The reason why an audience outside of the station's market is of little value to the originating station is that local commercials retransmitted to the distant audiences are of no value to the advertiser. Thus a used car dealer or furniture store in Chicago would not pay a penny more for bringing his commercials on a Chicago station to audiences in Dubuque, Iowa.

The net economic result of permitting the importation of programs from distant stations without copyright licensing has been well described by Dr. Leland Johnson of the Rand Corporation in his 1970 study, Cable Television and the Question of Protecting Local Broadcasting:

Because local audience is generally more valuable (to advertisers) than is the more distant audience, the financial costs of audience lost to the local station are likely to outweigh the gains to the distant station-implying a net reduction in financial resources available for programming. Under these circumstances***the benefit of cable growth might well lie largely in providing the public with more channels of worse stuff. (p. 21)

Some cable operators are urging that the bill should draw a distinction between distant and local signals. They argue for payment of royalties for programs retransmitted from distant stations. They would, however, exempt the retransmission of broadcasts from local stations.

H.R. 2223 provides for a total royalty based on the cable system's revenues from the basic service of transmitting broadcast signals. It does not distinguish between payment for distant and local signals for what, we believe, are very sound reasons. Technological innovation is causing constant changes in the cable television field. What may be considered a local or distant signal today may not be considered the same kind of signal tomorrow. For that matter, all signals may become "local" or "distant" tomorrow. Because of this fluid situation, neither the initial fee schedule nor the Royalty Tribunal should be tied to any artificial "local-distant" signal distinction. If a panel of the Tribunal determines that such a distinction should be considered in setting a fee schedule for a fiveyear period, then it may. But that distinction would not be locked into law, since a subsequent panel may give the distinction different weight.

NCTA publicly reaffirmed this past May 23rd that it favored the payment of royalties for local signals because it would result in a more equitable distribution of the total industry burden among metropolitan and small town systems. There are large and prosperous cable systems operating in the big cities with many local television stations so that the cable systems in these markets import relatively few distant signals and, therefore, importations play a minor part in the total operation and profitability of these systems.

On the other hand, there are many relatively small cable systems operating in areas where there are few, if any, local stations so that the importation of distant signals constitutes the major service which these systems render to their subscribers. It would not be fair to let these small systems in the remote areaswhich render a service where few over-the-air programs are available-pay all of the contribution which the cable industry will make to help finance the production of programs; and it would be equally unfair to free from such burden the large metropolitan systems which use primarily local signals.

C. Copyright Payments Will Not Destroy the Cable Industry

No one is out to destroy the cable industry. On the contrary, copyright owners see it as another customer for their product. But cable television is part of the free enterprise system. Its goal is to make a profit; that is the goal of television and the goal of copyright owners.

There is no justification to excuse the cable industry from paying copyright in the same manner as any other communications medium must. No other communications medium had an exemption from copyright while it was growing, or at any other time and cable should not be treated any differently.

The real effect, the end result of cable television's argument stripped of rhetoric, is that the cable industry should be subsidized. The subsidy would be in the form of a statutory exemption of copyright royalty payments-a subsidy by another private industry, the copyright owners.

Cable television should be required to meet copyright costs as one of its ongoing expenses. Copyright fees are as essential an ordinary business expense for a cable system as are its costs for head-end equipment, the cables it installs, the electricity it buys from the local utility to energize the equipment and the rental of poles from utility companies over which it strings its cable.

It is absurd to claim that royalty payments for programs-the most essential produce cable needs-are the straw that puts a cable system out of business. The

facts are otherwise. The original McClellan rate schedule would be a minor cost item for cable systems. It is arbitrarily low. Cable systems spend more than the proposed royalty payments in their campaign to oppose any copyright liability and appear to bear that burden without travail.

One of the scare arguments advanced by cable operators is that the payment of copyright fees would increase the subscription fees which the public would have to pay for cable television service. Indeed, some have described it as a "new tax" that would be imposed on their subscribers. As I have pointed out, the impact of the payment of copyright fees by cable operators on their total revenues is, to say the least, of minor consequence compared to a system's revenues or other operating costs.

