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to take our chances with fair, objective men setting these fees, then we will live by them, just as we have honored every provision of the consensus agreement to this very meeting.

Senator BURDICK. Mr. Chairman, I just want to correct the statement. I have taken no position on this. I merely asked a simple little question is all I did.

Mr. VALENTI. Well, let me say in answer to Senator Burdick's question, I will preface that.

Senator BURDICK. As I understand the justification and rationalization is first, you have got a complex situation, as the chairman has mentioned; and second, you are already bound to a consensus agreement, is that the basis?

Mr. VALENTI. Yes, sir. And we are willing to live by it.
Senator McCLELLAN. I thank you very much.
Mr. VALENTI. Thank you very much.
[The prepared statement of Mr. Valenti follows:]

STATEMENT OF JACK VALENTI, PRESIDENT OF THE MOTION PICTURE ASSOCIATION OF

AMERICA, INC., AND OF THE ASSQCIATION OF MOTION PICTURE AND TELEVISION PRODUCERS, INC., ACCOMPANIED BY GERALD MEYER, COUNSEL.

My name is Jack Valenti. I am the President of the Motion Picture Association of America, Inc., commonly referred to as MPAA, and of the Association of Motion Picture and Television Producers, Inc., commonly referred to as AMPTP. MPAA is a trade association whose membership comprises companies which are among the largest producers and distributors of copyrighted motion pictures in the United States. The membership of AMPTP which is a California membership corporation comprises 72 companies' engaged in the production of copyrighted motion pictures for theatrical exhibition and for television broadcasting, and of series specially produced for telecasting.

I also appear here for the Committee of Copyright Owners, commonly referred to as "CCO". CCO is an ad hoc committee formed by producers and distributors of filmed and taped copyrighted television programs formed in order to coordinate their efforts in resolving the CATV-copyright issue and various regulatory issues concerning the importation by cable systems of programs from distant television stations and the resulting duplication of programs telecast by local stations. The membership of CCO comprises only the independent suppliers of copyrighted

1 Allied Artists Pictures Corporation, Avco Embassy Pictures Corp., Columbia Pictures Industries, Inc., Metro-Goldwyn-Mayer Inc., Paramount Pictures Corporation, Twentieth Century-Fox Film Corp., United Artists Corporation, Universal Pictures, a division of Universal City Studios, Inc., and Warner Bros. Inc.

2 The following companies constitute the membership of AMPTP: Aaron Spelling Productions, Inc., A&S Productions, Inc., (The) Alpha Corporation, American International Productions, a California Corporation, Artanis Productions, Inc., Aubrey Schenck Enterprises, Inc., Bing Crosby Productions, Inc., Brien Productions, Inc., Bristol Productions, Inc., Charleston Enterprises Corporation, Cinema Video Communications, Iac., Chrislaw Productions, Inc., Columbia Pictures Industries, Inc., Daisy Productions, Inc., Danny Thomas Productions, Darr-Don Inc., Edprod Pictures, Inc., Filmways, Inc., Formosa Productions, Inc., Four Star International, Inc., Frank Ross Productions, Geoffrey Productions, Inc., Gilbraltar Productions, Inc., Hanna-Barbera Productions, Inc., Harold Hecht Company, Herbert Leonard Enterprises, Inc., Jack Chertok Television, Inc., Jack Rollins and Charles H. Joffe Productions, (The) Kappa Corporation, Lawrence Turman, Inc., Legarla, Inc., Leonard Films, Inc., Levy-Gardner-Laven Productions, Inc., Lucille Ball Productions, Inc., (The) Malpaso Company, Max E. Youngstein Enterprises, Inc., Meteor Films, Inc., Metro-Goldwyn-Mayer Inc., Metromedia Producers Corporation, Millfield Productions, Inc., (The) Mirisch Corporation of California, Mirisch Films, Inc., Mirisch Productions, Inc., Motion Pictures International, Inc., Murakami Wolf Productions Inc., NGC Television Inc., Norlan Productions, Inc., Oakmont Productions, Inc., Paramount Pictures Corporation, Pax Enterprises, Inc., Pax Films, Inc., Rainbow Productions, Inc., Rastar Enterprises, Inc., Rastar Productions, Inc., RFB Enterprisest inn R.F.D. Productions, Robert B. Radnitz Productions, Ltd., Sheldon Leonard Productions, Sid & Marty Krofft Television Productions, Inc., Spelling-Goldberg Productions, (The) Stanley Kramer Corporation, Stuart Millar' Productions, Inc., Summit Films, Inc., T&L Productions, Inc., Tandem Productions, Inc., Thomas/Spelling Productions, Twentieth Century-Fox Film Corp., Universal City Studios, Inc., Walt Disney Productions, Warner Bros. Inc., Wolper Pictures, Ltd., Wrather Corporation.

