Mr. HUGHES. Mr. Smith, we welcome you.

STATEMENT OF JOSEPH SMITH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CAPITOL-EMI MUSIC, INC., HOLLYWOOD, CA Mr. SMITH. Mr. Chairman and members of the committee, my name is Joe Smith. I'm president and chief executive officer of Capitol-EMI Music. On behalf of my company and the other members of the Recording Industry Association of America I am pleased to have the opportunity to appear today on the subject of digital audio recording and to urge your support for H.R. 3204, the Audio Home Recording Act.

Capitol-EMI Music encompasses a diverse group of operations in North America and around the world, including several record labels, manufacturing facilities for prerecorded cassettes and compact disks, a legendary recording studio in Hollywood, and a sales and distribution division. Our record labels include Capitol Records, which this year is celebrating its 50th anniversary; Blue Note Records, a premier jazz record label of over 50 years; Angel Records, one of the most important classical operations in the world; Capitol-EMI Latin Music, EMI Records, USA, and our Nashville operation called Liberty Records. We are also part of a worldwide organization called EMI, with companies in 38 separate countries. In the United States alone, we have over 3,000 employees.

When Capitol Records was founded, most big name artists 50 years ago were already signed to other labels, so Capitol Records set about signing and developing its own roster of artists. The fledgling label scored big hits with soon to be classic artists, like Nat Cole, Peggy Lee, Margaret Whiting, Stan Kenton, George Shearing, Ella Mae Morse, and others, and revitalized the career of Frank Sinatra. Over the years, the Beatles, the Beach Boys, the Band and others were introduced by our label.

Today, our diverse roster of artists includes Bonnie Raitt, Hammer, Garth Brooks, Tina Turner, Paul McCartney, Bob Seger, and many others. At Capitol Records, we're extremely proud of our artists and their accomplishments.

That's the history, and I would like to set forth several reasons why this legislation is of paramount importance to the record industry in general and to Capitol Records.

Our assets talk back to us. Our assets can walk out and leave us in a room. Our assets are not in recording studios or bricks or mortar. Our assets are the unpredictable and the dynamic recording artists and writers that we deal with.

H.R. 3204 significantly improves the landscape for our artists in many respects. The bill provides some compensation to the creators and producers of music for the home copying of our works. The legislation also protects against serial copying-making copies of copies endlessly. This has never been more important than with today's digital technology.

We did an experiment at our studios, Mr. Chairman, last year, where we lined up six digital recording pieces and six analog cassette machines. We took a brandnew compact disk recorded by Itzak Perlman and the Israeli Symphony Orchestra, with Zubin Mehta. We made copies from the compact disk to the digital line and to the analog line. The sixth analog cassette had lost all of its

high end, it was muddy, and not satisfactory. The sixth digital cassette was undistinguishable from the compact disk. We realized the danger in this unlimited recording ability.

As Barry Manilow said, success in the music business is a rarity, not only for the artists who make it but for the songs that rise to the top. The facts are, economically, in our business that 85 percent of all pop records and 95 percent of classical records do not recover their recording costs and marketing costs. It doesn't sound like a terrific business when 85 percent of everything you do doesn't make it back financially. The fact is that the 15 percent make enormous profits. It is those profits that we reinvest in new talent and new technology. Also in music like classical folk gospel.

When someone makes a copy of a record at home, as Barry said, they're only copying that 15 percent, those hits. That means less revenue for us, less money to develop artists and to produce music in the less popular genres.

Second, this legislation permits record companies to embrace the new consumer digital audio technologies, including the soon to be available digital compact cassette, known as DCC, and the minidisk developed by Sony. In this business, we have seen and heard the advances that digital technology has offered in the studio. Today, most of our artists will only record in the digital format, demanding the finest sound quality available. In the past, and without the protection that this legislation offers, all record companies were rightly concerned about the introduction of digital recording technology, like digital audio tape, for consumer use. This legislation removes that fear, provides the protection we need to move forward with technology and to offer our consumers prerecorded music on the newest digital formats.

