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Let us examine a very relevant and persuasive parallel. Most of the programing of network affiliates comes from the networks. Yet the network affiliate does not pay the network or the copyright owner for this programing carried on its broadcast channel." Quite to the contrary, last year the networks paid these affiliates $243,600,000-almost a quarter of a billion dollars. These payments are made because the network affiliates enlarge the audience available to the networks and thus enable the networks to offer advertisers a greater audience for their commercials. Cable systems perform exactly the same function of broadcasters and copyright owners-but so far (except in the case mentioned on page 2 of this letter) without compensation from advertisers or broadcasters. Thus, it is really beside the point to claim-as the copyright owners and broadcasters constantly do-that cable-television enjoys a unique and unjust exemp tion from copyright liability. As a special carrier of broadcast communications the industry is no diffrent in respect to its earnings than are the telephone companies, antenna and receiver manufacturers, and the host of other related businesses which can attribute some portion of their earnings to the fact that their service or product is involved in the transmission of copyrighted materials from broadcaster to viewer.

Cable television is a new industry which promises great public service. It should not be crippled in its youth because of superficially persuasive arguments that royalty-free cable retransmission, from which service cable systems derive substantial portions of their revenue, is inimical to national copyright policy. It is not, and the pressure to impose copyright liability for such cable activities is not based on sound copyright principles, but on the fears of a few but large program production companies and the cable industry's competitors." We must not let these fears influence public policy in a way which will directly discriminate against cable subscribers " and indirectly injure the public interest generally by blunting the growth and development of the cable television industry. No system of legislated copyright liability, licensing and arbitrary royalty fees can possibly do as much to further the goals and purposes of national copyright policy as will the adoption of reasonable public policies that free cable television to achieve its potential of public service."

The changes respecting cable television proposed by H.R. 2223 are unnecessary, unfair and discriminatory. Copyright owners are presently adequately compensated for material retransmitted by cable systems. FCC regulation can accommodate any proper broadcaster interests which may be harmed by cable system operations. We respectfully urge that the royalty obligation contained in Section 111 of H.R. 2223 and all related references to it in other provisions of the bill be deleted.

STATEMENT OF TIMES MIRROR

It is a fact-whose supporting data are presented later-that CATV is materially benefiting many_broadcasters and program owners through the enlarged audience it provides. Broadcasters either are (or could be) charging for this enlargement, and program owners could (or should be) negotiating on the basis of it. In brief, CATV is presently an economic "plus" for the TV industry,

11 Broadcasters may claim that in fact the network affillate does give up something in exchange for this money-namely its ability to sell its broadcast time directly to adver tisers itself or to another network. But this is no different from a cable station which imports distant signals. The cable system is not obligated to carry any particular distant signal; indeed it is not even obligated to carry any distant signals. Yet in many cases cable systems have transformed independent television stations into what amounts to regional networks to the great benefit of these stations and the copyright owners who deal with

them.

12 The broadcast industry has for the last twenty years been seeking to limit cable's growth and profitability by putting continued pressure on the FCC to adopt restrictive rules limiting which signals and programs cable may carry and by waging a massive campaign to prevent the development of a pay cable industry. Now, to further their goal of throttling the cable industry, the broadcasters have turned to Congress in an effort to cripple permanently a potential rival by way of copyright legislation.

18 Since advertisers ultimately pay for the use of broadcast copyrighted material, and this cost becomes part of their product prices, requiring cable subscribers to pay additional royalties for viewing broadcast programs is a double payment from them as well as a double payment to the copyright owner.

14 For example the development of the pay cable industry promises to be of immense benefit to copyright holders. Yet a precondition of such development is the existence of a financially sound cable industry.

and it is arguable that the further "plus" of copyright fees is unwarranted. Nonetheless, copyright fees appear to be an upcoming reality, and the purpose of this memorandum is to present Times Mirror's thoughts on an equitable fee schedule and on methods of administration. To summarize, our chief views are that:

--The royalty ceiling in H.R. 2223 should be reduced to the range of 1.5-1.75% of gross revenues.

-There should be no review of initial royalty rates for 7 years.

-The role of the Copyright Tribunal should be recast to one of recommending rates, with the ultimate disposition being made by Congress itself.