* Columbia Pictures Industries, Inc., MCA, Inc., Metro-Goldwyn-Mayer Inc., Metromedia Producers Corporation, Paramount Picture Corporation, Twentieth Century Fox Film Corporation, United Artists Corporation and Warner Bros. Inc.

television programs but not the networks, television stations, music performance societies or other owners of copyrighted works. However, the programs supplied by members of CCO to stations and thereby to cable systems, constitute by far the largest part of all copyrighted programs carried by television and cable.

CCO has negotiated a settlement with the cable system operators and broadcasters regarding the retransmission by cable systems of broadcasts containing copyrighted programs. In this settlement which was incorporated into a formal written "Consensus Agreement” (Appendix I attached hereto), the representatives of the cable, broadcasting and program production industries pledged themselves to support full implementation by the Congress and the Federal Communications Commission ("FCC") of all of the provisions of said settlement agreement. With respect to copyright fees the settlement provided that if the parties should be unable to agree on the amount of license fees payable by cable systems this issue should be settled by arbitration.

Promptly after the settlement was signed, the FCC implemented the agreement and issued new regulations (47 C.F.R. 88 76.51 et seq.) giving wide freedom to cable systems for the importation of distant signals but when copyright owners and cable operators failed to agree on copyright fees the cable industry repudiated the pledge contained in the Consensus Agreement that in the event of slich disagreement the parties would support the insertion of an arbitration clause into the bill. As a result the copyright owners are still unable to collect license fees for the use of their films by cable systems, and are faced with a statutory schedule of fees in the bill, S. 1361 which as I shall demonstrate hereinafter, is wholly inadequate to provide just and reasonable compensation to the copy. right owners for the value of their programs and for the losses suffered by them from the importation of distant signals.

Seated next to me here is Mr. Gerald Meyer a member of the law firm of l'hillips, Nizer, Benjamin, Krim & Ballon, counsel to CCO.

There are also present in this room at my request, Dr. Robert W. Crandall, Associate Professor of Economics at the Massachusetts Institute of Technology and Mr. Lionel L. Fray of Temple Barker & Sloane, Inc., Management and Economic Counsel. These two gentlemen are the authors of the study commissioned by CCO entitled “The Profitability of Cable Television Systems and Effects of Copyright Fee Payment." Professor Crandall and Mr. Fray are available to the Subcommittee in the event that members of the Subcommittee may wish to address questions to them regarding the economics of cable television and of the distribution of programs in the television markets of the United States.

I am grateful to the Committee for the privilege of testifying today and for the opportunity to state the position of the associations and groups of copyright owners for whom I am authorized to speak. We welcome the instant hearings and the resumption by the Subcommittee of its work on copyright law revision.

Indeed, the delay in the adoption of the Copyright Revision Bill for more than a decade combined with the slowness of the judicial process in establishing the right of the creators of copyrighted programs to collect under the present law, royalties from cable systems which use these programs for their commercial profit, has caused grievous injury to all those whose talents and investments have produced these programs."

