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I would say if this kind of proposal were to come before our Congress in 1965, de novo, it would seem almost inconceivable that there would be agreement to set a statutory fee for compulsory licensing of musical reproductions by mechanical means.
I believe we should take a look at this problem in the context of 1965 rather than 1909. It is true that in 1909 there were few music publishers, few record producers or other mechanical producers, the large item being the player roll for the piano.
There was a possibility of monopoly with the only player piano roll company having acquired, as we find in the records, some 80 percent of the mechanical reproduction rights of the music compositions of that time.
I believe, gentlemen, as we look at the picture now in 1965 we find a very vigorous competitive situation both within the music publishers group and also a vigorous competitive situation in the recordproducing industry. Therefore the picture of pending or threatened monopoly on either side does not prevail.
I do give considerable attention in my presentation, Mr. Chairman and members of the committee, to describing changes from 1909 to 1965, which I won't go into here. However, I would like to emphasize that we analyzed the historical perspective of this particular problem back through the hearings and the reports of the 1909 legislation. We found no evidence of a substantial nature to indicate that the 2 cents per composition was a substitute for or intended to reflect a percentage of price.
As I recall the records we studied there were three bills proposed at that time. One called for 5 percent of price as a fixed royalty arrangement; another proposed 10 percent; and then there was the 2 cents per composition, which was adopted. We studied the record carefully and while it is possible we may have missed some observations, we find no impressive evidence that the legislative intent as of that time was to have a 2-cent-fixed-royalty fee as equivalent to 5 percent or 10 percent or any other percent of cost or sales price per recording
It is our conclusion, as economists, as a result of studying this problem, that both the compulsory licensing and the statutory fee provisions ought to be eliminated entirely. I honestly believe from an economie point of view, from an equitable point of view, from a logical point of view, from a good business point of view, there ought not to be compulsory licensing nor the statutory fee.
Music publishing and music reproduction ought to be open to the free market, much as book publishing, much as other creative undertakings in our society.
I believe that our free enterprise system has provided us with a mechanism through the marketplace where values tend to be determined over time in the most appropriate manner. This does not mean that our free enterprise system does not need regulations and does not need certain limitations imposed upon it.
There are always those who will abuse power. That is why we have antitrust activities, that is why we have the Federal Trade Commission. There are certain areas where franchises are granted on an exclusive basis. That is why we have public utility regulation. Then there are, of course, forces in our society which create recurring im
balances and that is why we have moved to attack the boom and bust philosophy of the past through the Employment Act of 1946.
So that while we try to adhere to the concept of the free market we have at the same time recognized that certain limitations, certain difficulties, certain problems evolve and we try to deal with those, compatible with giving the marketplace the maximum possible role in our economy.
I believe it is the appropriate combination of the maximum role of the free market and free enterprise, and at the same time that degree of policy and regulatory activity which is demonstrated as being needed, that has given us our vigorous, dynamic, and successful economy.
I believe that the issue that is before this committee today is one which poses a situation incompatible with the way and the manner in which our society functions in the economic area.
I believe that logically both the compulsory licensing feature and the statutory fee ought to be removed. You gentlemen as legislators are faced with the problem of how changes are undertaken. I know that often we stay with tradition because the transition or changes would be so difficult, so distressing, and so distorting as not to permit sudden changes of major magnitude or major degree.
Whether the complete elimination of compulsory licensing and elimination of the statutory fee would have this result I don't know, but I do know that we have engaged in so many innovations in the past decade or two that this area ought not be unique in being excluded from some adaptation, some changes, and some bringing up to date.
It is my belief, gentlemen, as an economist, that if you were to preserve the compulsory licensing, which I don't believe has a solid economic base, you still could eliminate the statutory fee and let fees be set by bargaining. It seems to me as an economist that these could be handled separately.
What the Music Publishers Protective Association proposes is not the elimination of these two provisions. They feel, or at least it was expressed to me that they felt, that repeal was not likely to be achievable and therefore in the absence of this being feasible or accomplishable, they agreed that a modest change ought to be the increase in the statutory fee to the 3-cent royalty per composition or 1-cent per minute, whichever is greater.
