Full opinion text
OPINION & ORDER DENISE COTE, District Judge. TABLE OF CONTENTS INTRODUCTION. co CO o FINDINGS OF FACT. CO CO CO I. The American Society of Composers, Authors and Publishers . Co co CO A. ASCAP Background. CO CO CO B. The ASCAP Consent Decree. CO CO CO II.The Evolution of the Radio Industry. CO CO CO III. The RMLC-ASCAP License Agreement for the Period 2010-2016 ... lO <M CO IV. Pandora. CO CO -3 A. Pandora’s Music Genome Project. CO CO —3 B. Pandora Premieres. CO CO OO C. Pandora’s Comedy Programming. CO CO OO D. Pandora’s Revenue. CO CO OO E. Pandora’s Competitive Environment. CO CO OO V.Pandora’s Licensing History with ASCAP. o CO CO VI.The April 2011 ASCAP Compendium Modification. A. Overview and Context. T — t T — H CO CO CO CO B. Public Performance Rights for Compositions versus Sound Recordings. CO CO CO C. ASCAP-Publisher Negotiations Modification. CO CO CO D. The Compendium Modification Allowing New Media Withdrawals is Enacted. CO CO CO E. ASCAP Provides Administrative Services for Withdrawing Publishers. Cr-CO CO VII.A Second Compendium Modification in December 2012 the “Standard Services” Agreement. 00 CO CO VIII.Pandora Negotiates Direct Licenses with EMI, Sony, and UMPG and Fails to Negotiate an Agreement with ASCAP . CO CO A. The Pandora-EMI License Negotiations. CO CO B. The Pandora-ASCAP License Negotiations. CO ^ C. The Pandora-Sony License Negotiations. CO D. The Pandora-UMPG License Negotiations. CO ^ IX.September 17 Partial Summary Judgment Opinion. CO cn o X.Other Licensing Agreements Put Forth as Benchmarks. CO cn 1 — «• A. The Pandora-SESAC License . B. Apple’s iTunes Radio Licenses with Publishers and PROs. CO cn Í — l CONCLUSIONS OF LAW. CO lO CO I. ASCAP’s Rate Proposal of 1.85% for 2011 and 2012. CO cn cn II. ASCAP’s Rate Proposal of 2.50% for 2013 and 3.00% for 2014 and 2015. CO cn 01 A. Presumption of a Single Rate. CO cn 03 B. Pandora’s Direct Licenses with Sony and UMPG. CO cn 1. ASCAP and Publisher Coordination. CO cn 2. The Pandora-Sony License. CO cn 3. The Pandora-UMPG License . CO 0 C. ASCAP s Secondary Benchmarks: the SESAC and Apple LÍC6HS6S 1. The Pandora-SESAC license. 2. The Apple Licenses. D. ASCAP’s Theoretical Arguments and Motivations. 1. ' ' An Increase in Competition W 2. Demand for Variety. 3. Disparity Between Sound Recording and Composition Fees 4. Cannibalization of Music Sales. 5. Music Intensity. 6. Pandora’s Success.,. III. Whether Pandora is Entitled to the RMLC 1.70% Rate. 00 Oí to IV. Publisher Concerns Regarding the Consent Decree and the Rate Court. CO CONCLUSION 00 >0 INTRODUCTION Pandora Media Inc. (“Pandora”) has applied for a through-to-the-audience blanket license to perform the musical compositions in the repertoire of the American Society of Composers, Authors and Publishers (“ASCAP”) for the period of January 1, 2011 through December 31, 2015. The parties having been unable to reach agreement on an appropriate licensing fee, pursuant to Article IX of the consent decree under which ASCAP operates— known as the Second Amended Final Judgment (“AFJ2”), see United States v. ASCAP, Civ. No. 41-Civ-1395, 2001 WL 1589999 (S.D.N.Y. June 11, 2001) — Pandora requested on November 5, 2012 that this Court set a rate for that licensing fee. The parties disagree as to which are the most appropriate benchmarks for the license rate here. Pandora asserts principally that it is similarly situated to radio stations licensed through a 2012 agreement between the Radio Music License Committee (“RMLC”), which represents commercial radio stations, and ASCAP, and is therefore entitled to the rate in that license. Pandora also points to a direct license agreement between Pandora and EMI Music Publishing Ltd. (“EMI”) that was entered into after EMI purported to withdraw its new media licensing rights from ASCAP in 2011. ASCAP proposes a variety of benchmarks, including the direct licensing agreement into which Pandora entered with EMI, as well as Pandora’s direct licenses with Sony/ATV Music Publishing LLC (“Sony”) and Universal Music Publishing Group (“UMPG”) in the wake of those publishers’ putative withdrawals of new media licensing rights from ASCAP. ASCAP also puts forward other agreements between music rights holders and music users as secondary benchmarks. The parties have proposed the following rates, expressed as a percentage of revenue: ASCAP proposes a rate of 1.85% for the years 2011 and 2012, 2.50% for 2013, and 3.00% for the years 2014 and 2015. Pandora proposes a rate of 1.70% for all five years. This Opinion sets the rate for all five years at 1.85%. The task at hand is to determine the fair market value of a blanket license for the public performance of music. As this Court explained in a prior rate court proceeding: The challenges of [determining a fair market rate for a blanket music license] include discerning a rate that will give composers an economic incentive to keep enriching our lives with music, that avoids compensating composers for contributions made by others either to the creative work or to the delivery of that work to the public, and that does not create distorting incentives in the marketplace that will improperly affect the choices made by composers, inventors, investors, consumers and other economic players. In re Application of MobiTV, Inc., 712 F.Supp.2d 206, 209 (S.D.N.Y.2010), aff'd sub nom. ASCAP v. MobiTV, Inc., 681 F.3d 76 (2d Cir.2012). A bench trial was held from January 21 through February 10, 2014. Without objection from the parties, the trial was conducted in accordance with the Court’s customary practices for non-jury proceedings, which includes taking direct testimony from witnesses under a party’s control through affidavits submitted with the Joint Pretrial Order. The parties also served with the Joint Pretrial Order copies of all exhibits and deposition testimony that they intended to offer as evidence in chief at trial. Prior to trial, ASCAP presented affidavits constituting the direct testimony from ten witnesses, including four ASCAP employees, two music publishing executives, one composer, and three experts. The ASCAP employees are CEO John LoFru-mentó; Vice President for New Media and Technology Matthew DeFilippis; Director of Licensing Vincent Candilora; and Senior Vice President Seth Saltzman. AS-CAP’s music publisher witnesses were Peter Brodsky, the Executive Vice President of Business and Legal Affairs at Sony; and Zach Horowitz, the Chairman and CEO of UMPG. ASCAP’s composer-witness was Brett James. ASCAP’s experts were Dr. Kevin Murphy, Dr. Orley Ashen-felter, and Robin Flynn. ASCAP also .provided designated deposition excerpts from six witnesses. Pandora provided affidavits constituting the direct testimony of eight witnesses, four of whom are current or former Pandora employees and four of whom are experts. The current or former Pandora employees were founder and Chief Strategy Officer Timothy Westergren; former CEO Joseph Kennedy; Chief Technology Officer Thomas Conrad; and Chief Marketing Officer Simon Fleming-Wood. Pandora’s experts were Dr. Leslie Marx, Dr. Roger Noll, William Rosenblatt, and Fred McIntyre. Pandora also provided the designated deposition testimony of a number of witnesses. The parties also offered deposition designations of certain witnesses as joint exhibits. At the trial, the parties waived their right to cross-examine several of the witnesses. The witnesses who testified at trial were Brodsky, LoFrumento, DeFilip-pis, Murphy, Flynn, 'Marx, Rosenblatt, Horowitz, Saltzman, Noll, Conrad, Kennedy, Fleming-Wood, and McIntyre. In addition, Pandora called its outside counsel, Robert Rosenbloum, as a witness. 