The motion picture industry of the United States makes the films which are shown in more than fourteen thousand motion picture theatres throughout the country as well as the majority of the programs broadcast by almost 700 commercial television stations. It is an industry directly employing thousands of people and indirectly providing the payrolls for tens of thousands more. The skills of those responsible for these programs range from those of the actors, writers, directors, composers and producers to those of the technicians on the sets and in the studios, the costume and wardrobe designers and makers, carpenters, painters, electricians, teamsters, warehousemen and office and professional personnel. All of these men and women depend for their livelihood on the income derived by the industry from various uses of these programs. Their compensation depends on the copyright fees paid for the use of these films in theatres and on television, and, insofar as television series are concerned consists to a large extent of "residuals", i.e, of payments for each showing (run) of a series subsequent to its original run.

A The CATV-Conyright controversy covers solely the retransmission by cable systems of nrograms broadcast by television stations for which the cable system charges its subscribers a fixed monthly charge. When cable systems "originate" their own programs or make a separate program or a per channel charge (Pay-TV or Pay-Cable), their copyrightliability is admitted by all concerned.

I want to emphasize at the outset : the Program Suppliers are not anti-CATV, On the contrary, CATV systems represent important potential customers for television programs and, hopefully, an ultimate source of considerable revenue. In the public interest, as well as in their own self interest, all copyright owners look forward to a prosperous CATV industry. It is the desire of the copyright owners, therefore, to be as constructive as possible and to support the efforts of this Subcommittee in dealing effectively with this immensely difficult problem.

Both as a matter of economic necessity and of social fairness to those who produce the programs, it simply is wrong that the cable industry which reaps substantial profits from the use of the productive creations and investments of others should be permitted to remain outside of the program distribution market and to charge its subscribers $60 to $70 or more each year for transmitting to them a product for which—so far—they have paid nothing, and to do so in competition with the producers' paying customers, the television stations. I am glad to add that the cable industry concedes that it should pay royalties. Where we disagree, principally, is how much it should pay.

I. HISTORICAL BACKGROUND

1. Copyright Liability of Cable Systems under the 1909 Act

Television today is a major user of copyrighted film programs. Before a television station broadcasts a copyrighted program, it must secure a license from tle program's owner. The cable television segment of the television industry, on the other hand, picks up programs broadcast by television stations both nearby and far away and, for a monthly charge, retransmits them to individual set owner's over wires or cables. Up to now CATV, while diverting income from television stations, has escaped making payments to copyright owners even though it nses the copyrighted films for profit

The 1909 Copyright Act of course did not anticipate modern technology and novel methods of communication. Thus in Fortnightly Corp. v. United Artists, Inc., 392 l'.S. 390 (1968), the Supreme Court fo the United States held that the unlicensed use of essentially local broadcasting signals by community antenna systems which neither originated programs nor used microwaves and which were merely "well located” antennas enhancing the viewer's capacity to receive the broadeaster's signals, did not constitute a copyright infringement within the terms of the Copyright Act of 1909. On the other hand, in Columbia Broadcasting Systems, Inc., against Teleprompter Corp., 476 F. 2d 338 (1973) (2 Cir., 1973) the Court of Appeals for the Second Circuit held that the retransmission of programs from distant stations, constituted a copyright infringement. The court said :

we no longer have a system that 'no more than enhances the viewer's capacity to receive the broadcaster's signals.' Fortnightly, p. 399, 158 USPQ at 5. We hold that when a CATV system imports distant signals, it is no longer within the ambit of the Fortnightly doctrine, and there is then no reason to treat it differently from any other person who, without license, displays a copyrighted work to an audience who would not otherwise receive it. For this reason, we conclude that the CATV system is a “performer" of whatever programs from these distant signals that it distributes to its subscribers."