The bill gives our business a much-needed "shot in the arm." The record business, like so many others, has been hurt in these difficult economic times. With this protection, Capitol can now begin to release music on these new formats. We hope to see the same surge in sales that marked the introduction of the compact disk 10 years ago. When we reintroduced the entire Beatles catalog, Sergeant Pepper and all the others, it had an amazing economic impact right away. We foresee the same kind of impact with digital recording.

But to release our product on digital formats, we have to expand our manufacturing facility. At the moment, Capitol Records manufactures both compact disks and analog cassettes in Jacksonville, IL., employing over 1,000 workers. We are gearing up for the September launch of DCC, preparing our facility to begin production of digital compact cassettes. That translates into more jobs.

H.R. 3204 provides more than just a new format for Capitol's prerecorded music. This legislation also helps lead the way in opening new markets around the world for U.S. music.

In the global marketplace, over 40 percent of the market is U.S. music. It's one of the last exportable products this country has that is consistent. We are constantly looking to open new markets and expand our business. This legislation increases the level of production for our product here in the United States and helps open these future markets. Following the introduction of this legislation, Japan and the European Community began to move ahead with

plans for royalty systems similar to the proposal before you. When these proposals have been enacted, we can move into other new markets.

Let me explain briefly what the consumer gets out of this compromise. It's simple: the most exciting new digital audio recording technology available anywhere and the music to go along with it. Mr. Chairman, you and Americans everywhere will be able to listen to country, classical, jazz, rock, on innovative state-of-the-art digital recording equipment. New technologies bring the listener as close as possible to the experience of being right there. In sum, we all benefit from this legislation.

So, on behalf of the recording industry, Mr. Chairman, and members of the committee, I thank you for your leadership on this issue, and especially to our California Congressman, Mr. Moorhead, and other members. I encourage the swift enactment of this bill. The digital revolution is upon us and we've got to get ready for it. Thank you.

Mr. MOORHEAD [presiding]. Thank you very much, Mr. Smith. [The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF JOE SMITH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, CAPITOL-EMI MUSIC, INC., HOLLYWOOD, CA

Mr. Chairman, members of the committee, my name is Joe Smith and I am President and Chief Executive Officer of Capitol-EMI Music, Inc. I am pleased to have the

opportunity to appear here today on the subject of digital audio recording and to urge your support for H.R. 3204, the Audio Home Recording Act.

Capitol-EMI Music encompasses a diverse group of operations in North America and around the world, including record labels, manufacturing facilities for pre-recorded cassettes and compact discs, studio operations and a sales and distribution division. Our record labels include Capitol Records, Blue Note Records, Capitol/EMI Latin, Angel Records, EMI Records USA and Liberty Records in Nashville. We are also part of a world-wide music family of EMI with operations in over 36 foreign countries. the United States alone we have almost three thousand

employees.

In

Capitol Records was founded in June, 1942. In fact, this year marks our 50th Aniversary. The company was established by singer/songwriter Johnny Mercer, music store owner Glenn Wallichs, and motion picture producer B.G. "Buddy" DeSylva in 1942. As most "big name" artists were already signed to other labels, Capitol Records set about signing and developing its own stable of acts. The fledgling label scored big hits with soon-to-be-classic

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artists such as Nat King Cole, Ella Mae Morse, Stan Kenton, Peggy Lee, and Margaret Whiting. Today, our diverse roster of artists includes Bonnie Raitt, Garth Brooks, Tina Turner, Paul McCartney, Bob Seger, Hammer, Richard Marx, Phil Perry and many others. At Capitol, we're extremely proud of our artists and their accomplishments.

With this little bit of history behind us, I would like to set forth several reasons why this legislation is of paramount importance to the record industry in general and to Capitol Records in particular. First, and most importantly, this bill protects our most valuable assets our artists. Second, it enables us to embrace new technology and pursue new marketing opportunities. Third, it provides our customers with the most innovative technology the world can offer. In sum, H.R. 3204 is good for our business and for our customers.

First, the

These three points are interrelated. legislation protects our assets. The assets of a music company are not in the studio and not in the mixing boards or the microphones or the buildings.

Our assets talk back

to us and sometimes don't talk to us at all. Our assets are unpredictable because they are the artists that make the recordings we all enjoy.