On the other hand, it is noteworthy that during the last few years, cable operators have secured substantial increases in their subscriber fees although they have not paid a cent for copyright fees. In this connection I would like to direct the Subcommittee's attention to the 1974 Annual Report of Teleprompter Corporation, one of the leading multiple system owners. Teleprompter proudly proclaimed its rate increase program as follows:

In 1974 Teleprompter secured rate increases in 84 systems affecting approximately 777,000 subscribers-a task which required the approval of over 200 municipalities. These rate increases added more than $6,000,000 to 1974 revenues and, based on the current level of subscribers, will increase 1975 revenues by approximately $14,600,000. Teleprompter is continuing to seek rate increases in 1975, including rate increases in certain systems in which rate increases were obtained in 1973 or 1974. (p. 5)

D. This Copyright Bill Should Not Prohibit the FCC From Imposing Nonduplication or Exclusivity Rules in Accordance With Its Jurisdiction and Responsibilities

I understand that cable interests are urging the insertion into the bill of provisions directing the FCC to eliminate the nonduplication and exclusivity rules adopted by it in the Cable Television Report and Order of 1972 in accordance with the provisions of the Consensus Agreement. It seems to me to be highly inappropriate for a copyright statute to issue directions to the FCC encroaching upon its authority to issue regulations under the Communications Act.

The signals cable television should be required to carry, and the signals cable should be prohibited from carrying, are regulatory matters within the jurisdiction of the Federal Communications Commission. These determinations require careful consideration and detailed balancing of many factors. Congress established the Commission to carry out just such types of functions. H.R. 2223 is not a bill to decide communications and broadcast regulatory issues. Congress should not bog this bill down with regulatory determinations.

Moreover, provisions relating to FCC jurisdiction are outside the aegis of this Committee. During the past decade of congressional consideration of copyright revision bills, provision after provision dealing with communications regulations has been stricken as being neither germane to a copyright bill nor within the purview of the Judiciary Committee. A request to include a regulatory provision at this stage is only a thinly disguised attempt by cable interests to have the copyright bill referred to another committee with the purpose of delaying or defeating its enactment.

E. The Royalty Tribunal Is a Body Organized To Carry Out Important Functions and Is Not Another Useless Bureaucracy

Cable television operators also often claim that the establishment of the Royalty Tribunal creates another government bureaucracy, and the American public does not need another bureaucracy. If cable operators mean by this argument that they prefer elimination of the compulsory license and cable would negotiate for every program it carries, we approve. We are willing at any time to accept a proposal from cable that it should pay copyright based upon free and open negotiation.

However, in my view cable operators use this argument as an excuse to saddle copyright owners with a completely arbitrary rate schedule, engraved in stone by statute, never to be revised again except by law-maybe another 66 years from now. There is no denial that the original McClellan rate schedule was arbitrary, and that it was thereafter arbitrarily cut in half in H.R. 2223. There is no denial that Congress has neither the time nor the expertise to determine a fair rate schedule. Therefore, if equity is to be done for both parties, Congress must either

provide for privately negotiated licenses or a fair and impartial arbitration tribunal to adjust rates periodically.

Moreover, the Copyright Royalty Tribunal is not one specially organized to review only cable system royalties. It was established in the copyright bill also to review the adjustment of royalty rates for phonorecords (see sections 801(b) and 802(a)) and for the distribution of royalty fees deposited pursuant to sections 111 (cable television) and 116 (phonorecords). In other words, the Copyright Royalty Tribunal will be needed whether cable royalties are frozen into the statute or not.

F. The Definition of "Cable System" for the Purpose of Computing Royalties Should Not Be Changed

Cable interests also urge that the definition of cable system as contained in section 111 (e) of the bill be changed to make it conform to the general definition contained in the FCC's rules (section 76.5(a)). That rule prescribes that each separate and distinct community or municipal entity served by cable television systems, constitutes a separate television system, even if there is a single headend and identical ownership of facilities extending into several communities. However, in a number of areas dealing with cable television the FCC itself has modified this definition. The FCC has qualified the cable system definition so that it more nearly follows the thrust of the language in H.R. 2223. Even the Commission has recognized, as does this bill, that a definition of cable systems based on the boundaries of a political subdivision is artificial.

Moreover, the application of the unmodified definition of section 76.5(a) of the FCC rules to the computation of royalties would be grossly unfair to copyright owners. It would allow technically and economically integrated systems to split themselves artificially into several smaller systems and permit these large systems to pay copyright fees under the progressive percentage scale at the low rate reserved for smaller systems. If the royalty computation were to be based on this definition, the revenues of individual cable systems would be fragmented to such an extent that they could well halve the effective rate under the sliding scale of section 111.