The defendant in the Teleprompter case has petitioned the Supreme Court for a writ of certiorari regarding the Court of Appeals' holding that CATV is liable when it imports distant signals. 2. The Consensus Agreement

In 1965 and 1966, the FCC prohibited cable systems from importing programs from distant stations into the top 100 television markets on the ground that such importations would impair local broadcasting, would blanket the country with signals from the superstations in New York, Chicago and Los Angeles and would be unfair to program producers and broadcasters in that stations have to negotiate and pay for the programs while cable systems deny their copyright liability under the 1909 sta ute.

During the Fall of 1971, Mr. Dean Burch, Chairman of the FCC, and Dr, Clay T. Whitehead, Director of the Office of Telecommunications (OTP), sponsored negotiations between representatives of the industries principally involved in the controversy, i.e., cable operators, broadcasters and copyright owners. The deadlock among the cable industry--which felt that its expansion was unduly limited by the FCC's restrictions on the importation of distant signals-the

5 Second Report and Order, Community Television Systems, 2 FCC20 725 (1966). See also First Report and Order, 38 FCC 683 (1965).

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broadcasters—which felt that it was unfair to permit cable systems to carry the same programs as they do without having to bargain and pay for them—and the copyright owners—who wanted to put an end to the use of their product without receiving royalties therefrom-was broken by all parties consenting to the "Consensus Agreement” of November, 1971. This Consensus Agreement was accepted and signed by the National Cable Television Association (NCTA), the National Association of Broadcasters (NAB), and the Committee of Copyright Owners (CCO).

Under the Consensus Agreement (Appendix I), most of the distant signal carriage restrictions imposed by the FCC on cable systems were to be lifted. CATV systems were to be permitted to import programs from distant stations subject to certain limitations depending on the size of the market into which the importation was to take place and subject to the non-duplication by cable systems of programs available in the same market from local television stations.

Furthermore, the parties to the Consensus Agreement pledged themselves “to support separate CATV copyright legislation as described [in the Consensus Agreement], and to seek its early passage”. The copyright legislation to be supported by the parties according to the Consensus Agreement would include "liability to copyright" and a compulsory license to cable systems to retransmit copyrighted programs without negotiating with the owners of the programs. The compulsory license was to cover all local signals as well as a certain number of distant signals authorized “under the FCC's initial package" (which initial package was described in the Consensus Agreement). Signals carried by cable systems at the time the Consensus Agreement goes into effect were to be "grandfathered" and independently owned systems then in existence with fewer than 3,500 subscribers were to be omitted from liability to copyright.

One of the essential controversies which the Consensus Agreement was intended to solve, was the question of fees payable to the copyright owners under the compulsory license. Since the copyright owners had found the fee schedule which had been first set forth in the committee print of December, 1966 of the Copyright Revision Bill S. 543, 91st Cong., 1st Sess., wholly unsatisfactory, an increase in the amounts of these fees had been the subject matter of fruitless discussions between the parties. It was because of the wide divergence of views between the parties on this point that the Consensus Agreement specifically provided for an alternative method of setting these fees in the event that the parties should be unable to agree thereon. More specifically the Consensus Agreement provided :

"Unless a schedule of fees covering the compulsory licenses or some other payment mechanisms 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." (Italics supplied)

This Consensus was found to be in the public interest both by the FCC and by the Chairman of the Subcommittee on Patents, Trademarks and Copyrights of the Senate Committee on the Judiciary. Thus, in the Cable Television Report and Order, 37 Fed. Reg. 13843 (1972) par. 65, the FCC said in adopting its new cable rules :

"We believe that adoption of the Censensus Agreement will markedly serve the public interest :

"(i) First the agreement will facilitate the passage of cable copyright legislation. It is essential that cable be brought within the television programming distribution market. There have been several attempts to do so, but all have foundered on the opposition of one or more of the three industries involved. It is for this reason that Congress and the Commission have long urged the parties to compromise their differences.

