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STATEMENT OF JACK VALENTI, PRESIDENT, MOTION PICTURE

ASSOCIATION OF AMERICA, INC., AND CHESTER MIGDEN, ON BEHALF OF FILM UNIONS AND GUILDS ACCOMPANIED BY; GERALD MEYER, COUNSEL; LIONEL FRAY; CONSULTANT: ROBERT W. CRANDALL; AND DAVID HOROWITZ

Mr. VALENTI. Mr. Chairman, my time is obviously very brief. We have a total of 20 minutes, and that's only a fragment of time, and I am going to get on with this. I will begin at the very beginning.

As you know, in 1971, in order to hasten the passage of the copyright legislation, negotiations were begun at that time between the broadcasters, copyright owners and cable systems. Those meetings, as you know, were sponsored by Chairman Burch of the FCC and Dr. Whitehead of the Office of Telecommunications Policy at the White House.

In November of 1971, the now famous consensus agreement was signed by all three groups. There were compromises made in those three positions, Mr. Chairman; each side gave up something in order to reach an agreement in what we thought was an absolutely essential agreement before copyright legislation could speedily pass the Congress.

As a result of this agreement, most distant signal carriage restrictions were lifted. Cable systems were permitted to import programs from distant cities. The freeze was off and expansion of cable had begun.

Now, all parties to this agreement pledged themselves to support the concept of a speedy passage of the legislation, and also the concept of an arbitration tribunal that would be put in the bill if the parties could not agree on a private schedule of fees.

Now let me read to you the specific paragraph in the consensus agreement which nails down and fastens down this kind of support that all three parties gave. “Unless a schedule of fees covering the coulpulsory licenses or some other payment mechanism can be agreed upon between the copyright owners and the CATV owners in time for inclusion in the new copyright statute, the legislation would simply provide for compulsory arbitration failing private agreement on copyright fees."

Shortly after the consensus agreement was signed, Chairman Burch wrote Senator McClellan and said: "We believe that the adoption of the consensus agreement will markedly serve the public interests.”

On the 31st of January, Senator McClellan replied to Chairman Burch, and I would like to quote from that letter, because I think it is important in this aspect of the arbitration tribunal. Senator McClellan to Chairman Burch; "As I have stated in several reports to the Senate in recent years, the CATV question is the only significant obstacle to final action by the Congress on a copyright bill. I urged the parties to negotiate in good faith to determine if they could reach agreement on both the communications and copyright aspects of the CATV question. I commend the parties for the efforts they have made, and believe that the agreement that has been reached is in the public ties, and literally dozens of other variables that are inherent in the study of a fee schedule. I submit, sir, that this forum, fair and thoughtful as it is, is not equipped to deal with this mountainous task. It is just too much; it demands too much of busy Senators who have other duties.

That is why the arbitration tribunal was agreed upon in the first place in the consensus agreement. That is why it is indispensable, at the very outset, to set the standards, the procedures, and the painstaking attention to detail that this kind of fee setting deserves.

Now I also believe, and my colleagues believe that the arbitration tribunal is fair because it is beholden to neither side. I would not for one moment tell you that both NCTA and our groups are totally objective; of course we're not; we each have an ax to grind. Therefore, while I do believe the Senate is objective, I am saying that the Senate does not have the time—nor the House —to deal with this. Therefore, I would like to go to an objective body with the time to consider the detail.

When one looks at this bill, Mr. Chairman, they say, my goodness, at first blush, the large systems are going to pay a royalty fee or copyright fee of 5 percent. That is not true. This is a progressive rate schedule from i to 5 percent based on different levels of income in which the 1, 2, 3, 4, and 5 percent apply to these different levels.

That means, Mr. Chairman, overall this fee schedule yields an effective rate of 1.9 percent, and from this modest sum all-repeat allcopyright owners, film producers, broadcasters, music composers, all must share in that modest sum.

To put these figures in the proper perspective, let's see what they mean. The FCC published some data which is very pertinent. They pointed out in the year 1971, the individual television stations in this Nation paid $179 million in the year 1971 for the licensing of nonnetwork copyrighted material, $179 million. Now, if the fee schedule in S. 1361 had been in effect, in that same year cable systems would have paid for that same material $7.6 million.

Now by whatever standards or what measures you choose to lay down, we think that is grossly inadequate in a return.

