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ferent from those today. We suggest as one alternative the survey of his own members.

While we employ the NCTA estimates of subscriber demand in projecting the profitability of cable systems, we also utilize a more conservative assumption for the top 100 markets-55.3% of homes passed, the datum which the NCTA claims is representative of 1972 conditions. As a final calculation, we even utilize a very low 40% subscriber penetration assumption, and we find that copyright fees can be paid by systems in the top 100 markets with this very low subscriber penetration if revenues per subscriber grow by at least 2% per annum. Since few cable systems will be built in anticipation of subscriber penetration of less than 40% of homes passed, this provides a lower limit to anticipated profitability which is in the range of 14.3 to 19.2%. We cannot disagree with Mitchell's pessimistic projections for middle-market systems if they are connected to only 22 to 35% of homes passed. We simply do not believe, however, that profitability estimates should be based upon subscriber penetration levels of systems which even by Mitchell's own assertion will not be built.

3. THE EFFECTS OF NEW CABLE SERVICES UPON ESTIMATED PROFITABILITY

It is now a well-accepted principle of public-utility regulation that all of the capital facilities required for the generation of joint products should not be allocated to only one of these products or services. It would be equally falacious to attribute all of the profits of a very profitable cable system to leased channels and to assign the cost of the capital facilities required to transmit these channels entirely to the retransmission of broadcast signals offered by the cable owner. For this reason, we have calculated the profitability of cable systems under the assumption of modest revenue growth from new services. To do otherwise would understate the ability of these systems to pay mandatory copyright fees.

In his testimony, however, Mitchell admitted that he did not include the revenues or costs from new services such as leased channels or pay cable in his study because the "programming shown on such channels is fully subject to the present copyright law." While we do not doubt that cable owners will be required to compensate copyright owners for this additional programming in proportion to the added net revenues generated, we cannot agree with Mitchell in excluding these revenues from the analysis of overall cable profitability. These leased or pay channels will utilize the same capital equipment as the retransmitted broadcast signals and will contribute to amortizing this investment. Therefore, it is invalid to exclude such ancillary activities from calculations of the rate of return on total investment in cable plant. Mitchell should exclude a pro rata share of the capital base from his more narrow calculation of "profitability" or alternatively. include the net revenues to be expected from these new services. To do otherwise would be tantamount to assigning all of the profits from cable operations to leased channels or to pay-television services while treating the retransmission of broadcast signals of "loss leaders."

While we are unable at this time to provide precise estimates of future revenue growth. we have calculated the profitability of all systems under three different assumptions about the rate of growth in revenues per subscriber:

(a) 0% per year

(b) 2% per year

(e) 4% per year

These assumptions are probably conservative in light of the potential for new cable services and the possibilities for growth in fees for traditional basic services. This range of alternatives was chosen because it illustrates the difference between Dr. Mitchell's assumption (0%) and the projections implicit in cable owners' acquisition prices for completed systems in 1971-1972. These prices reflect the anticipation that cash flow will grow at a rate equivalent to 9% in perpetuity-an anticipation which is consistent with growth in revenues per subscriber of more than 3% per year with no increases in costs.

The effect of allowing revenues per subscriber to grow at 4% per year is considerable. On the average, this growth rate leads to an increase of 9 percentage points in the annual rate of return available to system owners. A more modest 2% growth rate increases the estimated rates of return by approximately 5 percentage points.

4. OWNER'S EXPECTATIONS OF CABLE PROFITABILITY

Perhaps the most dramatic evidence that Dr. Mitchell's profitability projections are too low comes once again from the cable television industry. In 19711972, a number of these firms were engaged in an active policy of acquiring existing cable systems at prices which averaged $325 per subscriber at maturity. Since the reproduction costs of these systems is usually less than $200 per subscriber, at least $125 of the $325 purchase price must reflect anticipated profits in excess of the cost of capital.

