Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd [2010] FCAFC 148 | Case summary

Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd [2010] FCAFC 148 | Case summary | Zoe

REASONS FOR DETERMINATION THE TRIBUNAL:

Introduction [1]
PPCA and Foxtel [3] PPCA [4] Foxtel [9] The Tribunal's Function and its Conclusions [14]
The Evidence [16]
The Current Agreement [19]
PPCA's Proposed Scheme [31]
Foxtel's Alternative Scheme [33]
The Approach of the Tribunal [34]
Market Value and Hypothetical Bargain [37]
Comparable Transactions [41]
PPCA's first proposed methodology: the top down approach [45]
PPCA's second proposed methodology: the relativity approach [57]
Foxtel's proposed method: Dr Pleatsikas [62] (a) Changes to the nature of Foxtel's services [67] (b) Growth in average revenue per user [83] (c) Growth in the use of commercials [87] (d) Increased delivery via the internet [89]
Judicial Estimation [92] (a) The extent of Foxtel's need for PPCA blanket licence [95] (b) Historic undervaluation of PPCA's licences [108] (c) Changes in content, platform and revenues [109] (d) Agreements in the industry [110] (e) IPTV Agreements [113] (f) Convenience to the Parties [119] (g) The Significance of Music [120] (h) Prior Payment [121] (i) The Value of Recorded Music in general [123] (j) Valuation [124]
Revenue or PSPM? [125]
Non-price term disputes [138]
Result [139]

[1]

Introduction 1 These are the publicly available reasons of the Copyright Tribunal in CT 1 of 2012. The reasons refer in several instances to information which is commercially sensitive, in some cases, highly so. In this publicly available set of reasons, that information has been redacted to preserve its confidentiality. However, the parties' representatives have been provided with an unredacted version, which is not to be distributed to the parties themselves and is only to be accessed by those of the solicitors and counsel involved who have executed appropriate confidentiality undertakings. 2 This is a reference by the Phonographic Performance Company of Australia Limited ('PPCA') under s 154 of the Copyright Act 1968 (Cth) ('the Act'). By the reference it seeks the Tribunal's approval of a licence scheme for the subscription television industry for the use of copyright sound recordings owned or controlled by the persons and entities it represents. The scheme, if approved, will replace an agreement between the parties made in 2004. In its proposed terms, the licence scheme will only apply to a subscription television provider who both packages and broadcasts channels. Although there are a number of subscription television providers in Australia only one, Foxtel Management Pty Limited ('Foxtel'), provides channels in this manner. All of the other providers presently simply sell Foxtel's offerings on a retail basis. The only party directly affected by the reference is, therefore, Foxtel. Foxtel was, accordingly, joined as a party to the reference. The current 2004 arrangement (which is holding over) involves a payment calculated on a per subscriber per month ('PSPM') basis. The effect of what PPCA seeks will be to calculate the fee based on Foxtel's revenue (as occurs in industries without subscribers). The immediate effect, if this is done at the level of the licence fee proposed by PPCA, will be to bring about an increase in the fees payable to PPCA of, at least in some years, around 1,100%. PPCA submitted that the current rates give Foxtel the right to obtain its licence 'at a massive undervalue'; Foxtel submitted that the proposed increase was 'outrageous'. The parties were far apart.

PPCA 4 PPCA is a copyright collecting society which was established in 1969. It represents the interests of its copyright licensors and registered artists, including record companies and Australian recording artists who are the owners or exclusive licensees for Australia of the copyright in commercially released sound recordings and associated cinematographic films and who have licensed their rights to PPCA. It grants licences authorising the exploitation of the sound recordings and music videos in its repertoire, including their public performance and, importantly, forms of communication including broadcast. It receives and distributes licence fees for these uses to its licensors and registered artists. 5 PPCA is a company limited by shares. Its current shareholders are Australia's major record companies, namely, Sony Music Entertainment (Australia) Pty Limited ('Sony'), Universal Music Australia Pty Limited ('Universal') and Warner Music Australia Pty Limited ('Warner'). A shareholding in PPCA does not, however, carry any right to receive PPCA's income, which is instead distributed in accordance with its distribution policy. PPCA has a board of directors, comprising one representative from each of PPCA's shareholders, three recording artist representatives and two directors representing PPCA's non-shareholder licensors. Two of the recording artist representative directors are elected by artists registered with PPCA under its Artist Direct Distribution Scheme, while the third is a representative of the Association of Artist Managers. 6 PPCA obtains the rights to grant licences of the copyright in sound recordings from its licensors through what are termed 'input' agreements, pursuant to which the licensors grant to PPCA the non-exclusive right to grant non-exclusive licences of the copyright in the sound recordings owned or controlled by them. The rights granted to PPCA under an input agreement, subject to certain conditions and limitations, include among others the following rights in relation to sound recordings: (i) public performance (causing sound recordings to be heard in public); (ii) broadcasting (transmission of content via radio frequency spectrum, cable, optical fibre or satellite); (iii) datacasting; (iv) simulcasting; (v) webcasting (non-interactive pre-programmed transmissions over the internet or a mobile telecommunications network); (vi) interactive webcasting; (vii) audiovisual streaming (communication of audiovisual content to the public over the internet, a mobile telecommunications network or any other communications network, including by means of an interactive service or linear channel where no copy is created); (viii) music on hold (communicating sound recordings to telephone callers on hold by any means); (ix) on-demand offerings of programs which have been broadcast, by streaming or timed-out podcasts; (x) digital content rental (making available rental content by broadcast, streaming or timed out podcasts); (xi) technical copying (the right to make copies of sound recordings for the purpose of exercising the above rights in circumstances where s 107 of the Act does not apply); and (xii) ephemeral copying (the right to make and use a copy of a sound recording in circumstances referred to in s 107(3) of the Act or retain a copy of a sound recording after the expiry of the 12 month period referred to in s 107(5) of the Act). 7 A licence granted by PPCA covering all sound recordings in PPCA's repertoire is referred to as a 'blanket' licence. PPCA's repertoire does not include sound recordings other than commercially released sound recordings. In particular, it does not include: (i) production music (also known as stock music or library music), being music usually produced by production music libraries that is written and recorded for use in audio and audiovisual productions including some television programs and advertisements and offered without reference to particular recording artists; or (ii) commissioned music being music that is commissioned and produced specifically for a particular audiovisual production, including a film or television program. 8 PPCA's repertoire changes as new sound recordings are released, as PPCA's licensors change and as the copyright in PPCA's sound recordings expires. It does not publish a list of all of the sound recordings which are included within its repertoire. Indeed, it is not in dispute that such a list is practically impossible. As at April 2015, PPCA had over 1,766 licensors covering what was described as a vast repertoire. It includes over 40,000 licensor labels.