In making these suggestions, we are not asking the Copyright Bill be cast as a cure for the CATV industry's economic ills. But it is our strong view that no royalty legislation can be reasonable that measurably increases those ills. Tests of reasonableness

While exact rates that fulfill "reasonableness" tend to be difficult to establish, the conceptual bounds of "reasonableness" are not, and we would like to start with the latter. Our belief is that an equitable fee schedule should meet these tests:

-"Credit" should be reflected for the audience-enlargement CATV is providing copyright holders.

-Clearly, the fee schedule should not be confiscatory by taking an inordinate share of CATV's profits.

-It should not even depress earnings unduly, which can only impair CATV's ability to attract capital and hence to grow.

These points are expanded on in the next paragraphs, and are related to some of the fee proposals that have been made, including the provisions of H.R. 2223. Application of tests

1. Cable's Value in Audience-Enlargement.-Certainly CATV is playing a significant role for copyright holders in two particular situations:

-Where CATV is serving communities with no television stations.

-Where CATV is providing two or more additional channels to communities that have only one local television station.

In the first category (no television), there are 1850 CATV systems serving 4.3 million households. This "market" is the equivalent of all the TV homes in Los Angeles and Minneapolis/St. Paul combined, simply to draw one comparison. As an indication of the "market's" financial worth, network and national spot revenues in these areas totaled $129 million in 1974. Since CATV viewers are qualified prospects for a vast amount of this advertising, Cable is benefiting advertisers, and a copyright-holder's product is made more valuable because of it.

In the second category (where CATV brings additional signals to communities that have only one TV station) there are 250 systems serving 900,000 households. Again, there are national advertisers "getting their message across" in areas where, without CATV, there would be no opportunity to do so.

If the two situations are added together, CATV's total audience enlargement is 5.2 million homes, or the equivalent of all the TV households in Los Angeles and San Francisco. In 1974, network and national spot advertising revenues in these markets totaled $154 million. Further, these 5.2 million homes comprise about 8% of all TV households in the U.S. There is value in an audience of this magnitude. And we believe the burden is on broadcasters and copyright holders to derive full benefit from it in any instances where they are not already doing so. We also believe that CATV should be granted credit for this audience-enlargement through a very conservative approach to copyright royalties.

(In fact, if Cable's audience really had "little or no value," as some broadcasters claim, why has the TV industry argued intensely at the FCC against permitting the sale of adjacent time by CATV operators, with or without copyright fees? And why have broadcasters argued so strongly for mandatory carriage of stations, with exclusivity protection, on various cable systems?)

2. Avoidance of Confiscatory Fees.-The Motion Picture Association of America has proposed a 16% royalty, and we mention it to illustrate how readily copyright fees could become confiscatory. In the case of our own cable subsidiary, Times Mirror Communications, a 16% royalty would take 164% of the pretax profit we earned last year. Our situation is not atypical. According to the National Cable Television Association, such a royalty would exceed the whole industry's profits.

8. No Undue Impairment of Earnings.-There are sharp limits to CATV's genuine ability to pay copyright fees. In the main, the industry has exhibited little or no profitability. This circumstance, combined with its capital intensity, has resulted in investment returns that are poor by any standard. Yet, if cable is to obtain capital for future expansion (in homes served and services provided), returns that are already poor cannot get poorer. CATV will be shorn of the ability to attract capital.

Copyright fees bear heavily on Cable's investment attractiveness, for the mathematics of the situation are extremely sensitive! CATV's profit margins are extraordinarily thin (where they exist) and can be deeply eroded by what, on the surface, might appear to be a small copyright percentage.

This fact can be illustrated, for instance, using the 5% maximum rate (and associated sliding scale) that many copyright proponents have argued for. Applying it to our own operations, the results would be disastrous. A 5% sliding scale would have taken 31% of our 1974 pretax income away from us. Earnings impairment of this order would discourage further Times Mirror investment in cable television, and many other capital sources would react similarly.

Even the lower 2.5% maximum (and related scale) proposed in H.R. 2223 would have an extremely adverse impact on CATV financing. In our own case, it would have siphoned off 16% of all pretax profits.