There appears to be some evidence that the rate of return before taxes required for the construction of cable systems is 15% per annum (although Mitchell states that returns in the range of 9% to 13% are likely to attract equity investors). Mitchell projects rates of return of less than 15% for all but large systems outside the top 100 markets. Even in these markets, he predicts that systems of 10,000 subscribers will realize only 13.6 to 17.0%. But the terms under which the average system was purchased in 1971-72 reflect expectations of at least a 20% annual return on capital before taxes. It is quite clear from this evidencethe price knowledgable buyers were willing to pay in the market place that the industry members do not believe Dr. Mitchell's low estimates of profitability.

5. NEW SYSTEMS AND FRANCHISES IN THE TOP 100 MARKETS

Much of the NCTA testimony centers on Dr. Mitchell's projections for the top 100 markets. It is his prediction that systems in the center of the top 100 markets will earn a rate of return of 2.4 to 10.4% per annum before taxes even without copyright payments. Clearly, if he is correct, there will be no construction of cable systems in the top 100 markets with or without copyright fee payments.

Surprisingly, however, there has been considerable activity in the center of the top 100 markets. Between 1970 and 1972, the number of franchise applications in the central cities of the top 100 markets increased from an average of 1.5 per city to nearly 3.0. In Chicago, 17 applications were pending in 1972. In Milwaukee, 14 were outstanding while in Portland, Maine, 13 were pending. In three other cities, 10 separate franchise applications had been received by municipal authorities. Since the beginning of 1973 another 10 franchise applications have been received by the regulatory authorities in the central cities of the top 100 markets.

Despite the freeze on imported signals in the top 100 markets until early 1972, 22 new systems began construction in the central cities of the top 100 markets between 1970 and 1972. The new cable rules enunciated by the FCC in 1972 should allow other franchise holders to begin construction once the municipal and FCC administrative processes are completed.

This strong evidence of investor optimism in even the center of the top 100 markets is hardly consistent with Dr. Mitchell's projections of low profitability for these systems. Once again, we conclude that the cable television industry does not accept Dr. Mitchell's conclusions and that its members believe that the future is bright for cable investment in even those areas with three or more strong local signals.

6. EFFECTS OF THE DEFINITION OF A CABLE TELEVISION SYSTEM

The definition employed for a cable television system in S. 1361 could have a substantial effect upon the magnitudes of copyright fees paid, and the Subcommittee should be aware of these effects.

Under the informal definition which has been used by the cable television industry since its inception, and employed by the NCTA as well as by statistical services such as the Television Factbook and others, a cable system has been considered as being under single ownership, generally having a single head end, and operating over a contiguous geographic area. The discussions held heretofore between copyright owners, representatives of the cable industry, the Subcommittee staff, and others, have been in terms of this definition. The economic analysis peerformed, including that by Mitchell, has also employed this definition. In his testimony on August 1, however, Mr. Foster proposed an alternative definition as follows. "A 'cable system' is any facility providing a cable service which in whole or in part receives signals transmitted by one or more broadcast stations licensed by the Federal Communications Commission and simultaneously distributes them by wire or cable or radio to subscribing members of the public within a political subdivision within which the facility operates (emphasis

supplied)." It is the latter part of this definition which has a significant effect upon the amounts of copyright fee to be paid because many systems operate over more than one political subdivision. Thus, by the conventional industry definition, there are about 3,000 systems; but by the definition proposed by Mr. Foster, there would be about 6,000 systems-each system being split into two "systems" on the average. If the alternative definition were made operative in the bill, the effect on the amounts of copyright fee paid by the cable industry would be to reduce them by one half.

An example makes clear why this would happen. Suppose a cable system with quarterly revenues of $160,000 operated over two adjoining townships, and obtained $80,000 in revenues from each one. Under the conventional definition, this system would pay $4,000 each quarter, or 2.5% of its total gross revenues. Under the alternative definition, however, this system would be viewed as two "systems," each with revenues of $80,000. Each of the "systems" would pay only $1,200 per quarter and together, they would pay $2,400 or only 1.5% of

revenues.

