10-3161-cv(L)
ASCAP v. MobiTV, Inc.

                                UNITED STATES COURT OF APPEALS

                                      FOR THE SECOND CIRCUIT

                                         August Term 2011

Heard: October 11, 2011                              Decided: May 22, 2012

                        Docket Nos. 10-3161-cv(L), -3310-cv(CON)

- - - - - - - - - - - - - - - - - - - - - -
AMERICAN SOCIETY OF COMPOSERS, AUTHORS AND
PUBLISHERS,
     Defendant-Appellant,

                         v.

MOBITV, INCORPORATION, f/k/a/ IDETIC,
INCORPORATION,,
     Appellee.
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Before: NEWMAN and LYNCH, Circuit Judges, and RESTANI,* Judge, U.S.
        Court of International Trade.

       Appeal from the July 6, 2010, judgment of the United States

District Court for the Southern District of New York (Denise Cote,

District       Judge),        setting     royalty    for   blanket   public   performance

license      for        music    in    the   ASCAP   repertory   that   is    embodied   in

television and radio content to be delivered to viewers and listeners

using mobile telephones. In re Application of MobiTV, Inc., 712 F.

Supp. 2d 206 (S.D.N.Y. 2010).



       *
      Honorable Jane A. Restani, of the United                          States   Court   of
International Trade, sitting by designation.
     Affirmed.

                             Ira M. Feinberg, Hogan Lovells US LLP,
                               New York, N.Y. (Eleanor M. Lackman,
                               Chava Brandriss, Hogan Lovells US LLP,
                               New York, N.Y.; Catherine E. Stetson,
                               Hogan Lovells US LLP, Washington, D.C.;
                               Joan M. McGivern, Richard H. Reimer,
                               Christine A. Pepe, ASCAP, New York,
                               N.Y.;   David  Leichtman,   Hillel   I.
                               Parness, Bryan J. Vogel, Oren D.
                               Langer, Robins, Kaplan, Miller & Ciresi
                               L.L.P., New York, N.Y., on the brief),
                               for Defendant-Appellant.

                             Kenneth L. Steinthal, Greenberg Traurig,
                               LLP, San Francisco, Cal. (Joseph R.
                               Wetzel, Harris L. Cohen, Matthew L.
                               Reagan, Greenberg Traurig, LLP, San
                               Francisco, Cal., on the brief), for
                               Appellee.

                             (Michael E. Salzman, Hughes Hubbard &
                               Reed LLP, New York, N.Y.; Marvin L.
                               Berenson, John Coletta, Joseph J.
                               DiMona, Broadcast Music, Inc., New
                               York, N.Y., for amicus curiae Broadcast
                               Music, Inc., in support of Defendant-
                               Appellant.)

                             (Bruce G. Joseph, Andrew G. McBride, Wiley
                               Rein LLP, Washington, D.C., for amicus
                               curiae Cellco Partnership d/b/a Verizon
                               Wireless, in support of Appellee.)


JON O. NEWMAN, Circuit Judge.

     This appeal concerns determination of the proper royalty the

Defendant-Appellant   American   Society   of   Composers,   Authors   and

Publishers (“ASCAP”) is entitled to receive for a blanket public
                               -2-
performance license for music in the ASCAP repertory that is embodied

in television and radio content to be delivered to viewers and

listeners using mobile telephones (sometimes called “handsets”).           The

applicant for the license is Plaintiff-Appellee MobiTV, Inc. (“Mobi”),

which   purchases   programming    from    cable   television   networks   and

transmits it to the wireless carriers to which consumers subscribe to

obtain wireless service on their handsets. When the parties could not

agree on a price for the performance rights to the music component of

Mobi’s offerings, ASCAP sought a reasonable rate in the District Court

for the Southern District of New York, acting as a rate court pursuant

to a consent decree.      Following a bench trial, the District Court

(Denise Cote, District Judge) issued a judgment on July 7, 2010,

establishing various royalty rates, depending on the nature of the

programming, and designating the revenue bases to which those rates

apply. See In re Application of MobiTV, Inc., 712 F. Supp. 2d 206

(S.D.N.Y. 2010) (“MobiTV”).         ASCAP appeals, contending that the

District Court’s rate formulation should have been based on the retail

revenues received    by   the   wireless   carriers   from   sales   to their

customers, rather than the content providers’ wholesale revenues paid

by Mobi.   We affirm.