“(ii) Passage of copyright legislation will in turn erase an uncertainty that now impairs cable's ability to attract the capital investment needed for

substantial growth. ... "It is important to emphasize that for full effectiveness the Consensus Agreement requires Congressional approval, not just that of the Commission. The rules will, of course, be put into effect promptly. Without Congressional validation, how. ever, we would have to re-examine some aspects of the program. Congress we believe will share our conclusion that implementation of the agreement clearly serves the public interest.” (See exchange of letters between Chairman Burch and Senator McClellan attached as Appendix E)

In the letter to the Chairman of the FCC dated January 31, 1972 and incorporated as an appendix into the FCC's report on the new rules, Senator McClellan, Chairman of the Subcommittee on Patents, Trademarks and Copyrights, said:

“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 interest and reflects a reasonable compromise of the positions of the various parties."

A copy of said letter is attached hereto as Appendix II.

Promptly after the adoption of the Consensus Agreement the negotiating committees of CCO and of the National Cable Television Association (NCTA) met in order to work out a mutually satisfactory license fee schedule. These meetings, however, did not lead to an agreement between the parties as to the amount of fees.

On the other hand, the lifting by the FCC of the restrictions on the importation of distant signals contemplated by the Consensus Agreement was implemented by the Cable Television Report and Order and a set of regulations was released by the FCC on February 3, 1972 to become effective on March 31, 1972. In said Report and Order (Dkt. No. 18397A, par. 64) the FCC stated that “if, as we judge, the terms (of the Consensus Agreement] are within reasonable limits and the agreement is of public benefit, then it should be implemented in its entirety".

On February 14, 1972, Mr. John Gwin, Chairman of the Board of the NCTA addressed a letter to Mr. David Horowitz, Chairman of CCO, pointing out that the Consensus Agreement obligated all of the agreeing parties to support implementation of all of the provisions of the Consensus Agreement and requesting the support of CCO in opposing any reconsideration of the FCC's Report and Order's unfreezing the carriage of distant signals. This letter was answered by Mr. Horowitz on February 18, 1972 expressing full accord with the need to support implementation of all of the provisions of the agreement and requesting that NCCA support its provisions dealing with arbitration of license fees in view of the parties' fruitless efforts to agree on a fee schedule. A copy of that correspondence between Mr. Gwin and Mr. Horowitz is enclosed herewith and marked Appendix III.

Subsequent to the exchange of this correspondence, Mr. Horowitz advised Chairman Burch that in view of the fact that all parties had agreed to support copyright legislation and in view of the exchange of letters between Chairman Burch and Chairman McClellan, CCO was satisfied that legislation would be promptly enacted implementing the Consensus Agreement and that accordingly, CCO in order to break the deadlock and enable CATV to build its facilities in the major markets, would not ask for a delay in the becoming effective of the new FCC rules but would support them in reliance on the compromise struck between the interested industries. 3. The Unfreezing" of Distant Signals and subsequent Repudiation by NOTA of

the Arbitration Clause of the Consensus Agreement The new FCC rules went into effect on March 31, 1972 and the "unfreezing" of the restraints on the importation of distant signals resulted in a spectacular expansion of the cable industry. According to a report in CATV weekly magazine of May 7, 1973, based on official FCC statistics, the "cable television industry recorded a one year jump of 21.5% in subscribers served and 24.6% in operating systems between January 1, 1971 and January 2, 1972.” The same statistics reveal that the industry served 6,085,532 subscribers on the 1st of 1972 compared with 5,008,580 a year earlier. Comparative figures for the number of communities served by systems for the same period are 5,006 in 1972 compared to 4,017 in 1971. This trend was accelerated during 1972 and 1973 although it has not as yet been fully reflected in the available statistics. In data published in the Television Factbook No. 43 and the addenda thereto published in Television Digest, it appears that as of the beginning of 1973 the number of subscribers served has further increased to 7.300,000, and that the number of communities serviced as of July 26, 1973 had risen to 6,010

Appendix El annexed to the FCC's Cable Television Report and Order, 37 Fed. Reg 13848 (1972).

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