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between $10 and $12 million. Referring once again to Exhibit 2, (the exhibit in Section II on program costs) two things should be noted: first of all, a performance fee expense of, say, $11 million would have added a scant 2.7% to total program costs in 1973. Secondly, the proportion of all expense dollars going into program costs has been declining, while that of administrative salaries, general overhead, and selling expenses has been rising. If the proposed performance fees were required, thereby adding about $11 million to program costs, the proportion of all broadcast expenses going toward programming would still be only 30.3%, less than it was in 1970. Hence, there would be no significant change in broadcasters' cost structures. All in all, the proposed performance fees represent less than a 1% increase in radio station expenses.

EXHIBIT 6.-Performance royalties that would be paid by radio stations

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1 These figures are based on 1973 FCC statistics for those radio stations operating a full year. 2 Formula for the performance royalty in both S. 1111 and in sec. 114 of copyright bill passed by Senate Judiciary Committee in July 1974:

Stations with revenues from $25,000 to $100,000 would pay a flat royalty of $250; stations with revenues from $100,000 to $200,000 would pay a flat royalty of $750-but the fees would average only about 81-96 percent of this because of fee reductions granted stations using less than the usual amount of recorded music. (See exhibit II-2 on the percentage of stations which are music stations.)

Stations with revenues above $200,000 would pay a royalty equal to 1 percent of their "net sponsor receipts." If allowance is made for stations devoting less than average air play to recorded music, the performance royalty would average perhaps 0.81 to 0.96 percent of "net sponsor receipts." AM, AM/FM stations in this revenue category had 77 percent of all AM, AM/FM stations expenses in 1973 and thus, we estimate, earned 77 percent of the $1,316,117,000 collected in "net sponsor receipts" by all AM, AM/FM stations in 1973. No data are available on total net revenues earned by FM stations with revenues above $200,000. We estimate that 24.7 percent of the FM stations with revenues above $25,000 fall in this category, while 42 percent of AM, AM/FM stations are known to do so. We have also estimated that AM, AM/FM stations with revenues over $200,000 earn 77 percent of total AM, AM/FM revenues. We, therefore, estimate that FM stations with revenues over $200,000 earned 45 percent of all FM revenues (24.7÷42X77) or $69,127,000 in 1973.

3 1973 FCC data indicate the distribution among various revenue categories of independent FM stations but do not do so for FM stations affiliated with an AM station but reporting separately to the FCC (and therefore not included in the statistics for AM, AM/FM stations). We have assumed that the 2 types of FM stations have the same distribution among the revenue categories. The number of FM stations with revenues under $25,000 was reported to be 98 in 1973. Therefore, this revenue category the number of stations is correct and is not an estimate.

Source: Analysis made by Cambridge Research Institute based on the FCC's "AM-FM Broadcasting Financial Data," 1973 (the latest available statistics).

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The same performance fee would represent about 8-10% of the radio industry's pre-tax profits (for all those stations with revenues above $25,000). On balance, the proposed performance fee for performers and record makers is not likely to seriously impair the profitability of the growing and generally prosperous radio industry.

Ability of broadcasting companies to pass forward the costs of a performance royalty

Although the preceding analysis demonstrates clearly that broadcasting companies can easily absorb the costs of a performance royalty, the stations could, if they so elected, pass this new expense forward just as other programming costs and profit increases have been successfully passed on in higher advertising rates. Indeed, it is equitable for the stations to pass along the costs of a performance royalty, because advertisers benefit from the audiences that sound recordings attract.

61 According to the FCC's AM-FM Broadcast Financial Data-1973, radio stations with revenues over $25,000 had total profits before taxes of $118,261,000 in 1973.

Furthermore, radio has raised its advertising rates repeatedly over the years. For example, from mid-year 1973 to mid-year 1974 alone, radio spot advertising rates rose 9%, and in the three years between mid-1971 and mid-1974 the rise in radio spot ad rates was 24%. All these increases were far greater than the 1% increase that would be required if radio were to pass forward fully the proposed new performance royalty.