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 second section. FINDINGS OF FACT I. The American Society of Composers, Authors and Publishers A. ASCAP Background ASCAP is an unincorporated membership organization of music copyright holders created and controlled by music writers and publishers. Its function is to coordinate the licensing of copyrighted musical works, and the distribution of royalties, on behalf of its nearly 500,000 members. ASCAP members grant ASCAP the non-exclusive right to license non-dramatic public performances of their music. AS-CAP licenses these works on behalf of the copyright holders to a broad array of music users, including television networks, radio stations, digital music services, colleges, restaurants, and many other venues in which music is performed. Employing ASCAP to perform these functions is efficient for both music users and copyright holders. A music user can license an enormous portfolio of copyrighted music through the execution of a single license without having to contact each copyright holder. Copyright holders benefit from ASCAP’s expertise and resources in policing the market, negotiating licenses, and distributing the revenue from a vast array of licenses promptly and reliably among the multiple owners of the public performance copyrights in each work. The ability of ASCAP and other performing rights organizations (“PROs”) to grant licenses covering a large number of compositions creates significant economies of scale in the market for music licensing. ASCAP offers the option of blanket licenses to users. A blanket license is a license that gives the music user the right to perform all of the works in ASCAP’s repertoire, the fee for which does not vary depending on how much of the music the user actually uses. These blanket licenses reduce the costs of licensing copyrighted musical compositions. They eliminate costly, multiple negotiations of the various rights and provide an efficient means of monitoring the use of musical compositions. They also allow users of copyrighted music to avoid exposure to liability for copyright infringement. Buffalo Broadcasting Co. v. ASCAP, 744 F.2d 917, 934 (2d Cir.1984) (Winter, J., concurring). ASCAP’s board of directors is comprised of an equal number of composers and music publishers. The head of the ASCAP board is typically a songwriter. The present head of ASCAP is composer Paul Williams. ASCAP competes with two other United States PROs: Broadcast Music, Inc. (“BMI”) and SESAC, LLC. (“SESAC”), each of whom also offers blanket licenses. BMI, which is slightly smaller than AS-CAP, operates under a consent decree that is similar to the one that governs ASCAP’s licenses. SESAC is a PRO that is not currently bound by any consent decree. B. The ASCAP Consent Decree Since 1941, ASCAP has operated under a consent decree stemming from a Department of Justice antitrust lawsuit. This consent decree has been modified from time to time. The most recent version of the consent decree was issued in 2001 and is known as “AFJ2.” AFJ2 governs here. In an attempt to ameliorate the anti-competitive concerns raised by ASCAP’s consolidation of music licenses, AFJ2 restricts how ASCAP may issue licenses in a variety of ways. First, AFJ2 provides a mechanism whereby a court, known as the rate court, will determine a reasonable fee for ASCAP licenses when ASCAP and an applicant for a license cannot reach an agreement. AFJ2 § IX. This Court is presently the ASCAP rate court. Second, AFJ2 requires ASCAP to grant a license to perform all of the musical compositions in ASCAP’s repertoire to any entity that requests such a license. AFJ2 §§ VI, IX(E). And third, AFJ2 prevents ASCAP from discriminating in pricing or with respect to other terms or conditions between “similarly situated” licensees. AFJ2 § IV(C). ASCAP members agree to be bound in the exercise of their copyright rights by the terms of AFJ2. For example, the 1996 Agreement Between Sony and ASCAP provides that “[t]he grant [of rights to ASCAP] ... is modified by and subject to the provisions of [AFJ2].” In addition to operating under a consent decree, ASCAP is governed by a series of internal rules and contracts. The most important internal rule set for purposes of this litigation is the ASCAP Compendium. The ASCAP Compendium can be modified by the ASCAP Board and reflects many of the important rules that govern ASCAP’s obligations to its copyright holder members and vice versa. II. The Evolution of the Radio Industry Much of the focus at trial was on the question of whether Pandora can be properly classified as “radio.” A description of the evolution of the radio industry will provide context in understanding Pandora’s features.and its place within the music business. Radio is a form of media in which a provider transmits audio programming to a listener, where the programming is not directly selected by the listener but is programmed by the provider. As a result, in the context of a music station, the listener does not choose the songs and does not know what composition will be played next. This radio experience has remained constant through the years, regardless of whether radio programming is transmitted by broadcasting, through a cable, from a satellite, or over the internet. Radio made its debut approximately a century ago and has been a dominant force in the music industry évér since. The first commercial radio station in the United States was located in Pittsburgh, Pennsylvania and was licensed in 1920. The original technological means for delivering radio programming was by broadcasting an “amplitude modulation,” or “AM” signal. By the 1930s, “frequency modulation” or “FM” signal technology was developed. FM broadcasting offered better audio quality but over a smaller range. Another important moment in the history of radio occurred with the passage of the Telecommunications Act of 1996. Pub.L. No. 104-104, 110 Stat. 56 (1996). Empowered by that legislation, the FCC eliminated most caps on the number of stations that a single company could own. Following that change in the law, there was a large-scale expansion of group ownership of stations. Many terrestrial radio stations are now owned by large conglomerates, such as Clear Channel Communications, Inc. (“Clear Channel”), which owns over 800 stations. In the 1990s, the first successful national cable radio network was launched, using cable TV transmission lines. Over time, what came to be known as digital TV radio was transmitted through means of cable, satellite, and telephone-company lines. Some of the major competitors in this market are Music Choice, SiriusXM Satellite Radio, Muzak, and DMX. Also in the 1990s, the nascent internet provided a new means of radio transmission. The introduction in the early 1990s of MP3 digital audio encoding and compression format permitted music to be compressed in way that facilitated distribution over the internet. In 1994, the first simulcast of an AM/FM broadcast occurred over the internet. As of today, over 10,000 AM and FM stations stream online. Internet radio includes not just the simulcasting of signals broadcast by AM and FM stations, but also the creation of internet-only radio