The members of this Association, the members of the Association of Motion Picture and Television Producers, Inc., and the Committee of Copyright Owners, who together represent the major copyright owners of materials that are viewed over television and cable in the United States, appreciate your courtesy in inviting our views.

The Teleprompter proposal, wholly apart from its merits or demerits, has been surfaced after the conclusion of the Subcommittee's formal hearings involving public witnesses. None of the parties concerned with and affected by section 111 and chapter 8 of the bill, have had the opportunity to testify before the Subcommittee in open session on the one hand to explain and justify the proposal, and on the other to analyze it and present its alleged deficiencies.

We have nevertheless, upon receiving your letter, sought to comply in the hope that this memorandum and its attachments, will be carefully considered by the Members of the Subcommittee, and of course be made a part of the formal record.

We have engaged the services of a distinguished constitutional authority to analyze and comment upon the legal question raised as part of the Teleprompter proposal.

Additionally, we have requested one of the most respected and widely recognized economic research firms in the Nation to analyze the mechanics and thrust of the Teleprompter formula in an effort to determine how it would operate, whether it is a practicable and workable idea in the marketplace, and what would be its economic and fiscal effect on various classes of cable systems, on copyright proprietors, and on the public interest.

The Teleprompter proposal consists of three parts:

(a) a memorandum by Professor Ernest Gellhorn of the University of Virginia concluding that certain provisions of H.R. 2223 concerning copyright Royalty Tribunal are "vulnerable to constitutional attack under the due process clause";

(b) texts of amendments to the bill which would eliminate the Tribunal's jurisdiction over cable copyright liability and the initial rate schedule in the bill and substitute for them a rather complicated cable-copyright formula; and (c) a memorandum by the Teleprompter Corporation purporting to explain the formula.

Here is our response to your letter:

1. With respect to the Gellhorn legal memorandum, we submit a memorandum prepared by Professor Louis H. Pollak, Albert M. Greenfield Professor of Law at the University of Pennsylvania Law School, formerly Dean of the Yale Law School, and a recognized authority on constitutional law. This legal brief by Professor Pollak expresses the opinion that the provisions of the bill to which Professor Gellhorn takes exception are constitutional.

2. With respect to the Teleprompter proposal, we submit a detailed and exhaustive analysis of that proposal by National Research Associates, Inc. This analysis has determined that the Teleprompter formula:

Will tend to shift copyright liability from the larger systems to the smaller systems. It does this by exempting many larger cable systems from any copyright liability, pushing the burden of copyright payments to smaller and mediumsized systems, payments which in a number of instances are larger than what they would pay under H.R. 2223.

Will exempt substantial numbers of cable systems and their revenues from all copyright liability.

Will reduce the overall copyright liability of the Teleprompter Corporation by some 13 percent.

Is ambiguous, and internally illogical, and would be a formidable administrative burden.

The Teleprompter proposal also has these additional deficiencies:

1. The text of the Teleprompter amendments to carry out the formula conflicts with the text of the explanatory memorandum. They contradict each other. 2. A major element of the Teleprompter formula is the rate base (basic subscriber fees of cable systems) which may be a valid element in today's market, but which is unlikely to be valid in the marketplace in the future.

3. The formula is deficient in exempting network signals and local signals from copyright liability:

(a) The formula erroneously exempts such signals because it ignores the basis on which television advertising fees are computed and copyrighted programs are negotiated with buyers.

(b) The formula erroneously exempts such signals because it ignores the copyright concept of a separate payment for each commercial use.

4. The formula, if made a part of the Copyright Bill, would give the Commerce Committees an appropriate basis for claiming jurisdiction over H.R. 2223. If the Teleprompter formula has any validity, the Company is free to submit it to the Tribunal for its consideration in making rate adjustments. The formula does, however, highlight two essential facts: it recognizes the substantial percentage of television broadcasting revenues devoted to procuring programs, and it acknowledges cable's liability for copyright.

The formula would give cable systems a shield of apparent copyright liability but, in practice, allows them to continue to act as parasites, living off the broadcast industry and copyright holders.

The cable television industry has become "big business" and is on the way to becoming much much bigger. The Department of Commerce estimated 1974 cable revenues as $590,000,000 and predicts that 1975 cable revenues will be threequarters of a billion dollars. (U.S. Industrial Outlook, 1975, U.S. Department of Commerce, pp. 311-312)

Under the fee schedule in H.R. 2223, cable would pay less than 1% of its revenues for programming-the one product which is indispensable to it. Yet, Teleprompter acknowledges in its explanatory memorandum that broade isting pays thirty times that much of its revenues for program material. The NERA report states that 28 percent of broadcasting revenues in 1974 was devoted to program procurement.