Foxtel 9 Foxtel is Australia's largest provider of subscription television services. It is the manager of the Foxtel Partnership between Telstra Corporation Limited ('Telstra') and News Corporation Australia. The partnership interests in Foxtel are held in equal proportions by Telstra Media Pty Limited and Sky Cable Pty Ltd. In May 2012 Foxtel completed its acquisition of all of the issued shares in Austar United Communications Limited ('Austar'). The Australian Competition and Consumer Commission ('ACCC') approved the acquisition subject to certain undertakings offered by Foxtel. Foxtel now provides subscription television services to former Austar subscribers. 10 Depending on where the customer is geographically located, Foxtel's retail subscription television services are supplied to customers nationally either via Foxtel Cable Television Pty Ltd ('Foxtel Cable') or via Austar Entertainment Pty Limited. Foxtel Cable holds subscription television broadcast licences under s 96 of the Broadcasting Services Act 1992 (Cth) ('the BSA') for each channel broadcast by Foxtel Cable that is a subscription television broadcasting service. Austar's subscription television broadcast licences under s 96 of the BSA are held by Selectra Pty Ltd on behalf of Austar for each channel broadcast by Austar that is a subscription television broadcasting service. Foxtel provides subscription television services via: (i) hybrid fibre-coaxial ('HFC') cable to Foxtel-owned and supplied set top units ('STUs'); (ii) satellite to Foxtel-owned and supplied STUs; and (iii) computer and mobile telecommunications networks using the internet protocol ('IPTV') to selected customer devices including compatible PCs and Macs, Smart TVs, consoles, smartphones and tablets, in regional, rural and metropolitan markets in Australia. 11 Foxtel subscribers account for the vast majority of all cable and satellite subscription television subscribers in Australia. Foxtel is also a wholesaler of some subscription television services to Telstra and Singtel Optus Pty Limited ('Optus'), which on-sell certain of Foxtel's subscription television services to their customers. In the case of Optus, services are sold over the Optus HFC cable network. 12 Foxtel also offers Foxtel Broadband, being home phone and broadband internet services on Telstra's ADSL network, which can be bundled with Foxtel subscription television packages. 13 Foxtel launched its cable subscription television service in October 1995, and its satellite subscription television service in 1999. In 1996 Foxtel launched its cable subscription television service for business premises such as hotels and motels. Customers of these services are referred to as 'commercial subscribers'. In 2002 Foxtel and Optus entered a content supply agreement under which Foxtel made its subscription television offering available to Optus customers. In 2002 Telstra commenced providing Foxtel's subscription television offering with its telephone services as part of a 'bundled' package. In 2004 Foxtel began broadcasting its cable and satellite subscription television services using a digital signal. By April 2007 Foxtel had completed its analogue to digital transition with 100% of Foxtel's service then being broadcast using a digital signal. In 2005 Foxtel launched Foxtel iQ, a set-top box which incorporates a digital video recording device. Foxtel iQ allows subscribers to pause and rewind live television, as well as to record and play back television programs. In 2010 Foxtel and Optus entered a new agreement following the 2002 content supply agreement which provided for Optus customers to receive Foxtel's HD services. Since February 2015 Foxtel has offered Foxtel Broadband.

The Tribunal's Function and its Conclusions 14 The Tribunal is authorised to approve the licence scheme or to substitute another scheme proposed by a party on such terms as it considers reasonable in the circumstances: s 154(4) of the Act. It can do this only after giving the parties to the reference an opportunity to present their cases. In relation to price terms or pricing formulae, the Tribunal should be satisfied that the remuneration provided by a scheme is reasonable or equitable. 15 The debate in this reference principally concerns the question of price. For the reasons which follow, the Tribunal considers that the fees which PPCA receives should, in future, be calculated by reference to Foxtel's subscription television business revenues rather than on a PSPM basis, although the Tribunal does not consider that Foxtel's revenues from pay-per-view sporting events should be counted in this process. Further, the Tribunal is satisfied that there has been a change in the extent to which Foxtel uses PPCA sound recordings sufficient to warrant an increase in the amount it is paying for its blanket licence. The amount of the increase should be phased in over a period of five years. The steps in applying a new licence formula would be as follows: (i) the gross quantum of fees paid in the final year of the former agreement (that is, 30 June 2011) should be expressed as a percentage of Foxtel's relevant revenues in that year; (ii) that percentage (of Foxtel's relevant revenue for that year) should be increased, over a five year period, to a percentage of revenue that is 150% higher than the percentage applying in the year ending 30 June 2011; and (iii) the phase in should occur in equal percentage increases, that is, 30% increase for the year ending 30 June 2012, 60% year ending 30 June 2013, 90% year ending 30 June 2014, 120% year ending 30 June 2015, 150% year ending 30 June 2016, and 150% in following years. The effect of this new formula would be twofold. First, the amount payable to PPCA will vary (and potentially increase) each year in line with movements in Foxtel's revenue (as calculated for this purpose). Secondly, the percentage of revenue rate applying in the final year of the reference will be 2.5 times higher than the percentage of revenue rate implicit in the final year of the former agreement.

[3]

The Evidence 16 A large number of witnesses were called. For PPCA there was called its General Manager, Ms Small, who swore seven affidavits dealing with a broad range of issues about PPCA and subscription television, as well as about the proposed scheme, in a most detailed way. Also called was Mr Horgan, the CEO of OMD, Australia. He gave evidence about the development of advertising on subscription television and free to air television and their respective comparative advantages. PPCA also called Mr Taylor, then the Executive Vice President, Artist and Repertoire at Universal and Island Records Australia. He described in detail the process by which artists are located, engaged and their music recorded. Dr Donnelly, a Reader at the University of Southampton, gave expert evidence about the nature and role of commercial sound recordings in television and its relation with production and commissioned music. Mr Parkhill, a music supervisor at InSync Music Services, gave evidence about the musical aspects of screen industry productions. Ms Brownlow, of PwC, gave evidence about the nature of, and changes to, the Australian subscription television industry. Mr Crossey, a Project Manager at Soundmouse Ltd, provided an analysis of a sample of recorded music. Ms Don, of Universal, gave evidence about the commercial music industry including its competitive environment, whilst Mr Nicholls, an engineer, gave evidence about the technical aspects of subscription television. Ms Crews, also of Universal, gave evidence about synchronisation licences. Mr Bernstein, a New York attorney, gave evidence about some aspects of the law of New York and US copyright law. 17 For its part Foxtel called: (i) Mr Freudenstein, its CEO; (ii) Mr Crowley, its Director of Programming; (iii) Mr James, its Director of Presto and Video on Demand; (iv) Mr Neill, Head of Production and Programming, FOX FOOTY, at Fox Sports Australia Pty Limited ('Fox Sports'); (v) Mr Galbally, Director and General Manager of Mana Music Australia Pty Ltd, which specialises in the negotiation of music licences for television advertisements and television program promotions; (vi) Ms Green, a music supervisor and principal of Music Licensing Pty Ltd in Australia, whose role is to obtain music licences for producers and/or directors of films and television programs and to advise them in relation to music licences; (vii) Mr Robertson, an American music and media consultant and owner of the company CR Music & Media Consulting, who seeks and negotiates licences to use commercial music sound recordings for film and television; (viii) Mr Mollere, a film and television music supervisor and owner of the company Fusion Music Supervision, who also negotiates licences for the use of sound recordings in television episodes and films; (ix) Mr Sheils, the APRA/AMCOS Director of Media Licensing, employed by the Australasian Performing Right Association Ltd ('APRA'), the collecting society that owns, inter alia, the right to communicate musical works to the public; and (x) Ms Edge, a solicitor employed by Minter Ellison, who gave evidence of some PPCA distribution reports (required to be published as a condition of PPCA authorisations issued by the ACCC), and who presented data reflected in those reports. 18 In addition, both parties called expert economists: Mr Thorpe for PPCA and Dr Pleatsikas for Foxtel.

