Let us now examine more closely who has benefited from this growth, and by how much. The Revenues, Costs, and Profits of the Recording Companies. The revenues of recording companies have grown with only a few set-backs -- as in 1960 since 1955. Their profits, however, have fluctuated widely. Some years are better than others in terms of absolute dollar profits as well as margins. The recording industry does not always reap high rewards for the ingenuity and capital it has invested in improving the technology the musical quality, and the marketing of records. Its profits are uncertain. It is a risky industry, in total, and record by record. Over the years, the recording companies have been deriving an increasing share of their profits after taxes from the licensing of U.S. made masters to foreign record companies for manufacture and distribution abroad. These gains amount to about one-half of the "other income" obtained by the recording industry. In recent years fees from foreign recording companies for use of U.S. recording masters have fluctuated from a high of something like 4.8% of record company sales in 1969 to a low of 0.8% in 1973. Similarly, recording companies derive important revenues from rentals of recording studios and equipment, for instance and interest -- on accounts receivable, for instance. The costs of recording, manufacturing, and marketing and of mechanical - fees also fluctuate and vary over time, as do the successes of the recorded offerings of the industry. It is for these reasons that the profits of record makers fluctuate widely, as they do. Over the past 4 years, two that were good and two that were somewhat poorer, the earnings of the recording industry from records, before taxes, can be summarized as follows: In addition, the industry had profits before taxes from income sources other than making, manufacturing, and selling records, of an amount about equal to foreign fee income. (Profits after taxes, of course, were much less than the indicated pre-tax profits probably something like half. or less.) Income to Copyright Owners from Records - Copyright owners are in a position somewhat similar to that of preferred stockholders when it comes to income from records: their mechanical fees get paid, record by record or, rather, license by license irrespective of whether individual records, or record makers make any money or not. With only one set-back, in the very poor year of 1973, mechanical royalties going to publishing companies have increased every year since 1967. Going back still farther, mechanical royalties have increased every year since the aid 1950's, excepting, our data shows, only the year 1962. In summary, the mechanical royalties paid by the recording industry to the publishing industry over the past four years have been as follows: Estimated at 50% of other income. The percentage of the recording industry's revenues from records that goes to the publishing industry averages more than the before-tax profit that goes to the record makers! Over the past 4 years, an average of 7.9% of revenues has gone to the publishing industry as compared to 7.1% of pretax profits to record makers. In dollar terus, mechanical royalties paid to the publishing industry over the four years came to $311.8 million as compared to the pre-tax profits to the recording industry from records of $279.9 million. It would be interesting to compare the net profits after taxes which the two industries derive from records. The net profits after taxes for the recording industry are estimated in Exhibit 5. Unfortunately, the publishing industry has refused to provide the necessary data despite requests from Congress. In the absence of such disclosure, the best that can be done is to compare mechanical royalties before taxes with record companies' profits from records, also before taxes. Actually, the comparison is not at all unreasonable: The publishing companies incur little or no expenses in connection with recorded music other than to collect the mechanical royalties. Even more important, the comparison completely sets aside the very large performance fees the pubiisning industry derives from recorded music. Again, about the only cost incurred in that connection is the collection of the fees. 54 Taking into account both mechanical royalties together with performance fees from records which are certainly not less than one-half of the dollar value of mechanical royalties and probably considerably more than that the publishing industry derives considerably greater dollar benefits from records than does the recording industry, itself. Contribution of the Music Publishing Industry to Recorded Music It is not unreasonable to inquire into the contribution of the music publishing industry to the creation, production, risk-taking and marketing of recorded music. The point need not be labored: No one who loves musical experiences would wish to downplay for a moment the importance of tunes, compositions, and the unique contributions of composers. Equally, however, it is clear that the success over the past twenty years and growth of recorded music is attributable in large measure to unique performances; to arrangements; to accompaniment; to advances in electronic technology and recording artistry; to marketing; to innovation and risk-taking by record makers and to their marketing efforts, including very large outlays for advertising, designed to bring new recordings to the attention of musicloving publics. Conclusion - - There is no obvious reason of justice or of economics for Congress, by legislation, to attempt to increase by almost 60% the share of the proceeds of record sales going to the music publishing industry -which includes music publishing companies, other copyright owners, and composers. There is no more economic reason for Congress to attempt to increase that particular share of record revenues than the share of any of the other parties who are surely no less deserving in light of their mique contributions to recorded music. But that is what Section 115 of H.R. 2223 would do. This conclusion must be reinforced by the fact that publishing companies and other copyright owners are already deriving more of the total benefits om recorded music including performance fees from Commerciai :se of records than the recording industry itself. - 55 II. THE IMPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY A. THE 3 RATE WOULD GIVE A LARGE AND UNJUSTIFIED WINDFALL TO If the statutory license royalty were increased to 3¢, with Although the income of music copyright owners from recordings has grown far faster than inflation, even under the provisions of the 1909 law, and even though copyright owners derive much more financial benefit from recorded music than recording companies do, themselves, a higher statutory royalty of at least 3¢ per tune has been written into the bill before you. An increase in the statutory royalty from 2 to 3 does not sound like very much. However, this seemingly trivial "penny increase" would have a major impact on the earnings of the music, the publishing industry and other copyright owners, on the prices consumers pay for recordings, and quite likely on the amount and kind of music recorded. Thus. a composition In the first place, raising the nominal statutory rate from 2 to 3¢ represents an increase of 50%. The actual increase would be considerably larger, for H.R. 2223 calls for payment to the copyright owner of not just 3 per tune, but of 3¢ per tune, or 3/4¢ per minute of playing time, or fraction thereof, for each tune, whichever is greater. running four minutes or less would incur a rate of Je. more than four ainutes would be subject to an added cost: would call for a rate of 3-3/4¢; 1 "5-minute" tune would call for 4-1/2; a "7-minute" tune would call for payment of 5-1/4e; and an 8-minute" tune would call for Se, and so on. The proposed rate based on playing time is something new; that concept is not provided for in the existing copyright law. The proposed rate is a substantial increase over the widespread current voluntary industry practice of paying 12: per minute of i une's plaving time over five minutes. 56 |