                                  Background

A. ASCAP
                                     -3-
     ASCAP represents about half of the nation’s composers and music

publishers. These composers grant to ASCAP the non-exclusive right to

license public performances of their music.1          ASCAP has an estimated

8.5 million musical works in its repertoire. Because of concerns that

ASCAP’s size grants it monopoly power in the performance-rights

market, it is subject to a judicially-administered consent decree, the

most recent version of which was entered into on June 11, 2001.2

United States v. ASCAP, No. 41-1395. 2001 WL 1589999, at *1 (S.D.N.Y.

June 11, 2001).      Under this Second Amended Final Judgment (“AFJ2"),

ASCAP    is   required   to   issue   a   “Through-to-the-Audience”   (“TTTA”)

license to any operator “that transmits content to other music users

with whom it has an economic relationship relating to that content.”

AFJ2 § V.      A TTTA license effectively allows the licensee to pay a

single fee in exchange for the right of the licensee, as well as any



     1
      The bundle of rights created by American copyright law includes
the “exclusive right[] to do and to authorize . . . perform[ance of]
the copyrighted work publicly.”     17 U.S.C. § 106.   Although most
aspects of a copyright are typically owned by the studio or company
commissioning the musical composition, it is customary to allow
composers and music publishers to retain this “public performance”
right. In order for music to be legally performed, the prospective
user must first acquire a license for this public performance right.
     2
      Broadcast Music, Inc. (“BMI”) represents most of the remaining
composers in the American market. It operates under a consent decree
similar to ASCAP’s. See United States v. BMI (Application of Music
Choice), 316 F.3d 189, 190 (2d Cir. 2003).
                                 -4-
of its downstream partners, to perform any of the music in ASCAP’s

repertoire.   Thus, for example, a radio broadcaster that transmits

music to various independent stations around the country could request

a TTTA license to cover the performances of any of the stations

receiving and playing its programming.    The consent decree provides

that “[t]he fee for a [TTTA] license shall take into account the value

of all performances made pursuant to the license.”    Id.

      The AFJ2 obliges ASCAP to issue a TTTA license to any qualified

applicant seeking to perform ASCAP music within the United States.

Id.   Upon request, ASCAP must quote a reasonable price for such a

license and enter into negotiations with the applicant. AFJ2 § IX(A).

If, following a predetermined negotiation period, the parties are

unable to reach agreement, either one may request the District Court

for the Southern District of New York, acting as “the rate court,” to

determine a reasonable rate.

B. Mobi

      Mobi acts as a middleman between “content providers” – television

networks, record labels, and radio broadcasters – and wireless phone

carriers.   To do that, Mobi aggregates content – television programs,

music videos, and the like – into a number of “channels” (with themes

such as “news,” “music,” and “comedy”) that wireless carriers then

offer to their customers as part of their phone subscription plans.
                                -5-
In addition to aggregating content, Mobi also provides the technology

infrastructure for delivering this content directly to viewers.3

     Mobi’s primary offerings may be roughly divided into three types:

television   channels,   radio   channels,    and   music   video   channels.4

Television channels consist of programs and clips acquired directly

from the networks.       Radio channels are acquired from audio-only

content providers, such as National Public Radio, ESPN Radio, or DMX,

Inc (“DMX”).    Music video channels feature music videos that Mobi

acquires from various record labels.         In the case of television and

radio channels, Mobi has little control over the content that is

ultimately placed into the channel by the content provider.            In the

case of music videos, Mobi acts as a content provider itself by

acquiring and assembling individual music videos into themed channels


     3
      Mobi’s technology infrastructure is directed to transferring
large amounts of data quickly and fluidly over mobile phone networks.
Mobi provides this “back-end” infrastructure to a number of carriers
for whom it does not provide any content.      In   those cases, the
wireless carrier acquires content directly from the networks, record
labels, and other content providers and uses Mobi’s infrastructure to
the deliver that content.
     4
      Depending on the type of content it provides, a given channel may
be offered in a live, clip-linear, or video-on-demand (“VOD”) format.
Live content is streamed directly from the networks and is the most
popular and expensive content available from Mobi.          Clip-linear
content delivers a repeating sequence, or “loop”, of programming set
by the content provider and refreshed periodically.        VOD content
allows the customer to select a particular program or clip and watch
that piece of content immediately.
                                  -6-
designed and marketed by Mobi.