IV. PROPOSED AMENDMENTS TO H.R. 2223

I turn now, Mr. Chairman, to a brief discussion of a number of amendments that we strongly urge be made in the bill. I will supply for the record in part VI of this statement, specific amendatory language to cover these proposals.

A. Delete the "Stevens" Amendment

Let me talk first about what became known in the Senate as the "Stevens Amendment," originally proposed by Senator Stevens to meet a problem in Alaska, a problem that happily has now been solved and no longer exists. The Stevens Amendment will be found on page 17, beginning on line 29, of the bill. It is a re-definition of a "secondary transmission." It says that the taping of a primary transmission shall be deemed a secondary transmission in certain circumstances and under certain conditions.

Let me explain.

Under section 111, all cable systems would have a statutory license to carry and retransmit those television signals permitted "under the rules, regulations, or authorizations of the Federal Communications Commission" (section 111 (c) (1) (c)). For all cable systems, whether located in the 48 states or in the offshore areas, the statutory license applies to the simultaneous retransmission of television signals received off-the-air.

The Stevens Amendment, however, gives special permission to cable systems in Alaska, the Virgin Islands, Guam, or other U.S. possessions, and, under more limited circumstances, to cable systems in Hawaii, to tape programs on the mainland and to retransmit them nonsimultaneously to their subscribers. In addition, language proposed by the Delegate of Guam, and now pending before this Subcommittee (H.R. 4965), would go further and give taping rights to all offshore states, territories, commonwealths, and possessions of the United States. By giving statutory permission to tape and record programs, the Congress would be authorizing the physical creation of copies of the copyright owner's work. These copies could easily become the basis for large-scale trading in pirated television programs. The motion picture industry has had a long and continuing struggle to eliminate any trade in or circulation of pirated prints of feature films. Both the Amendment and H.R. 4965, however, would place into the stream of commerce the very kinds of copies and tapes which the industry

has so strenuously tried to eliminate. In addition, it might also encourage cable systems in foreign countries (e.g., Canada) to engage in similar practices on the theory that they should be subject to no greater limitations than apply to cable systems outside the 48 contiguous states.

The Stevens Amendment and H.R. 4965 are in direct contradiction to the philosophy of copyright protection. This view is emphasized by the Register of Copyrights in a recent general review of and comments on the copyright revision bill requested last year by your Committee's Chairman, the Honorable Peter Rodino. The Register wrote:

The definition of "secondary transmission" has been revised to include nonsimultaneous carriage by a cable system located outside the boundary of the 48 continguous states. This change is related to a new definition of "cable system," which is broadened to permit cable operators located outside the contiguous 48 states to be regarded as one system, even though the secondary transmissions are nonsimultaneous with the primary transmissions. Recognizing the concerns that led to these changes, we have serious reservations about their advisability.

Adoption of the Stevens Amendment for the benefit of Alaska was asserted to be justified on the grounds that some cable systems were located in communities too remote from any television station for reception of their signals off-the-air and for the further reason that, unlike in the continental United States, no microwave service existed which could have transmitted these signals.

This potential problem, however, was solved subsequent to the adoption of the Stevens Amendment in the Senate when copyright owners issued special blanket licenses to cable systems located in these remote areas enabling them to serve their Alaskan viewers. The agreement, formally approved by the Federal District Court, is entirely satisfactory to the involved Alaskan operators, who have so informed Senator Stevens, and to our members who represent about 80 percent of copyright programming used by television and cable.

Clearly, therefore, the Stevens Amendment has lost its usefulness for Alaska and serves no purpose.

A similar license arrangement can and would be made for the Guam cable system, if it so desires. Consequently, there is also no need for special statutory language for Guam, and no case has been presented for adopting special statutory language for other American territories and possessions.

It is neither necessary nor desirable for such an offshore location as Hawaii to be covered by this Amendment. It simply has no rational base. There is a full complement of television stations in Hawaii to provide more than enough programming for the island cable systems to pick up for their subscribers. Indeed, the situation in Hawaii is the same as it is in the continental United States where the taping of programs by cable systems is prohibited for good and sufficient reason. So long as there are an adequate number of television stations whose signals can be picked up by cable systems and retransmitted simultaneously, there are no economic, social, or legal reasons why cable systems in Hawaii should be treated any differently than cable systems in the continental United States.