The NERA report points out that the Teleprompter company's own copyright payments would be reduced by more than $135,000 annually if its formula replaced the pending bill's graduated rate schedule. The Teleprompter systems represent 4.5 percent of the nation's total cable systems. Thus, if a projection of the Teleprompter formula were to be made to all cable systems, a 13 percent slice in total copyright revenues nationally would take place. The effect is to cut nearly $1 million from the initial annual copyright revenue provided by the graduated rate scale in the bill.

Please keep in mind several crucial facts:

Fact 1: The original McClellan fee schedule was arbitrarily cut in half. Fact 2: If Teleprompter has its way, the already reduced fee schedule would be cut still further, by at least 13 percent.

Fact 3: If that occurred, the total liability for copyright for all copyright owners (not just films and TV material, but also sports and music) would be about $6 million annually, for an industry with revenues today of some $700 million annually.

I. THE FORMULA IS CONFUSING AND COMPLEX AND CONFLICTS WITH THE EXPLANATORY

STATEMENT

A crucial element of the Teleprompter formula is that copyright is to be imposed only in the case of signals a cable system is not required to carry. Put another way, all signals (programs) that the Federal Communications Commission requires a cable system to carry are to be exempt from copyright liability. But Teleprompter's explanatory memorandum says something else: local signals will be exempt from copyright while non-network distant signals will be subject to copyright.

Obviously, the formula text and the explanation contradict each other. Depending on the television market and other factors, some cable systems are required to carry what would normally be classed as distant signals. At the same time, some cable systems carry, but are not required to carry, local signals. Thus, the formula text fails to distinguish between local and distant signals and, in fact, imposes copyright liability for some local signals and at times exempts distant signals.

This contradiction and inconsistency is also apparent when basic subscriber revenues are multiplied by copyright owner's percentage share and the total is multiplied by 100. The result converts percentages into whole numbers which produces astronomical copyright liability for a number of cable systems. Clearly such systems would strongly protest such a formula.

One other contradiction exists. The second element of the formula is based on all broadcasting (radio as well as television) revenues and program expenses. Yet the explanatory memorandum speaks in terms of television revenues and broadcast expenses. While this additional conflict is obviously not fatal, it does

evidence the lack of careful consideration that went into putting the Teleprompter package together.

Another example of the complexity of the formula is the burden that will fall on the FCC in certifying once every three months which signals are subject to liability and the "popularity" of each of those signals on a county-by-county basis. With more than half of the 3,200 cable systems subject to copyright liability, and assuming an average of two distant signals per each system, the FCC would be required to make 14,080 determinations annuallly, each of which could be the subject of a dispute.

Finally, the formula gives cable television a special incentive to petition the FCC to increase the number of required signals. Such a procedure grants cable additional signals with which to attract cable subscribers but the direct effect will be a reduction in copyright liability. In other words, cable will enjoy a double benefit-one of which is circumvention of copyright.

II. USING BASIC CABLE SUBSCRIBER FEES AS A PERMANENT ELEMENT OF THE FORMULA IS INVALID

The first element of the formula is basic subscriber revenues received by a cable system. The Teleprompter proposal would therefore lock into law, as the rate base, an element which is not likely to be a valid base for the future.

As admitted in oral argument before the Supreme Court in United States v. Midwest Video (406 U.S. 649, 1972, reported in 40 Law Week 3509), as cable advertising revenues increase, basic subscriber fees can be reduced. In short, advertising revenues will be used to provide basic subscriber services.

Another means of reducing basic subscriber fees is through the use of pay cable. For example, a cable system can sharply reduce a $6 a month basic cable subscription fee as an inducement to the basic cable subscriber to become a paycable user for fees that range from $9 to $12 per month for the pay cable channel. Indeed, at the 1975 National Cable Television convention in New Orleans, panel participants explained this policy as an effective means of securing pay-cable subscribers whose higher subscription rates would sharply increase cable system

revenues.

These are just two methods of circumventing copyright liability under the Teleprompter formula. Doubtless, cable systems will find others. This is not to denigrate cable systems for doing so. They have a product to sell, and they will use means available to them to promote cable in the marketplace. But copyright owners should not be penalized, and cable copyright liability effectively nullified, because the methods of merchandising cable television change.