       Payments to Mobi from the wireless carriers.            Television, radio,

and music video content may be packaged for consumption in one of two

ways.       First, groups of channels may be packaged for “à la carte”

selection, for which wireless phone customers pay a monthly fee,

usually around $10. Second, content may be “bundled” with other types

of non-Mobi products and services and sold to the customer as part of

a larger offering.         When Mobi’s products are sold as part of a bundle,

it receives a flat dollar figure per subscriber per month based on the

relative value of the Mobi service to the bundle.              In the latter case,

Mobi does not know how much the carrier received for the sale.                   In

both       types   of    packaging,   payments   are   not   affected   by   whether

subscribers actually use any of Mobi’s content.5

       In addition to the revenue from carriers for packaged content,

Mobi also earns a small amount of income from advertising that it

inserts into its channels.            This revenue may be retained solely by

Mobi       or   shared   with   the   wireless   carriers    pursuant   to   license

agreements.

       Payments from Mobi to content providers.                 For the right to



       5
      Mobi markets its services as a way to help drive demand for more
expensive data plans, which are lucrative to the carriers.

                                           -7-
distribute content to the wireless carriers, Mobi generally pays the

networks and other content providers a per-subscriber fee.   The size

of the fee, which Mobi negotiates with each content provider, depends

on the popularity of the channel.    Although Mobi’s revenue-to-cost

ratio had been improving steadily in 2008, as of 2008 it had never

made a profit.

C. Procedural History

     In November 2003, Mobi applied to ASCAP for a TTTA license for a

“service that allows mobile handset users to access television and

other content by aggregating television and other audio-visual content

for transmission over telecommunications networks.”   Failing to reach

agreement over an appropriate rate, ASCAP applied to the District

Court in May 2008 for “a reasonable fee retroactive to the date of the

written request for a license.”

     In the proceedings in the District Court, ASCAP contended that it

was entitled to over $41 million in fees for the period between 2003

and 2011.6 Mobi contended that it owed only $301,257.99 for the period

from November 2003 to July 2009.

     When a party applies to the District Court to set a reasonable



     6
      In its appellate brief, ASCAP contends that the portion of this
fee attributable to the period from November 2003 to July 2009 was
approximately $15.8 million.
                                  -8-
rate for an ASCAP license, the AFJ2 requires that court to first

assess the reasonableness of the fee quoted by ASCAP.                       AFJ2 § IX(B),

(D).       During this phase of the proceedings, ASCAP bears the burden of

establishing the reasonableness of its proposed fee.                        Id.     If ASCAP

fails to meet its burden, the District Court must “determine a

reasonable fee based upon all the evidence.”                      AFJ2 § IX(D).

       The     District      Court’s     rejection     of       ASCAP’s   fee     proposals.

Pursuant to          the   AFJ2,   the   District Court          first    considered, and

rejected, ASCAP’s fee proposals.7                  ASCAP had proposed a fee formula

that used as a starting point the revenues wireless carriers received

from their customers.            In a thorough review, Mobi, 712 F. Supp. 2d at

236-244,       the    District     Court    identified      a    number    of   errors   and

deficiencies in that methodology.                  Among these were the unrealistic

size of ASCAP’s starting revenue base ($54 billion), id. at 239, the

inclusion in that figure of large sums of revenues unrelated to the

value of       Mobi’s      products,     including    the revenues         earned    by the

wireless       carriers       on    their     primary       services       of     telephonic


       7
      ASCAP made two different fee proposals in the court below. The
same formula was employed in each proposal, the principal distinction
being whether the wireless carriers would share some of the burden of
paying for the resulting fee. See Mobi, 712 F. Supp. 2d at 243.




                                             -9-
communications and Internet access, id. at 240-41, the use of faulty

calculations, id. at 240-41, the use of a high royalty rate (2.5

percent) based on an non-analogous benchmark, id. at 242, and the

large size of the resulting fee, id.     Notably, the District Court

implicitly rejected the proposition that wireless carrier retail

revenues from their customers could be used as a base for a rate

calculation:

    In sum, ASCAP has not carried its burden of showing that its
    proposed fee for a TTTA license for Mobi is reasonable. It
    has not shown that it located a revenue base with a
    sufficient nexus to content “sourced” by Mobi within the
    wireless carriers’ revenue base or that it is entitled to a
    fee built upon any broader revenue base.      Because ASCAP
    chose a vastly inflated revenue base it faced the Herculean
    task of contracting that base through a series of
    calculations.    Each of those layers of calculations was
    laden with unsupported and faulty assumptions. The final
    fee request was a demonstrably unreasonable number. . . .
    And, of course, as the discussion of the complexity of the
    [ASCAP] calculations illustrates, the adoption of this vast
    revenue base, along with the layers of calculations required
    to reduce it to a fee proposal, imposes enormous transaction
    costs on the parties that are entirely out of line with the
    commercial realities faced by both ASCAP and all but perhaps
    the very largest communications companies in America.