7. THE EFFECT OF MODIFYING THE PROPOSED FEE SCHEDULE

The copyright fees proposed in S. 1361 vary from 1% to 5% of gross revenues in five discrete steps. The Chairman of the Subcommittee has requested that we analyze the effect upon cable system profitability of fees which are twice as high, i.e., which vary from 2% to 10%.

The average fee paid under the schedule proposed in S. 1361 would be nearly 2% of total cable revenues under current conditions. This average would approximately double to 4% of cable revenues if the fee schedule were increased to 2-10%. The effect upon profitability would be de minimis as the following excerpt from Tables E-3 to E-7 of our study demonstrates:

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As may be observed, the effect of doubling the fee schedule is to reduce rates of return by less than 1 percentage point. Average returns are still far in excess of the 10-15% required to attract investor capital.

8. THE AVAILABILITY OF EVIDENCE FOR THE DETERMINATION OF COPYRIGHT FEES

In his August 1 statement before the Subcommittee, Mr. Foster argued for the establishment of an initial fee schedule for compulsory copyright license for cable television systems by Congress (p 26). His major reason was that "sufficient empirical data simply does not presently exist to permit arbitrators to fairly establish an initial fee schedule" but would be available in three years when the arbitrators would convene under the proposed bill. We believe that a great deal of economic evidence presently exists or can readily be obtained, sufficient to permit arbitrators to make an informed determination as to just and reasonable fees.

The amount of financial data presently available from the cable television industry includes financial statements of hundreds of cable companies, some of them publicly held. In most cases, these companies maintain financial records by system, samples of which could be obtained under proper circumstances by an

agency of the government. Some of these financial statements are available for each of more than ten years in the past. In addition, in the spring of 1972, the FCC requested detailed financial information from all cable television systems in the country (via their form 326). This included not only profit and loss statements by system, but also much other data which could be of use to the arbitrators. While this data is not in the public domain because it was obtained under conditions where individual system confidentiality is to be maintained, the FCC might be persuaded that its suitable analysis under proper auspices for the purpose of determining copyright fees would be in the public interest. In addition to the above, literally dozens of economic studies have been prepared by financial analysts and consulting companies, in particular, Rand, Mitre, and the Stanford Research Institute. These can all provide the arbitrators substantial guidance.

Mr. THOMAS C. BRENNAN,

MUSIC EDUCATORS NATIONAL CONFERENCE,

Washington, D.C., July 25, 1973.

Chief Counsel, Subcommittee on Patents, Trademarks and Copyrights, U.S. Senate, Washington, D.C.

DEAR MR. BRENNAN: At the request of Leonard Feist, Executive Vice President of the National Music Publishers' Association, we are sending you the fol

lowing actions taken by the National Executive Board of the Music Educators National Conference at their recent meeting here in Washington:

"It was moved by Baird, seconded by Klotman and carried unanimously that the MENC National Executive Board establishes as the policy of the Music Educators National Conference that the Copyright Law shall be observed and that improper and unauthorized use of music and other printed materials protected under that law shall be prohibited in all Conference activities. Further, all MENC national and state affiliates are urged to adopt a similar position as official policy.

"It was moved by Benner, seconded by Baird and carried unanimously that the MENC National Executive Board directs that official MENC policy on the use of copyrighted materials be implemented in the following ways:

(1) When a director accepts an invitation to appear on a convention program he shall sign a declaration stating that he has read the MENC policy and will not use unauthorized copies of copyrighted materials.

(2) Any participant in a MENC program violating this policy position will be subject to suspension from the program.

(3) The action of the National Executive Board shall be communicated as a matter of general information to all participants in MENC-sponsored activities." This demonstrates the concern of our officers for educating the membership to have respect for the Copyright Law. At the same time we would like to reaffirm our interest in having new legislation which would make it easier for teachers to understand what they can do with copyrighted materials as they pursue their professional charge of educating children.

Cordially yours,

CHARLES L. GARY,
Executive Secretary.

