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After the cable industry had thus received substantially all of the benefits provided for it by the Consensus Agreement and while it enjoyed an explosive growth in its newly gained freedom, the attitude of its negotiators for the license fees payable to copyright owners stiffened notably as soon as the regulatory restraints were removed. Indeed, since that time and in spite of the inability of negotiators for NCTA and CCO to agree on a fee schedule, NCTA has shown an increased reluctance to support the arbitration clause of the Consensus Agreement.
This does not mean that the efforts to reach agreement on a fee schedule were suspended. For most of the year of 1972, representatives of CCO and NCTA labored through long detailed and exhausting sessions, consuming hundreds of man-hours, both at plenary and at technical subcommittee meetings of experts, in an attempt to find agreement on a fee schedule. Notwithstanding these efforts the parties were unable to reach such agreement.
In July, 1972, the representatives of CCO and NCTA determined that if no agreement on a fee schedule was reached by September 30, 1972, the negotiations would be terminated. This deadline was extended several times until the last meeting between these representatives on November 6, 1972 at which time both sides expressed the view that the gap between the positions of the parties as to what fees would be reasonable, continued to be so wide that further negotiations on a fee schedule would be senseless. (CO thereupon proposed an arbitration procedure for insertion into the bill to implement the Consensus Agreement in this respect.
At the conclusion of said meeting of November 6, 1972 the NCTA Committee stated that it would consider CCO's proposal and submit it to its executive committee at a meeting to be held on November 20, 1972. The NCTA negotiators further promised to advise CCO immediately after said meeting of its executive committee as to what its response to the CCO proposal would be in view of the need for speedy action because of the impending consideration of the copyright bill in the Congress. NCTA however failed to advise (CCO of its executive committee's response to the arbitration proposals discussed at the November 6 meeting.
Upon inquiry from CCO, NCTA advised ("Co that the response would have to await the meeting of the full XCTA Board on December 13 and 14, 1972. On December 16, 1972, I talked with the President of the NCTA. He told me that NCTA had decided not to accept the copyright owners' proposal. (CO's proposal, he said, was referred back to the XCTA negotiating committee, and they would submit a counter proposal to us. That proposal, however, was never submitted. At about the same time the Chairman of the YCTA negotiating committee, Jr. Alfred Stern, advised the Chairman of the (CO negotiating committee, Mr. David Horowitz, that the NCTA Board has rejected the proposal of CCO for the arbitration and that it would not submit any counter-proposals on the subject since it was unwilling to support arbitration regardless of the provisions of the Consensus Agreement and that NCTA would support instead the fee schedule contained in $ 111 of the Committee Print of December, 1969 of S. 644.
The copyright owners find themselves in a situation now where they have made substantial concessions in a compromise which has heen implemented only insofar as the major benefits for the cable industry are concerned but where the reciprocal promises made by the cable industry have been repudiated unilaterally by NCTA.
II. THE INADEQUACY OF THE FEE SCHEDULE IN S. 1361 The fee schedule of $ 111(d) (b) of S. 1361 first appeared in the committee print dated December 10, 1969 for a predecessor bill (S. 543, 91st Cong.. 1st Sess.). An earlier predecessor bill, HR 2512 (90th Cong., 1st Sess.), had provided for negotiations between copyright owners and cable systems with penalties of loss of royalties or a trebling thereof in the event of unreasonable demands or offers. The fixed-rate schedule was thereafter inserted into the aforesaid committee print, into the successor bill S. 644 and into the present bill, S. 1361, without any prior hearings on the reasonableness of this schedule.
We are not aware of any economic evidence before the Subcommittee prior to the insertion of the fee schedule or of any fact-finding effort to ascertain whether the scheduled fees would correspond even approximately to the reaso:able value of the use of their programs by cable systems aud whether they woului be reasonably compensatory of the losses expected to be suffered by the copyright owners. In fact, these fees are grossly inadequate and represent only a small fraction of what the copyright owners feel would be fair and compensatory fees, Attached hereto and marked Appendix IV is a computation based on the fee schedule contained in § 111 indicating that the fees payable by the cable industries for the year 1971 pursuant to that schedule would have amounted to a total of only $7,630,000. If an exemption of systems with less than 3,500 subscribers had been applied (see below under III 5.), this amount would have been even lower. These license fees would have to be shared by program suppliers, networks, broadcasters, music performing societies, and others. Indeed while § 111 at first sight gives the impression that cable systems with large revenues would pay a royalty rate of 5%, the progressive rate from 1% to 5% in reality yields license fees at an effective rate of only 1.93% of the gross revenues of the cable industry. This low effective rate results from the fact that the scale of marginal rates progresses in successive steps from one to five percent based on quarterly revenue segments of the systems. Thus, even large systems with huge revenues pay less than 5% because the 1% royalty applies to their first segment of $40,000 of their quarterly revenues, 2% to the next $40,000, etc. so that the 5% royalty is applicable only to that segment of their revenues which is in excess of $160,000 quarterly of $640,000 annually.