Although radio advertising rates have been raised periodically, the increase in these rates has been considerably lower than for prices generally. Although the Consumer Price Index rose 47% between 1967 and June, 1974, the rates for network radio ads rose 7% and those for spot radio ads rose 30%. Thus the prices radio advertisers paid for their advertising rose much more slowly than the prices at which the advertisers sold their own products.

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Even with these price increases, however, advertising costs per thousand of audience which is a much more meaningful measure of cost than the rate per minute of time—are far lower for radio advertisers than for advertisers in print media. For example, in 1974 the J. Walter Thompson Agency estimated that the cost per thousand readers for daily newspapers (1,000 lines black and white, all daily papers) was $7.85, and the cost per thousand for consumer magazines (one 4-color page in top 50 magazines) was $6.39. In contrast, the cost per thousand viewers for prime-time network TV (one 30-second announcement) was $2.54, and the cost per thousand listeners for daytime spot radio (25 adult Gross Rating Points) was $1.91.**

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It is important to recognize that radio has distinct advertising advantages. A vice-president of Goodyear Tire is quoted as saying, "Radio and television may constitute the most satisfactory media buys during this period of inflation." ** He reasoned that the price of paper has zoomed, the wages of printers have escalated, and the price of postage is climbing. He pointed out that radio and television have "considerable latitude" in their cost structure, in contrast to the built-in costs of direct mail and other print media that work against adjustable rates. In addition, radio provides important advantages to advertisers wishing to reach specific local markets such as teen-agers, ethnic groups, and commuters. Radio also reaches important segments of local markets that are not inclined to read newspapers. Radio's appeal to advertisers is enhanced by the medium's focus on local rather than national advertising: In 1973, local sales provided 73% of radio advertising. This focus enables radio to profit from the overall trend among advertisers to emphasize local more than national advertising. Local advertising expenditures in all media grew 70% between 1967 and 1973, while national advertising expenditures grew 35%.*

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Many factors beside price affect an advertiser's choice of media. Among other things, the advertiser wants a medium that is appropriate for his particular product and his current advertising and marketing strategy. The effectiveness of a given medium in reaching the advertiser's target audience is a primary consideration. The advertiser is also concerned with the availability of openings in the various media, each medium's flexibility in placing and changing advertise ments, and the risk associated with the various media. Radio advertising, for example, has the great advantage that ads can be prepared on short notice and with a minimum expenditure of time and money. This makes radio a particularly appealing medium to advertisers during a recessionary period when there is

52 1974-75 Cost Trends," Media Decisions, August 1974, p. 45. As indicated earlier, both network and spot radio advertising are national, but with network ads, the adver tiser is restricted to network-affiliated stations, while with spot ads the advertiser can select the markets to which he wants his message beamed.

53 Ibid.

In comparing the costs per thousand of these media, it is recognized (as we will show), that each offers different advantages and reaches different markets. However, what the comparison and the following discussion indicates is that for those advertisers whose needs are already best met by the broadcasting media, a 1% increase in the cost per thousand for those media is not only negligible in an absolute sense, but would surely not provoke a substitution effect toward print media which carry a cost per thousand that is 300% higher.

A Gross Rating Point is the percent of the population in a market listening to a station during a time period times the number of announcements.

50 Television Advertising Stakes Out New Turf for Future Growth," Broadcasting, November 18. 1974, p. 22.

Statement by Edward H. Sonnecken, Vice President. Corporate Planning. Goodyear Tire and Rubber Company, Akron, Ohio, summarized in "The dollars side of advertising gets going-over in Phoenix," Broadcasting, May 13, 1974. p. 4.

According to Advertising Age's Research Department. total expenditures on radio advertising in 1973 were $1.7 billion, while local radio advertising expenditures were $1.2 billion.

