for an MCCL is three years. Seventy-eight out of the ninety-two publishers whose licenses have come up for renewal have renewed either by express authorization or pursuant to an automatic renewal provision in the initial agreement. 4. Refusals to Renew MCCLs Of the fourteen publishers that did not renew MCCLs, at least three controlled significant catalogs: The Walt Disney Company, Abkco Music, Inc., and Cherry Lane. BMI contacted all three publishers. Indeed, BMI told Cherry Lane that if it renewed its direct license agreement with DMX, BMI would force Cherry Lane to repay BMI the payments BMI had made to it during the direct license period. These three publishers accounted for just over 2% of the music performed by DMX and its licensees. A fourth publisher declined to renew after agreeing to serve as a BMI witness in BMI’s litigation with DMX. Of the remaining ten publishers, six were small catalogs that were sold to a new administrator that had not signed an MCCL agreement. The final four were catalogs represented by an administrator that renewed its MCCL agreement with DMX, but only for its other catalogs. 5. DMX’s Outreach to “Major” Publishers: The Sony MCCL There are four major publishers in the music publishing industry that control a considerable share of the total market: Sony, Warner/Chappell, EMI, and Universal. From the early stages of the development of its direct license initiative, DMX recognized that in order for the program to be successful, DMX would need to secure the participation of at least one major publisher. Indeed, in response to DMX’s solicitations to enter into MCCL agreements, numerous independent publishers indicated that they would be willing to execute the MCCL if DMX signed some number of the majors. Given the strong affiliation between the PROs and the major publishers, DMX believed that in order to conclude an MCCL agreement with a major it would be necessary to offer an attractive royalty advance. On November 14, 2007, Sony became the first and, to date, the only major publisher to enter an MCCL agreement with DMX. Sony promptly advised ASCAP that it had executed the MCCL. The Sony MCCL grants DMX the through-to-the-listener public performance rights and mechanical rights to the entire Sony repertory, except for the Neil Diamond catalog. The fee structure in the Sony MCCL is identical to the rate provisions in all of DMX’s direct license agreements: Sony is entitled to its pro rata share of the annual royalty pool, which is calculated by multiplying $25 by the number of DMX locations. The Sony license is distinguishable from all of DMX’s other direct license agreements, however, in that the Sony MCCL provides for a $2.4 million “non-returnable, non-refundable advance” that is “recoupable from any and all royalties payable to [Sony].” Additionally, in a letter agreement signed the same day as the MCCL, DMX agreed to pay Sony $300,000 to cover the “additional administrative and overhead costs” that Sony would “incur in connection with the Agreement.” This supplemental fee was also “recoupable from any and all royalties owed to Sony by DMX under the Agreement.” Thus, DMX gave Sony a $2.7 million recoupable, but nonrefundable advance. Under the license, either party can publicly disclose the existence of the agreement, but most of its terms — including the advance — are confidential. DMX employed a four-step formula to calculate the Sony advance. First, DMX identified the amount of money that Sony had received from ASCAP and BMI on behalf of DMX in the prior year-approximately $300,000. This amount was then doubled, because unlike the payment that Sony received from the PROs, the DMX royalty fee covers both the composer’s and the publisher’s share. Next, this figure-$600,000-was increased by fifty percent, resulting in an annual rate of $900,000. This 50% increase reflects the premium DMX was willing to pay to get a major publisher to sign a direct license. Finally, to determine the advance for the entire license term, the annual rate was multiplied by three-the number of years in the agreement-for a total advance of $2.7 million. Although DMX intended to recoup as much of the advance as possible, by expanding its locations and increasing its reliance on the Sony catalog, DMX could not have realistically expected to recoup the full advance. DMX suspected that Sony had quoted DMX an inaccurate figure for the amount of royalty payments it had received from BMI due to music performed by DMX and its customers. This intuition was confirmed in October 2008, when discovery taken in the rate court proceeding between DMX and BMI revealed that the number quoted to DMX included BMI payments not just for music performed by DMX but for all of the music performed by the entire BG/FG music services industry. Only 27% of the royalties on the “DMX” line were actually attributable to DMX performances of the Sony repertory. On April 9, 2009, DMX and Sony signed an amendment to the Sony MCCL (the “2009 Amendment”) that extended the period in which DMX could recoup its advance for an additional twenty-one