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annually in a predetermined amount (a blanket license). However, many broadcasters maintain logs as a matter of standard practice, and these are made available to the clearinghouses if required. These logs, plus a limited amount of sampling of performances, provide sufficient information for proportioned distribution among the individual copyright owners of the fees collected. The distribution is made approximately according to the estimated number of performances of each work. The cost of operating ASCAP is said to run about 19% to 20% of its gross revenues.

4.4 ROYALTY PRICING SCHEMES

This section considers pricing rules that can be employed to differentiate different classes of users and to cover different types of costs. It is assumed that all users in a particular class are treated identically, and that the purpose of the pricing rules is not for anticompetitive reasons, but to efficiently maximize income.

4.4.1 Individual and Institutional Users A theory which justifies price differentials between individual and institutional users is described in Appendices C1 and C2 of this report. Here, an institutional user is one that serves to further distribute the work among individuals served by the institution. It is noted in Appendix C1 that, for a product distributed to classified users who do not move from class to class, an existing theory states that the prices among the classes should be inversely proportional to those classes' respective price elasticities, provided that marginal costs are the same for each class. However, in the provision of certain copyrightable works, e.g. scientific journals, users may obtain their copies either as the result of individual subscription or through use of an institutional copy. Thus, there are "cross-market" effects as users move between the classes. In this case, the work of Appendix C2 employs a variable called "the average number of potential subscriber's" which measures the number of additional individual uses that would result from discontinued institutional use due to increased prices to the latter class. The value of this variable determines the price differential that should be offered. Tests that producers can make about the potential market can determine the value of this variable.

A second issue raised in these Appendices is whether the users of the institutionally-obtained work should pay per-use fees to the institution to defray the cost of the institutional subscription. In general, to the extent that the individual uses via the institutional subscription are private appropriations, these uses should be paid for by the users unless there are valid countermanding reasons. One such reason might be that it is in the public interest (or in the interest of the institution's owner) to encourage such individual use; and a second reason might be that the costs of collection are high relative to the revenue gained.

4.4.2 Services With High Fixed Costs

A pricing system often used for the provision of services that have a high fixed-cost element is the combination entry fee and per-use charge. Utilities often have connection charges as well as per-use charges. Some computerized, on-line, bibliographic or full-text search services are now using this type of pricing. Typically, there is a monthly or yearly use fee or entry charge, a time-on-line charge, and a "hit" charge for retrieval.

It is possible, also, to offer a user a choice between two charge plans. For example, a user might be offered either (a) a higher connect (entry) charge and a very low per-use charge or (b) a very low entry charge and a higher per-use charge. Depending on the break point, the high volume user will probably select (a), the plan with the low per-use charge, whereas the casual user probably will select (b), the plan with the low entry charge. The offering of two such plans may prevent either type of user, casual or high volume, from subsidizing the other type.

4.5 FAIR USE AS AN ECONOMIC CONCEPT

"Fair use" was originally a judicially-developed concept that can be conceived as a method of reducing certain kinds of transaction costs. It is now embodied in Section 107 of the 1976 General Revision of Copyright Law, as described in Section 3.6 above. The "fair use" concept historically recognized and attempted to allow for two basic principles that can be counterposed to the principle of copyright in a potential infringement situation. A third principle of "fair use" was added in the 1976 General Revision.

The first principle is that of the freedom of communication of ideas, derived from First Amendment considerations. (Professor Melville Nimmer has delineated the balance point in this potential conflict. 31) Where First Amendment principles have dominance, there can be no exclusion. Thus, under "fair use", purposes of use such as "criticism, comment, news reporting, teaching..scholarship or research" are permitted, subject to limiting factors such as the amount of the work used. "Fair use" may be viewed as a method of reducing the cost inherent in a conflict between Article 1, Section 8 of the Constitution and the First Amendment.

The second principle allowed for under "fair use" is lack of marketplace impact. In the consideration of whether a particular use is a "fair use," a factor to be taken into account is "the effect of the use upon the potential market or value of the copyrighted work." Thus, it is recognized to be uneconomical and therefore inappropriate for resources to be expended in contractual efforts to obtain permission for usage of little or no market impact.

The third principle now added to "fair use" is indicated by the phrases in Section 107 of the 1976 General Revision relating to education.

These phrases, concerning allowable purposes of fair use, are "(.... multiple copies for classroom use)" and "for nonprofit educational purposes."

The exemption of royalty payments for worthy uses has been criticized by economists on principles of economic efficiency. The argument is that if a use is genuinely worthy, it is a public good whose cost ought to be spread over all the population and paid for through taxes. Otherwise, allowing an exemption for some uses and not for others has the effect of imposing the costs of worthy use exemptions on the "lessworthy users" as a specific class. This argument was similarly expressed by Professor Paul Goldstein in a criticism of the full Court of Claims decision in the Williams & Wilkins case 32. In that case, the worthy use of medical research was given as a reason for rejecting the plaintiff's claim of infringement in a wholesale copying situation. 4.6 PRICE SETTING FOR COMPULSORY LICENSES

Compulsory licenses have been established in statute by Congress for certain categories of intellectual property; and in one case, a compulsory license is being enforced by Court order. In general, royalty prices in these situations have been (or will be) established by adversary proceedings involving producers and users and their supporters testifying before some institutional group empowered to set the figures.

4.6.1 The Phonorecord Manufacturing License, 1976 Act

An example of the procedure is the establishment of the compulsory license royalty fee for phonorecord manufacturing as a statutory matter in the 1976 General Revision. A summary of the testimony on this subject and the conclusion of the Senate Committee on the Judiciary is given on pages 91 through 94 of Senate Report No. 94-473.