Id. at 244.

     The District Court’s fee formula.   After rejecting ASCAP’s fee

proposals, the District Court proceeded, as provided in the consent

decree, to “determine a reasonable fee based upon all the evidence.”

AFJ2 § IX(D).   In setting a reasonable rate, the District Court


                                -10-
largely credited Mobi’s fee expert and adopted Mobi’s proposed fee

structure.    The District Court’s formula differs from ASCAP’s in

several important respects.

       First, the District Court declined to use the wireless carriers’

retail revenue from their customers as the base for the royalty

calculations.      Instead, for programming obtained from television

networks, it used Mobi’s costs, i.e., the amount it pays to content

providers    for   content,   plus   any   revenue   derived   by   Mobi   from

advertising inserted into that content. Mobi, 712 F. Supp. 2d at 246-

47.8   For programming obtained from record labels (music videos), the

Court used Mobi’s revenues, i.e., the amount it receives from wireless

carriers for its services, again along with advertising income. See

id. at 247.

       Second, the District Court used ASCAP’s suggested rate of 2.5

percent only for all-audio channels. See id. at 248. For audio-visual

content, it applied the rates used in benchmark agreements between

ASCAP and the cable television industry. See id. at 247-48.                The

District Court followed these benchmarks in applying rates of 0.9

percent to music-intensive programming (e.g., music video channels),



       8
      One result of taking Mobi’s costs as the revenue base, as the
District Court recognized, was that ASCAP received no fee for some
programming that content providers offered to Mobi for free. Mobi,
712 F. Supp. 2d at 250-51.
                                 -11-
0.375 percent to general entertainment content, and 0.1375 percent to

news and sports content. See id. at 255.

      The result of these calculations was a judgment setting a fee of

$405,000 for     the    period   from   November    2003    through    March   2010,

substantially less than ASCAP’s proposed fee of $15.8 million for a

somewhat shorter period.9

                                     Discussion

A. Standard of Review

      On an appeal from a rate determination, this Court reviews the

District Court’s factual findings for clear error and its conclusions

of   law   de   novo.   See    United   States     v.    ASCAP   (Applications   of

RealNetworks, Inc. and Yahoo! Inc.), 627 F.3d 64, 76 (2d Cir. 2010)

(“In order to find that the rate set by the District Court is

reasonable,     we   must     find   both   that   the    rate   is   substantively

reasonable (that it is not based on any clearly erroneous findings of

fact) and that it is procedurally reasonable (that the setting of the

rate, including the choice and adjustment of a benchmark, is not based

on legal errors).”). We have likened this distinction to that between

the admissibility of evidence (a question of law) and an evaluation of

the persuasive force of that evidence (a question of fact). See ASCAP


      9
      The District Court’s fee structure was also intended to govern
the parties’ relationship through the end of the statutory contract
period, i.e., through 2011.
                                 -12-
v. Showtime/The Movie Channel, Inc., 912 F.2d 563, 569 (2d Cir. 1990).

     When setting an appropriate rate, the District Court must attempt

to approximate the “fair market value” of a license – what a license

applicant would pay in an arm’s length transaction. See United States

v. BMI (Application of Music Choice), 316 F.3d 189, 194 (2d Cir. 2003)

(“Music Choice II”).      In many cases, “the appropriate royalty rate” –

i.e., the fair market value of the license – “is determined by

applying the appropriate percentage rate to the fair market value of

the music.”     Id. at 195 (emphasis supplied).      In so doing, the rate-

setting court must take into account the fact that ASCAP, as a

monopolist, exercises market-distorting power in negotiations for the

use of its music. See RealNetworks, 627 F.3d at 76.

B. Rejection of ASCAP’s proposal

     ASCAP does not contend on appeal that the District Court erred in

rejecting its royalty proposal.10         Instead it devotes its entire

argument   to   claimed    deficiencies   in   the   District   Court’s   own

determination, pursuant to the AFJ2, of a reasonable royalty.              We

therefore limit our discussion to those alleged deficiencies.



     10
      Toward the end of its brief ASCAP asserts that the District
Court “erred in rejecting ASCAP’s proposed methodology outright as
unreasonable,” Brief for Appellant at 44, but this statement simply
continues the argument that the District Court should not have based
a royalty rate on wholesale revenues; it is not a claim that ASCAP’s
proposal should have been adopted.
                                 -13-
C. Alleged Deficiencies in the District Court’s Royalty Determination

     The District Court’s royalty determination began with selection

of a revenue base to which the Court applied different percentage

rates depending on the category of programming.       ASCAP’s primary

contention on appeal is that the Court selected an incorrect revenue

base.