Based on advertising expenditure figures supplied by Advertising Age's Research Department.

uncertainty about markets, the size of companies' advertising budgets, etc. If, on the basis of all such considerations, an advertiser feels that a given medium is the most desirable for him, he will normally stick with that medium even if the medium's advertising rates rise.

For all these reasons, a small-1% maximum-increase in radio advertising rates to cover a performance fee paid performers and recording companies is not likely to have an appreciable effect on advertising sales in these media and is equally unlikely to promote substitution of other media. Broadcasters, if they elected to pass on the performance fee, could become simply a conduit for placing the cost upon the advertisers. In effect, the broadcasters could collect the fee from their advertisers and then transmit it to performers and recording companies. The fee would simply pass through the broadcasters' hand without affecting their financial situation. The cost of the fee wouid, in effect, be paid by advertisers who are currently benefiting at no cost to themselves from the talent and money invested in recordings by performers and recording companies. Fur thermore, as we shall next show, such a fee even with a nominal markup by broadcasters would represent no great burden for advertisers.

The proposed performance royalty would have a negligible impact on consumer product costs

We have shown that it is equitable for radio stations who benefit directly from the playing of recordings, to pay for the commercial value they derive from the use of other people's property and creativity. It is equally equitable for advertisers to do so. Advertisers benefit from the fact that radio reaches a vast audience. This audience "pays", in a sense, for the free music on radio by listening to commercials. Advertisers should pay for the use of recordings that attracts this audience for their commercials. Artists and recording companies deserve compensation for the indispensable contribution they make to the selling of cars, cosmetics, and the host of other products advertised on radio.

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If broadcasting companies raised their advertising rates to cover a performance fee paid to artists and recording companies, the impact on advertisers' budgets, and ultimately on product costs would be negligible. For example, the Ford Motor Company, one of the top ten radio advertisers in the country, spent $13.9 million on network and spot radio ads in 1973. Suppose, as an illustration, Ford even spent an equal additional amount on local radio ads. Then its total expenditures for radio advertising in 1973 would have been around $28 million. If the advertising budget had to be increased by 1% ($280,000) to cover the pass-through of the performance fee from radio broadcasters, and if Ford passed these costs on to the consumner, the impact on one of the roughly 2 million vehicles Ford produces every year would be minuscule. Indeed, the impact of any markup on this total taken by broadcasters would also be minimal. It is far more likely for the sum to simply be absorbed within Ford's operating budget.

Similarly, the Coca Cola Company, another major radio advertiser, spent $8.3 million on national network and national spot radio ads in 1973. If Coke spent even an equal, additional amount on local radio ads, its total radio advertising expenses might approximate $16.6 million. A 1% increase in these costs would equal $166,000. Again, it is most likely that this sum would be lost in the costs of Coke's doing several billion dollars worth of business each year. However, if this increase due to a performance royalty were passed forward to the consumer in a general price increase, the performance right's share would represent a minute 0.0079% increase in prices ($166,000 divided by Coca Cola's 1973 sales of $2.1 billion). This sum, spread out over billions of bottles of Coke, would be imperceptible to consumers and wholesalers alike.

In short, the impact on consumer product costs of the proposed performance fee for performers and recording companies would scarcely be perceptible either to advertisers or to consumers, even if the new fee were passed forward fully. No appreciable effect would be felt on consumer prices.

Television stations should also pay for their use of sound recordings

Television stations also make use of recorded music, particularly as theme songs and background music for their programs. Although audiences may be less conscious of the music on television than on radio, television's performance royalty payments to composers and publishers actually exceeded those of radio in 1973,

According to "Advertising. Marketing Reports on the 100 Top National Advertisers." Advertising Age, August 26, 1974. pp. 27ff. Ford spent $13.9 million on network and spot radio ads in 1973 and had sales of $23 billion.