[4]

The Current Agreement 19 PPCA has licensed Foxtel and other subscription television providers to use the sound recordings in its repertoire since around 2001. In the case of Foxtel, the licence was dated 20 December 2004, but was backdated to March 2001. The rates were negotiated in mid-2003 but were based on earlier rates agreed with Austar in late 2000. It provided for Foxtel to pay PPCA a licence fee calculated by reference to fixed fees per month for each subscriber. Subscribers were grouped into residential customers and also commercial operators with specified ranges of numbers of accommodation rooms. It also provided for annual increases by reference to the Consumer Price Index ('CPI'). 20 The agreement was terminated on 30 June 2011. The parties have agreed that it should continue in place on the same terms and that any scheme approved by the Tribunal should be retroactive to 1 July 2011 being the day after the former agreement expired. To the extent that the new scheme calls for payments different from the current held over licence, the parties are agreed there should be a reckoning. The Tribunal rejects the proposition that this process of rolling over somehow shows PPCA was content with the current arrangement. 21 The current arrangement does not licence Foxtel to use PPCA's sound recordings for the broadcast of music videos on Foxtel's dedicated music video channels or its audio only channels, features which, as will be seen, are reproduced in PPCA's proposed scheme. 22 Significantly, by cl 4.1 the right given to Foxtel is a right to 'broadcast'. There was a debate between the parties as to whether this gave Foxtel any right to use PPCA's sound recordings in television programming communicated to subscribers via the internet or over a mobile telecommunications network. Contrary to the submissions of PPCA, the Tribunal does not accept that such a right was not, in substance, included under the 2004 agreement. The path to this conclusion is, perhaps, not so short. There are two limbs. The first concerns the meaning of 'broadcast'. 'Broadcast' is defined in the dictionary to the 2004 agreement this way: 'Broadcast means the Act described in section 85(1)(c) of the Copyright Act as defined in section 10(1) of that Act and includes any method or means of communications to the public delivered by a broadcasting service, including without limitation terrestrial or satellite broadcast, simulcast, or diffusion by means of cable or other material.' 23 The drafting of this is not ideal. The right referred to in s 85(1)(c) is the exclusive right 'to communicate the recording to the public' which, on its face, is broad enough to include the communication of a cinematographic film via the internet. 24 There is, however, an ambiguity about the drafting of the definition of the word 'broadcast' and it is in the words 'as defined in section 10(1) of that Act', for it is unclear whether it is referring to how the word 'broadcast' is defined in s 10(1) or some other word mentioned in s 85(1)(c). Section 85(1)(c) provides: '85 Nature of copyright in sound recordings (1) For the purposes of this Act, unless the contrary intention appears, copyright, in relation to a sound recording, is the exclusive right to do all or any of the following acts: … (c) to communicate the recording to the public; … 25 Only the word 'communicate' in s 85(1)(c) is a defined term and it is defined in s 10 this way: 'communicate means make available online or electronically transmit (whether over a path, or a combination of paths, provided by a material substance or otherwise) a work or other subject‑matter, including a performance or live performance within the meaning of this Act.' 26 On the other hand, s 10 defines 'broadcast' this way: 'broadcast means a communication to the public delivered by a broadcasting service within the meaning of the Broadcasting Services Act 1992. For the purposes of the application of this definition to a service provided under a satellite BSA licence, assume that there is no conditional access system that relates to the service. Note: A broadcasting service does not include the following: (a) a service (including a teletext service) that provides only data or only text (with or without associated images); or (b) a service that makes programs available on demand on a point‑to‑point basis, including a dial‑up service.' 27 The better view of the definition in the dictionary to the 2004 agreement is that the act being referred to in the definition is the act of communication and not the act of broadcast. This is because it is the more natural reading: 'as defined' does not comfortably connect with 'broadcast'; it is also because if it is not read that way, it is difficult to see what the words 'described in section 85(1)(c)' do. 28 PPCA submitted that what the agreement gave by cl 4.1 was a 'non-exclusive licence to Broadcast the PPCA Sound Recordings embodied in or synchronised with Programs Broadcast as part of the Subscription Television Services'. It then sought to argue that the concept of 'Subscription Television Services' was circumscribed by Schedule 4 of the agreement in a way which suggested that internet broadcasting was not intended. However, the agreement does not define 'Subscription Television Services' by reference to Schedule 4. Rather that term is defined in the Dictionary to mean: 'Subscription Television Services means the subscription television services Broadcast by the Licensee in the Territory to Residential Subscribers and Commercial Subscribers from time to time.' 29 This does not link the services to Schedule 4. Indeed, cl 14.6 shows that the relationship works the other way around. It provides that if Foxtel adds or deletes a channel then the list in Schedule 4 must be changed accordingly. Even assuming, therefore, that all of the channels in Schedule 4 are not 'internet channels', this would not constrain the breadth of the definition in the Dictionary. Accordingly, the 2004 agreement did give Foxtel the right to use PPCA sound recording in communications over the internet. The proposed new agreement does not, therefore, bring about a change in that regard. The Tribunal does accept, however, that the extent of internet broadcasting has increased very substantially since 2004 and that the right is now much more valuable. The Tribunal discusses this below. 30 The current arrangement has resulted in the payment of the following fees to PPCA from Foxtel and Austar: PPCA - Foxtel fees 2004 - 2012 Year Residential Rate Commercial 100 rate Total amount paid 2004 1.631 cents 10.767 cents 21.534 cents 44.373 cents [redacted] 2005 1.674 cents 11.046 cents 22.092 cents 45.523 cents [redacted] 2006 1.172 cents 11.355 cents 22.710 cents 46.797 cents [redacted] 2007 1.776 cents 11.725 cents 23.449 cents 48.320 cents [redacted] 2008 1.829 cents 12.072 cents 24.143 cents 48.286 cents [redacted] 2009 1.896 cents 12.516 cents 25.033 cents 50.065 cents [redacted] 2010 1.936 cents 12.780 cents 25.561 cents 51.121 cents [redacted] 2011 1.988 cents 13.120 cents 26.239 cents 52.478 cents [redacted] 2012 2.05 cents 13.527 cents 27.053 cents 54.107 cents [redacted]

[5]

PPCA's Proposed Scheme 31 Under the proposed licence scheme, a licence would be available to subscription television providers who package channels such as Foxtel: see cl 4 of the Further Amended Reference. It has a number of features that require noting: (i) the licence will commence on 1 July 2011 and run until 30 June 2016; (ii) it will impose in its final year, the financial year ending 30 June 2016, a fee of 0.24% of Foxtel's gross revenue, a term defined to include all of Foxtel's revenues derived from the operation of its subscription television service apart from sub-licencing arrangements (i.e., where Foxtel sells its service on a wholesale basis to another provider such as Telstra). The initial rate in 2011 will be 0.12% which will gradually increase to 0.24%; (iii) that fee will be phased in over the five years of the licence's nominal duration; (iv) if Foxtel wholesales its services to another provider then if the other provider holds a PPCA licence no additional fee will be payable but if it does not a fee on those revenues will be payable subject to a 33% uplift (in most cases); (v) the rights under the new licence, as under the old, include the right to use PPCA's sound recordings both by traditional broadcast but also via the internet and mobile telecommunications networks. These latter rights are referred to as the New Media Rights; (vi) upon its expiry, the licence rolls over for 12 month periods at the same rate as in the final year until it is finally terminated; and (vii) it is non-exclusive in the sense that copyright owners will retain the right to licence their work independently. 32 Foxtel's revenues are confidential to it as are its subscriber numbers, and it is not necessary to set them out. What can be said is that the rates now proposed by PPCA would increase the fees payable by Foxtel in the 2014 year by 846%. In the main the dispute between the parties was concerned with the ascertainment of an appropriate fee and a determination of whether it should be paid by reference to revenue or continue on a PSPM basis.