stations. Over time, some independent companies built directories of internet radio stations. These directories can contain tens of thousands of radio stations. Thus, the internet has enabled providers to present listeners with a vast library of radio programming, the likes of which has never been available before. Clear Channel and CBS Radio, two major commercial radio companies, launched their own internet radio services in 2008 and 2010, respectively. Clear Channel’s internet radio service is called iHeartRa-dio, and began as a vehicle to simulcast Clear Channel’s own stations. The arrival of the internet as a radio delivery platform has also permitted radio providers to introduce a level of instantaneous user interactivity for the first time. With the internet, each listener’s device gets its own data stream, in contrast to the broadcasting of a common signal across a geographic area. As will be explained in greater detail below, this permits internet radio services to offer customized music programming based on user feedback. Thus, while a listener to a customized radio service cannot select and does not know what song will be played next, that listener can often give feedback to the customized station to shape the nature of the music that will be played. As of today, Pandora is the most successful customized radio service. But it was not the first. Prior to Pandora’s launch in 2005, LAUNCHcast and Lastfm, two customized radio services, began in 1999 and 2002, respectively. Recently, three major competitors have emerged as challengers to Pandora’s dominance. In 2011, Clear Channel launched a customized radio offering within its iHeartRadio service, called “Create Station.” Spotify launched a customized radio feature called Spotify Radio in late 2011. And in September 2013, Apple launched its customized radio service called “iTunes Radio.” In addition to programmed and customized radio, the presence of digital technology and the internet have allowed for the emergence of a third means of delivering music: “on-demand” streaming services. These services provide users with access to large libraries of songs, from which they can select exactly which song to play at any time. A leading on-demand service is Spotify, which had 24 million active users globally as of March 2013. Launched in 2008 in Europe and in the United States in 2011, Spotify has a library of over 20 million songs. Other popular services with on-demand offerings include Rhapsody and Grooveshark. The most popular on-demand services offer both advertising supported and subscription options, but seek to persuade- consumers to elect the subscription model. Through its century of existence, radio’s popularity has remained robust. The radio industry is a $15 billion industry. It is understood by those in the music business to account for roughly 80% of the music listening experience in the United States. This percentage has remained roughly constant despite the rapid evolution in technology. Thus, while the 80% figure was once confined to listening to music over AM/FM radios, that figure now includes music delivered over radio stations playing through'-TV cable systems and over the internet. Almost half of radio listening occurs while the listener is in an automobile. The other 20% or so of music listening in the United States is experienced by listeners who seek more control over the music that they hear, whether through the purchase and playing of a record album or. a CD, or the subscription to an on-demand digital music service such as Spotify. III. The RMLC-ASCAP License Agreement for the Period 2010-2016 Much of the radio industry obtains its license for the public performance of AS-CAP music through the RMLC, which is a trade association that represents the commercial radio industry. Between 2003 and 2009, the RMLC paid ASCAP for public performance licensing rights in the form of a “fixed fee” agreement. As a result of the deep recession that hit the country in 2008, the RMLC’s members’ revenues contracted and the fixed fee license began to constitute an increasingly' high percentage of RMLC member revenue. Consequently, in 2009, the RMLC began to negotiate new licensing terms to apply to commercial radio stations effective January 1, 2010 through December 31, 2016. The RMLC wanted a return to the 1.615% rate at which it had paid ASCAP before the fixed-fee arrangement was adopted. It also wanted a license not only for new media transmissions by RMLC member stations, but also new media transmissions by Clear Channel which aggregates many stations for delivery over the internet and mobile devices. At one point in those negotiations, the RMLC offered ASCAP a dual rate structure for new media and terrestrial broadcasts, under which the RMLC would pay a proposed rate of [REDACTED] of revenue for terrestrial broadcasting and simulcasting of terrestrial radio over the internet, and a separate rate of [REDACTED] of revenue for other new media uses of the ASCAP repertoire. The revenue for the latter category of uses was miniscule in comparison with the revenue to be covered at the [REDACTED] rate. RMLC licensees still derive almost all of their revenue from traditional broadcasting services. ASCAP and the RMLC ultimately reached an agreement on terms for a license that established separate rates for radio stations depending on their intensity of music use. The rate for Music Format Stations was set at 1.70% of all revenue, including revenue derived from new media uses. The RMLC and ASCAP memorialized their agreement in a binding letter of December 21, 2011. And on January 27, 2012, this Court approved the agreement and its terms became public. It is of significance to the issues litigated in this trial, that the 1.70% rate applies both to revenue derived from terrestrial broadcasting and from internet transmissions by RMLC members. In addition, the 1.70% rate applies not only to simulcast radio stations that are streamed over the internet by terrestrial broadcasting RMLC members but also to programmed and customized internet radio stations owned by RMLC members. One RMLC member, Clear Channel, is licensed at this rate under a “Group License” form, which covers new media royalty payments for revenues not associated with an individual station. Thus, iHeartRadio’s customized radio Create Station feature, which competes head on with Pandora, is licensed at the 1.70% rate. Until July of 2012, however, there was no revenue generated by the Create Station service. In 2011, the year of Create Station’s launch, as well as the year that ASCAP and the RMLC agreed to license terms, Create Station constituted just [REDACTED] of the listener hours on iHeartRadio. For the month of March of 2013, which is the last month for which there was data at trial, it had grown to comprise approximately [REDACTED] of its total listener hours on iHeartRadio for that month. Thus, a rapidly increasing share of the iHeartRadio listeners are choosing the customized Create Station feature when listening to iHeartRadio. But from its inauguration in September of 2011 until June of 2012, Clear Channel ran Create Station as an advertising-free service. It began to contribute revenue for the first time in July of 2012. Despite its-growth in audience, the contribution to digital revenue from the Create Station feature [REDACTED]. For the first three months of 2013, it contributed substantially less than [REDACTED] to