According to Advertising Age, August 26, 1974, p. 27ff. Coca Cola spent $8.3 million on network and spot radio ads in 1973 and had sales of $2.1 billion.

the last year for which data are available. Total music license fees paid by television exceed $41.5 million in that year. It is no doubt true that a higher proportion of this total amount was for live performances than was true for radio; nevertheless, use of recorded music is substantial.

Just as composers and publishing corporations are entitled to compensation for the use of their music on television, so artists and record makers are entitled to compensation for the use of their copyrighted recordings. The performance royalty prescribed in this bill would require television stations to pay only token sums to recording companies and artists. Television stations with annual revenues of $1 to $4 million would pay only $750 a year, and stations with revenues over $4 million would pay $1,500 a year. Total television payments, which would be divided between artists and recording companies, would equal $429,000-less than onetenth of one percent of television station profits in 1973. (See Exhibit 7 below.) Television is a highly profitable industry and would scarcely feel the pinprick of such small performance royalties paid artists and record makers. Total television pre-tax profits rose 58% between 1967 and 1973. on page 1331.)

(See Exhibit 8 Television enjoys an unusually high profit level. In 1973, television's pre-tax profits were 18.8% of its revenues."

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Advertising dollars spent on television rose 54% between 1967 and 1973. The Commerce Department predicts that television revenues will grow about 9% a year between now and 1980.65

Unlike radio, television's growing revenues appear to be the result of increases in its advertising prices rather than increases in the amount of time it sells, largely because available time is frequently sold out. Network television advertising revenues rose 35% between 1967 and 1973, a period during which the cost per minute of advertising on nighttime network TV rose 47%, and on daytime network TV, rose 33%.

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EXHIBIT 7

PERFORMANCE ROYALTY TV STATIONS WOULD PAY RECORDING COMPANIES AND ARTISTS UNDER S. 1111-H.R. 5345

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1 TV stations with revenues over $1,000,000 have 93 percent of all TV station expenses and probably an even higher percentage of TV station profits since 81 percent of the stations in this revenue category are profitable, while profits are enjoyed by only 48 percent of the stations with revenues under $1,000,000.

Source: FCC, "TV Broadcast Financial Data-1973."

62 According to the FCC's annual TV Broadcasting Financial Data, television pre-tax profits rose from $414.6 million in 1967 to $653.1 million in 1973.

03 FCC's annual reports on Broadcast Financial Data for TV.

64 According to the Research Department of Advertising Age, television advertising revenues rose from $2.9 billion in 1967 to $4.5 billion in 1973.

FCC's annual reports on Broadcast Financial Data for TV.

66 According to the Research Department of Advertising Age, network television reve nues were $1.455 million in 1967 and $1,968 million in 1973. Network ad price indices are from "1974-75 Cost Trends," Media Decisions, August 1974, p. 45.

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EXHIBIT 8.-Television revenues and pretax profits 1967-1973
Sources: FCC's annual report on TV Broadcast Financial Data.
Research department of Advertising Age.

Television's audience has been growing. Between 1968 and 1973 the audience for nighttime network TV grew 8% while the audience for daytime network TV grew 26%. Because of the growth in television audiences, television ad costs per thousand viewers grew more slowly than did ad costs per minute: cost/1,000 viewers rose 12% for daytime network TV and 20% for nighttime network TV. Television profits are so high that the industry could absorb the entire performance royalty proposed in this bill, and its income statement would remain virtually unchanged. If television paid the royalty entirely out of its profits, television stations with revenues above $25,000 would continue to enjoy a 22.7% pre-tax return on sales. (The rate would merely ease from 22.76% to 22.74%.)

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07 "Broadcasting in 1975: Shipshape in a Shaky Economy," Broadcasting, January 13, 1975. p. 35. 68 1974-75 Cost Trends," Media Decisions, August 1974, p. 45.

Television stations with annual revenues of $25,000 or more, had net revenues of $2.059,847,000 and pre-tax profits of $468.803.000 in 1973, according to the FCC's "TV Broadcast Financial Data-1973" (August 1974).

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