[10]

PPCA's first proposed methodology: the top down approach 45 PPCA called an economist, Mr Thorpe, to give evidence on its behalf. Mr Thorpe believed that the 2010 PPCA-FreeTV agreement could be used as the basis for determining a fee to be paid by Foxtel to PPCA. 46 He thought this could be done in two ways (initially he thought there were three ways but PPCA did not proceed with one of them). The first he described as his 'top-down approach'. Under this approach one would compare the amount of PPCA's fee to the size of FreeTV's revenues from which one could then deduce a percentage rate. Mr Thorpe's suggestion was that, subject to some adjustments, that percentage could then be applied in the case of Foxtel. The underlying idea was that the use by free to air broadcasters of PPCA's repertoire was likely to be the same as Foxtel's and hence, subject to any relevant adjustments, it should be possible to transpose the rates. 47 For this approach to be viable it would be necessary to be satisfied that the 2010 PPCA-FreeTV agreement was itself the product of circumstances which might reasonably be thought to be reflective of a situation free, so far as possible, from market imperfection. Obviously enough in the situation which obtains between television providers and collecting societies, the search for perfection is likely to be elusive and there needs to be a degree of practicality brought to bear. Nevertheless, there are aspects of the 2010 PPCA-FreeTV agreement which make it unsuitable, or at least quite unsafe, for use as a comparable transaction. 48 In order to understand the problem it is necessary to go back a little in time to the litigation in this Tribunal between PPCA and Fitness Australia Incorporated, the collective body for gyms and fitness centres. That litigation was CT 1 of 2006 in this Tribunal. At stake was the amount that gyms were to pay for use of PPCA's repertoire in fitness classes. After a protracted hearing the Tribunal decided to increase substantially the remuneration which PPCA had been receiving: Reference by Phonographic Performance Company of Australia Limited under section 154(1) of the Copyright Act 1968 (2010) 87 IPR 148; [2010] CopyT 1 ('the Gyms Case'). That decision was delivered on 17 May 2010. The effect of the decision was, in part, to increase the remuneration due to PPCA by 1,486%. 49 More or less in a parallel fashion PPCA also commenced proceedings in this Tribunal involving FreeTV to determine an appropriate licence fee for free to air broadcasters. These proceedings were known as CT 2 of 2007. Prior to that case being heard, but after it was substantially prepared for hearing, the Gyms Case was determined on 17 May 2010. FreeTV and PPCA then settled CT 2 of 2007 in July 2010. This may rather suggest that whatever settlement was agreed between FreeTV and PPCA was likely to have been influenced by the Tribunal's determination in the Gyms Case that PPCA was entitled to an increase constituting 1,486% of the current fee structure. 50 If matters had rested there, there may have been an issue to be debated about the role of litigation risk in the information contained within the fee structure of the 2010 PPCA-FreeTV agreement. However, matters did not rest there. Fitness Australia commenced judicial review proceedings in the Federal Court, the Full Court of which, on 13 December 2010, set aside the Tribunal's decision because it had denied Fitness Australia procedural fairness: Fitness Australia Ltd v Copyright Tribunal [2010] FCAFC 148. 51 Subsequently, the parties to the Gyms Case settled it on the basis of an agreement which resulted in a 59% increase in PPCA's fees. Just why there was such a major change between the negotiated result and the Tribunal's conclusion cannot usefully be analysed if only because it involves the negotiating postures of two parties. It may reflect a different approach to value; it may equally represent a decision to bring to an end an episode of expensive litigation. 52 In any event, what is clear to the Tribunal is that the 2010 PPCA-FreeTV agreement was negotiated under the shadow of the Tribunal's decision substantially to increase PPCA's fees in the Gyms Case and that decision was later set aside and substituted by a much more modest agreement. 53 On its face this tends to suggest that there may be reason to doubt the reliability of the 2010 PPCA-FreeTV agreement as a measure of the correct value of PPCA's rights, in that there is a substantial risk that the fee values it discloses may be too high. 54 On balance, the Tribunal is inclined to accept the force of that argument, and to do so notwithstanding PPCA's observation that although FreeTV subsequently had the opportunity to terminate the agreement, it has not done so. The point here was that this was capable of suggesting that the values inherent in the agreement were sound, because if they were not, FreeTV would have terminated the arrangement. 55 There are, however, other possible explanations for FreeTV's position. Each of the 57 constituent members who signed the agreement may have conflicting views; terminating would mean, at the very least, further complex negotiations with PPCA and quite possibly further litigation in this Tribunal; it may be that FreeTV regards the whole episode as closed or, in a related sense, that costs may already have been passed through to the budgets of others. It is not possible to say which of these, if any, is the case or even to exclude the possibility of other explanations. 56 That uncertainty is sufficient to persuade the Tribunal that the 2010 PPCA-FreeTV is not safe to use as a comparable transaction. This has the consequence that whatever other virtues Mr Thorpe's 'top down' approach may have, the Tribunal cannot accept it since it is premised on the 2010 PPCA-FreeTV agreement.