Clear Channel’s digital revenue, which itself is only a small component of Clear Channel’s entire revenue stream. IV. Pandora Pandora is the most successful internet radio service operating in the United States today. It is estimated to have approximately 200 million registered users worldwide and an approximately 70% share of the internet radio market in the United States. Pandora launched its internet radio service in 2005. Roughly eight years later, it had achieved great popularity, streaming an average of 17.7 billion songs per month in the fiscal year 2013. A. Pandora’s Music Genome Project Pandora’s exponential growth and popularity can be directly attributed to its substantial investment in its proprietary Music Genome Project (“MGP”) database and associated algorithms. Pandora uses the MGP database to create customized internet radio stations for each of its customers. A Pandora customer creates a station by “seeding” it with a song, artist, genre, or composer. That seed serves as a starting point to which Pandora then applies the information in its MGP database to match that seed with other songs that Pandora’s algorithms predict that the listener is likely to enjoy. The listener continues to give feedback by giving a thumbs-up or thumbs-down when a composition is played, or by signaling that a song should be skipped. The MGP contains a wealth of data for every composition in its database. Trained music analysts, many of whom have music related degrees or are musicians, listen to the compositions selected for inclusion in the database and register the composition in reference to as many as 450 characteristics. For pop and rock songs, for example, Pandora analyzes between 150 to 200 musical traits. Rap has about 350 “genes,” and classical works have between 300 to 500 MGP-defined attributes. As Pandora’s Conrad testified, “[b]ecause Pandora utilizes trained musicologists to analyze songs, the MGP is able to differentiate not only between an alto and tenor saxophone, but also between various styles of playing a tenor saxophone.” When a Pandora listener seeds a station or registers a thumbs-up reaction, Pandora records that feedback and draws upon the MGP to locate other compositions that the listener is likely to enjoy. Conversely, when the feedback is a “thumbs down,” the song will not reoccur in the user’s playlist, and songs sharing its attributes will appear less frequently. Besides listening to as many as 100 of their own customized stations, Pandora users can opt to listen to programmed “genre” stations. The most popular Pandora genre stations include “Today’s Hits,” “Today’s Country,” and “Today’s Hip Hop and Pop Hits.” These genre stations are populated by songs which are hand selected by Pandora curators. Pandora has a catalog of between approximately 1,000,000 to 2,000,000 songs, somewhat less than half of which are licensed through ASCAP. This number is considerably lower than the catalog size of an on-demand service like Spotify, which must have the ability to play virtually any composition any customer might select. Successful on-demand services have catalogs in the range of 20 million songs. B. Pandora Premieres Pandora has a small on-demand music service, but it is not part of this license application. The Pandora on-demand service is called Pandora Premieres. It features at any one point in time a few dozen songs, each available for listening on-demand for a limited period of time. This is music that artists and music publishers provide to Pandora for promotional purposes, typically before the commercial release of an album. This on-demand component of Pandora’s service is not a significant part of Pandora; it constitutes a “barely measurable portion of Pandora listening.” Pandora secures the rights to play the songs on Pandora Premiers by negotiating direct licenses with the copyright holders. C. Pandora’s Comedy Programming While Pandora is overwhelmingly a service that plays music, in 2011 it introduced comedy offerings. The comedy content constitutes a very small percentage of Pandora’s played content. D. Pandora’s Revenue Pandora derives revenue from two principal sources: advertising and subscription fees. As of today, Pandora derives approximately 80% of its revenue from the sale of display, audio and visual advertising, and the remaining 20% or so from a paid subscription service without advertising called “Pandora One.” Pandora’s revenue has grown exponentially since its inception. For fiscal year 2009, Pandora reported revenue of approximately $19 million. By fiscal year 2013, Pandora’s revenue had risen to over $400 million. As of today, however, Pandora has yet to demonstrate sustained profitability. Pandora’s payment of licensing fees for the use of music consumes a very significant portion of its revenue. In 2013, Pandora’s content acquisition costs were close to $260 million, or over 60% of its revenue for that fiscal year. A very substantial portion of these costs are for the fees paid to record companies for licenses for sound recordings, as described in more detail below. E.Pandora’s Competitive Environment Pandora’s competitive environment is dictated by the nature of its service. Pandora is a radio service, albeit a customized radio service. Unlike traditional broadcast AM/FM radio, in which one program is played for many listeners, Pandora’s digital radio service provides the opportunity to have a unique program created for the enjoyment of each listener. This distinction between programmed and customized radio has been referred to as the one to many, versus the one to one distinction. But, despite that differentiation, made possible by digital technology, Pandora is radio. The listener does not control what song will next be played and doesn’t know what that next song will be. As with other forms of radio, the listener may be introduced to new music she has not heard before. There is an industry term for distinguishing among types of listening experiences: lean-back versus lean-forward. Like radio, Pandora is a lean-back service, in contrast to the on-demand lean-forward services like Spotify. Not surprisingly, therefore, Pandora competes aggressively with other radio stations for listeners. It competes directly with internet radio stations, whether they are programmed music streaming services or customized radio stations. But, because the internet radio market is comparatively small and because Pandora already holds a significant share of that market, Pandora expects its increased audience, listening hours, and advertising revenue to come largely at the expense of terrestrial radio. While Pandora has a 71% share of the internet radio market, it has less than an 8% share of the overall radio market. Pandora is attempting to make itself ubiquitous, so that its listeners have Pandora available to them throughout their day, whether they are at home, at work, in the car, or somewhere else. As Pandora explained in a 2013 SEC 10-Q filing, “[o]ne key element of our strategy is to make the Pandora service available everywhere that there is internet connectivity.” Pandora has consequently expanded its service to smartphones, tablets, and television streaming devices. And because almost half of radio listening takes place in cars, Pandora has negotiated agreements to integrate its service into new cars built by a number of auto companies. Besides competing with traditional radio for