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Mr. Bradley. The point there, sir, is that within our industry, as I have mentioned, there is a wide divergence of opinion on property. There are many members of our association, and many members of the industry who are not members of our association who are violently opposed to any copyright payment. There has been testimony, as I mentioned, to the effect that various people feel that there certainly should be no payment for local stations which can be received locally over the air.
Our suggestion is simply an effort to exclude those small systems which would encounter an unusual financial burden as a result of copyright payments; and pass a token recognition of the fact that there should be no payment for the local signals. And while you can't relate the dollars to the value of local signals, at least it is an effort to recognize that.
Mr. Wiggins. What part of the cable industry--if your answer can reflect it in percentage-would be exempt by the $25,000 gross receipt exemption?
Mr. BRADLEY. Slightly over 50 percent would be exempt.
Mr. Wiggins. Now, in that connection, I think it's well that we keep in mind that the royalty fee schedule is not a tax, which might be subject to policy reasons for granting preferred tax rates to socially or economically deprived units in furtherance of a governmental policy.
Rather, this is a statutory payment to the owner of the property.
The bill before us proposes a fee schedule commencing at one-half of 1 percent of the gross revenues up to $10,000, and graduated up to 219 percent. As you have indicated in your testimony, and as we all know, this represents about a 50-percent reduction from that originally considered by the Senate.
Can you enlighten me and the members of the committee what considerations entered into that judgment by the Senate, why was that reduced?
Mr. BRADLEY. There was a study prepared by someone named Mitchell, to the Senate, which indicated the economic impact of these dollars on the cable industry. I, to some degree, am speculating for a moment, since I was not there personally. But, in discussions which related to this point, there is this continual recognition that we should not be paying for local signals that are receivable over the air.
And that in paying this schedule we are paying an amount substantially in excess of the fee schedule for these signals that we might be legitimately required to pay for, if you exclude the local ones. If you accept that point, which we do, any payment is substantially higher than the numbers would indicate because we are paying for, in effect, all service,
Mr. WIGGINS. Well, would it be fair for me to conclude that the Senate listened to your argument that local signals should not be subject to royalty payments, and perhaps your argument that all signals should be exempt, and simply made an accommodation to these arguments by reducing by 50 percent the fee schedule proposed in the original House bill and thus reached a compromise?
Mr. BRADLEY. Perhaps so, I really don't know. I do know that in our experience it would be extremely difficult to relate a dollar amount to be paid to a value to be established in any scientific fashion for the signals, or the contents of the signals which are being carried. I think the decision, admittedly without total scientific foundation, was arrived at from the basis of representations by various persons, that the industry could presumably pay this amount and that the copyright owners would be adequately compensated in receiving this amount of money.
Mr. Wiggins. I have been told that primary transmitters who have customarily paid copyright royalties, compute that royalty payment as a cost of doing business, and that the cost as a percent of total cost is considerably higher than the percentage figure here for cable. Numbers as high as 75 percent and more have been represented to me as being equivalent to the cost of doing business by primary transmitters of copyrighted material.
You may disagree with those numbers, but do you disagree with the proposition that the percentages stated in this bill are significantly less than those paid by primary transmitters of copyrighted material?
Mr. BRADLEY. I'm not familar with it, sir. But, accepting your statement, I presume that they are less in absolute value. However, the primary transmitter has the opportunity to sell advertising, which increases his revenue, which in turn gives the copyright owner a chance to get higher dollar returns for the value of his copyrighted material.
We don't have that opportunity, we don't sell advertising. While we do collect from the customers, it is a relatively inflexible type of revenue.
Mr. Wiggins. Then that is your justification for paying a lesser return, because you are denied revenue opportunity for sale of advertising
Mr. BRADLEY. Sir, as I mentioned before, and you will hear additional testimony from others who follow me, I am sure, to the effect that we should not be paying any copyright; and in paying on this schedule we are paying as much as we can be reasonably expected to pay; and in particular, in view of the fact that I know of no way of scientifically developing what the value should be. It is a political, arbitrary decision that must be made, and it seems to us to be totally adequate.
Mr. Wiggins. I understand your point.