     1. The appropriate revenue base

     The District Court used as a revenue base “the wholesale price

for the musical content,” MobiTV, 712 F. Supp. 2d at 247.    At first

glance, this phrase might seem to involve circular reasoning: the

revenue base is being selected to determine what Mobi must pay ASCAP

for the right to perform ASCAP music, but what Mobi must pay ASCAP

might also be called “the wholesale price for the musical content.”

But, as used by the District Court, that is not what the phrase means.

In fact, the phrase has two other meanings depending on whether Mobi

is licensing content from content providers (typically television

networks) or obtaining music videos from record labels.     The Court

explained its revenue base in these words:

     For the programming that Mobi licenses from content
     providers, aggregates, and conveys to wireless carriers, the
     revenue base shall be the amounts that Mobi pays to the
     cable television networks or other providers to license the
     content, plus any revenue from advertising Mobi inserts into
     that programming, including revenue that is shared with
     wireless carriers or potentially content suppliers. For the

                                 -14-
     music videos that Mobi obtains from record labels, programs
     into music video channels, and then provides to the
     carriers, the revenue base will be the revenue that Mobi
     receives from the wireless carriers for this programming,
     plus any revenue from advertising Mobi inserts into that
     programming, including revenue that is shared with wireless
     carriers or potentially content providers.

Id. (emphases added).

     As can readily be seen, both revenue bases use wholesale revenue,

in one case the wholesale revenue that the cable television networks

receive from Mobi and in the other case the wholesale revenue that

Mobi receives from the wireless carriers.   In neither case is retail

revenue used, i.e., the revenue the wireless carriers receive from the

handset customers.

     At the outset, we can put aside one aspect of ASCAP’s challenge,

which is merely a semantic quibble.      ASCAP repeatedly faults the

District Court for using Mobi’s “cost” or “costs” to obtain rights,

see Brief for Appellants at 30, 33.     The District Court focused on

revenue, either the content providers’ revenue from Mobi or Mobi’s own

revenue from record labels.   Obviously, with respect to programming

from content providers, the providers’ revenue from Mobi is the same

as Mobi’s payment of costs to those providers.     The labeling is a

matter of perspective, not substance.

     ASCAP’s fundamental objection is that the revenue base should

have been retail revenue received downstream in the distribution chain

                                 -15-
by the     wireless   carriers   from    their   customers,   rather   than the

wholesale revenue received upstream by the content providers from

Mobi.     We consider first the adequacy of the District Court’s reasons

for using the content providers’ revenue and then ASCAP’s complaint,

which is based primarily on this Court’s decision in Music Choice II.

     The District Court’s reasons for using wholesale revenues.             The

District Court expressed several reasons for using wholesale revenues

as “the appropriate revenue base from which to measure the value of

the public performance of the music at issue here.” MobiTV, 712 F.

Supp. 2d at 246.       First, the Court explained that “[p]ricing the

public performance right at the time the content is first sold gives

direct and immediate feedback to content producers about the value of

a component of their product.” Id.          Second, the Court accepted the

concept of what       Mobi’s   expert,   Professor Roger      G.   Noll, called

“derived demand”:11

          Mobi has shown that the value of the public performance
     of the music at the retail level is indeed captured at the
     wholesale level, not just theoretically by the concept of
     derived demand, but also functionally from the fact that the
     cable television networks principally generate their
     revenues by measuring the number of subscribers for their
     programming. To the extent that a channel’s content becomes


     11
      Noll explained in his 83 page declaration that “[t]he
relationship between final product markets and the demand for inputs
is called the theory of derived demand, and for the case of variable
factor proportions was first developed in John R. Hicks, The Theory of
Wages, MacMillan (1932).” Noll Declaration 47 n.40.
                                 -16-
      popular among consumers, the seller of content demands a
      higher rate of compensation from advertisers and from
      purchasers of the content.     And, Mobi’s payments to the
      cable television networks for the programming it distributes
      are driven by the subscriber data that Mobi tracks and
      conveys to the networks.

Id.