I believe that if there is not going to be complete elimination, then this change is justified on a number of grounds which I will summarize very briefly.
First, it should be done on the basis of equity. Equity is always a difficult problem to be determined in a free enterprise system other than in the marketplace. I have been concerned with wage negotiations and wage policy, I have been concerned with tariff negotiations, I have been concerned with rates in public utility cases, I have been concerned in airline tariff cases before the Civil Aeronautics Board and I admit, Mr. Chairman and members of the committee, that one deals with a very complicated problem when one seeks to arrive at what is conceptually equitable in these price or fee or rate determinations.
In the free market you let prices be set by what happens from demand and supply factors, innovation and technological changes, product adaptation, and other influences which manifest themselves in the competitive sphere. But in this area of music publishing the mechanical royalty fee is not established in the free market.
I believe that the 3-cent statutory fee is justifiable on equitable grounds because it will open up the bargainable area somewhat.
I know that you gentlemen have had evidence presented to you to the effect that there is very little deviation from the 2-cent fee and you have had other evidence that there is a significant deviation. I have not been asked to do, nor have we conducted a study of exact pricing practices, but I will say here, gentlemen, that I did meet with a number of music publishers and I left with the impression, and this is only an impression, that this is a pretty individualistic competitive bunch and there is nothing very uniform about their practices or techniques. I felt that they operate in the tradition of vigorous innovators and hard competitors.
I came away with the feeling that the 2-cent fee is not a fixed fee. The Fox office did have some evidence that some 20-plus percent of the negotiations had been below the 2-cent level, and that was exclusive of record clubs and the like. It is my impression, gentlemen, and I have no fixed evidence except based on my discussions, that the 2 cents is not a fixed amount but more of a ceiling. I believe that if the 3 cents is enacted by this committee and by the Congress this will become even more of a ceiling than a fixed price.
To that extent, gentlemen, you will be widening the range of the bargaining area which will be helpful in introducing a greater degree of market competitive forces than can now operate.
Let me just raise the second point I would like to discuss about the statutory fee and that has to do with record prices.
In every bargaining that has ever taken place, whether it be the employer and the union bargaining or the producer in Government contract negotiations, it is always contended that any increase in any unit factor cost will bring increased prices.
Gentlemen, history is replete with thousands of times more instances where a rising price of a unit of input was absorbed and final product prices not increased, or even decreased. If, in all of our economic life, every time a rise in input price had the finished product price to be increased, we would have had such inflation as to make Brazil's inflation experience of recent years or Germany's inflation of 40 years ago look pretty mild.
The process of economic life is such that inputs compete with each other. For instance, the automobile industry uses steel, they use rubber, they use unholstery and labor. There are wide variations of products that go into the automobile. In a meaningful sense you have a complex of competition among the inputs in the automobile industry and also in the final price of the automobile to the consumer. The statement that indicated that any increase in the royalty payment is bound to result in an increase in the record price to the consumer I think does not stand up according to history. It is always contended, though it may or may not be true, that prices will rise. "I am not appearing here and promising that if the price of the royalty payment went to 3 cents for all reproductions that record producers and distributors would absorb it all. One does not know for certain.
It is entirely possible that with higher royalties there would be more selectivity in record production. Music depends on one's taste, but I like free competition and prefer to let all composers have an opportunity to produce what they create.
Certain people in society might say we would be better off if certain items or selections didn't appear. Or if there is a market for only a limited number of records, well, there might be a decision against its production if the royalty fee were higher. The marketplace in a sense will decide this. If it is true that 75 percent of the records are loss items as indicated, that if you put the royalty to 3 cents it will be 78 percent or only 2 or 3 percent difference, as was indicated in one set of testimony, it may be that for the greater risk items not as many will be recorded.
I believe it can certainly be demonstrated on economic grounds that the absorptive likelihood is much greater than the passing on, in terms of any increase in any given cost such as the statutory fee.