Now, I want to move on to the tribunal. Your testimony indicated opposition to the periodic review by the tribunal because it would be an unstabling factor in the financing of cable operations.
There are a great many corporate, regulated entities in this country which are subject to review by rate-making authorities. Is there any difference, conceptually, between a tribunal subjecting your royalty payments to review, and therefore your revenue to some uncertainty. and the review that a utility, for example, is exposed to?
Mr. BRADLEY. I believe there is. It seems to me that in the case of a utility the reviewing authority will establish the rate, is controlling the amount of revenue which can be received by that utility.
In the case of the tribunal, the tribunal would have the authority to decide how much of our existing revenue could be taken away from us and given to someone else, and without any type of limit, and in our opinion without any demonstrable basis for establishing this. And the financial community, and the investment community, looking at the prospect of a totally unknown possible deduction from our revenue
hanging over our head, are going to be extremely reluctant to invest. We have, to some degree, some of that now.
Is you no doubt know, certain of our expenses that we have had are historically uncontrollable; and the uncertainty of this one is of greater magnitude.
Mr. Wiggins. One final question, Mr. Chairman, then I will yield back the balance of my time.
I would think that if your industry was subjected to the royalty schedule, it would attempt to pass through those added costs to your subscribers. Is there any reason that you would be unable to do that?
Mr. BRADLEY. It would be difficult in many instances. We, in order to get rate increases, generally must appear before a city council in an effort to justify our rate. And though we have great respect for city councils, very frequently they are not sophisticated analysts that are encountered nationally, and the local pressures and politics are brought to bear on them and cause us to frequently get substantially less than we feel we need; and sometimes nothing.
Mr. WIGGINS. Are they currently unsympathetic to your rising costs, accounts, and all the other cost factors that go into provision of the cable?
Mr. BRADLEY. It varies from place to place, yes, sir. In my personal experience, my company has recently made a presentation--we are in the process of doing it now-with all of the figures that I think almost any sophisticated accountant could accept, which justifies a rate increase of $1.25 over what we are now getting. We are probably going to end up with 75 cents because they feel we shouldn't increase the rate to their fellow citizens. We have been through this, as have other companies, many times.
Mr. Wiggins. Thank you, Mr. Chairman.
On the matter of the tribunal, let me ask you this, it may not be realistic, but the tribunal could lower the fees, as well as raise them. Would you comment on that, please?
Mr. BRADLEY. Yes, sir. While it is theoretically possible that the tribunal might lower the fees, the risk in the eyes of the investment community, and the financial community is still there, that they are likely to raise the rates in an undeterminable amount. And realistically, in view of our experiences, and the experiences generally encountered in the country, we think the chances are much greater that they will go up, than down.
Mr. DANIELSON. Well, I think that is the realistic view of the situation, although it could happen, I suppose, the other way.
How about the prospect of a periodic review by the tribunal, say, every 5 years? There are changes in costs, in the marketplace, and the value of the dollar. Will you comment on whether or not it would be proper for the tribunal to have this power?
Mr. BRADLEY. Yes, sir. With the statement I just made, the uncertainty of the tribunal's action, the financial community is still going to be reluctant to consider investment, or to consider investment at lower costs, which we desperately need.
Second, the escalating fee schedule that is contained in the bill, and the fact that the percentages apply to the gross revenues will tend
to compensate for inflationary effects in the presumption that the cable system will grow, both by the addition of subscribers, and by increasing rates which will reflect costs.
Mr. DANIELSON. You mentioned earlier increasing of rates. A while ago in response to Mr. Wiggin's question you expressed insecurity as to whether your local franchising agency, usually a city council, would recognize your added costs.
Is it not the general pattern in your industry that wherever you operate, the company operates under a franchise from some governmental agency or another?
Mr. BRADLEY. Yes, sir.
Mr. DANIELSON. And are the rates charged to your subscribers fixed by that franchising agency?
Mr. BRADLEY. At the present time they are not all fixed, some of them are, and some of them are not. But, under the new rules of the FCC, the 1972 rules, the franchising agency will fix and approve the rate.