(a) Changes to the nature of Foxtel's services 67 At the time the 2004 PPCA-Foxtel agreement was signed, Foxtel provided traditional broadcasting services by HFC cable or satellite via an STU. The purpose of the STU was to convert the signal coming from the cable or satellite into a signal suitable for reception by an analogue television. 68 After 2004 new technologies began to emerge to take advantage of the developing sophistication of television design. For example, it was only in 2004 that Foxtel began to convert its signal from analogue to digital, and it was only after 2004 that it began to supply high definition STUs to take advantage of that digital signal, to provide on-demand content or to provide for internet-delivered services. According to Foxtel's Chief Executive Officer, Mr Freudenstein, it was only from about 2006 that 'Foxtel began to invest in making its services available on a broader range of platforms'. Initially this was confined to Telstra mobile customers, but over time it has expanded so that Foxtel provides services to subscribers in their home and also on their mobile devices including on-demand. Foxtel's Foxtel Go, Foxtel Play and Presto services are examples of these developments. 69 Only in 2007 did Foxtel complete the transition to its digital signal and it was not until May 2008 that it introduced its high definition service. 70 According to the agreed statement of facts, Foxtel commenced offering the following subscription television services over the internet or mobile telecommunications networks on the dates indicated: (i) Mobile Foxtel by Telstra (from 2006 to date) which enables Telstra customers who pay a fee to view Foxtel content for limited amounts of time on their compatible mobile phones and on tablet devices; (ii) Foxtel Download (from 2009 to September 2012) which was a catch up television service made available to subscribers via the internet to PCs (but not Macs). The service allowed subscribers to download some programs from channels within their subscription package. The service was offered as a free additional service to subscribers but was discontinued in 2012; (iii) Foxtel on Xbox 360 (from 2010 to August 2013) which enabled Foxtel subscribers to view more than 30 channels of Foxtel programming delivered over the internet (rather than by cable or satellite transmission) via Microsoft's game console, "Xbox 360". Users could access live Foxtel channels and also on-demand content (including on a pay-per-view basis) through the Xbox 360. This service has since been replaced by "Foxtel Play", which is available through Xbox 360 consoles and other devices as described below; (iv) Foxtel Store + Box Office (previously known as Foxtel on Demand) via the internet (from 2010 to date) which enables Foxtel subscribers to view television shows and movie programming on demand on compatible internet-enabled set top boxes. Some on-demand content, such as new release movies, is only accessible by paying an additional fee per movie (or program). The content is purchased from an online store and delivered to a subscriber's compatible set top box via the internet. Foxtel on Demand for iQ (from 2007) also provides access to a limited range of on-demand content for cable and satellite customers; (v) Foxtel on Telstra T-Box (from 2011 to date) which enables Telstra customers with an internet-connected Telstra T-Box unit to subscribe to 30 channels of live Foxtel programming delivered over broadband internet and to access Foxtel catch up television content on demand; (vi) Foxtel on Internet TV (from July 2012 to August 2013) which enabled users to subscribe on a monthly basis to access live Foxtel programming on Samsung Smart TVs, delivered via the internet and without the need for a set top box. This service has since been replaced by "Foxtel Play" which is available on Samsung Smart TVs and is described further below; (vii) Foxtel Go (from November 2012 to date) which allows Foxtel subscribers to access live Foxtel channels and catch up television on demand delivered via the internet to compatible smartphones, tablets (including the iPad), PCs and Mac computers. The channels that are available through Foxtel Go are linked to the subscriber's subscription package; (viii) Foxtel Play (from August 2013 to date) which enables customers to subscribe to receive live Foxtel channels by package and access to on-demand content on a month-by-month basis (i.e. without a long term contract). The programming is delivered by the internet to compatible smartphones, Xbox 360, tablets, PCs and Mac computers and Smart TVs. As at September 2013, 48 Foxtel channels were available through Foxtel Play on a full subscription; (ix) Foxtel Presto (from March 2014 to date) which enables subscribers to watch first-run and library movies streamed to their internet-connected devices. Customers can download the Presto App from various app stores, and the service is also available via Google Chromecast; and (x) Foxtel Anytime (previously known as Foxtel Catch Up) (from around 2012 to date) which enables customers to access selected TV episodes and movies on demand through their internet-connected Foxtel iQ set top box, or through the Foxtel Go device. Content is available to subscribers who have subscribed to the relevant channel. 71 Mr Freudenstein gave evidence that while Foxtel's cable and satellite delivery of channels to subscribers remains the cornerstone of its business, it has been forced to enhance its services to meet the very competitive environment in which Foxtel now finds itself. That environment includes: illegal downloading of content by the public; licensed subscription services such as Fetch TV, Telstra T-Box, Quickflix and sporting bodies offering coverage of events by means of apps on mobiles (to this might be added Netflix); transactional services such as Apple's iTunes store, Google Play, Microsoft's movie rental service and Sony's video download service; and free to air broadcasters with multichannel capacity. 72 The Tribunal infers that the competitive environment has developed since 2004 to include the provision of large quantities of content over the internet, much of it on demand. Plainly, Foxtel's business has had to evolve to counter these competitive threats whilst taking advantage of its own competitive strengths. A significant advantage that Foxtel has is access to large quantities of content and a substantial subscriber base. 73 The provision of Foxtel's considerable content over a proliferating array of on-line services counters its on-line competitors using that content. At the same time, Foxtel has sought to increase its subscriber base by making its offering more attractive. This it has done, in part, by substantially increasing the number of its channels and their content. By way of comparison, in 2004 Foxtel had 100 channels (excluding the audio only channels). In 2009 it introduced 30 channels which were viewable on mobile devices and it also launched the Next Generation Services which included 15 new standard definition channels and 13 high definition channels. As of September 2014, excluding audio channels, there were 148 channels of real content, although 28 of these were simulcasts of both standard and high definition offerings. In terms of content, the Tribunal proposes not to count twice channels broadcast in both SD and HD, although they obviously have value. The Tribunal will proceed, however, on the basis that since the execution of the 2004 PPCA-Foxtel agreement Foxtel has increased its substantive channel offerings by around 20%. At the forefront of these competitive endeavours has been the acquisition of live domestic sports, especially AFL, high-end drama and feature films. 74 There was some debate before the Tribunal about the extent to which Fox Sports, which packages the sports offerings, actually used PPCA's repertoire. There is no doubt that Fox Sports proceeds on the basis that Foxtel, as a broadcaster, holds a PPCA licence. But Mr Neill, the head of Production and Programming, FOX FOOTY at Fox Sports, gave evidence about the circumstances in which the various Fox Sports channels used commercial sound recordings. His evidence was to the effect that in relation to music which was used to identify channels, in promotions, as theme music for particular programs or as background music, it frequently used specifically commissioned music from a particular composer. For example the theme music which runs at the start of every AFL game on the FOX FOOTY channel was composed, on specific commission, by a United Kingdom composer, Mr Mark Willett. The reasons for taking this course related to the developing of a particular style for what was being broadcast. As noted earlier, PPCA's repertoire does not include commissioned music. 75 Fox Sports also uses a lot of production music (i.e. music purchased in entire libraries), which is also not part of PPCA's repertoire. For example, Foxtel purchased one such library from a third party containing some 80,000 tracks which it was then at full liberty to use. Often these pieces are only three or four seconds long and relate to some aspect of the broadcast where emphasis or some other effect is desired. 76 According to Mr Neil, a recent example of a FOX FOOTY brand promotion that used production music is the 2014 FOX FOOTY 'A Better Place' promotion featuring Eddie McGuire walking Sandy Roberts through heaven that aired from around February 2014. For this promotion, FOX FOOTY used a production music track in the background that had an ethereal quality to it but which did not detract from the conversation between the two men in the promotion explaining the key features of FOX FOOTY or the visual images used, such as the pearly gates in the shape of the FOX FOOTY logo. 77 It is easy to see that sporting formats might well generate diverse circumstances in which such barely noticeable, indeed barely musical, offerings might be used. 78 Mr Neill's evidence was also that Fox Sports' use of commercial sound recordings was circumscribed by some commercial considerations. The principal one of these was the arrangement that Fox Sports had with the Australian Recording Industry Association ('ARIA') in relation to its repertoire. Under that arrangement Fox Sports is not permitted to use ARIA's repertoire in themes, promotions or advertisements. This tends to limit Fox Sports' use of commercial recordings. Indeed, often enough when Fox Sports wishes to use well-known contemporary music it deals directly with the label which owns the music. This has tended to mean that Fox Sports' use of commercial music is circumscribed. Mr Neill did not deny it was used; it could be used as background music and sometimes it was also used as a result of pass through from the international channels. 79 The bottom line of this evidence was the proposition that Fox Sports was perhaps not such a heavy user of sound recordings in PPCA's repertoire. PPCA sought to contradict this position through evidence given by its General Manager, Ms Small. She had arranged for a sample of Foxtel's programming to be made. This sample was taken on a Saturday between 6pm and 12am in July 2013. Ms Small and, indeed, PPCA did not submit that the sample provided accurate statistical information and they frankly acknowledged its limitations. It was only advanced to demonstrate that Foxtel's use of its repertoire was not trivial. 80 This evidence suggested that over the sample period PPCA's sound recordings had been used in a way which, if turned into an annual rate, would amount to the use of 353,028 PPCA sound recordings across the Foxtel sports channels (looking solely at the four Fox Sports channels, this figure was 144,540). Mr Neill downplayed this by reference to various matters mostly related to the sample period being on a Saturday night in the middle of the football season. It is not necessary to deal with the detail of this. The Tribunal accepts that the use of commercial sound recordings on Fox Sports is likely to be somewhat less than it is on the other channels. Nevertheless, the Tribunal remains of the view that the use is a substantial one. It would be pointless and impossible to put a number on this. 81 Returning then to Foxtel's increased use of sport and high end drama over the period between 2004 and the present it follows that Foxtel has, over that period, used a greater range of content which has directly increased the use by it of PPCA's repertoire. Although it is impossible to quantify this increase with any precision, the Tribunal is of the opinion that the increase is a substantial one. PPCA's submission is that its blanket licence gives Foxtel the freedom to decide when and how to use sound recordings in its sporting broadcasts. 82 One then has the situation that Foxtel has responded to competitive pressures by increasing the number of platforms from which its services are provided and, at the same time, changed its content in a way which has involved a substantial increase in the use of PPCA's repertoire.

(b) Growth in average revenue per user 83 It is possible to calculate Foxtel's average revenue per user ('ARPU') on a monthly basis. In 2004 this was [redacted] per month. In 2014 it was [redacted] per month, which is an increase of around [redacted]. That fact needs to be seen in the context of inflation over the same 10 year period, but also Foxtel's substantially increased use of PPCA's repertoire. Even without inflation, it is clear to the Tribunal that Foxtel is using PPCA's repertoire more often than it did in 2004 and that this is likely to be a factor in Foxtel making more money since 2004. It would be quite wrong, of course, to think that all of this relates to PPCA's material; other rights holders are involved too, indeed, other rights owners whose rights are probably much more valuable. 84 Foxtel submitted that historical increases in ARPU did not justify the conclusion that PPCA was entitled to an increased share of revenue. This was because, first, in principle Foxtel's capacity to pay more is an irrelevant consideration. Secondly, Foxtel had in fact just recently reduced its subscriber rates which will impact on its ARPU. Thirdly, the ARPU referred to above was only calculated on Foxtel's cable and satellite subscribers, which mattered because its IPTV services are offered at a lower price and will have a lower ARPU. 85 The Tribunal accepts that generally speaking Foxtel's capacity to pay is not relevant to the fixing of remuneration, but it does not accept that this is what PPCA deploys the ARPU to do. It is not being used to measure how much Foxtel can pay; it is being used as a proxy to measure how valuable Foxtel's use of its repertoire is. The Tribunal therefore accepts the relevance of ARPU to its deliberations. On the other hand, the Tribunal does accept that Foxtel's recent reduction in subscriber rates is likely to diminish Foxtel's ARPU in the near to middle future and that ARPU is likely to be much less in the case of its IPTV services (although the Tribunal observes that Foxtel's costs in relation to those platforms are also likely to be less). 86 The Tribunal also accepts that Foxtel's audience share has been gradually increasing so that by December 2013 it was the number three broadcaster in Australia, behind Seven and Nine (and ahead of Ten, ABC and SBS).