Among the subjects of the testimony were (1) the need for an increase in the fee by copyright holders, (2) the potential impact of an increase on the record industry, and (3) the potential impact of an increase on the consuming public. Songwriters and publishers testified in favor of an increase over the 2¢ per each recording manufactured that was provided for in the 1909 Statute. They were supported by music consumers represented by the National Federation of Music Clubs who preferred a higher (royalty) ceiling "as a means of encouraging the writing of more and better music." The record companies testified in opposition to any increase in the 2¢ figure. They were supported by the Consumer Federation of America who wrote to the Committee agreeing that if the statutory fee were raised, record manufacturers would have to avoid risks on new and unusual compositions, reduce the number and length of selections, record fewer serious works and rely more on the public domain for popular material.

Some of the factors discussed in testimony included the royalty as a percent of list price per song; the royalty as a percent of manufacturer's

wholesale selling price; record company sales and profits; organization of the record industry; changes in income of copyright owners as a function of time, inflation rate, and royalty fee; and the effect of royalty fee on incentives for quality and quantity of products.

The Senate Committee concluded that the royalty fee per work embodied in each phonorecord manufactured and distributed should be 2 1/2 cents or one-half cent per minute of playing time, whichever is greater.

The House Committee on the Judiciary, on the basis of essentially the same testimony, concluded that the royalty fee per each work embodied in a phonorecord that is made and distributed should be "2 3/4 cents or 0.6 of one cent per minute of playing time or fraction thereof whichever amount is larger." (See House Report No. 94-1476 at pages 16 and 111).

The Conference Report (House Report No. 94-1733 at page 77) adopted the House fixed rate and the Senate per minute rate. This was ultimately enacted. Therefore the royalty is "either two and three-fourths cents or one-half of one cent per minute of playing time or fraction thereof, whichever is larger." (Section 115(c) (2), P.L. 94-553).

4.6.2 Jukebox Performance Royalty, 1976 Act

Under the 1909 statute, renditions of musical compositions through recordings in coin-operated machines (jukeboxes) were not classified as public performances for profit unless an admission fee to the location of the performance was also charged. Thus, most jukebox renditions were exempted from royalty payments. As both the Senate and House Reports on the 1976 Copyright Law Revision state, efforts to remove this exemption have persisted for 40 years. It is believed by some observers that in 1909, the extent of the jukebox industry could not be forecast and that this exemption was an historical accident. Testimony by copyright owners in congressional hearings on copyright revision strongly urged the imposition of a royalty fee on jukebox renditions of copyrighted works. Testimony by jukebox operators and manufacturers supported the retention of the present exemption. (See House Report No. 94-1476 at pages 111 to 115, and Senate Report No. 94-473 at pages 95 to 99.)

In the 1976 General Revision, Congress ended the exemption and imposed a yearly compulsory blanket license of $8 per jukebox (Section 116(b)(1), P.L. 94-553). In general the reasons given for ending the exemption were that the exemption was unfair to music producers; and also unfair to those other users who paid royalties and therefore were also paying the jukebox operators' share.

4.6.3 New Statutory Compulsory Licenses

The 1976 General Revision established two other compulsory licenses in addition to the jukebox performance license, all three of which joined

the previously-established phonorecord manufacturing license. The new licenses are for cable-assisted television (CATV) retransmission of broadcasted programs (Section 111(c) and 111(d), and for the use of certain copyrighted works in non-commercial broadcasting (Section 118). As stated in Appendix A, Section A.4.6.3 "the purpose of the compulsory license in these three instances...is to avoid the difficulties that the user groups would encounter if they had to obtain licenses from and pay fees to the individual copyright holders." In other words, transaction costs are lessened under the compulsory license system.

4.6.4 The Copyright Royalty Tribunal

The 1976 Act establishes a Copyright Royalty Tribunal as an independent agency in the legislative branch (See Chapter 8 of the Act). The Tribunal's function is to periodically and equitably adjust the statutory blanket license fees for jukebox operation, to distribute equitably to copyright holders the statutory royalty proceeds collected from CATV operators, and to determine the terms and conditions of the compulsory license for non-commercial broadcasting of certain copyrighted works, but in the latter case, only if the interested parties fail to negotiate their own arrangements. The Tribunal determines, also, the royalty rates for CATV retransmissions under certain conditions.

4.7 COPYRIGHT AND MONOPOLY

It is common understanding that copyright is a monopoly, although limited to some degree. Walter Pforzheimer has quoted Judge Learned Hand on this point:

"Copyright in any form, whether statutory or at common law, is
à monopoly;... Congress has created the monopoly in exchange for
a dedication, and when the monopoly expires the dedication must
be complete. 133

Similarly, the House Committee on Patents in their report accompanying the bill that became the 1909 Copyright Act stated:

"The granting of such exclusive rights, under the proper terms
and conditions, confers a benefit upon the public that out-
weighs the evils of the temporary monopoly. "34

The appellation of "monopoly" can have several implications. A question that can be asked is: to what extent does the exclusive right granted to an author and his assignees constitute an exercisable economic monopoly in a market sense, thereby requiring Government regulation or other collective action as an antidote? The answer to this question may also provide an answer to an issue raised by Hurt and Schuchman which is: whether "copyright protection artificially enhances the private returns on [ some 7 ventures and leads to the distortions of monopoly pricing."35

The answer depends, to some extent, on the nature of the copyrighted work

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