listeners, Pandora also competes with traditional radio for advertising dollars. Most terrestrial radio advertising revenue comes from local advertising. To compete for these advertising dollars, Pandora has hired a large in-house local advertising sales force. And to improve its ability to compete for advertising dollars with terrestrial radio stations, Pandora contracts with third party Triton Digital, a firm that collects radio audience data on both a local and national level, in order for radio advertising buyers to better understand the reach of advertisements run on Pandora. Despite this intensive effort to build advertising revenue, Pandora is still unable to play as many minutes of advertising per hour as its broadcasting competitors. Therefore, as of today, Pandora plays on average approximately 15 songs per hour as compared to terrestrial radio’s roughly 11 songs per hour. While Pandora’s free radio service now runs less audio advertising per hour than do terrestrial radio stations, this gap may lessen as Pandora’s business matures. In accordance with the above, in its public filings with the SEC Pandora identifies its principal competitors as broadcast radio providers, including terrestrial radio providers such as Clear Channel and CBS, satellite radio providers such as Sirius XM, and online radio providers such as CBS’s Last.fm and Clear Channel’s iHeartRadio. But, while programmed radio and customized radio are Pandora’s primary competition, Pandora also competes with interactive, on-demand internet music services. Its identified competitors in this market include Apple’s iTunes Store, RDIO, Rhapsody, Spotify, and Amazon. V. Pandora’s Licensing History with ASCAP On July 11, 2005, Pandora first entered into an agreement with ASCAP for a blanket license to publicly perform the compositions in the ASCAP repertoire. This license was in effect from 2005 to 2010, when Pandora exercised its option to cancel it. The license which ASCAP issued to Pandora during this span of years was a form license. Pandora was licensed by ASCAP from 2005 to 2010 under the ASCAP Experimental License Agreement for Internet Sites & Services — Release 5.0 (“5.0 License”). ASCAP first adopted the 5.0 License in 2004. As of 2004, internet radio had been in existence for roughly ten years, customized internet radio had been in existence for approximately five years, and on-demand services had been in existence at least three years. With its adoption of this form license, ASCAP made two important distinctions. First, it raised the rate for new media licenses, reflecting a judgment that those services made more intensive use of music than broadcast radio. Second, it made a distinction between interactive and non-interactive new media services. It did not, however, make any distinction between programmed and customized internet music services. The 5.0 License allowed non-interactive users to choose between three rate schedules. Schedule A of the 5.0 License, which Pandora chose, required it to pay the higher of 1.85% of revenue or a per-session rate. The 1.85% rate represented an increase in ASCAP’s form license rate from the previous rate. The predecessor to the 5.0 License had an equivalent rate for this schedule of 1.615%. ASCAP’s form license for interactive services provided for a substantially higher license rate of 3.0%. The interactive/non-interactive distinction in the ASCAP form license agreements is borrowed from 17 U.S.C. § 114’s (“Section 114”) use of the term interactive in the context of the licensing of sound recording rights (Section 114 and sound recording rights are discussed below). Because ASCAP considers its music to be more valuable to the services it classifies as interactive, it has licensed them at a higher rate than non-interactive services. As noted, under the 5.0 License Pandora was required to pay the greater of either the percentage of revenue corresponding to its applicable rate, or a fee based on a concept known as “sessions.” A “session” is defined in the license as “an individual visit and/or access to [the] Internet Site or Service by a User.” Any visit that exceeded one hour in length began a new session. At some point in 2010, Pandora recognized that it had been calculating sessions incorrectly, and that it had substantially underpaid ASCAP. It paid ASCAP over $1 million to account for that error. If the payments Pandora was required to make to ASCAP, when measured by the per session rate, are converted into a flat percentage of Pandora’s annual revenue, the effective rate for the years 2005 through 2010 ranged from a high of 3.63% in 2006 to a low of 1.91% in 2007. But there is no evidence that any party believed that Pandora was obligated to pay above the 1.85% rate until 2010. Pandora’s systems do not track its customers’ use of its services with any measure that corresponds to the 5.0 License definition of a session, and it was a complex undertaking for Pandora to calculate the amount it owed to ASCAP using that measure. As a result of its dissatisfaction with this sessions component of its license, on October 28, 2010, Pandora sent a letter to ASCAP terminating its license and applying for a new license, pursuant to the terms of AFJ2, to run from January 1, 2011 through December 31, 2015. Upon making a written request to AS-CAP, Pandora obtained, pursuant to AFJ2 § V’s requirement that “ASCAP is hereby ordered and directed to issue, upon request, a through-to-the-audience license to ... [inter alia ] an on-line user,” the right to perform all of the compositions in AS-CAP’s repertoire for that period, with only the proper payment rates to be determined, either through negotiation or by the rate court. Having been unable to agree with ASCAP on the proper price for the license after roughly two years of negotiation, and spurred by Sony’s impending withdrawal from ASCAP (as discussed below), on November 5, 2012, Pandora filed with this Court a petition for determination of reasonable licensing fees pursuant to AFJ2. See AFJ2 § IX. VI. The April 2011 ASCAP Compendium Modification A. Overview and Context In 2011, ASCAP modified its Compendium to permit its members to selectively withdraw from ASCAP the right to license works to new media entities. This was an unprecedented event. Never before had ASCAP granted partial withdrawal rights to its members. As this Court would hold in 2013, the modification violated the terms of AFJ2. AFJ2 requires that ASCAP license to any applicant all of the works in its repertoire, and consequently if a publisher leaves a composition in ASCAP’s repertoire for some licensing purposes AS-CAP is required to license that work to any applicant. See In re Pandora Media, Inc., 12 Civ. 8035(DLC), 2013 WL 5211927, at *1 (S.D.N.Y. Sept. 17, 2013). In the year and a half that followed the adoption of the modification of the Compendium, three of the four largest music publishers withdrew their new media rights from AS-CAP. EMI’s withdrawal was followed by the withdrawal of Sony and then UMPG. Each of these publishers thereafter negotiated direct licenses with Pandora. Those negotiations and licenses have been a central feature of this litigation, and are discussed in detail below. To place the Compendium modification in broader context, it was simply one of the many ripple effects that have followed the onset of the digital age in the music business, and the industry’s attempt to recover from the