(One wonders, incidentally, how producing companies would react to a fee of the same magnitude. A 2.5% charge against MCA's 1974 revenues would have reduced that company's pretax earnings 15%. For Twentieth Century Fox the reduction would have been 30%. And as another illustration, Columbia Pictures would have been driven into the "red." A spokesman for the MPAA has called the H.R. 2223 schedule "minuscule." It seems doubtful that his clientele would find it so were the schedule applied to them.)

4. Inability to Pass Royalty Costs Along.-The preceding discussion reflects the premise that royalty costs cannot be readily passed on by cable operators to their subscribers. We believe the premise is quite accurate.. Cable rates are set by municipalities who, in our experience, focus far more on political climates than on economics. Time and again, in rate presentations, we have had our financial data ignored, while the thrust of discussion has centered on "people don't want to pay more." Moreover, when relief is granted, it is only partial and the process of obtaining it typically extends over many months, and even years.

In some instances, too, cable prices are at the upper limit and further increases will cause more subscriber loss than a new rate can compensate for. This is particularly true in urban areas which represent cable's prime growth opportunity (and where cable construction costs and "off-air" competition are vastly greater). As a practical matter, royalties will have to come from the CATV operators' purse, and at best only much later and only in part from cable subscribers.

A suggested ceiling

Summarizing to this point, it is our belief that:

-The CATV industry, rather than "pirating" signals, is creating a substantial audience for broadcasters and copyright holders; and that credit should be given this fact.

-Further, the economics of CATV are fragile, and a seemingly little "bite" at the top (gross revenues) can cause a large swing at the bottom (net income). -Finally, any undue depression of earnings can only result in CATV's being even less attractive to capital sources: money is difficult to secure now; material copyright fees will make it much, much harder.

There is no way of course to precisely translate factors like these into a fee schedule, and we do not envy those who have the task. Nonetheless, our own strong conviction is that the ceiling should be around 1.5% to 1.75% of quarterly gross revenues exceeding $160,000, not 2.5%. as H.R. 2223 provides. At the suggested level, that is 1.5% to 1.75%, Times Mirrors Communications would have given up 9.5-11% of its 1974 pretax income, and that is the most we can genuinely afford. Beyond these percentages, the earnings outlook is likely to be such that we would undoubtedly redeploy the cash flow from Times Mirror's cable properties into other corporate areas.

Moreover, a moderate royalty schedule one that is clearly within CATV's practical ability to pay-is not necessarily antithetical to the copyright holders' interests. Their best chance of getting "more" from CATV is to help foster cable's growth. The process of investing more capital to serve more CATV subscribers

means more gross revenues, which compounded by the sliding scale for copyright fees, means ever increasing royalty incomes.

To illustrate, the CATV industry now serves approximately 11 million subscribers at an investment of some $800 million. It is conceivable-given access to capital-that by 1983 the number could grow to 22 million.1 Under the royalty schedule suggested here, currently copyright holders would receive about $5.8 to $6.5 million from CATV, Given the opportunity for growth just described (and providing for at least some modest rate increase within an 8-year period) the holders' total receipts could increase to $25-30 million. This is not inconsequential. Further, such payments represent pure income to program producers (since distribution to CATV involves no additional expense). For the copyright holder, we believe that taking a long view offers a better "deal" than insisting now on higher copyright percentages that could choke cable growth.

We also believe that the copyright burden should be borne by all CATV operators, without distinction between "local" and "distant" signals. If everyone participates, then the financial impact on each system can be moderated while still producing a meaningful "pot" for program owners. Conversely, the "distant signalonly" approach would thrust the financial burden of satisfying copyright holders on rural CATV-and the burden could become heavy. In truth, too, there are urban CATV systems serving "classic" parts of cities (where signal improvement is a necessity) that derive just as much benefit from broadcast signals as do outlying or remote systems. Times Mirror Communications is one example. The signals of the Los Angeles stations are just as economically important in serving the Palos Verdes Peninsula (which is within the Los Angeles Metropolitan Area) as they are when we "import" them to San Diego County-100 miles away. And finally, the "distant signal" approach would seem to us to involve some very difficult and complex definitions in a subject matter where complexity already abounds.

Establishment of a Review Mechanism

Conditions change and a royalty schedule that is equitable and realistic at one point in time might not be at another. Some review mechanism is needed if CATV copyright fees are enacted.