To put these figures into perspective, it should be mentioned that according to FCC published figures the total broadcast revenues for the television industry during 1971 amounted to $2,750.3 Million Dollars while total programming expenditures amounted to 1,488.5 Million Dollars or a ratio of $54.1%. During that same year the cable industry with gross revenues of about 400 Million Dollars would have paid $7,630,000 under the schedule of $ 111 (and even less if an exemption for small systems had been applied) or less than 2% of their gross revenues. (See Appendix IV).
That the cable industry is economically well able to pay much larger fees has been demonstrated in the aforementioned study entitled “The Profitability of Cable Television Systems and Effects of Copyright Fee Payments” by Robert W. Crandall and Lionel L. Fray, 1972. Copies of said study accompany my instant statement as a special appendix. In said study it is shown that cable systems could afford to pay more than 15% of their revenues for copyright fees and still earn enough profits to attract sufficient capital to sustain their growth. The calculations made in said study also suggest that cable owners would prosper, that their profits would be sufficiently above the level required by investors and that they should not find copyright fees in the aforesaid amount an impediment to their future growth.
This of course does not mean that 15% is actually what cable systems should ray as just and reasonable license fees for the use of copyrighted programs. It shows, however, that the assertion voiced by cable interests that the fee schedule in § 111 represents the maximum which they could afford to pay, is unwarranted or, at least, subject to substantial disagreement among experts in the field.
I respectfully submit to you that the percentages set forth in the schedule of $ 111 having been set without thorough fact finding and economic evaluation, are a priori figures without any rational relationship to the value of the programs to any of the more than 3,000 CATV systems, which vary greatly in the number of their subscribers, the number of channels, the programs carried by them, the circumstances of their operations and many other factors which should be taken into consideration. They are bound to be unfair either to a substantial part of the CATV industry, or to the program suppliers, or, which is more likely, to both. We believe that the basic principle should be that CATV should pay, and the program suppliers should receive, “just and reasonable" royalties, and that the statute provide for an appropriate procedure for the setting of such fees.
The determination of what fees are reasonable and should be paid by cable systems in fairness to themselves and to copyright owners depends on many factors obviously not taken into consideration when the fee schedule was fisrt inserted into the Committee Print of 1969. Such factors may include, among others, the location of the cable system, the number and origin of the signals it carriers, the value of the programs carried by the system, the size of the system, penetration of its franchised areas, saturation of the television market in which it operates, 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 distinguished from other activities of the system and literally thousands of variables on which the advice of economic experts should be sought.
It is apparent that a Congressional committee or subcommittee should not be burdened with such complicated and time consuming tasks of economic factfinding and rate making. The setting of fee schedules based on complex economic data is, of course, not unknown in our society and economic system. Indeed, the questions faced here are very close to the ratemaking process engaged
in by federal and state agencies setting rates for common carriers in transportation and communications and for such utilities as electric power and gas. Such administrative ratemaking procedures have been delegated traditionally by the Congress and the states to public utility commissions and similar administrative bodies which determine rate schedules fair both to the public and to investors in order to improve service. Even if arbitration had not been specifically provided for in the Consensus Agreement, its adoption is called for as the most sensible and fair method of resolving the question of what license fees are fair and reasonable.
Accordingly, it is the position of the copyright owners that the copyright revision bill should contain a provision for arbitration of the copyright fees payable under the compulsory license.
The Copyright Revision Bill (S. 1361, $$ 801 et seq.) provides for the establishment in the Library of Congress of a special Royalty Tribunal charged “to make determinations concerning the adjustment of the copyright royalty rates specified by Sections 111 ..." and other sections. It would appear appropriate that this Tribunal be charged from the outset with the setting of royalties under the compulsory license.
The Copyright Royalty Tribunal would be an objective body and not beholden to either the cable industry or the copyright owners. It would be able to deal equitably and without favoring either side, on the fixing of fees. Indeed, it is possible that the Tribunal may, after its deliberations, determine that the cable operators ought to pay lower fees than what the copyright owners so strongly feel is reasonable. But that is the principal reason for arbitration—it is eminently fair, neither side has an advantage. The Tribunal will hand down its decision after full, complete and possibly mountainous piles of evidence will have been submitted by the parties and experts. In that event neither side can claim that it was short-changed. The fairness of the Tribunal is its most valuable asset.
The question has sometimes been asked of the copyright owners whether the periodic adjustment of the compulsory license fees provided for in the bill (88 801, 802) would not satisfy their concern regarding their inadequacy. At most, it is argued, the fees, if inadequate, would be adjusted at the end of a three-year period. Unfortunately, the practicalities of the situation do not provide sufficient reassurance on this point.