concomitant decline in some types of music sales. The modification of the Compendium came in response to pressure from ASCAP’s largest music publishers. These publishers were focused principally on the disparity between the enormous fees paid by Pandora to record companies for sound recording rights and the significantly lower amount it paid to the PROs for public performance rights to compositions. The modification was enacted despite significant concern about the impact of this change on AS-CAP, its writers and its independent publishers. B. Public Performance Rights for Compositions versus Sound Recordings A brief overview of the distinction between public performance rights in sound recordings and public performance rights in compositions is necessary to provide context for the discussion of the motivations of the largest publishers in effectuating the Compendium modification. A right to the public performance of a sound recording is the right to control the performance of one recording of a performance of a song. By contrast, a right of public performance in a composition is the right to control the use of the underlying musical composition itself. The latter right has been long recognized; but the right of public performance of a sound recording is a relatively new phenomenon and is restricted to digital services. The licensing fees for sound recordings are paid to an entity called SoundExchange, which collects and distributes these fees to the holders of sound recording copyrights. In 1995, Congress passed the Digital Performance in Sound Recordings Act (“DPSRA”), which provided for the first time a public performance copyright in sound recordings. See 17 U.S.C. §§ 106, 114 (“Section 114”). Section 114 did not require all music users to obtain a license to perform a sound recording, but only services that “perform the [sound recording] publicly by means of a digital audio transmission.” 17 U.S.C. § 106(6) (emphasis added). Section 114 differentiates among services that are, in the meaning of the statute, “interactive” and “non-interactive.” An interactive service is defined as a service “that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording ... which is selected by or on behalf of the recipient.” 17 U.S.C. § 114(j)(7). If a digital service does not provide users with this level of control it is non-interactive. The distinction between interactive and non-interactive services is meaningful because “non-interactive” digital music services are eligible for “a compulsory or statutory licensing fee set by the Copyright Royalty Board [“CRB”] made up of Copyright Royalty Judges appointed by the Library of Congress,” see Arista Records, LLC v. Launch Media, Inc., 578 F.3d 148, 151 (2d Cir.2009), whereas interactive services must independently negotiate rates for sound recording licenses. Pandora is a non-interactive service within the meaning of Section 114. Importantly for purposes of this proceeding, Congress also provided that this rate court (and the BMI rate court) may not take into account sound recording licensing fees in setting a rate for the licensing of the compositions themselves. The DPSRA provides that “[l]ieense fees payable for the public performance of sound recordings ... shall not be taken into account in any ... proceeding to set or adjust the royalties payable to copyright owners of musical works for the public performance of their works.” 17 U.S.C. § 114®. Ultimately, the CRB decided that the market for sound recording rights was materially different from the market for the public performance rights to musical compositions, and set rates for compulsory license fees for sound recordings at rates many times higher than the prevailing rates for the licensing of the public performance of the compositions. Consequently, Pandora pays over half of its revenue to record companies for their sound recording rights, and only approximately four percent to the PROs for the public performance rights to their songs. The disparity between rates for the public performance of compositions versus sound recordings does not exist for most of ASCAP’s revenue streams since, as just explained, the need to acquire sound recording licenses only applies to services who conduct digital audio transmissions. Thus, there is no disparity at all when it comes to most of ASCAP’s business, including its general licensing program and its licensing of cable TV, broadcast TV, and terrestrial radio. Because only new media music services must acquire sound recording licenses, the PROs end up receiving far more money from public performance rights license fees for compositions than do the record companies from public performance license fees for sound recordings. C. ASCAP-Publisher Negotiations Pñor to the Compendium Modification Against this backdrop, music publishers assessed their options. In September 2010, music publisher EMI advised AS-CAP that it was contemplating withdrawing entirely from ASCAP. EMI Chief Executive Roger Faxon has explained that EMI wanted to withdraw because it believed that it was inefficient to license each right in the musical works and recordings it administered through different institutions. Faxon wanted EMI to be able to “unify the rights in the compositions that we represented so that a single negotiation with ... a customer who wanted the rights could encompass all rights ... necessary to empower their business.” Faxon also said that EMI was dissatisfied with the “delays” in ASCAP’s procedures and AS-CAP’s high operational costs. Spurred by the potential loss of one of the four largest music publishers, ASCAP began in 2010 to explore a proposal to amend its Compendium to allow members to withdraw from ASCAP only the right to license works to new media users. It was, after all, only new media users who needed to acquire both a public performance and sound recording license. Not all of the ASCAP board was in agreement on this proposal. Large publishers were in general enthusiastic about such a change, but the songwriters and independent publishers were less so. As noted, the largest publishers were fixated on the higher rates that record companies — often their corporate affiliates — were receiving from internet music providers, of which Pandora was the most prominent, for sound recording rights under Section 114’s compulsory license regime when compared to the rates that Pandora and others were paying for public performance rights under AFJ2. The major publishers viewed AFJ2 as preventing them from closing the gap between the composition rates and the sound recording rates. In the words of Sony’s Brodsky: We were struck by the vast disparity between what record companies received from digital music services for the sound recording rights that they conveyed and what was paid for the performance right. This concern over the discrepancy between the revenues generated for record labels and those generated for music publishers is repeated in many of the communications related to the adoption of the Compendium modification and the subsequent withdrawals by the publishers of new media rights from ASCAP. In many of those exchanges they focus their attention directly on Pandora. For example, an email from ASCAP General Counsel Joan McGivern to LoFrumento of July 30, 2010, brought up the possibility of permitting partial withdrawals from ASCAP as a means to attempt to close the gap in Pandora’s payments: I spoke