months. While DMX contends that Sony granted it this extension solely to compensate DMX for its miscalculation of the advance, there is evidence suggesting that Sony had been considering giving DMX an extension prior to learning about the confusion surrounding the BMI royalty statement. Due to the twenty-one month extension that Sony granted DMX in the 2009 Amendment, the period in which DMX can recoup its advance from Sony will not end until September 30, 2012. The parties dispute the extent to which it will be possible for DMX to recoup this initial investment as a credit against royalty payments. Because DMX has control over its programming, it has already doubled the percentage of its catalog that is derived from Sony music, increasing it from roughly 6% to 12%. In addition, to the extent DMX continues to add to its revenue base by securing more locations, it also increases its recoupment of the advance. Nonetheless, there is little to no likelihood that the Sony advance will be entirely recouped by September 30, 2012. 6. DMX’s Negotiations with Other Major Music Publishers DMX has reached out to the three other major music publishers, but for several reasons, has not concluded MCCL agreements with any of them. The PROs have tried their best to prevent the major music publishers from entering direct licenses with DMX. ASCAP CEO John LoFrumento actively tried to discourage the CEOs of Universal and Sony from entering into MCCL agreements. BMI offered Universal a substantial guaranteed advance payment if it refrained from signing an MCCL. In addition to these efforts by PROs, at least two of the major publishers were concerned that the $25 per location royalty pool was too low. F. DMX’s Application for an ASCAP Blanket License DMX requested a through-to-the-listener blanket license from ASCAP on June 3, 2005. On November 21, 2005, ASCAP provided DMX with its first quote — a per location annual rate of $48 to $52, depending on the number of DMX subscribers. DMX rejected this proposal. On July 25, 2006, ASCAP initiated this rate court proceeding by applying for the determination of a reasonable fee. ASCAP offered DMX a revised proposal on October 3, 2006, based on the Muzak Agreement. Under the second proposal, the interim fees that DMX had already paid ASCAP for the period between June 2005 and December 2006 would be deemed final, and DMX would be charged at a $41.21 per location rate for the period beginning September 2006 and ending December 2011. Again, DMX rejected AS-CAP’s proposal. On June 13, 2007, the parties settled on a new, lower interim rate, retroactive to January 2007. They could not, however, reach agreement as to a final rate. At a court conference held on August 20, 2009, ASCAP acknowledged that under Judge Conner’s Muzak I decision, it was obligated to “account for [DMX’s] direct licensing in formulating [its fee] proposal.” ASCAP’s final fee proposal, which is described at length below, was delivered to DMX on April 5, 2010. Contrary to its representation in August 2009, ASCAP’s fee proposal did not account for DMX’s direct licensing initiative in any meaningful way. G. DMX’S Application for a BMI Blanket License At the same time that DMX applied to ASCAP for a blanket license in 2005, it also requested a blanket license with carve-outs from BMI. Unlike ASCAP, BMI did not object to the structure of the requested license: the parties agreed, in principle, to an adjustable fee blanket license under which DMX would receive a proportional credit off the blanket license fee to reflect performances of BMI music that were directly licensed. They also agreed that the fee would be constructed from three components: a Floor Fee, a Blanket Fee, and a Direct License Ratio. BMI and DMX could not agree, however, on the benchmarks upon which the Floor Fee and the Blanket Fee should be based. They also disputed which performances should be considered when calculating the Direct License Ratio. On January 10, 2008, BMI filed a petition with the BMI rate court. Broadcast Music, Inc. v. DMX, Inc., 726 F.Supp.2d 355, 356-57 (S.D.N.Y.2010) (“BMI/DMX”). On July 26, 2010, the BMI court entered a final rate for the blanket license, subject to adjustment based on the proportion of DMX’s BMI performances that are directly licensed. Id. at 364-65. Based on the record created at a February 2010 trial, the Honorable Louis L. Stanton chose the $25 royalty pool rate in the MCCLs as the relevant benchmark for determining the value of the public performance of music. Id. at 360-62. Judge Stanton also found that the Sony advance was a “cost of entry” into the market rather than a royalty payment, and therefore the $25 royalty pool in the MCCL did not need to be adjusted to account for the portion of the Sony advance that DMX will be unable to recoup. Id. at 361-62. BMI raised a number of issues during its trial with DMX, however, that have not been raised by ASCAP in the instant proceeding. These include various arguments relating to the Floor Fee and a request for an increase in the Blanket Fee due to the “option value” that the adjustable