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this side, that it is considered to be a drafting error that would be corrected.
Mr. KASTENMEIER. I understand.
One other question I have. Supposing a bill more or less like this is passed, and a number of years go by, and you are able to live with and absorb the $8 fee, but it becomes evident that there has been an erosion, that there has been a cost-of-living increase, and that given the standards of, let us say, 1975, 1976, or 1977, with inflation and whatnot, suggests that a comparable fee at that time, some years hence, let us say the year 1980, would be $10 or $12. Would you oppose the matter being reopened for a determination of what an equitable fee would be by Congress or otherwise for the purpose of an adjustment, or do you consider the $8 nonadjustable, in concrete forever?
Mr. ALLEN. Well, Mr. Chairman, this is the way I think I should put this: The jukebox industry, the jukebox operators look to you, Mr. Chairman, and they look to the Congress to do the thing that is right in the public interest. Certainly no future Congress is going to be bound by what this Congress does, and no future committee is going to be bound by what your committee does. But, the jukebox people look to Congress for their protection, and we have made this point, or endeavored to make this point, whenever this question has come up in the past. We have made it when your committee was holding hearings 10 years ago. We cannot bargain on equal terms with the big performing rights societies, and we know it. We know from the history of the societies themselves that BMI was spawned because ASCAP could not be dealt with. We do not expect that we can bargain on equal terms with the people who control the music we play, but we can look to Congress.
Absent a ceiling in the statute, and this is the thing that has been so important to us all the way through, and so important to us when we agreed to the $8, the thing that we need most is the protection that is afforded by a statutory ceiling.
Now going back, if the Congress in its wisdom, and your committee in its wisdom, in the future should decide that a higher rate is in order, certainly our industry will abide by it and will gladly do so. But, we do not feel that we can bargain on equal terms, nor do we feel we can before a copyright tribunal litigate, let us say, on equal terms with an adversary who can pour in millions of dollars in an effort to raise the fee.
Ours would be a pittance. We could not do the job adequately of meeting the kind of opposition we anticipate.
Mr. KASTEN MEIER. Well, I appreciate your statement, and that, as I recall, is a consistent statement, although I do wonder, with all deference, whether the Music Operators of America with 7,500 members plus the manufacturers, even though it may be an economically distressed industry at the moment, are not on equal terms with the three performing rights societies, given, as I think one of you has suggested, the slight difference from Mr. Korman's figures, that their gross receipts are somewhat under-I think you suggested $100 million, and they suggest somewhat over, that you are not on really equal economic footing with them.
Now, I should understand why it is that you would not want to have to bargain if, in fact, you were protected statutorily, so that such bargaining was unnecessary, obviously. But, the question as to whether
you are equals in a tribunal, should one be created, is a question about whose answer I am not very sanguine.
Mr. ALLEN. It is a matter of economics, Mr. Chairman, and just the sheer power of financial strength. Billboard magazine last month reported that the societies' yearly take is $97 million, almost $100 million. That is a different world from the jukebox people, whose incomes are in just thousands. They cannot possibly organize studies, economic studies or reports, analyses that come anywhere near what their opponents would be able to do; and that is why we do not feel that we can look down that road for the protection that we believe would be much more meaningful to us through the Congress.
Mr. KASTENMEIER. Yes.
I appreciate your statement, although in terms of economics, Mr. Mawdsley says that a box grosses perhaps $25 a week, and then it has to be split and so forth.
Looking merely at the gross alone, 50 times $25, $750 a year, times around half a million boxes, suggests somewhere approaching grosses handled by machines in the order of $375 million. That is not the net income, of course. That compares with perhaps $100 million handled by the performance rights societies in a year. So in comparing economic strength, one group against the other, you know, I am not altogether persuaded that you are at that sort of disadvantage, notwithstanding the fact that I should understand why you would not want to have to negotiate at all.
Mr. ALLEN. I would like to respond to some of the figures, Mr. Chairman.
You were using a $25 figure, and our point is that our people receive only a half of that.
Mr. KASTEN MEIER. Yes. That is the outer figure of total money that the operator puts his hands on. He has to share that 50-50, and he then has to buy the machines, he has got the overhead, so his net is first of all, you split the $375 million in two, and then figure a net on the balance of $180 million plus. Obviously it is much smaller as a figure for 7,500 operators.
Mr. ALLEN. Now, our organization, Mr. Chairman, is not 7,500. It is about less than 1,000. So, we are small. We are small people compared with the people on the other side of this problem.