Our own strong preference is that Congress itself be the reviewing body. The reasons for this are stated later, but in brief, and to be frank, we think Congressional review would afford CATV the fullest assurance of a fair hearing. However, if Congress chooses to assign review responsibility to a "Copyright Tribunal," there are three points in H.R. 2223 that are likely to be highly detrimental to CATV (or put in the reverse, seem structured in favor of copyright and broadcast interests). They are: (1) the short initial review period of just 18 months; (2) the absence of any stated criteria to guide rate making; and (3) the practical absence of any appeal from the Tribunal's findings.2

1. 18 Months Too Short. While acknowledging that conditions and cable economics may change, they certainly won't change this fast. That fact is obvious. Congress, along with participants from broadcasting, production, CATV, and other affected areas, will have expended material effort in working out a fee schedule. The presumption is that fair and reasonable rates will result. We do not see the sense in re-opening the whole matter just 18 months later. From Cable's standpoint, we will not be doing less for copyright holders than we are now by enlarging their audiences, and certainly there will be no substantial improvements in our economics and in our genuine ability to pay fees.

While this may be a false fear, it appears that the 18-month provision was designated for the benefit of those who would exact "more" from CATV. But there will be no "more" to exact.

We believe the initial fee schedule should have force for 7 years, and should be subject to review at 7 to 5-year intervals thereafter.

Aside from avoiding a near-term "rehash," there are good financial reasons for reasonable longevity in any initial fee schedule. The possibility of a fast (and probably adverse) change in cable-exacted royalties would add to the climate of uncertainty already surrounding CATV. We have presented mathematics showing how sensitive cable net income is to royalty percentages. Given the specter of a change in fees just 18 months ahead, capital sources will be

1 Frost & Sullivan Report of June 1975.

2 It also seems unusual that a Copyright Bill would be used to grant broadcasters the right to sue CATV operators for what are essentially FCC infractions. This provision (Section 501) of H.R. 2223 smacks of a nuisance clause ripe for misuse and harassment, and in our view should be struck. Broadcasters have ample remedy through the FCC.

increasingly reluctant to invest. Certainly our own corporation would view cable royalties as a particularly risky unknown, and would adjust its capital spending accordingly.

Further, we believe that at least seven years are needed to obtain a sound understanding of cable's worth, which is lacking now. No one presently knows, for instance, whether urban penetration will ever be practical, or whether attractive investment returns can eventually be achieved, or if pay-TV will be a meaningful success, or if the so-called "extra services" (such as special interest programming or merchandising) will become practical realities. Only against a much more stable understanding of what cable is going to amount to can royalty fees be equitably adjusted-up or down.

2. Absence of Criteria.-H.R. 2223 states only that the Tribunal shall act "to assure that such royalty rates are reasonable. ." It does not set forth any criteria on the factors to be considered, and consequently there is no guidance on the basis for determining reasonableness. We believe there should be, and we obviously feel that CATV's genuine ability to pay-without impairment of its capacity to grow-should be one of the governing elements.

Similarly, we believe that any copyright liability should be limited to basic cable revenues, and should exclude revenues from auxiliary income-especially pay-TV where copyright fees have already been paid. H.R. 2223 appears to create an "open door" for an ever-enlarging royalty base.

3. Absence of An Appeal Opportunity.-H.R. 2223 further provides that the Tribunal's findings are final unless modified by a House of Congress within 90 days. As a practical matter, it appears impossible that the House or the Senate could act on such a matter (whose priority will not be high) in such a limited time. There is, in short, no real appeal from Tribunal conclusions.

4. The Tribunal As A Staff Body.-At the minimum, we believe the period for Congressional review of Tribunal actions should be increased to nine months. Beyond that, however, it is our earnest hope that the Tribunal's role will be recast.

We believe the Tribunal should recommend royalty rates to Congress, and that the ultimate decision should be Congress'. Frankly, our experience has been that CATV, as the newcomer in communications, is disadvantaged in proceedings against established broadcast and entertainment interests. CATV is much more likely to get objective treatment should Congress take Tribunal findings into consideration and then set royalty rates itself. Further, if the frequency of rate review is modified to the realistic intervals suggested earlier, the burden on Congress in making these determinations should not be onerous.

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