Now the cable systems are economically viable and able to pay larger fees, surely larger than is in S. 1361, beyond any doubt as far

as we are concerned. We have gone to the expense of commissioning a study by two distinguished economists, Mr. Fray of Temple, Barker and Sloane, Inc., and Dr. Crandall, associate professor of economics at MIT, to study, to find out the capability of cable systems today to pay fees tomorrow. I think this study graphically illuminates the fact that cable systems, even after deducting the 15 percent return on investment which any bank would be pleased to loan money on, I am sure, even on the deduction of the 15 percent royalty, there are considerable funds available to pay a higher fee, much higher than S. 1361.

Now, I don't have time, Mr. Chairman-
Senator McCLELLAN. Is that study in the material?
Mr. VALENTI. Yes, sir; it is in the brown cover.

I am hopeful, Mr. Chairman, because, if I may say a word within the timeframe that I have, I am not sure I do not have time to discuss this; I am hopeful that you might see fit, sir, to ask some quesnoticeably changed and noticeably stiffened. In more than 60 hours of exhausting and tormenting negotiations, it became very clear there would be no agreement reached. Deadlines were continually lengthened and it finally became very plain to us that cable systems had no intention of budging off the fee schedule which was put in the bill. They had determined that that was where they were going to make a stand, and they did.

Now, we find ourselves, Mr. Chairman, in a difficult position. We pledged our support to the consensus agreement, we gave our word, and we redeemed it. Cable systems got everything that was in that consensus agreement, but the key element, the key element that the copyright owners believed that would be honored was, in fact, not honored at all.

Now I could spend more time, but in the interest of time, I want to go on to what I consider to be another key point, Mr. Chairman, which is the inadequacy.

Senator MCCLELLAN. The what?

Mr. VALENTI. The inadequacy of the fee schedule. I want to cite to you two crucial points—at least to perhaps our biased eyes—but I hope that an unbiased observer would feel the same way. We believe this fee schedule is neither adequate nor appropriate, now let me tell you why.

Point No. 1, we are not aware of any economic evidence of any kind that corroborates the fee schedule which is in S. 1361. To our knowledge, there has been no factfinding efforts of any find which preceded the insertion of that fee schedule in S. 1361. There is no kinship in these fees, in our judgment, sir, to the reasonable value of the copyrighted programs that we produce and go out on the air and whether or not these fees would reasonably compensate copyright owners for the expected loss of value in their programs. That is point No. 1.

Point No. 2, the complexity, the elaborate material, the tormenting detail that exists in setting a fee schedule, is enormous. It has been our conviction in 20 minutes, I cannot even begin to make a comprehensive statement to you; I am not even sure it could be done in 20 hours. But the examination of a fair and reasonable fee schedule simply demands the full-time scrutiny of a body of experts.

That has been our contention, sir, and even if the fee schedules were higher, they would still be artificially based, without a solid base of facts or without a sturdy rostrum of research, and that is also our contention.

Now what we are advocating, Mr. Chairman, are fees that are just and reasonable; that is all. We believe that you cannot have just and reasonable fees unless you have a careful examination of all the undergirding facts on which you build your edifice of a fee schedule.

Now, there are many areas, sir, that we have not even begun to talk about. I want to bring to this subcommittee some of these variables; the location of the system; the number of signals it carries; the value of programs carried by the system; the size of the system; the penetration of its franchised areas; saturation of the television market in which it operates; the age and stage of development of the system; investments necessary to construct the facility; amortization of its capital investment; allocation of the investment in its plant to retransmission of broadcasts as contrasted and distinguished from other activi

ties, and literally dozens of other variables that are inherent in the study of a fee schedule. I submit, sir, that this forum, fair and thoughtful as it is, is not equipped to deal with this mountainous task. It is just too much; it demands too much of busy Senators who have other duties.

That is why the arbitration tribunal was agreed upon in the first place in the consensus agreement. That is why it is indispensable, at the very outset, to set the standards, the procedures, and the painstaking attention to detail that this kind of fee setting deserves.

Now I also believe, and my colleagues believe that the arbitration tribunal is fair because it is beholden to neither side. I would not for one moment tell you that both NCTA and our groups are totally objective; of course we're not; we each have an ax to grind. Therefore, while I do believe the Senate is objective, I am saying that the Senate does not have the time-nor the House to deal with this. Therefore, I would like to go to an objective body with the time to consider the detail.