      Third,   the   District   Court   pointed   out   the   administrative

advantages of using wholesale revenue:

           [T]he administrative advantages of basing a rate on
      wholesale revenue are amply illustrated in this case by the
      challenges that ASCAP’s expert sought to surmount as she
      endeavored to construct calculations that might result in a
      reasonable fee and to justify those calculations.     Fully
      appreciating that the retail revenue base vastly overstates
      the value of the public performance of the musical
      composition, since it reflects so many inputs that bear
      little or no relation to that content, she designed layers
      of formulae to reduce the retail revenue base. At each step
      of the process, those formulae raised a multitude of
      questions about their intellectual rigor, fairness, and the
      cost and burden associated with their implementation.

Id.

      Fourth, the District Court relied on two factors that our Court

in Music Choice II had pointed out counsel against using retail

revenues as a revenue base:

      This is a case in which many of the retail customers pay a
      single fee for a bundle of programming, making it difficult
      to determine what part of the fees is paid for music. Music
      Choice II, 326 F.3d at 195 n.2. And the digital revolution,
      which has turned handsets into computers and permitted
      television programming to be included among the many
      innovative products to which a consumer has immediate and
      constant access, makes it an extremely complex task to tease

                                    -17-
      out one component of the retail price and identify the
      extent to which retail price is driven by the musical
      content of the television programming. Id. at 196 n.3.

MobiTV, 712 F. Supp. 2d at 246-47.

      ASCAP challenges the District Court’s reasons for using wholesale

revenues as the royalty base by disputing the validity of Prof. Noll’s

use of the principle of derived demand. See Brief for Appellant at 33-

36.    Prof. Noll justified his use of that principle, which the

District Court accepted, in these words:

      If consumers value musical performances more highly, they
      will increase their purchases of musical performances, which
      in turn will cause the derived demand      for content that
      contains music to increase. The resulting increase in sales
      of content that contains music will lead to higher payments
      for rights holders even if the royalty rate is unchanged.

Noll Declaration 45.      He gave three reasons for using wholesale

revenue as the appropriate base:

      First, using the revenue of the channel supplier leads to
      royalties that are most closely connected to the intensity
      of music use. Second, basing royalties on the revenue of
      the channel supplier also avoids unreliable and expensive
      methods for allocating revenue among bundled products and
      services and to other inputs of retailers (here, the
      wireless carriers). Third, the revenue of channel suppliers
      includes sources of revenue that accrue to the channel but
      not to the retailer, such as advertising that is inserted by
      the channel supplier.

Id. at 48.

      Despite   cross-examining   Prof.   Noll   in   120   pages   of   trial

transcript, ASCAP failed to provide the District Court with any basis

                                   -18-
for discounting, much less rejecting, his analysis.

     ASCAP’s challenge to wholesale revenues based on Music Choice II

and IV.      The Music Choice litigation, see Music Choice II, 316 F.3d

189, and United States v. Broadcast Music, Inc. (Application of Music

Choice), 426 F.3d 91 (2d Cir. 2005) (“Music Choice IV”), concerned the

appropriate royalty rate to be paid by Music Choice to Broadcast

Music, Inc. (“BMI”), for a TTTA license for the performance rights to

music   in    BMI’s   repertory.   Music    Choice   is   a   partnership   that

transmits numerous music channels to listeners’ television sets via

cable and satellite and to their computers via the Internet.                Like

ASCAP, BMI is subject to a consent decree that designates the Southern

District of New York as the rate court in the event of a royalty fee

dispute. Music Choice II, 316 F.3d at 190.           BMI urged the Court to

follow an agreement between BMI and DMX, a competitor of Music Choice.

Under that agreement, DMX paid BMI 3.75 percent (later 4 percent) of

DMX’s wholesale revenue, which in this context meant the money paid by

the cable or satellite operators to DMX for music programming. See id.

at 192.      That rate was designed to be approximately double the rate

previously applied to the retail revenues of the cable or satellite

operators on the theory that these operators charged their retail

customers approximately double what they were paying to the providers

of the music programming. See id.

                                     -19-
     The District Court in the Music Choice litigation ruled that a

3.75 percent rate based on the wholesale revenues of Music Choice was

not appropriate. See id. at 193.     The District Court explained that

this rate had been used in the DMX contracts to approximate the use in

previous contracts of a 2 percent rate of DMX’s wholesale revenues

plus 2 percent of the cable or satellite operators’ retail revenues.

Then the District Court reasoned that retail revenues did not reflect

the fair market value of music because the subscriber paying the

retail price was paying for materials and services not provided by the

author of the music. See id. at 194.      The Court therefore deducted 2

percentage points (the retail rate) from the 3.75 percent that had

been applied to wholesale revenues and set 1.75 percent of wholesale

revenues as the appropriate rate. See id.