Mr. KASTEN MEIER. Mr. Mawdsley said there were 7,500, but I gather those that are actual members of your organization are more or less 1,000?
Mr. COLLINS. Right.
Mr. MAWDSLEY. I maybe have not explained what I meant to imply. We feel there are about 7.500 operators of jukeboxes in the country.
Mr. KASTEN MEIER. That might be affected by this bill, whether or not they are members of your organization?
Mr. MAWDSLEY. That is right, and the members of our association are about 1.000.
Mr. PATTERSON. Mr. Chairman, if I may refer the committee to hearings before the Senate Subcommittee on Patents, Trademarks, and Copyrights on S. 597 in 1967, there is a study in there prepared at our request by Price, Waterhouse & Co. You may recall the details of that. And it appears on pages 268 through 273. But the Price, Waterhouse study states:
For the operators who own less than 50 machines, and who constitute 54.2 percent of the total replies received, the average amount available for salary and for Federal and State income taxes is less than the average for all operators and is $4,966 a year or $414 a month. If the annual amount is reduced by $1,422, representing a 6-percent return on a $23,000 investment, and $517 for the proposedroyalty, the owner-operator would have $3,027 a year, or $252 a month available for salary and Federal and State income taxes.
Now they sent out something like 22,000 questionnaires to the estimated 7,000 jukebox operators, and I do not think that the economics of the industry have changed significantly, because I do know the priceof the machines has gone from $2,000 to $2,500, and the price per play has remained fairly static, so that the average small operator's economic position is no better than it was when the $8 per year fee was agreed as a compromise.
Mr. KASTEN MEIER. Yes. The thrust of that particular report is that the net an average operator makes is what? Around just under $5,000? Mr. PATTERSON. That is right.
Mr. MAWDSLEY. May I point out, Mr. Chairman, that the figures that. I used here on page 4, where I say I note the prior gross receipts average only $24 or $25, these are our figures that I derived from my company. Now these are highly disputed by some of the people that are on this panel as they think that my average is a little bit higher than theirs and that in certain sections of the country it is much lower than my average. I truthfully had nothing to go on but my own figures from my own company, and we may be a little bit different than some of the other companies in the way we operate, and so we average a little bit higher.
Mr. KASTENMEIER. I am surprised that it is that low if we are dealing in quarters rather than dimes. You know, that is only 100 quarters per machine in a week, and that is not very much.
Mr. MAWDSLEY. If I may respond to that, our average in our company went up slightly when we did move from 10 cents to 25 cents a play, but not drastically. I think it went up probably by $1.35 per week per machine when we made the changeover from a 10-cent play to two for a quarter play.
Mr. KASTENMEIER. I am going to yield to the gentleman from New York, Mr. Pattison.
Mr. PATTISON. I have one question. There is a section 115 and section 116 and both provide for a change in the mechanical fees from your testimony, is that correct?
Mr. ALLEN. No; not quite, Mr. Congressman. It is 115. It changes the mechanical.
Mr. PATTISON. From what, 2 cents to 3 cents?
Mr. ALLEN. Yes.
Mr. PATTISON. Mr. Mawdsley testified that there was a reference from a change to a 2 cents to 6 cents.
Mr. ALLEN. Mr. Congressman, the 6 cents is the combination of the two sides, that is the 3-cent royalty looking at the record as taking two or containing two songs.
Mr. PATTISON. So we are talking about the same thing, the 2 cents to the 3 cents, and that is reflected, is it not, to the price of the record? Mr. ALLEN. Yes.
Mr. PATTISON. You do not pay that each time you play it?
Mr. ALLEN. Yes, Mr. Congressman. It is reflected in the price of the record, and that is why the jukebox industry insists that it is carrying
the burden of the mechanical fee. The manufacturers certainly do pass it on, and the record industry study referred to, was made, and you will be receiving it next week, includes an exhibit which establishes the cost of about $5 a box as a result of the 1-cent increase.
Mr. PATTISON. So that you could expect, if you were paying 75 cents for a record that you would pay 76 cents?
Mr. ALLEN. No, sir. It is in the 75 cents.
Mr. PATTISON. It is 2 cents now? And if it goes from 2 cents to 3 cents, then you expect it would go to 76 cents?
Mr. ALLEN. It probably would.
Mr. PATTISON. But that would be the total effect on the increase in the mechanical fee from 2 cents to 3 cents?
Mr. ALLEN. Yes.
Mr. PATTISON. I have no further question.