The Register of Copyrights testified before the Subcommittee on October 30, 1975, that she does not favor giving the Tribunal the power (as H.R. 2223 presently does) to change the rate base from basic subscriber revenues to another base: "In our opinion, this is a legislative function that should not be delegated." (Draft of Second Supplementary Report of the Register, chapter V, page 30). The Register did not state whether her opinion is based upon constitutional grounds or policy reasons. On either basis, she is incorrect.

Professor Pollak, in his attached memorandum, has already made clear beyond any doubt that rate-making is a function which may be delegated. More importantly, the standard of “reasonableness”, without any further embellishment, is a constitutionally acceptable standard when Congress delegates a rate-making authority. (See pages 6-8 of Professor Pollak's memorandum, attachment A, and cases cites therein.)

As a policy matter, there is no justification for not delegating to the Tribunal the authority to determine an appropriate rate base. The Supreme Court has recognized that prescribing rates involves several steps, generally two primary steps in determining a fair rate of return:

(1) the determination of the rate base, and

(2) the adjustment of the rate schedule. (See FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 1942.)

In short, the administrative agency is best suited to determine the rate base in adjusting rates, and this rate base may change from situation to situation. (See Permian Basin Area Rate Cases, 390 U.S. 747, 1968.)

Consistently, Congress has recognized that market situations change and that it does not have the expertise or time to determine rate bases and has, therefore, delegated that authority to administrative agency discretion using a standard of reasonableness. Examples of this delegation include the FCC for wire and

radio common carriers ("just and reasonable", 47 U.S.C. § 205); the Federal Power Commission for natural gas company rates ("just and reasonable", 15 U.S.C. § 717c); the Interstate Commerce Commission for common carriers of passengers and property ("just and reasonable", 49 U.S.C. §1(5); the Civil Aeronautics Board for air carriers, ("just and reasonable", 49 U.S.C. § 1374); the Federal Maritime Commission for vessels in commerce ("just and reasonable", 46 U.S.C. § 817); and the Postal Service and Postal Rate Commission for postal rates ("reasonable and equitable", 39 U.S.C. § 3621).

Therefore, the Tribunal may be delegated authority constitutionally, to change the rate base. As a policy matter, the Tribunal should have the authority to determine the rate base for cable copyright because Congress has neither the time nor expertise to determine a fair rate base. The marketplace, especially for cable, is fluid and what may be a fair rate base today is not likely to be reasonable tomorrow. Changes may be made in subscriber rates having the effect of hiding or sheltering from copyright liability, revenues that are properly allocable to providing the basic cable service to subscribers.

III. THE FORMULA IS DEFICIENT IN EXEMPTING NETWORK SIGNALS AND LOCAL SIGNALS FROM COPYRIGHT LIABILITY

A. The formula erroneously exempts network and local signals because it ignores the basis on which advertising fees are computed and copyrighted programs are negotiated with buyers.

The Teleprompter formula excludes network signals and required signals from copyright liability on the assumption that advertisers pay broadcasters for cable coverage and broadcasters, in turn, pass on this compensation for cable coverage to copyright holders. These assumptions are false, and the formula is therefore also deficient in this respect.

1. Advertisers Do Not Pay for Cable Coverage

Network officials and advertising time buyers assert that cable coverage is not a factor and is not weighed in determining national network or spot program purchases.

The executives of five major purchasers of national advertising time on the three networks totaling some $434.5 millions annually, affirm that there is no breakout for and no specific charge in the rate card or any allocation in the advertising budget for cable coverage.

Harry Schroeter, vice president-communications for Nabisco, Inc., and former chairman of the Association of National Advertisers, says that advertisers have very little interest indeed in the audience reached over cable through importation of distant signals.

Richard A. R. Pinkham, Chairman Executive Committee of Ted Bates & Co. (the sixth largest advertising agency with $136.5 million in television advertising billings in 1974) said that in his company the subject of cable coverage is not considered or discussed with any of his advertising clients.

Harry D. Way, manager of media planning for Colgate-Palmolive-Peat, a buyer of $76.5 million of national television advertising, says that cable coverage is not considered in their buying (of advertising) and selling (their product) operations.