First of all, the initial setting in the bill of a royalty rate amounting to only a fraction of what would be a just and reasonable royalty, would make it extremely difficult for the Royalty Tribunal to multiply that fraction at the time of adjustment in order to reach a rate which the Tribunal might determine to be just and reasonable.
Secondly, regardless of the merits of such increase, it will undoubtedly be strongly resisted by interested parties because, it will be claimed, the cable industry will have adjusted itself economically to this low rate. Such economic misjudgment may well occur in spite of all warnings expressed by the Congress regarding the temporary nature of the original fees.
In any event and even if it were possible to achieve a fair adjustment of the rates after three years, there appears to be no good reason why the copyright owners should be deprived of just and reasonable royalties for an additional three-year period on top of the more than a decade of the free ride which the cable industry has enjoyed in the past.
III. ESSENTIAL CHANGES IN BILL
When S. 1361 was introduced by Chairman McClellan in the Congress (Congressional Record, March 26, 1973), he indicated that its cable television provisions would have to be revised in the light of events since December, 1969 when the Committee Print of the predecessor bill was reported out of the Senate Subcommittee on Patent Trademarks and Copyrights to the full Senate Committee on the Judiciary. On behalf of the copyright owners for whom I speak here I respectfully submit several suggestions for changes which they consider essential in order to permit and facilitate the continued production of high quality motion pictures and television programs. These changes are in addition to those required by the insertion of an arbitration clause:
? We have previously submitted to the Subcommittee a proposed text for $$ 111 and 501 which incorporates most of the changes proposed herein. That text, however, did not contain the change proposed for $ 801 of the bill discussed below under subheading 3. Furthermore, a clarifying change has been made in the definition of "cable system" ($ 111(f) (1) (C) deviating slightly from our previously submitted text. I annex hereto as Appendix V a copy of our revised text for $$ 111, 501 and 801 containing the proposed changes which the copyright owners consider to be essential.
1. Grant of Compulsory License to Cable Systems with Appropriate Limitations
on its Scope
Consistent with the Consensus Agreement the Bill should grant to cable systems a compulsory license to retransmit all signals lawfully being carried by them prior to March 31, 1972 (“grandfathered" signals) and all local signals as defined by the FCC as well as such other additional or distant signals as would be consistent with the rules adopted by the FCC in February, 1972. With respect to signals subject to compulsory licensing, violation of exclusivity provisions established by the FCC should be a copyright infringement for which both the copyright owner and the broadcaster holding an exclusive license shall have a remedy under copyright law through court actions for injunctions and monetary relief.
The Consensus Agreement provides that the compulsory license shall be limited to "those distant signals defined and authorized under the FCC's initial package" (in addition to local and "grandfathered" signals). In general terms, the FCC's initial rules contemplate importation of usually two distant signals into the 35mile zones of larger markets (subject to certain exclusivity requirements), of enough distant signals to provide adequate program service within the 35-mile zones of smaller markets, and virtually unlimited distant signal carriage beyond the 35-mile zones of all markets. By incorporating by reference the pertinent provisions of the FCC's rules, the bill should adopt corresponding limitations on the scope of the compulsory license otherwise being given to cable systems. Thus, 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 Consensus Agreement the FCC would not“... be able to limit the scope of exclusivity agreements as applied to such signals beyond the limits applicable to over-the-air showings."
These provisions dealing with limitations on and enforcement of the compulsory license which are called for by the Consensus, were vital to reaching any consensus and are essential for insertion into 8111 rather than to be left to regulation by the FCC. Such a compulsory license constitutes preferential treatment of CATV under copyright law at the expense of the program suppliers and broadcasters. Indeed, under the statutory compulsory license cable systems will not have to bargain with the copyright owners for the right to use their programs or for the amount of fees which they would have to pay for such use. In the light of these privileges granted to the cable industry, it would be completely unfair to allow a four member majority of the FCC to expand the scope of that compulsory license by simple administrative regulation as would be the case if the compulsory license were open-ended.
The limitation on the scope of the compulsory license is not a regulatory measure, nor is it a measure that unwisely ties the hands of the FCC. The FCC would retain full power to change its rules as it sees fit consistent with the public interest standards of the Communications Act. But the FCC would not be given, just as the FCC does not now have and should not have, the power to change the copyright law and thereby the power to take private property from one party and give it to another party simply through administrative fiat. 2. Basis for computation of fees
The present text of the bill imposes the percentage royalty on the gross amounts received from subscribers "for the basic service of providing secondary transmissions of primary broadcast transmitters." $ 111(d) (2) (A).