(d) Increased delivery via the internet 89 We have already set out above the greatly increased range of on-line services which are now offered by Foxtel. There are two other aspects of that phenomenon worth noting. First, as we later explain, delivery by Foxtel of recordings 'made in' the United States (a complex concept we deal with in more detail below) via the internet requires PPCA's permission whereas their broadcast by cable or satellite does not. The effect of consumers moving to on-line services is to change in a material way the degree to which Foxtel requires PPCA's permission. There is a change in the mix and it is a change which favours PPCA. The second matter worth noting is that this is likely to be a growth area. Many more houses have an ADSL (or other internet) connection than have a traditional subscription television service. The future capacity to expand the provision of services to persons having ADSL (or some equivalent) is an obvious benefit of pursuing the provision of on-line services. The Tribunal does not foresee this effect diminishing. 90 Further, the evidence before the Tribunal confirmed that Foxtel's online services constituted a growing and increasingly important part of its services. For example, Mr Freudenstein gave evidence that a good proportion of Foxtel's subscriber growth in 2013 and 2014 came from its internet protocol products and that this was an important part of its strategy. Mr Crowley, Foxtel's Director of Programming, gave evidence that these kinds of services were an important part of Foxtel's strategy of competing with free to air broadcasters. An expert in the industry, Mr Brownlow, gave similar evidence about the expansion since 2010 of Foxtel's internet services and the increasing number of options in this area including those arising from smartphones and tablets. 91 These circumstances persuade the Tribunal that it would be quite unsound to rely upon the 2004 PPCA-Foxtel agreement to convey relevantly comparable information about the appropriate pricing structure in 2011. Because Dr Pleatsikas' methodology assumes that this agreement is a relevantly comparable transaction, the Tribunal is unable to accept his conclusions.

(a) The extent of Foxtel's need for PPCA blanket licence 95 It is obvious that Foxtel uses a great deal of PPCA's repertoire. The Tribunal does not think that it is useful or even practical to try and guess how numerically extensive that use would be. But reflection on what Foxtel does, how prevalent music is on television and PPCA's representation of the major music studios must mean that Foxtel's use is very extensive. The Tribunal proposes to proceed on the basis that PPCA should be remunerated under any scheme when Foxtel, as a matter of law, needs PPCA's permission under the blanket licence, to avoid infringement. It is not, on the other hand, just, equitable or reasonable that it should be remunerated in respect of those circumstances where its permission is not needed even if, practically, these cannot be usefully identified. 96 There are, in fact, many circumstances in which Foxtel does not require PPCA's permission to use a sound recording. Some examples of this have already been provided above in the case of Fox Sports. Where Foxtel commissions the individual composition of a piece of music for use on its presentations, it derives all the rights it needs from those whom it commissions to write and perform the music. In a real sense, the music is its and it has no need of PPCA's permission to use it. So too, Fox Sports' purchase of a library of stock music for use in particular circumstances for emphasis is an example of 'production' music. Foxtel submitted that production music and commissioned music could, in many instances, be used as valuable alternatives to PPCA's repertoire. Obviously, a degree of substitutability may be possible but the Tribunal does not accept that it is plausible that this is truly so to any significant extent. There are, in fact, six categories of sound recording for which Foxtel does not require PPCA's licence: (i) commissioned recordings; (ii) production recordings; (iii) 'cleared at source' recordings; (iv) 'unprotected' recordings; (v) Foxtel's music video channels; and (vi) Foxtel's audio-only channels. 97 Categories (i) and (ii) have already been explained. As to (iii), a sound recording synchronised into a film or program will be cleared at source where the entity producing the film or television program has acquired sufficient rights itself to grant to persons purchasing the film or program the right to broadcast the sound recording. Obviously enough, selling material with such rights attached to it is likely to be an advantage in the market place. The Tribunal is satisfied that some of the material broadcast by Foxtel is cleared at source in this sense. Knowing the extent of this material is a different question altogether. It appears that material produced by Foxtel which may be distributed is cleared at source. Beyond that, it is not really possible to go. The parties spilt a great deal of ink on this issue but the extent of this practice is essentially unknowable. Foxtel has no particular need to identify what proportion of its musical content is cleared at source as it holds blanket licences from APRA and PPCA. The Tribunal is satisfied that some of Foxtel's programming is cleared at source and that the quantity involved is likely not to be trivial. Further than that it is not possible meaningfully to go. 98 For completeness it should be noted that the Tribunal rejects the evidence of Mr Crowley, who was called by Foxtel in relation to this issue. His evidence was that after the actors' strike in 2007/2008 in the United States, most studios had moved to clearing material at source. This evidence did not appear in his statement, was unexpectedly elicited orally in reply, was entirely anecdotal in character, was, if true, central to this part of Foxtel's case and yet was not mentioned by any other witness. 99 As to (iv), the topic of 'unprotected recordings' is a somewhat technical aspect of the way in which Australia's copyright laws interact with those of the United States (and also China). The detail is unhelpful. The substance is that in Australia copyright in a US sound recording is not infringed by broadcast (where the recording is said to be 'unprotected'), but it is infringed by communication over the internet (where it is said to be 'protected'). The significance of the issue is that Foxtel does not need PPCA's permission to communicate US sound recordings via satellite or cable but it does need permission to do so over the internet or via a mobile telecommunication network. PPCA's point was that as Foxtel's internet offerings expanded so too would the uses of US sound recordings in respect of which PPCA was entitled to remuneration. 100 The parties devoted considerable energies to trying to estimate how much of Foxtel's use of PPCA's repertoire was unprotected. There was no clear evidence before the Tribunal of just how much of PPCA's repertoire used by Foxtel was protected, although Ms Small thought that 70% of PPCA's repertoire was itself protected. Accepting that to be so, it is not quite the same question as what proportion of Foxtel's use of PPCA's recordings is protected. The Soundmouse sample obtained by PPCA was accepted not to have statistical utility and was of use only to show that Foxtel's use of PPCA's sound recordings was substantial. The debate about the use of unprotected recordings is therefore about determining what the share of 'substantial' an otherwise unknowable quantity is to be. This appears to the Tribunal to be a pointless endeavour. All that can be said is this: Foxtel's use of PPCA's repertoire is substantial; amongst that substantial use are sound recordings broadcast by cable or satellite which do not require PPCA's permission. It is likely that quite a lot of the sound recordings fall into this category. 101 There was an additional nuance to this argument. The extra-territorial operation of the Act was engaged with respect to 'makers' who were citizens of, or residents or bodies corporate of a 'Schedule 3 country': reg 7(2)(a) of the Copyright (International Protection) Regulations 1969 (Cth). PPCA argued that where a recording of a 'live performance' was made then its maker, by s 22(3A) of the Act, would be the owner of the record at the time the recording was made but also 'the performers who performed the performance'. This is certainly what s 22(3A) provides: '22. Provisions relating to the making of a work or other subject‑matter … (3A) For the purposes of this Act, the makers of a sound recording of a live performance are: (a) the person or persons who, at the time of the recording, own the record on which the recording is made; and (b) the performer or performers who performed in the performance (other than a performer who is already covered by paragraph (a)). Note: A performer might be liable to pay compensation under section 116AAA to a person who owns the record on which the recording is made.' 102 The next step was PPCA's observation that 'performer' was defined in s 22(7) to mean 'each person who contributed to the sounds of the performance' and includes explicitly, in certain instances, the conductor even though he makes no, or hopefully little, sound: s 22(7). Thus, at least where a live performance was involved, there was a range of people who could be its 'maker' and these included the record owner and all of the performers. If any of these people was a citizen of or resident in or a body corporate of a Schedule 3 country, then the broadcast right would be included. None of this is especially controversial. However, the last step in PPCA's argument was. It pointed to the definition of live performance in s 22(7) to make the submission that there did not need to be an audience and that, in effect, every studio recording was a live recording. The relevant part of s 22(7) is as follows: '22(7) In this section: live performance means: (a) a performance (including an improvisation) of a dramatic work, or part of such a work, including such a performance given with the use of puppets; or (b) a performance (including an improvisation) of a musical work or part of such a work; or (c) the reading, recitation or delivery of a literary work, or part of such a work, or the recitation or delivery of an improvised literary work; or (d) a performance of a dance; or (e) a performance of a circus act or a variety act or any similar presentation or show; or (f) a performance of an expression of folklore; being a live performance, whether in the presence of an audience or otherwise. performer in a live performance: (a) means each person who contributed to the sounds of the performance; and (b) if the performance includes a performance of a musical work - includes the conductor. sound recording of a live performance means a sound recording, made at the time of the live performance, consisting of, or including, the sounds of the performance.' 103 As Foxtel pointed out, if this be correct it appears to involve a contention that a recording done in a recording studio will be a protected recording so long as one of the performers was a citizen or resident of a Schedule 3 country. Further, it would also be protected, as PPCA pointed out, if the track was recorded or mixed in a Schedule 3 country. PPCA's argument (and Foxtel's concern) was that this cast the net of protected recordings very wide. 104 The Tribunal accepts the argument in relation to track production and mixing. However, it does not accept that a studio recording is a live performance within the meaning of s 22(7). Such a reading would be inconsistent with s 22(3) which provides: '22(3) For the purposes of this Act: (a) a sound recording, other than a sound recording of a live performance, shall be deemed to have been made at the time when the first record embodying the recording was produced; and (b) the maker of the sound recording is the person who owned that record at that time.' 105 This appears to contemplate the possibility of a sound recording other than a sound recording of a live performance. If, as PPCA submits, every recording of a performance is a sound recording of a live performance, then the exception consumes the rule. This rather suggests that the definition of 'live performance' is directed at complete 'performances' rather than recording studios involving any degree of mixing. In any event, there is also force in Foxtel's submission that s 22(3B), which makes the employer of a performer the maker for the purposes of s 22, is likely to reduce the potency of the argument even if it were correct. The upshot is that the Tribunal does not regard this argument as impacting upon the conclusion it has already reached. Even if the Tribunal was minded to accept it, however, it accepts that the effect of s 22(3B) would be to reduce its impact on the overall analysis to a level which has no material impact on the manner in which the Tribunal proposes to approach the problem. 106 As to (v) and (vi), Foxtel obtains the right to broadcast its video and audio channels under separate agreements and PPCA's blanket licence is not needed for them. 107 What is to be drawn from all of this? Only this: Foxtel is a substantial user of PPCA's repertoire; and that it generally requires PPCA's permission under a blanket licence but not infrequently that this is not so.