fee blanket license provides DMX. Id. at 361-64. Based on his resolution of all of the issues presented, Judge Stanton approved a per location fee of $18.91. Id. at 364-65. The structure of DMX’s proposal in this proceeding is similar to the one to which BMI consented, and DMX’s proposed benchmark for the valuation of the right to publicly perform music is the same as that adopted by Judge Stanton. At the DMX/ASCAP trial, ASCAP’s Director of Licensing took the position that to the extent that ASCAP and BMI have comparable market shares, adopting the BMI rate is a “proper way to determine the [ASCAP] fee[ ].” It is not disputed that, in fact, the ASCAP and BMI market shares of DMX performances are roughly equal. CONCLUSIONS OF LAW After a brief description of the kinds of licenses that ASCAP must offer music users under AFJ2 and the standard for determination of a reasonable fee, this Opinion will examine the two fee proposals submitted by ASCAP and conclude with a review of the DMX proposal. The Opinion finds that ASCAP is required to issue DMX a blanket license with carve-outs for DMX’s direct licensing program. After finding that neither of ASCAP’s fee proposals is reasonable, the Opinion adopts DMX’s proposal as representing a reasonable fee for the right to publicly perform music licensed by ASCAP. A. The Governing Law Under AFJ2, ASCAP is required to grant music users who make a written request a “non-exclusive license to perform all of the works in the ASCAP repertory.” AFJ2, § VI. AFJ2 describes two licenses of interest to these proceedings. The first is a blanket license, which is defined as a “non-exclusive license that authorizes a music user to perform ASCAP music, the fee for which does not vary depending on the extent to which the music user in fact performs ASCAP music.” Id. § 11(E). The other license — the per-segment license — is a non-exclusive license to perform any or all works in the ASCAP repertory in “all segments of the music user’s activities in a single industry, the fee for which varies depending upon which segments contain ASCAP music not otherwise licensed for public performance.” Id. § II(K). ASCAP must “advise the music user in writing of the fee that it deems reasonable for the license requested. ...” Id. § IX(A) (emphasis supplied). If the parties are unable to reach agreement, either of them may apply to the Court for a determination of a reasonable fee. Id. AFJ2 “gives ASCAP the initiative in proposing the entire formula” for calculating a reasonable fee. United States v. ASCAP (In re Application of Metromedia), 341 F.2d 1003, 1009 (2d Cir.1965). But ASCAP is only required to respond to requests for the kinds of licenses “which some other portion” of the consent decree requires ASCAP to grant. United States v. ASCAP (In re Application Shenandoah Valley Broadcasting, Inc.), 331 F.2d 117, 122 (2d Cir.1964) (“Shenandoah Valley ”). In AM, 275 F.3d 168, the Second Circuit considered whether the rate-setting provision of the BMI Consent Decree permits the rate court to enter a “blanket license subject to carve outs, i.e., a license that would enable a licensee to reduce its fee obligation to BMI to the extent it had licensed works represented by BMI directly with BMI’s composer and music publisher affiliates.” Id. at 173 (citation omitted). The AE1 court concluded that under the BMI Consent Decree, BMI was obligated to offer an applicant “a blanket license with a fee structure that reflects such alternative licensing” and that its “[fjailure to do so will empower the district court to set a reasonable fee.” Id. at 177. This holding was based on two findings of particular relevance to the DMX application. First, the court found that blanket licenses are a form of license that BMI must make available to music users under the BMI Consent Decree. Id. at 176. Second, the court held that a blanket license subject to carve-outs “differ[s] from the traditional blanket license only in its fee structure,” and is therefore still a “blanket license” within the meaning of the consent decree. Id. at 177. The provision of the BMI Consent Decree requiring the PRO to respond to a request for a license is almost identical to the corresponding provision in AFJ and AFJ2. See Muzak I, 309 F.Supp.2d at 577. In Muzak I, this court followed the Second Circuit’s holding in AM and found that under § IX(A) of the AFJ2, the existence of direct licensing relationships may and will be considered in a rate court proceeding under AFJ2 section IX in determining whether ASCAP has met its burden of proving the reasonableness of the blanket licensing fee it seeks or, in the event that ASCAP fails to meet that burden, in the Court’s calculation of a reasonable fee based on all the evidence. Id. at 581 (emphasis supplied). In any fee-setting proceeding, AS-CAP bears the burden of showing that the fee it seeks is reasonable, absent exceptions not relevant here. AFJ2 § IX(B). If ASCAP does not establish the reasonableness of its proposed fee, “the Court shall determine a reasonable fee based on all the evidence.” AFJ2 § IX(D). Alth