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I have perhaps told you more than you want to know about the consensus agreement.

Mr. KASTENMEIER. You perhaps heard, it was stated that Peter Flanigan, perhaps to some extent the FCC and the Office of Telecommunications Policy, to some extent bludgeoned the parties into acquiescing, to agreeing to this. As representing a couple of parties to this agreement, do you feel that, were you aware of any of these extraordinary efforts on the part of those ?

Mr. VALENTI. No. I do not know about that. But, Mr. Chairman, we can go back again to bedrock common sense. The environment in which that consensus agreement was created, the ambience of the moment, a freeze on cable television, no distant signals could be imported. Cable television stunted, atrophied.

If you were in that situation, what would you do? You would want to do all you could to unfreeze, to thaw the freeze, as it were. If cable was bludgeoned, it is because they wanted the quid without the quo. They wanted to unfreeze, but without giving up something. Consensus was a compromise. The networks and broadcast licensees were not satisfied with the consensus agreement. We were not wholly satisfied with the consensus agreement. Cable says they were not satisfied, but they did a very marvelous thing. It was a kind of interesting way to handle it. They took what they liked, and walked away from what they did not like. That is what happened.

We thought the copyright bill was so important that we were willing to sacrifice some things we did not like on the consensus to get a copyright bill enacted. That is the play of the marketplace. It happens in family life and political life. It happened in the negotiation. So, I do not know about anybody being bludgeoned. All I know is that cable got a vast asset, and the stock market quickly reflected that, and we did not get a copyright bill.

Mr. KASTENMEIER. One thing, of course, you have to concede the cable industry had, was at that time, perhaps, one, and later a second Supreme Court decision in its favor, which, I suppose, was a factor.

Mr. VALENTI. Mr. Chairman, obviously it was a factor. Of course it was a factor. It was one of the factors that was weighed in the consensus agreement. You are absolutely correct, sir.

Mr. KASTENMEIER. Let me ask you, Mr. Valenti, to what extent does the Senate passed bill, last year, embodied in H.R. 2223, express the consensus agreement? I will put it a different way-to what extent does this digress from the consensus agreement ?

Mr. VALENTI. I think basically the consensus agreement, among other things, said that if the three parties could not privately agree on a negotiated fee schedule, that a royalty tribunal would be put into legislative construction and a royalty tribunal would decide what those fees would be. That is one thing that is not in the bill. Obviously, in the bill, there are no provisions dealing with regulatory functions, distant signals, exclusivity, which I am given to understand may be beyond the purview of this committee. But that is something for you gentlemen to decide, and not me. To the extent that the consensus agreement did not have a fee schedule and would start out with an arbitration tribunal to set initial rates, this H.R. 2223 does differ in more than casual form from the consensus agreement.

You have a legitimate reason to ask why did you go along with the Senate bill. We struggled. We did not think the McClellan fee schedule was the right thing for us. We thought it was painfully low. We made known our distaste to Senator McClellan on a number of occasions. Then we were horrified that at 1 minute to midnight, as it were, in the last hours of the markup, we learned that the Mcclellan fee schedule was cut in half. By that time it was just too late to do anything. While I made clear to Senator McClellan my distaste for it, I got out of the way of the avalanche, and the bill passed the Senate, and you have it here now.

As far as we are concerned, we were willing to accept the bill, if we could get the McClellan fee schedule reinserted because we think even a bad copyright bill is better than no copyright bill. It will bring some sort of order to a chaotic marketplace.

Mr. KASTENMEIER. In terms of the question relating to section 111, the only change you recommend in the bill is to return to the original McClellan fee

schedule. Mr. VALENTI. No. We have some amendments, Mr. Chairman, that are of particular concern. One, the so-called Stevens amendment, which has to do with nonsimultaneous transmission off-shore, the taping of programs for use in Alaska and Guam. There are a number of others of a more technical nature.

We are very much opposed to the Stevens amendment. It was put forward as a result of unusual geographic and environmental conditions in Alaska where many villages literally cannot get television of any kind. They are isolated. So, Alaska cable systems taped programs illegally in the States and then ran those taped programs. I urged my companies, and they were eager to follow my urging, that it was in the public interest to make a special agreement for Alaska. This we have done, and we have given permission to Alaska cable systems under control and monitoring to tape programs, because taping is piracy if it is unauthorized. That is now operating and the Alaska cable system owners are perfectly satisfied.

We are willing to make the same deal with Guam, so that they will have permission to tape our programs under a license agreement. But, there is no need of taping by cable systems in Hawaii and Puerto Rico because the number of television stations is as large or larger than on a similar area within the continental United States.