(d) Agreements in the industry 110 The Tribunal has already dealt with the agreements put forward by the parties involving Foxtel, FreeTV, PPCA and APRA. None of these has proved to be useful to derive a value for what PPCA will now provide Foxtel, but they do provide a range. Use of the 2004 PPCA-Foxtel agreement is likely to lead to an undervaluation of PPCA's rights if Dr Pleatsikas' approach is used. On the other hand, for the reasons given earlier the 2010 PPCA-FreeTV agreement is likely to overvalue them if Mr Thorpe's relativity approach is used. This tends to suggest that an appropriate valuation is likely to be higher than the former might suggest and lower than the latter might. 111 Foxtel also drew attention to a number of other agreements or determinations to which it was party: (i) Foxtel's music video and audio channel licences. The licences under which it has the right to broadcast or communicate the sound recordings in music videos and its audio channels. The Tribunal was provided with the pricing for these arrangements which, as we have already observed, are not covered by PPCA's blanket licence. It is not necessary to set them out and they are of a commercially confidential nature. It is enough to say that they are significant. The Tribunal does not, however, believe that they are of much use for present purposes. The fee paid for the right to transmit the music videos includes not only the right to use the music but also the video footage. This makes it very difficult to determine anything about the value of those sound recordings. (ii) Foxtel's production music licence. Foxtel pays a modest sum to Audio Networks Australia Pty Limited for the synchronisation of production music. The Tribunal does not think that this throws any light on the issue at hand. (iii) Tribunal determinations involving Screenrights. Foxtel retransmits all 16 free to air channels on its own platform. The terms of the BSA require Foxtel to pay equitable remuneration to the collecting society for the interests of those who produce such programs, Audio-Visual Copyright Society Ltd, which is also known as 'Screenrights'. There are no agreements between Screenrights and Foxtel. Instead, there are three determinations by this Tribunal: Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd (No 4) [2006] ACopyT 2 which determined a rate of 22.5 cents PSPM for retransmission of the five free to air channels; Audio-Visual Copyright Society Limited v Foxtel Management Pty Limited [2012] ACopyT 1 which determined a PSPM rate of 10 cents for retransmission of the new multichannels on free to air TV (i.e., Seven HD, One HD, One SD etc); and Audio-Visual Copyright Society Limited v Foxtel Management Pty Limited (No 2) [2012] ACopyT 2 which determined what was to occur in respect of Foxtel subscribers who did not have access to all nine channels. 112 The Tribunal does not think that there is much utility in these determinations for present purposes because of the difficulty in disaggregating the sound from the video.