It is clear, we believe, that the Stevens Amendment and H.R. 4965 are unnecessary, unwarranted by the facts, and legally imprudent. We ask that the Amendment be deleted from H.R. 2223 and that H.R. 4965 not be considered. The specific language to delete the Stevens Amendment is included in part VI of this statement.

B. Increasing the Initial Fee Schedule

I believe the record gives ample support why the original McClellan rate schedule should be included in H.R. 2223. We therefore recommend that the initial rate schedule require cable systems to pay from 1 percent to 5 percent of their subscriber revenues as copyright royalty.

C. Administrative Provisions Relating to the Royalty Tribunal

As a result of the need for prompt Tribunal action, the first public notice for reviewing the section 111 royalty schedule should be changed from July 1, 1977, to January 1, 1977. The Tribunal staff will have been previously appointed shortly after the enactment of the bill and will have had a year to assemble data and information. Succeeding staffs and panels of the Tribunal will have available this background. No reason exists why one year is needed for the Tribunal to reach an initial decision. We therefore recommend that the Tribunal

be required to reach a decision within 90 days, except that upon certification by the panel that it needs additional time, the panel will have a maximum of an additional 90 days to reach a decision.

As a result of the change in time for convening a panel of the Tribunal to review the first cable rate schedule and the change for timely periodic review, the dates of the subsequent reviews should likewise be changed. We recommend that subsequent rate review be commenced in 1982 and every fifth year thereafter. The bill does not specify when the facilities and staffing of the Tribunal should first be provided. Due to the importance of reviewing as quickly as possible the arbitrary section 111 statutory rate schedule, we recommend that the Library of Congress be directed to provide staff and facilities within 60 days of enactment of H.R. 2223.

Because members serving on panels of the Tribunal are not permanent, fulltime employees of the United States, a clarifying provision should be adopted that members of a panel are to be paid compensation only for each day (incluỏing travel time) they are performing their duties as members of the Tribunal. H.R. 2223 presently provides that facilities and incidental services are to be provided by the Library of Congress, while temporary and intermittent employees are to be appointed by the Tribunal. Since the Tribunal is in fact a series of three-member panels, administratively it would be beneficial to provide that the Library should provide all facilities, services, and personnel. D. Clarification of Cable Ownership Notice Requirement

Section 111(d) (1) of H.R. 2223 provides that each cable system must file with the Copyright Office within 30 days of enactment of the bill or before commencing transmissions (whichever is later), a notice of ownership or control. It is logical that this section should also require such a notice whenever the ownership or control of a cable system changes. We recommend that such a clarifying amendment be adopted.

E. Criminal Penalties for Piracy and False Labeling

The bill provides that a first offender who pirates certain copyrighted material for profit (section 506, page 49), or who knowingly transports in commerce copyrighted material with a forged or counterfeited label (section 2318, page 64), may be imprisoned for not more than one year. A second or subsequent offender may be sentenced for up to two years imprisonment. A first offender can be charged under either section only with a misdemeanor-even though that offender has pirated thousands or hundreds of thousands of dollars of copyrighted material. These types of offenses are serious and are felonious in nature, and should thus be accorded the stature and consideration of other felony statutes.

We agree fully with the Department of Justice in its testimony to this committee that pirating of copyrighted works has become a major and serious problem. Consequently, convicted offenders should be subject to appropriate terms of imprisonment.

We also agree with this Judiciary Committee's statement in its Report last year on the copyright extension and piracy bill. Film piracy and counterfeit labeling are "economic" offenses, as the Report declared. But the Committee must also recognize that the statutes protect a constitutionally recognized right. Such "economic" crimes as embezzlement are subject to greater imprisonment penalties in federal statutes. Similarly, while antitrust violations are "economic" offenses, only last year Congress increased the antitrust imprisonment penalty to three years.

The piracy and counterfeit labeling penalties for imprisonment should be increased so that such offenses are classified as felonies and treated on an equal footing with similar "economic" offenses. We therefore urge that a first offender under either section 506 or section 2318 be subject to a maximum of three years imprisonment and a second or subsequent offender be subject to a seven year sentence.

V. BACKGROUND

A. Copyright Liability of Cable Systems Under the 1909 Act

Television is perhaps the largest user of copyrighted film programs. To use such programs, the television station must first secure a license from the program's owner. But cable television, on the other hand, picks up programs broadcast by television stations both local and distant and, for a monthly charge, retransmits them to individual set owners through wire or cable. Thus cable