That is one of the principal deletions that we would urge in this bill, Mr. Chairman.

Mr. KASTEN MEIER. Is that a change to section 111?
Mr. VALENTI. Yes.
Mr. KASTENMEIER. The gentleman from Illinois.

Mr. RAILSBACK. Mr. Valenti, yesterday we heard testimony that I am going to ask you to respond to, if you will.

It deals not with legal liability, but rather with the practical effects of having an expanded market and how that allegedly benefits a copyright holder. Let me give you an example.

Then the television networks, or an independent nonnetwork station which has access to cable, or where cable is carrying its programfor example, WGN in Chicago, which is carried by many, many cables, sells its programing to a buyer, it can say, look, you are not just getting a limited market. You are getting access to this very expanded market carried by cable. Presumably, so the story goes, they can charge more, naturally, to that potential buyer. The advertiser, then, in addition, a copyright holder like some of your firms, would take that into account in selling that particular program to the network or to the nonnetwork station. The witnesses yesterday showed us advertisements that listed the networks or the stations actually referring to this expanded market because of cable.

So, from the standpoint of the copyright holder, it would appear to me that they make a pretty good case, that they ought to be partaking in those additional benefits.

How do you respond to that?

Mr. VALENTI. Dir. Railsback, I am reminded of what Thomas Carlyle once said about one of his contemporaries. This man has spent his entire life plastering together the truth and the false, and therefrom manufacturing the plausible. That is what this is all about.

One has to approach this issue at two levels, Mr. Congressman. The first level is the relationship between the advertiser and the network or the independent station.

The next relationship is between the copyright owner and the station licensee with whom he deals.

Let us take the first relationship.

The broadcasters are here, and they will speak to the relationship between advertiser and broadcaster, because that is a bargaining process we do not get into. But I must say, when you ask a station if it is getting paid for this extra cable coverage, the answer is uniformly-no. It defies credibility to me that a used car dealer in Baltimore would pay

the Baltimore station extra money because the program on which he advertises is carried in Richmond, Virginia. It boggles my mind that any advertiser is that naive. Insofar as the copyright owner is concerned, I can tell you

Mr. RAILSBACK. Let me ask you this, if I may. I agree with you, but what about a regional advertiser that would be willing to pay?

Mr. VALENTI. I used to be in the advertising business quite some years ago. You bought advertising to cover a market; and if you wanted to buy Richmond, you would not depend on the cable situation in Baltimore to cover Richmond. You would buy Richmond directly also. If the advertiser is getting some extra coverage though, it really is not that important to him. If he wants the other market, he does not get it by the reach of a cable system. You want to buy an entire market, not what the cable system might add. But as I say, that is a relationship, Mr. Railsback.

Mr. RAILSBACK. But you would concede there are some benefits obviously derived from expanding your market through cable?

Mr. VALENTI. It could be, sir. I think it is possible, but I think with respect to the arena with which I have more than casual familiarity, the copyright problem, I can tell you flatly that insofar as we are concerned, the additional cable coverage is not a factor in the price that we get. It is just not an asset value that yields a higher license from the station.

Mr. RAILSBACK. Why not?

Mr. VALENTI. I will tell you why. If we even get a marginal increase, we would lose more under the following case. Suppose we sold a film, say "The Sting,” to Baltimore. We got $700 for "The Sting” there. We also sold it to Richmond for $600. Now, “The Sting” plays in Baltimore first. It is lifted out of Baltimore and brought in on the Richmond cable system, and the Richmond station says hey, wait a minute,

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boys; I paid you $600 for that program, and now cable's showing it a month before I am supposed to show it. I am either not going to buy it, or only give you $150 for it. Therefore, we have lost revenue on "The Sting.” If we add it up, we could get far more money if it played in Baltimore and played in Richmond on separate sales to the two television stations and did not have the importation of distant signals. The same problem exists in series programs syndication. Our business is hurt because the audience has been fragmented. Insofar as we are concerned, it is a detriment, not a help, to us.

Mr. RailSBACK. You are very experienced in your business; and you would certainly know, what you were selling and what market you were selling to. If you were the copyright holder selling to Boston, you would know of the cable market and how that cable market there would expand your coverage. I would think that would be part of your negotiation.

Mr. VALENTI. Well, Mr. Railsback, what seems plausible at this council table is not the situation in negotiation. The local audience is really the key as far as the station in Baltimore is concerned. They are not going

to pay any more money for a program because it is being imported by cable into Richmond. They might get some more money out of an advertiser if he wants those cable homes but they sure as the devil do not pay us more money for the program because of that. If they do, it is marginal.