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Revenue or PSPM? 125 PPCA has submitted that the fee should no longer be calculated on a PSPM basis, but instead should be made a function of the revenues derived from Foxtel's subscription television business. The Tribunal has in the past adopted both approaches: cf. Re WEA Records Pty Ltd (1983) 78 FLR 268 at 314 (revenue basis); Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd (No 4) (2006) 68 IPR 367 [519] (rate per subscriber). 126 The Tribunal, in explaining why a PSPM basis no longer remains appropriate in the Australian subscription television industry, begins by recalling that our task is 'to bring a licence scheme into operation' that contains a reasonable and equitable pricing structure for future payments (see s 154(1) of the Act). There are a number of reasons why we are of the view that a revenue rather than a PSPM basis for payments is more reasonable and equitable. Fundamentally, the Tribunal does not accept that a PSPM basis remains appropriate in the Australian subscription television industry. There are a number of reasons for this. First, the revenues raised by Foxtel from its subscribers no longer consist solely of the subscriptions paid by them. Foxtel's pay-per-view services involve the raising of revenues from the subscriber base which find no reflection in the subscription rates paid by its subscribers. This is true, not only in relation to some sporting events, but also in relation to television programming and movies, through Foxtel Store + Box Office. Secondly, subscribers now have a choice of which level of programming they wish to acquire, i.e., a simple 'Entertainment' package through to a 'Platinum' package. Foxtel submitted that this was to PPCA's benefit because the current arrangement effectively treated all customers as if they were Platinum subscribers. It is not necessarily clear to the Tribunal that this submission can be correct. Just because the licence covers all of Foxtel's offerings does not entail that what is involved is Platinum subscriptions by all subscribers. But, in any event, the submission does not meet the gravamen of PPCA's argument that where subscribers are paying quite different rates it makes little sense to settle upon a remuneration structure which reflects the number of subscribers rather than the amount that they are paying. Thirdly, the PSPM model leaves out of account other revenue streams which Foxtel generates by using, inter alia, PPCA's repertoire but for which it currently pays nothing. These include Foxtel's expanded advertising revenues and ad hoc arrangements such as that reached with Virgin. Fourthly, although Foxtel is principally a subscription television provider, it is clear that the revenue complexion of its business has been changing and may continue to change. A PSPM basis would tie Foxtel's licence payments to PPCA to a subscriber number in the face of other business and revenue changes. A revenue basis for licence payments is far more likely to take account of the greater value that Foxtel can derive over time from its PPCA licence. 127 Against that it may be said that revenue streams such as advertising and the Virgin arrangement are comparatively modest which is true. Even so, it is difficult to see why PPCA is to be deprived of its entitlement to reward in relation to these uses. Of course, one could try and compensate for that lost stream by increasing the PSPM rate still further to make up for those users. But there is no science about that and it is very far from obvious that a static regime of that kind would remain valid in such a dynamic environment. 128 On the other hand, there is a flipside to this argument. Not all of Foxtel's revenue streams involve the use of sound recordings. Foxtel gave the example of Foxtel Broadband and asked rhetorically why it should pay any share of its revenue to PPCA in respect of that. However, the definition of Gross Revenue given in PPCA's proposed scheme only picks up the revenue related to its subscription television business, and it does not seem to the Tribunal that the revenue from Foxtel Broadband answers that description. 129 Foxtel also submitted that the United Kingdom Copyright Tribunal had rejected a fee based on revenue in the case of BSkyB: British Sky Broadcasting Ltd and Another v The Performing Right Society Ltd [1998] RPC 467. There the Tribunal said: ● "In our judgment the business of Sky remains in commercial terms a high risk one. It plans to take advantage of the opportunities offered by the large number of available channels when digital television commences …Subscribers will have to buy new and more expensive equipment which Sky consider they will have to subsidise. The investment in transmission and reception equipment and programming necessary to participate in the revolution, will be enormous, but the revenues and profits from it will be uncertain (at 4.19); ● Although Sky carries advertising, it now generates its revenues principally from charging the users of its service (at 4.22); ● The Tribunal and its predecessor have in the past rejected as unreasonable a royalty based on a percentage of revenue formula (at 6.4); ● the role that music plays is typical of other television services: one creative ingredient amongst many of greater or lesser importance (at 6.18); ● We are in no doubt that it would be unreasonable on the facts of the present case to adopt a percentage of revenue basis. We find that in the case of Sky, it would be particularly unreasonable to allow the PRS a direct percentage share in their revenues…we do not think that the PRS are co-adventurers with Sky in their broadcasting business. A simple example illustrates why it is unfair. Suppose Sky (as they have) introduce "pay-per-view" boxing matches. In the first year this venture brings in an extra £10 million in revenue. Commercially that increase is due to innovative marketing techniques and heavy and high risk investment in securing exclusive rights to the match. Why should PRS's royalty for that year increase by a percentage of that ten million, when it owes its origin principally to risk taking by Sky? To put it another way, why should they be partners in sharing the revenues when they were not partners in sharing the costs and risks? The special circumstances of Sky's business mean that a revenue basis is inappropriate (at 6.19)." 130 Those remarks may well have been apt in the United Kingdom market at that time. Foxtel's business is now substantial. Whilst it faces a highly competitive environment, it is no kind of start up. 131 The example given by the Tribunal of a pay-per-view boxing match is apparently powerful because, at least as a matter of impression, it seems unlikely that there would be much in the way of commercial sound recordings involved; an impression rather supported we think by the evidence of Mr Neill. There does seem to be something unfair about giving PPCA a cut of such revenue. On the other hand, whilst Foxtel offers such live sporting events on a pay-per-view basis through MainEvent, it offers a great deal of movie and TV material on a pay-per-view basis as well. This was not a matter with which the UK Tribunal was confronted. 132 Foxtel submitted that it was unfair for a collecting society to share in the benefits of a broadcaster's entrepreneurial activities without also sharing the risks. This argument would find greater purchase if the proposed fee was levied on profits, but this is not its nature. In truth, the PSPM fee structure is itself a form of revenue-based model, that is to say, the fee is calculated on the revenues raised from subscribers. To broaden the nature of that revenue fee so that other forms of revenue related to Foxtel's subscription television business are captured, is not to change the extent to which PPCA shares in the risks of Foxtel's business. PPCA is not, under either scenario, exposed to the losses or the profits which Foxtel makes. In fact, not to widen the revenue captured beyond that raised from subscribers would be to permit Foxtel to generate revenue by using PPCA's sound recordings without compensation. In the Tribunal's view, it is that which would be unfair. 133 Foxtel submits that a revenue model should not be imposed retrospectively because it will not be able to pass the cost on in respect of the years which have passed (which will be nearly the whole agreement). PPCA submits that the parties in their pleadings agreed that the Tribunal's decision would be retroactive to 1 July 2011. This is indeed what paragraph 17 of Foxtel's Statement of Points in Answer says. However, contrary to PPCA's submission, Foxtel is not arguing that the Tribunal's decision should not be retroactive to that date; rather, it is advancing an argument as to why the Tribunal should not adopt a revenue basis for imposing the fee. It says that it would be unfair to take a portion of its revenues which were premised upon given costs when it had no opportunity in the relevant past years to pass on this cost. This argument is superficially attractive. However, whatever the Tribunal does by way of remuneration which represents an increase over and beyond the rate paid under the 2004 agreement is going to be an additional expense for those years. Assuming in Foxtel's favour that it has made no provision in respect of the Tribunal's decision, the difficulty Foxtel identifies just as much arises in the case of a fee which is imposed on a PSPM basis as it does in relation to a fee calculated by reference to revenue. The Tribunal would accept that making its decision retroactive to 1 July 2011 does generate the problem which Foxtel points to, but that is the consequence of its own agreement and is an unrelated phenomenon to the imposition of a revenue-based fee. 134 Foxtel also submitted, in a related argument, that it paid for most of its material on a PSPM basis. The introduction of a revenue-based fee would create an inconsistency between these structures. The Tribunal is unclear about the extent of this effect but does not think that it provides a sound basis for not moving to a revenue model. Foxtel also submitted that a revenue-based fee was less efficient than a PSPM fee because it operated as a 'tax at the margin'. The Tribunal accepts that efficiency is a relevant consideration for the purposes of fixing remuneration. However, it is not the only one. In this case, the Tribunal is not persuaded that efficiency should trump the other considerations bearing on this issue. 135 The Tribunal therefore accepts that there should be a shift to a revenue model. The Tribunal's view is that the revenues upon which the fee will be charged should not include those coming from pay-per-view sporting events. 136 The Tribunal's conclusion then is that, as set out briefly above, the following should occur in relation to price: (a) the total remuneration paid by Foxtel to PPCA under the current licence for the financial year ending 30 June 2011 is to be calculated; (b) that figure is to have added to it 150%; and (c) it is then to be divided by Foxtel's gross revenues for that year (calculated in accordance with the definition of Gross Revenue in the PPCA proposal) less revenues from pay-per-view sporting events. 137 Although applicable on 1 July 2012, the rate should be phased in in equal increases over the life of the referral. The rate is to be applied to Foxtel's revenues in the manner discussed.

Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd

At a glance

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Judgment (38 paragraphs)

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Legislation Cited (3)

Cases Cited (4)

Cited By (5)