Peter Bardach, vice president and director of broadcasting for Foote, Cone & Belding, a major agency that buys time for Lever Bros., which spends $81 million annually for television advertising, says that in none of his agency's purchases (of national television advertising) is cable coverage considered or even discussed; the price of the spot or program purchased is based solely on its assumed total circulation.

R. L. Condit, media director for Proctor and Gamble, the largest dollar volume television advertiser in the country, says that P & G considers it impossible to quantify any percentage of their advertising budget for cable coverage. (See attachment C for additional details.)

2. Networks Are Not Paid for Cable Coverage

Max Buck, vice president for national sales for the NBC Network states unequivocally that he "never even discusses cable coverage" (with on adver tiser); nor does he recall ever having been asked any questions about it.

John Cowden, assistant to the President of CBS Television Network, and Jay Eliasberg, vice president of CBS Television Network Research, concur in Mr. Buck's statement and agree that (network) sales are now "individual negotia

tions" per spot and are based on the total number of homes reached and the "quality" of the program. (See attachment C for additional details.)

3. Copyright Owners Are Not Paid for Cable Coverage

(1) Statements of eleven program buyers and sellers, some with twenty and twenty-five years' experience, refute the cable industry contention that television stations and their program suppliers are able to charge more to their buyers because of the increased audience available through cable carriage.

(2) Stations do not and cannot obtain increased advertiser payments for cable carriage to additional homes beyond their market. Advertisers buy time on the basis of Neilson or ARB reports of that area where the station delivers a majority of the viewers (the Area of Dominant Influence or the Designated Market Area).

a. Homes beyond that area are of no interest to local advertisers; "Local advertisers are interested only in viewers in the metropolitan area in which they conduct their business, recognizing that the customer potential from distant homes is marginal at best"-Kent Replogle, President, Metromedia TV.

"Additional viewers hundreds of miles away are not a market for local advertisers, nor will they pay for the privilege of exposing their messages to these far-away viewers"-Crawford Rice, V.P., KSTW-TV, Tacoma.

b. National and regional advertisers, covering the markets they choose by buying exposure to numerous ADIS, will not pay more simply to have that exposure duplicated:

"Homes outside this station's ADI simply do not figure in the price of advertising"-James Terrell, Chairman, Association Independent Television Stations. “Advertisers are value conscious and will not pay for wasted coverage or for coverage that is not measured by audience ratings within the immediate market area"-Frank Reel, President, Metromedia Producers Corp.

"Approximately 142 (of the 170 cable systems carrying WGN) are located beyond the Chicago ADI. . . . (T)he price of advertising purchased on our station reflects only the homes we reach within the ADI"-Sheldon Cooper, Vice President and Station Manager, WGN, Chicago.

(3) Program suppliers do not and cannot receive additional money from stations whose signals are picked up by cable systems.

a. The number of cable households reached is irrelevant in setting a program price:

"In determining a sale price, we analyze (the history of sales in that market, market rank, number of competing stations, our costs, the buyer's needs). The sale price has no relationship to the number of increased cable viewers"—Keith Godfrey, Executive Vice President, MCA-TV, Los Angeles.

"Cable carriage in enlarging distant audiences plays no part in price determination at all. The primary factor in syndication pricing is supply and demand. When there are more stations in the market, there will be more bidders for the program, and accordingly the price will be higher"-Erwin Ezzes, Chairman and CEO, United Artists TV.

b. The money that can be spent on program buying is diminished when station revenues are harmed by audience fragmentation due to cable carriage of distant signals:

"If a cable system carries a program from the bigger markets to the smaller markets, syndication therein becomes difficult because cable importation reduces the value of the program to the buying station. As a result a television station may refuse to license a syndicated program or may license it only by paying a lower price . because its potential audience has been or will be cxposed. . . ."-Frank Reel, Pres., Metromedia Producers Corp.

"A network acquires rights to the whole United States and would not pay more money for cable retransmissions, especially since network affiliates are faced with competition for their own local spot commercials when the same programs are imported by CATV with the local spot commercials of the distant station."-Erwin Ezzes.

"The only time CATV audiences are discussed in program negotiations is when a buyer seeks to depress the price of a program because part of his potential audience has already been exposed to the program or series by CATV"-Frank Reel.

"Cable brings to (Johnstown and Altoona) the signal of WTAE-TV in Pittsburgh, a station that is 75 to 100 miles away from. . . the area served. . . . The Pittsburgh station can't sell this coverage, but the viewers watching its pro