     This Court reversed. We faulted the District Court for rejecting

retail revenues in determining an appropriate rate. See id. at 195.

In language embraced by ASCAP in the pending case, we said:

     As to the court’s rejection of retail revenues, absent some
     valid reason for using a different measure, what retail
     customers pay to receive the product or service in question
     (in this case, the recorded music) seems to us to be an
     excellent indicator of its fair market value. While in some
     instances there may be reason to approximate fair market
     value on the basis of something other than the prices paid
     by consumers, in the absence of factors suggesting a
     different measure the price willing buyers and sellers agree
     upon in arm’s length transactions appears to be the best
     measure.

                                   -20-
           It is true without doubt that to make the music
      available to its customers, the retail seller must incur
      expenses for various processes and services not provided by
      the owner of the music, such as the laying of cable, the
      establishment of satellite systems, etc. However, this is
      in no way incompatible with the proposition that retail
      revenues derived from the sale of music fairly measure the
      value of the music.    The customer pays the retail price
      because the customer wants the music, not because the
      customer wants to finance the laying of cable or the
      launching of satellites.

Id. (citation and footnote omitted).

      In the pending case, we are of course obliged to follow the

holding of Music Choice II, which was that the District Court had

erred by reducing a percentage rate that had been applied to wholesale

revenues by the rate previously applied to retail revenues.               Nothing

of that sort occurred in our case.           Of course, ASCAP urges us to heed

not   merely   the   holding   of   Music     Choice   II   but   its   language,

particularly the observation that “what retail customers pay to

receive the product of service in question (in this case, the recorded

music) seems to us to be an excellent indicator of its fair market

value.”   For several reasons we conclude that the quoted words do not

compel a reversal of the District Court’s decision in this case.

      First, the quoted words were preceded by the important qualifying

phrase “absent some valid reason for using a different measure.”               In

the pending case, the District Court had a very valid reason for using


                                      -21-
a   different   measure:     the   unimpeached        testimony       of   Prof.   Noll

explaining several reasons why wholesale revenue was far superior to

retail revenue as a basis for a royalty rate in this case.

      Second,   in   Music    Choice    II     our   Court    added    a   significant

footnote, observing that “where the customers pay a single fee for a

package of audio and visual programming, which includes the music, it

will be difficult to determine what part of the fees paid was for the

music, as opposed to other programming.” Id. at 195 n.2.                      That is

precisely the sort of “bundling” that occurs with Mobi’s transmission

of programming to wireless carriers.            The wireless carriers typically

offer Mobi’s television products as part of a bundle of services that

also includes Internet access and text messaging, and then charge a

single data plan fee for the whole bundle.            As ASCAP’s fee proposal to

the District Court illustrated, separating out the relative value of

each individual product is fraught with methodological difficulty.

ASCAP’s   proposal   was     premised   on     the   notion    that    the   value   of

different products in the bundle could be determined based upon how

much data each product used.            As the District Court noted, this

proposal made the essentially arbitrary assumption “that a consumer

would pay the same amount of money to receive a kilobyte of text

messaging as a kilobyte of television programming, even though a

kilobyte might give a consumer several back-and-forth exchanges of

                                        -22-
text messages but only the briefest glimpse of an image from a

television program.” MobiTV, 712 F. Supp. 2d at 241.   ASCAP’s failure

to develop a rational formula for valuing the component parts in the

bundle of products sold by the wireless carriers confirms the wisdom

of the District Court’s decision to reject the use of a retail base in

this case.   The products bundled by Mobi differed considerably from

the programming channels in Music Choice II, which were essentially

audio channels devoted exclusively to music.

     Third, although not disagreeing with the holding of Music Choice

II, we are not persuaded that its contention that “retail revenues

derived from the sale of the music fairly measure the value of the

music,” id. at 195, is universally true.   Indeed, an example offered

in that opinion seems to undermine that assertion.        The example

concerned purchasers of music on a compact disc sold for $12.       Music

Choice II noted that the purchasers

     were not motivated to spend their money to pay the salaries
     of truck drivers, warehousemen, bookkeepers, office
     administrators, salespersons and executives, all of whom
     played necessary roles in bringing the record to market.
     What the customers wanted was a record of certain music, and
     they were willing to pay $12 to get it.

Id. (emphasis added).

     At an earlier time, the customer who wanted to hear the music in

that example had a choice between a then-novel compact disc and an


                                 -23-
old-fashioned vinyl plastic record, which (unless it had value as a

rarity) would have sold for considerably less than the $12 for the CD.