Now I come to another point and that has to do with profits. I must say I have seen data much abused in my time but I have seldom seen data abused as much as an analysis of gross and net incomes I saw presented before this committee.
The profit data in one testimony presented here was to the effect that one can compare the gross fee to the music publishers with the net profit of the record companies.
Now, gentlemen, if I turned it around and said to you, let us compare the gross revenues of the record companies with the net profit of the publishers, you would see something utterly insane. The former would be a thousand times greater than the latter. Well, it is only in differing degree that this nonsense manifested itself in the data and comparisons that were placed before you in earlier testimony.
The music publishers' gross receipts are not profits. They share first of all with the artist, with the creator, with the composer. Half and sometimes more of the royalty goes to the composer. Even then the balance cannot be compared with the net profits of the recording companies. Music publishers have all kinds of expenses. They have payrolls; they give advances to the composers. Often this is lost. They pay retainers to composers to keep them in their so-called stable of writers, which advances and retainers by no means are always recovered.
They have expenses of promotion. The first time I ever heard about promotion in the record industry was when I was in Chicago and a relative of mine told me about his work. He worked for a music publisher. He went around to band leaders—to date myself it was in the old days when band leaders were common—and he went to band leaders to urge them to play a or y record. This then increased the demand for records.
Today they do the same with disk jockeys. This is a promotional activity of the music publishers which is costly. They also produce demonstration records. In the old days all one had to do was take a composition to a record company with a musician who would sit at the piano and play. The record producers would decide whether or not to record it. I like it or I don't. Today the record company wants a demonstration record.
To try to help sell the composition the music publishers selects outstanding artists and often the demonstration record becomes the distributed record. These costs of the music publishers are real costs, and one would have to compare net with net and not the gross with net.
One final point I would like to make, gentlemen, has to do with the amount of the change in the royalty fee. Should it be a 3-cent statutory fee? Should it be two and three-quarters? Should it be a 5-cent statutory fee? This is a conjecture.
I myself feel setting a 3-cent statutory fee as distinguished from the present 2-cent level calls for a modest increase. In the context of changed times and the desirability to allow a little more room for bargaining, I think this is a modest proposal.
Again I would say it would be better to eliminate the statutory fee provision, but if that is not to be done then I believe that in view of our environment, our prosperity, our affluence, the competitive situation in the industry, of all factors as we can see them, this modest increase should be enacted.
As an economist I would strongly urge that favorable consideration be given by this committee to the proposed change. Thank you.
Mr. KASTENMEIER. Thank you, Mr. Nathan. Your position then, as I understand it, is that while you would argue at least theoretically for no compulsory licensing, no statutory fee, as a matter of fact your organization, the Music Publishers Protective Association, notwithstanding that, takes the position that the 3-cent fee, and indeed the proposal as contained in H.R. 4347, is acceptable to you?
Mr. NATHAN. Yes, it is acceptable to the client and I say it is certainly better than what the present legislation provides. If one were to treat the subject ideally and start from scratch, I would argue against the statutory fee entirely.
Mr. KASTENMEIER. You made some reference to whether the increase would be passed on, suggesting it would not be. The witnesses some weeks ago argued the other side of the case, suggesting, and they had charts and the like, that not only would the increase be passed on but that it would be considerably amplified in the business marketing cycle to something considerably more than the actual penny or so, itself.
They went on to suggest that it would be a sizable increase to the ultimate purchaser.
Mr. NATHAN. I noticed that in the statement. I assume you are referring to the statement of John Desmond Glover, because I did study his charts. There are many things about this contention that raise very serious questions.
In the first place, I must say I don't understand the figures. I suppose a copy of that report is not readily available. There are some items, especially the item to which you are referring, Mr. Chairman, about the pass-through of the margins. It was in exhibit 19, where that witness said that the 2 cents—namely if there were 12 compositions on the record it would be 24 centswould then have margins added on at each successive stage by the producer, by the distributor, by the retailer.
First of all, I don't understand his figures because when he is talking about the total price he shows a 26-percent margin for record companies in exhibit 19, whereas his figure of 44 cents based on 126 cents is 35 percent, not 26 percent.