to Peter Brodsky at Sony late yesterday. He would like to meet with us ... to discuss — why publishers are not receiving as much as their record labels from Pandora and what options Sony might have, such as trying to license Pandora directly, withdrawing its rights, etc. Similarly, an email of July 31, 2010 from McGivern to other top ASCAP officials confirms Sony’s focus on the gap in the payments made by Pandora: Peter Brodsky at Sony, asked that we meet with him and two [outside lawyers] to discuss our Pandora license, and in particular, why publishers and writers are not receiving as much from Pandora as it is paying to SoundExchange. ASCAP’s DeFilippis responded to this email by explaining that he had already had conversations with Brodsky about the same issue “about 2 months ago” and that “[h]e seemed to understand the basic reasons, i.e., CRB set rates, ASCAP/BMI market share.” The publishers believed that AFJ2 stood in the way of their closing this gap. They believed that because the two PROs were required under their consent decrees to issue a license to any music user who requested one, they could not adequately leverage their market power to negotiate a significantly higher rate for a license to publically perform a composition. On occasion the publishers offered a second rationale for executing the new media withdrawals: the high cost of litigating a case in rate court. Martin Bandier, the CEO of Sony, cited this rationale in an email to Sony employees, in which he contended that “litigating a rate is an expensive and inefficient way to license our repertoire to new digital services.” Against the backdrop of the urgency felt by the largest music publishers to close the gap between payments for composition rights and sound recording rights, other ASCAP members had their own separate concerns. Songwriters, and at least some independent music publishers, were concerned about the damage that might be wrought from the Compendium modification and the partial withdrawal of rights from ASCAP. Songwriters trusted AS-CAP to account reliably and fairly for the revenues ASCAP collected and to distribute the portion of revenues owed to writers promptly and fully. Songwriters were concerned about the loss of transparency in these functions if publishers took over the tasks of collection and distribution of licensing fees. They were concerned as well that the publishers would not manage with as much care the difficult task of properly accounting for the distribution of fees to multiple rights holders, and might even retain for themselves certain monies, such as advances, in which writers believed they were entitled to share. Overall, they were concerned about the increasing concentration of the publishing industry and the willingness by some, particularly Sony, to engage in direct licensing outside the framework of the PROs. These concerns ripened as the writers learned that Sony intended to follow EMI’s lead and take advantage of the Compendium modification to partially withdraw from ASCAP. Some of this tension is captured in an email sent by ASCAP-member and composer [REDACTED] to LoFrumento on September 6, 2012. In that email, [REDACTED] explained the conflicts that he perceived between the major publishers and writers of ASCAP: [W]riters and (the major) publishers differ. Writers, I believe are concerned with the health and well being- of AS-CAP. As small business owners we are dependent upon ASCAP for our success. ... Today’s publishers (the majors) are executives not owners. Their focus is on the well being of their company, their investors and their own perceived performance all of which is reflected in the quarterly bottom line. In their vision of the future, ASCAP plays an inconsequential role. [REDACTED] was not alone among writers in his concern about the publishers’ plan for new media withdrawals. Writer [REDACTED] wrote in an email of August 28, 2012 to LoFrumento, that there was a “disintegration of trust between writers and publishers,” and that “the new breed of publishers was understood by writers to be motivated primarily by profits, and that writers would not look positively on ASCAP becoming a clearinghouse for processing direct licensing royalties.” [REDACTED] concluded by expressing his opinion about “the vital role ASCAP plays in protecting writers from the shark-infested waters of the music business.” Tension between the major- publishers and the writers of ASCAP is not surprising given that the two groups’ interests are not perfectly aligned. To balance their competing interests, ASCAP’s internal rules are premised on equality in decision-making between writers and publishers. As LoFrumento testified: [ASCAP’s] rules are geared towards equality between writers and publishers. [For example] [o]ur rules say that if you get a stream of revenue that was an adjustment -for the past, we normally go back to the past and make that' adjustment. There is not necessarily the same credibility that a publisher who got extra money would say, oh, well, this is for two years ago, well, let’s go back and make that distribution. It’s not a certainty what they would actually do with it. As significantly, ASCAP provides writers with transparency. Again, in the words of LoFrumento: Major, major driving issue is [that] with ASCAP [the writers] get transparency .... [They] know our rules and we take the money that we collect, take off our overhead and split it fifty-fifty. Our writers get that part of the fifty percent, the publishers get the other parts. It’s an equal division .... The writer’s greatest fear is that in the world of publishers collecting the money the splits will not be reflective of how AS-CAP splits the money. Finally, the writers were concerned that to the extent that the major publishers pulled their significant resources out of ASCAP, the writers would have to shoulder a larger burden in paying for activities like licensing, advocacy, and litigation. In that vein, [REDACTED] urged LoFru-mento to “not let ASCAP become the ‘accounting firm’ for the publishers who want to withdraw rights.” The large publishers were well aware of the. discomfort that at least some writers felt with the new media withdrawals and made the following argument to convince them to come on board: if the major publishers could get higher license rates by direct negotiations with new media companies outside, of ASCAP then those rates could be used in rate court litigation to raise the ASCAP license fees. The publishers found an ally on this issue in writer and ASCAP chairman Williams, who agreed with the new media rights withdrawal strategy. His email illustrates the strategy he pursued to get writers to support the publishers’ partial withdrawal of rights from ASCAP: My job is to make this transition as smoothly as possible in the board room ... to assuage the fears of the writers who may see this as an ASCAP death knoll .... [W]e are in fact giving [the major publishers] the right to negotiate. The end result being that they will set a higher market price which will give us bargaining power in rate court. As an internal debate swirled, the AS-CAP Board authorized management on September 16, 2010 to “examine alternative means of licensing digital media and to engage antitrust counsel.” In March 2011, ASCAP notified the Department of Justice of its consideration of a proposal to allow the withdrawals of new media licensing rights from