Mr. KASTEN MEIER. That amount varies in a sense. They assume now they are paying $3 million a year in mechanical royalties buried in the price of the record, and that would be raised to 4.5, 50 percent by virtue of the mechanical royalty provided for in the bill.
Just one other question. As candidly as you can, could you tell me what happened in the Senate Judiciary to convince them that they ought to adopt a tribunal; that is to say, they are to make section 116 subject to tribunal readjustment after July 1, 1977? What persuaded them? Why were they persuaded? What equity did they see?
Mr. ALLEN. This was in executive session. The statements that Senator McClellan has made, or his counsel for him, are to the effect that they want to see all of the statutory rates dealt with similarly. Now, we answered in this way: CATV interests could never agree on a royalty, they remain widely apart even I believe to this time. Now, that was 114. The mechanical fee that we have been talking about, there was no incentive really from the proponents of that section to take it out of the copyright tribunal, because those same interests were advocating the new performance royalty and they could not argue against it.
Now, in our situation we are very much unlike CATV, and this is what we stressed in our responses to Senator McClellan. We had an agreement. We did not need a copyright royalty tribunal to resolve the current issue of what the royalty rate should be. CATV did. And the people behind the mechanical fee were neutral on it.
But the fact still remains we have an agreement, an agreement which we intended and expected to serve as a ceiling, and, therefore, the rationale for bringing the other statutory rates into the control of a copyright tribunal does not apply in our situation. And I think that is the reason behind the Senate action in taking it out.
I think I know a little about that one too, how that came about. It was for that very reason that we had an agreement. There was no need for any further review of a rate that had been agreed on, and I would surely like to emphasize this aspect of our problem. And I guess this is the nub of the hearing today, whether there should be readjustment of this rate. We are going right now from zero performance fee to a proposed $8. There is a huge jump there, and we have endeavored to show it is all we can stand. So, it is not like revising a rate. It is establishing something new that this industry has never had to carry before, and it is going to require a lot of adjustment, and undoubtedly
it will result in marginal locations, or a certain percentage anyway in marginal locations, being taken out.
Mr. KASTENMEIER. My last question is, you have heard, I believe it was Mr. Korman's suggestion, how if there were tribunal effective after July 1, 1977, how it would work, how you would negotiate, and what the history has been of ASCAP, talking about his own performing rights society, in negotiations with others up or down, as a matter of fact. How do you see it working? How would it work? Supposing the Senate bill as it came out of committee were, in fact, then enacted into law, despite your protestations. How would it work? That is, how do you see it working any differently than Mr. Korman suggested it might work operationally in terms of your getting together and negotiating?
Mr. ALLEN. Well, Mr. Chairman, the bill as it came out of the Senate does not have this in it.
Mr. KASTEN MEIER. No; I understand. This is a hypothesis only, that somehow a bill as it came out of committee were adopted and you found yourselves, your industry, in a position of having a tribunal, a $8 fee, the other thing that you agreed upon, but there would be a tribunal. Then there would be notice in the Federal Register by the Register of Copyrights and so forth. How do you see it working? Presumably you and others, perhaps you and Mr. Patterson, and various others here, the officers of the organization would be involved as well, and we would be getting together with representatives of the performing rights societies and negotiating some way. I was wondering how you see it working if you were, you know, in that position, if that happened to you!
Mr. PATTERSON. I would think, Mr. Chairman, that there would be the alternative of negotiating with the representatives of the societies when they advise that they felt that the fee should be $12 per year or alternatively, trying to develop in depth and in detail the economics of the industry and whether there had been changes that merit that. And as Mr. Korman said, under the consent decree, ASCAP has yet to have the Federal court establish a decree although there have been a number of proceedings. The parties have arrived at a negotiated rate. But I think again, using the term you did, in candor, the reason the exception has prevailed for 40 years or more is because the jukebox industry has been a grassroots, rural industry in terms of image and in terms of looking to Congress for protection, while the performing rights societies have essentially been urban or metropolitan in image. And going to a copyright tribunal, the operators, in my judgment, feel that they would be at a disadvantage from a standpoint of sheer weight of bargaining strength, whereas if they were looking to their Congressman to accept as reasonable or not an increase in the statutory rate, their position would be more effective.
Mr. KASTENMEIER. But you do not take any major difference from the way Mr. Korman suggested it would operate, what he suggested in terms of hypothetically how it would operate?
Mr. PATTERSON. If it were there, for practical purposes I think that is how it would operate.
Mr. KASTEN METER. Well, thank you very much.
If Mr. Pattison has no more questions, I would like to thank all the members of the panel for their contribution this morning. And in terms