Mr. WIGGINS. I have been fidgeting here, Mr. Valenti, because I do not believe what you have said. I am going to give you an opportunity to correct my impression. You have told us, a few moments ago, that when you sell a movie to a net, you get perhaps as much as $800,000. And yet, when you sell a movie to a local station, you may get $100 or $200, even up to $1,000. There is a big difference between $800,000 and $1,000; and I suggest that the principal reason for that difference is the difference in market.

Mr. VALENTI. I am sorry, Mr. Wiggins. I did not mean to I was talking about station syndication. You are talking about network sales.

Mr. WIGGINS. I am trying to make the point that your copyright owners get more money for a sale to a large market than they do to a small market.

Mr. VALENTI. Absolutely.

Mr. WIGGINS. Having conceded that point, you then address yourself to the narrow point of the sale to a local market. Do you extract a higher fee because that local market is expanded by a cable system?

Mr. VALENTI. I have examined all of our companies on that very point, and they tell me the answer is no.

Mr. WIGGINS. I think that information is of some critical importance to the committee, and if there is some way that it can be documented so that the facts can be laid to rest with respect to this assertion that the copyright owner, in fact, is paid more by reason of the expanded cable market, it would be most helpful.

Mr. RAILSBACK. I think it is a very relevant question, as far as when we decide how we want to provide incentives to an author or to a producer or to a production firm, to take into account what kind of benefits he derives by reason of that expanded market.

Mr. VALENTI. I think we have to insert another piece of fact into this equation. You are talking about a market. Mr. Wiggins is correct; let us take Houston, Tex., my home town. That is about the thirteenth largest market in the country as a market. In Houston, Tex., there are three network affiliates and two UHF's. There are five stations in Houston, Tex. If they have a cable system there, it would be importing additional signals. They would have three, three and one--a total of seven signals.

Now, when cable brings in two more stations into Houston, what happens? You fragment the audience of any single Houston station.

The obvious is that some station is going to lose audience-probably all of them—because the TV homes have alternative sources of viewing. So the importation of distant signals really hurts an advertiser, because it allows foreign stations to come into that market and fragment what he has bought. That is point No. 1.

Point number two, unlike network, which is nonduplicated, you know you have exclusivity. When "Godfather I” is shown on CBS or NBC, you know that it is not being sold to any other station. We sell first to networks, so they have exclusivity. But I am talking now about our other valuable market called syndication. We will take a picture or a package of film, and we will sell it to 300 television stations in this country. Mr. Railsback, in that case our people are getting varying amounts of money, depending upon the size of each television station market-not cable market, but the size of the individual market. So, if you sold the film or the package say, 300 times around the country, 300 different stations, you do not know when they are going to telecast it. You do not have a specific schedule. They may have bought a total of 20 pictures from you. They are going to space their showing out over a period of, say, a year. You have sold it to Dallas, you have sold it to San Antonio, you have sold it to Bryan. All of a sudden, this picture is picked up by cable systems and goes into these other markets from Houston. We have thus lost a tremendous amount of revenue, because the TV stations are not going to pay you when their audience has already seen the picture, for which they paid the full value-has already seen it 1 week or 1 month before.

That is the disfiguring aspect of the signal importation. I do not care what the advertiser pays for the program. It is what we get for it on a syndicated basis. It has nothing to do with networks, because we sell them for an average of $800,000, but based on their total nationwide market, Mr. Wiggins, and on the popularity of the film. You get more for "Gone With the Wind," because it is a popular film.

Mr. WIGGINS. You do not deny the fact that when a popular film is going nationwide it becomes a factor which enters into the price?

Mr. VALENTI. Absolutely. That is what the price is all about. Now, the average price that we get for films, if you took all the films we sold to the networks, the average price is $800,000. That is the point I am making; a popular film commands more money.

Mr. RAILSBACK. Just one more question, Mr. Valenti. Yesterday, it was pointed out that the fee schedule set involves gross revenues which presumably, again, would take into account any substantial inflation etc. Why is there a need to have a tribunal review, inasmuch as that rate is determined on gross rather than nets? I want you to give us your views, if you will.

Mr. VALENTI. Gross?
Mr. RAILSBACK. I am talking about gross revenues.

Mr. VALENTI. We support—we believe, if I am responding, to your question, it should be gross subscriber revenues; we think that is fair.

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