Mr. DANIELSON. You are also required, aren't you, to carry all TV signals within at least the primary transmission area?
Mr. BRADLEY. Yes, sir.
Mr. DANIELSON. How far out does that extend, just the primary transmission area ?
Mr. BRADLEY. In the top 100 markets it is 35 miles; in the other markets the distance varies with what is called the grade B contour of the broadcast station, which generally is roughly 70, 75 miles.
Mr. DANIELSON. You are getting out beyond the primary transmission area, at least in the grade B; are you not?
Mr. BRADLEY. I believe, sir, that the definition of the FCC of “primary transmission area" separates into the two categories, the top 100 markets, and the other markets. Though, it is certainly true that we are getting out a farther distance.
Mr. DANIELSON. And you are required to carry those signals.
Mr. DANIELSON. You made reference to the fact that small operators who are within the primary transmission area, I think that you are using the terms not necessarily synonymously, but they tend to be the same, have such few subscribers, and obviously a lesser growth revenue that you feel they should be exempted.
I think that is on the theory that they are operating in the primary transmission area; am I right in that?
Mr. BRADLEY. For the most part, yes, sir.
Mr. DANIELSON. How about the other part, is the state of the art such that a small operator could have a distribution system located a number of miles away, quite a number of miles away, and receive his input either by microwave, or a lease line of some kind ?
Mr. BRADLEY. Yes, sir; that is technically feasible. However, the economics of the situation are such that unless he has a pretty large universal subscriber, he can't afford to pay microwave charges, or invest in microwave service.
Mr. DANIELSON. How big a system would you need to break through this economic barrier ?
Mr. BRADLEY. I don't know that I can answer precisely, but there are some small systems in the western part of the country where there is virtually no television reception, where microwave service is used, and the rate charged the subscriber is much higher than in other parts of the country.
So, while I haven't seen the figures, they are, presumably, economically viable. They must be, they are still in business.
Mr. DANIELSON. Are there any in the eastern parts of the United States, sa y, east of the Mississippi?
Mr. BRADLEY. Small systems using microwave?
Mr. DANIELSON. Yes, or leased cable, other means to bring it in, other than picking it out of the air.
Mr. BRADLEY. Yes, sir; I am sure there are some. I believe there are some in the State of Pennsylvania, and there are probably others.
Mr. DANIELson. Well, that brings you into a situation where those people would be competing, probably, with a local transmission, or could be.
Mr. BRADLEY. You mean competing signals ?
Mr. BRADLEY. They are competing in a sense, perhaps, in those instances they are usually-or are sometimes, at least-importing the signal that is not available locally. They are filling out a network service, or an independent.
Mr. DANIELSOx. What I am thinking of, see, unfortunately we are dealing with copyright here
Mr. BRADLEY. Yes, sir.
Mr. DANIELSON (continuing). And I think there is tremendous confusion. FCC is trying to regulate using copyright, and we are trying to regulate it; it's kind of mixed up. .
But, if you have an overlap, and you are bringing in outside signals into an area served by a regular TV station, conceivably you are bringing in signals which compete for viewer interest with another signal generated locally.
Mr. BRADLEY. Yes, sir.
Mr. DANIELSOx. And the copyright value to the owner of the copyright could be diminished. Would you comment on that, please?
Mr. BRADLEY. Well, I'll try; it is a complicated picture, obviously. There are owners of the copyright of the programs distributed by the local station; and there are owners of the copyright of the programs which are imported. And, certainly, there is some likelihood that there will be some reduction in the viewership of the local signals if the transmitted imported signal is more attractive to that viewer.
So, on the one hand, I suppose, it's fair to say that the owner of the copyright of the local signals might suffer, and the other one might benefit.
Mr. DANIELSOX. You certainly gave us a truism that this is a complicated problem. I would like a helpful suggestion. I don't mean you are not being helpful, but if you have a constructive suggestion on how to solve this, I would invite it.
Mr. KASTENMEIER. The Chair will interrupt for the purpose of observing for the subcommittee that there is an on-going quorum call to which members may desire to respond. However, the committee will continue through this or any other quorum call. But, in the event of a vote we will recess.