STATEMENT ON S. 1361 ON BEHALF OF THE MUSIC EDUCATORS NATIONAL CONFERENCE The Music Educators National Conference has followed the struggle for new copyright legislation with great interest for the past 10 years. Members of the organization testified at earlier hearings and were a part of the "summit meeting" in the office of the Register of Copyrights at which the compromise on "fair use" which led to section 107 in the present Senate Bill 1361 was reached. MENC has participated regularly in the deliberations of the Ad Hoc Committee of Educational Organizations on Copyright Legislation. At the same time it has maintained friendly relations with the music publishing industry and has acted to protect the interests of that group with the MENC membership. A recent action of the MENC National Executive Board designed to enforce obedience to the present copyright law during all MENC sponsored events has been sent to the office of the subcommittee's chairman.

It is the position of the MENC that new copyright legislation is badly needed.

Music teachers need to know what they can and cannot do with the sophisticated means of copying printed material and sound now at their disposal. They need to be able to teach in ways that will enable them to do their best job of instructing their charges but without damaging the interests of authors and composers. The compromise represented by the fair use provisions of section 107 still seems to be a workable solution and MENC specifically endorses this section:

Section 107. Limitations on exclusive rights: Fair use. . . the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by [Section 106], for purposes such as criticism, comment, news reporting, teaching, scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

The Conference takes this position fully aware that the decision on the Williams and Wilkins case may have implications for the future development of the concept of "fair use". The possibility of this prompts the request for some disclaimer in the report that accompanies the bill in order that the understanding that existed when section 107 was conceived not be prejudiced. Without that some additional protection for the teacher, such as the Ad Hoc Committee's suggested limited educational exemption would be needed. In other words MENC is satisfied with the compromise worked out originally and anxious to see it made into law so that we can begin operating under it. We pledge our resources to helping music teachers understand it in the belief that it can be made to work to the benefit of students, composers, publishers and American musical culture generally.

MUSIC LIBRARY ASSOCIATION,

August 8, 1973.

Mr. THOMAS C. BRENNAN, Chief Counsei, Select Committee on Patents, Trademarks and Copyright, Committee on the Judiciary, U.S. Senate, Old Senate Office Building, Washington, D.C.

DEAR MR. BRENNAN: On behalf of the Music Library Association I should like to offer a statement on the proposed general revision of the copyright law (S. 1361) and request that this statement be included in the record of the hearings which were held by Senator McClellan on July 31 and August 1, 1973.

We wish to express our concurrence with the principles of the fair use provision as presented in § 107 and § 108 of S. 1361. We are, however, concerned about the phrase "other than a musical work" (§ 108 (d), line 28), by which librarians are prohibited from extending to users of printed music the privilege of obtaining a single copy of a work that is granted by that section to users of other printed materials contained in libraries. Musicologists, musicians, and music lovers should not, we believe, be denied this means of access to certain library materials which differ from other materials simply by virtue of their subject.

The copyright legislation passed by the House of Representatives in 1967 (H.R. 2512, 1st session, 90th Congress) does not contain the exclusion noted above. Circumstances relating to music in libraries and the use of such music are precisely the same now as they were during the period leading to the 1967 bill. Thus, we cannot help but observe that the phrase in the Senate bill is not in the best interests of library users.

We therefore urge that the phrase "a musical work" be deleted from S. 1361, enabling librarians to extend to users of music the rights of fair use of library materials, the same rights provided in § 108 (d) to others.

Sincerely yours,

JAMES W. PRUETT, President.

Mr. THOMAS C. BRENNAN,

WATTENBERG & WATTENBERG,

ATTORNEYS AND COUNSELORS,
New York, N.Y., August 10, 1973.

Chief Counsel, Select Committee on Patents, Trademarks and Copyright, Committee on the Judiciary, U.S. Senate, Old Senate Office Building, Washington, D.C.

DEAR MR. BRENNAN: This is with reference to a letter dated August 8, 1973

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