ASCAP. D. The Compendium Modification Allowing. New Media Withdrawals is Enacted. On April 27, 2011, the ASCAP Board adopted a resolution to amend its Compendium to allow a member to withdraw from ASCAP its rights to license music to new media outlets, while allowing ASCAP to retain the right to license those works to other outlets. Six songwriter members of the Board abstained from the vote, but there was no vote in opposition. The Compendium modification was executed by creation of Compendium Rule 1.12. It allowed any ASCAP member, on six months notice, to “modify the grant of rights made to ASCAP ... by withdrawing from ASCAP the right to license the right of public performance of certain New [M]edia Transmissions.” The modified Compendium defines “New Media Services” — i.e., entities which make “New Media Transmissions” and which would be purportedly subject to a decrease in their ASCAP rights as the result of publisher withdrawals — as any standalone offering by a ‘Music User’ ... by which a New Media Transmission of musical compositions is made available or accessible (i) exclusively by means of the Internet, a wireless mobile telecommunications network, and/or a computer network and (ii) to the public, whether or not, in exchange for a subscription fee, other fee or charge. In the Compendium modification, ASCAP provided that ASCAP would continue to have the right to license such works only to those New Media Services which are licensed under Li-eenses-in-Effect on the Effective Date of the Membership Modification, and only for the duration of such Licenses-in-Effect. One effect of the Compendium modification was that major publishers could pull a writer’s works out of the PRO that the writer had decided to join. Although publishers had in the past considered a work to belong to the repertoire of the PRO to which the writer of the work belonged, in fact, it was a publisher that generally had contractual control over the licensing decisions for the work. With the withdrawal of rights from the PRO, the withdrawing publisher unilaterally removed the work from the PRO insofar as new media licensing rights were concerned. The Compendium modification also allowed the withdrawing publishers to rejoin ASCAP at any point, eliminating any risk to the publisher if a withdrawal proved to be a bad idea. Section 1.12.6 of the Compendium provided that: “[a]ny Member may terminate its Membership Modification at any time upon written notice to ASCAP, and thereby grant back to ASCAP the rights previously withdrawn.” (Emphasis added.) To manage the withdrawal process, the Compendium modification mandated, in Section 1.12.4, ASCAP’s creation of a list of works subject to any publisher’s withdrawal by “[n]o later than ninety days before the Effective Date” of the withdrawal. The publisher was required to notify ASCAP of any errors or omissions “within ten days of receipt of the List of Works.” Thus, ASCAP and the publisher would both have a list of works that would be affected by the withdrawal well in advance of the effective date of the withdrawal. E. ASCAP Provides Administrative Services for Withdrawing Publishers. EMI publicly announced in early May of 2011, within days of the adoption of the Compendium modification, that it would be withdrawing new media rights from AS-CAP. The turmoil caused by EMI’s decision was widespread. Confronted with the reality of losing this major publisher, on May 5, ASCAP’s LoFrumento made a proposal to EMI. He offered ASCAP’s services in distributing the EMI revenues to ASCAP members and to other songwriters and publishers who would be entitled to share in the revenues. LoFrumento argued at the time that ASCAP is uniquely positioned to handle the distribution of these rights because it already distributes royalties from the online licensees; its operating ratio remains one of the lowest in the world and certainly the lowest in the US; its technology is leading edge and its databases are authoritative; and finally, its staff is truly professional. LoFrumento also advised EMI’s Faxon that ASCAP had been flooded with inquiries since EMI’s announcement from both foreign and domestic rights holders and organizations. As he explained, many writers were concerned that EMI would not distribute royalties as carefully, accurately, and promptly as they had relied upon ASCAP to do. Ultimately, EMI and other withdrawing publishers agreed to let ASCAP handle the distribution of royalties collected for the new media direct licenses that they negotiated. They executed “Administration Agreements”' fór this purpose. AS-CAP charged a fee of [REDACTED] for this service, which represented a very substantial discount from its ordinary charge to members. Essentially, ASCAP set a rate based on the direct costs associated with these functions. ASCAP was concerned that without a low rate, the withdrawing publishers would be tempted to use competing PROs to perform the administration services. As a result of the publishers’ partial withdrawals from ASCAP, the burden on remaining ASCAP members to pay for all of the other functions that ASCAP performs for its members, including in Lo-Frumento’s words at trial, “membership, legislative, legal, senior management, [and] international costs,” increased. On the other hand, because ASCAP continued to administer the distribution of licensing revenues, the writers could continue to have confidence that they would actually receive the monies owed them by the withdrawing publishers. Finally, the Administration Agreements meant that the withdrawing publishers faced little downside in withdrawing new media rights. They could continue to enjoy the benefits of having ASCAP perform burdensome back-office tasks while licensing internet music entities directly. VII. A Second Compendium Modification in December 2012: the “Standard Services” Agreement At the urging of Sony, another change to the Compendium, executed in December 2012, further reduced the burdens on withdrawing publishers. The modification allowed the publishers to target large new media entities for direct licensing negotiations and to effect withdrawals of rights from ASCAP solely with respect to those large licensees. The December 2012 amendment permitted a member that was withdrawing under Section 1.12 of the Compendium to indicate that it wished to leave to ASCAP the right to license certain new media services that paid to ASCAP license fees of less than $5,000 per year. Where the withdrawing member indicated that it was only withdrawing new media rights “in part,” ASCAP continued to license new media services for the member that were defined in the Compendium as “Standard Services.” As a consequence, smaller new media entities could avail themselves of an ASCAP license so long as they accepted ASCAP’s 5.0 License (or its successor licenses) without negotiation. ASCAP’s DeFilippis offered the following explanation for the adoption of the Standard Services exception for the withdrawal of new media licensing authority: Given the rapidly changing marketplace and the low barriers to entry, new digital music services launch quite frequently. Many will never gain traction with listeners or generate substantial revenue. From the perspective of the withdrawing music publishers, they lacked the necessary staff and infrastructure to track the thousands of small music users that wished to license their music. Sony’s Brodsky stated that Sony wanted