Spokesmen for the CATV industry, however, have publicly voiced their hope that income and profit from sources other than secondary transmissions will permit them in the future to reduce the fees they charge to their subscribers and may even enable them to eliminate subscribers' fees entirely.
Thus, at the argument before the Supreme Court of U.S. v. Midwest Video Corp. (decided in 406 U.S. 649; 1972) the following colloquy took place between the Chief Justice and the Deputy Solicitor General, Mr. Lawrence G. Wallace as reported in 40 L.W. 3509.
The Chief Justice: "Is there advertising on cable TV ?”
Mr. Wallace replied that it is authorized in cablecasting and furthermore, if the programs are picked up from the networks they are run as they are without deletions of advertisements.
The Chief Justice: “Does that mean that subscribers [of CATV] will be paying to have advertising?"
"Yes," Mr. Wallace replied, "but to the extent that there is advertising, it will reduce the subscription rates." (italic supplied)
It is apparent that if said subscribers' fees should be reduced due to circumstances wholly unrelated to the use of programs and due solely to cable systems developing other sources of revenue, the copyright owner should not be deprived of his fair compensation. This is so especially since his property continues to be used by the CATV system which still retransmits its programs for promotional purposes in order to acquire and retain the subscribers to whom it sells other profitable services. Consequently, the statute should provide that in readjusting the fees, the Tribunal shall have broad powers to set and to adjust the fees both with respect to the manner and method in which it is to be computed and the base on which the fees are to be assessed.
The granting of such broad powers to the Tribunal are necessary to prevent a manipulative restructuring of subscribers' fees in order to attract customers to operations of the cable system other than “the basic service of providing secondary transmission of primary broadcast transmitters."
In the absence of a specific grant of such powers, the Tribunal might not be in a position to promulgate fee changes freely and flexibly as economic changes and total fairness might require. Instead, it might be bound by the rigid limitations contained in the statute. It might not be able to take into consideration the requirements of a fast moving technological age. If the hands of the Tribunal were limited to a particular manner and method of setting the fees or if it had to utilize a particular base on which fees were to be assessed, the result may well be that the fees would be grossly or even shockingly inadequate. In such case, the parties would be compelled to seek legislative relief and the history of copyright law revision abundantly demonstrates how difficult it is to achieve statutory enactment in this field. 8. Guidelines for adjustment of fees
Another matter which causes great concern to the copyright owners, especially if the Congress should adopt a fixed fee schedule contrary to the joint recommendations of the parties contained in the Consensus Agreement and contrary to the arguments which I am presenting here today, is the wording of $ 801 (b) of S. 1361 which now provides that the Tribunal “shall make determinations concerning the adjustment of the copyright royalty rates specified by Section 111 ... so as to assure that such rates continue to be reasonable .. (italic supplied). I urge that this language be changed to provide that the Tribunal "shall make determinations concerning the adjustment of the copyright royalty rates specified by $ 111 ... so as to assure that such rates are just and reasonable. *** Only thus will the Tribunal at the periodic review of the rates be able to proceed to an open and fair determination without any implication such as that contained in Section 801 as presently worded, that the royalty rates initially set in the statute were deemed "reasonable" when they were initially adopted. 4. Definition of Cable Systems
The degnition of cable systems as now contained in $ 111(f)(1)(C) is ambiguous and may be misinterpreted to fragment the revenue of a system for the purpose of computing royalties payable under a progressive rate such as that used in the fee schedule of § 111 or such as may be adopted by arbitration. Thus the computation of royalties under the fee schedule of $ 111 of S. 1361 made in Appendix I attached hereto and referred to supra on p. 296 is based upon the "conventional" definition of a cable system employed, for example, by the TV Fact Book. On the other hand, the FCC embodied a definition of cable systems into its cable rules $ 76.5(a)) which contained a note as follows:
"YOTE: In general, each separate and distinct community or municipal entity (including single, discrete, unincorporated areas) served by cable television system, constitutes a separate cable television system, even if there is a single headend and identical ownership of facilities extending into several communities. See, e.g., Telera ma, Inc. 3 FCC 20 585 (1966); Mission Cable TV, Inc., 4 FCC 2d 236 (1966).".
If the royalty computation of the Table, Appendix IV were to be based on the FCC's definition of cable systems, the revenues of individual cable systems would be fragmented to such an extent that they would pay an even lower rate of copyright fees until $ 111's sliding scale. The result would be that the average effective fee paid by cable systems would be reduced from 1.93 to perhaps as low as 1%.
*$ 111 subsection (d) (2) as proposed hy CCO (Appendix v attached hereto), provides that the cable system in its neriodic reports must indicate "the gross amounts irrespertire of source received by it" and provides for determination of "just and reasonable compulsory license fees" without limiting specifically the revenues which must serve as the base for computing the royalties.