When one looks at this bill, Mr. Chairman, they say, my goodness, at first blush, the large systems are going to pay a royalty fee or copyright fee of 5 percent. That is not true. This is a progressive rate schedule from 1 to 5 percent based on different levels of income in which the 1, 2, 3, 4, and 5 percent apply to these different levels.

That means, Mr. Chairman, overall this fee schedule yields an effective rate of 1.9 percent, and from this modest sum all-repeat allcopyright owners, film producers, broadcasters, music composers, all must share in that modest sum.

To put these figures in the proper perspective, let's see what they mean. The FCC published some data which is very pertinent. They pointed out in the year 1971, the individual television stations in this Nation paid $179 million in the year 1971 for the licensing of nonnetwork copyrighted material, $179 million. Now, if the fee schedule in S. 1361 had been in effect, in that same year cable systems would have paid for that same material $7.6 million.

Now by whatever standards or what measures you choose to lay down, we think that is grossly inadequate in a return.

Now the cable systems are economically viable and able to pay larger fees, surely larger than is in S. 1361, beyond any doubt as far

as we are concerned. We have gone to the expense of commissioning a study by two distinguished economists, Mr. Fray of Temple, Barker and Sloane, Inc., and Dr. Crandall, associate professor of economics at MIT, to study, to find out the capability of cable systems today to pay fees tomorrow. I think this study graphically illuminates the fact that cable systems, even after deducting the 15 percent return on investment which any bank would be pleased to loan money on, I am sure, even on the deduction of the 15 percent royalty, there are considerable funds available to pay a higher fee, much higher than S. 1361.

Now, I don't have time, Mr. Chairman-
Senator McCLELLAN. Is that study in the material?
Mr. VALENTI. Yes, sir; it is in the brown cover.

I am hopeful, Mr. Chairman, because, if I may say a word within the timeframe that I have, I am not sure—I do not have time to discuss this; I am hopeful that you might see fit, sir, to ask some questions, pertinent questions about this study to bring out the source data and how it was developed and what it means.

Senator McCLELLAN. Well, I have not seen this study, and I did not have the opportunity to review it, but I am saying,

Mr. VALENTI. I cannot argue with you on that point.

Senator McCLELLAN. I'm saying to you, and all of you, I do not necessarily mean for this to be final, but in order to get the thing in motion again, we set these days, to give everybody a chance to present their views and as you know, of course, you have the right to submit rebuttal statements and whatever you want to. We are going to try to make a complete record.

But as you indicate, this seems to be a very, very complicated—and in fact, we know it is complicated—and we want again to bring the record up to date. That is what we are trying to do.

Now, if we did not limit it, limit the time to some extent, it would go on here for months and months. I am sure, when we get this record, we will try to have it reviewed and we may fill in some gaps, of course, if we need to.

Have you finished ?
Mr. VALENTI. I have just about 2 or 3 minutes to go, Mr. Chairman.

Senator McCLELLAN. Go ahead. I will ask you a question or two after you have finished.

Mr. VALENTI. I was just going to say, we do not have time to present the study, but as you point out, it is in the record there, and I hope the committee will have a chance to examine it, and we might have a chance to expand on it some other time.

But, let me make a few concluding remarks.

One is that the overwhelming argument in favor of an arbitration tribunal is simply this, Mr. Chairman. You ask two questions: is it right and fair that a fee schedule should be set after an examination has been made of all the evidence, all the facts have been weighed in, all the variables have been tested and scrutinized; or is it right and fair that a fee schedule should be set artificially unaccompanied by facts or data whose numbers and arithmetic were plucked out of the air with no claims to study or to any factfinding procedure?

Well, the answer to those questions is quite obvious; that is why it makes good sense. And I wish I had more time, as I say, to discuss it.

I will make my final comment.

When this bill was first introduced by Senator McClellan, the Senator indicated that the cable television provisions in the bill would have to be reexamined in the light of evidence since December 1969.

I would like to respect fully submit to you, sir, that we have some suggestions for changes which the copyright owners consider essential, and there are four or five and I will go quickly through them.

The first is that the grant of compulsory license to cable systems with appropriate limitations on its scope be made. In our detailed statement to the committee, we have told you what we mean by this. The consensus agreement provides, Mr. Chairman, that the compulsory license shall be limited to "those distant signals defined and authorized under the FCC's initial package," of course with the local and grandfathered signals additionally. The retransmission by a cable system of distant signals beyond the compulsory license should be subject to full copyright protection. Further, as provided for in the con

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