True, the purchaser was not motivated to pay the salaries of all the

personnel whose efforts made possible the production and delivery of

the CD (or the vinyl record), but preference for a CD would have

resulted in payment of a higher price than for a record, even though

both contained the same music.            The retail price of the CD was

reflecting not just the value the purchaser assigned to the music but

also the value assigned to the mode of delivery of that music.               In

another significant footnote, Music Choice II acknowledged this very

fact:

     If it were demonstrated that retail purchasers were
     motivated to pay more because of advantages that resulted
     from a particular mode of delivery, such as better quality,
     better accessability or whatever, this might justify a
     conclusion that retail price of the service purchased by the
     customer exceeded the fair market value of the music.

Id. at 196 n.3.       Whether or not in some contexts the retail price of

a product containing music is a good measure of the fair market value

of the music, the District Court in the pending case, on the record

before it, did not err in concluding that the retail price paid by

customers for     a   service   that   delivers   video   and   audio   channels

containing music to their handsets is not a good measure of the value




                                       -24-
of the music itself.12

     ASCAP’s challenge to wholesale revenues based on uncompensated

rights.        ASCAP also faults the District Court’s use of wholesale

revenues because such use fails to provide any compensation to ASCAP

in the few instances where Mobi acquired programming without paying

anything to content providers.       Prof. Noll recognized that this would

occur     in   some   instances   because   a   new    channel   trying   to   get

established sometimes cannot command any price, and providers of such

content would rather offer it for free in order to have it included in

a package of bundled content.          He explained, however, that such a

channel would either disappear for lack of an audience or achieve an

audience, in which event the popularity of its programming would

subsequently be reflected in the later revenues that content providers

could demand, thereby increasing ASCAP’s royalty for the benefit of

the music composers. See Trial Tr. 985-88.            Either way, the temporary

use of free content would not undermine the overall reasonableness of

the District Court’s royalty determination.              As the District Court



     12
      Although our Court’s decision in Music Choice IV noted that the
District Court in that litigation “should not have rejected the retail
price of music as an indication of its fair market value,” 426 F.3d at
95, it also acknowledged that “in spite of our endorsement of retail
price as generally a good marker for fair market value, we did not
require it to be used in all circumstances, but only absent some valid
reason for using a different measure,” id. at 97 (internal quotation
marks omitted).
                                  -25-
explained, “The market for television content has spoken, and this

content would receive no airing at all through a wireless distribution

platform unless the content were provided for free and given the

opportunity to build a base.”       712 F. Supp. 2d at 251.

       2. ASCAP’s Remaining Objections

       ASCAP’s   remaining   objections     were   properly   rejected   by   the

District Court.      For clarification, we discuss briefly two such

matters.

       ASCAP contends that the District Court erred in failing to “test”

the resulting fee for reasonableness.         Although the size of the fee is

clearly relevant to its reasonableness, there is no requirement that

the District Court explicitly engage in a testing of the fee resulting

from its formula.     On the contrary, the AFJ2 requires only that the

District Court “determine a reasonable fee.”           AFJ2 § IX(D).

       ASCAP also contends that the District Court erred by failing to

include the value of licenses for content acquired by others but

streamed to customers using Mobi’s back-end technology infrastructure.

Such   content   would   include,   for     example,   television   programming

acquired by Sprint directly from the networks, and then provided to

its customers using Mobi’s servers and patented technology.               ASCAP

argues that Mobi is required to obtain a performance license for all

unlicensed content that it streams, regardless of whether it has been

                                     -26-
assured by its upstream partner that such a license has already been

procured.   This objection also lacks merit.   If an upstream content

provider has already acquired a TTTA license from ASCAP, it would be

unfair to require Mobi to make a second payment for the same content.

See United States v. ASCAP (In re Application of AT&T Wireless), 607

F. Supp. 2d 562, 570-71 (S.D.N.Y. 2009).        Furthermore, Mobi is

entitled to rely on its upstream partner’s assurances that it is

protected – and to manage the accompanying risk that the partner has

not obtained the promised right.13   ASCAP, for its part, retains the

power to protect its rights by bringing an infringement action against

Mobi or any other party.   As a result, the District Court did not err

by construing the license to exclude such content.

                              Conclusion

     For the foregoing reasons, the judgment of the District Court is

affirmed.




     13
      Mobi   would,  presumably,    manage this  risk  through  an
indemnification agreement or similar arrangement with the upstream
provider.
                                 -27-
