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II.

THE IMPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY (CONT'D)

E.

THE HIGHER STATUTORY RATE WOULD BECOME THE STANDARD RATE,

NOT A "CEILING"

More than 99% of all royalty rates are at the statutory rate or standard variations thereof. For single records, the 2¢ statutory rate is essentially the rate. For Regular Price LP Albums, the 24 statutory rate is payable for more than 80% of the licensed tunes, and rates above and below 2¢ represent standard variations from the 24 rate. For budget and club records, royalty rates below 24 are the norm and all but a few rates are at standard variations from the statutory rate or are at the 2¢ rate itself. In short, just as was the case 10 years ago, the statutory rate of 24 and standard, generally available, non-discriminatory variations therefrom account for the overwhelming bulk of all royalty rates payable on licensed tunes. These findings are based on an analysis of all records released by two record companies during the bulk of 1974 which covered 1,361 licensed tunes on 330 regular price single records and LP albums, and 1,232 licensed tunes on 112 other albums which were heavily discounted to the trade.

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We have shown thus far that a higher statutory mechanical royalty rate is unwarranted. No less important, surely, it would have adverse impacts on the public interest, performing artists, new and experimental music, and upon the recording industry. These are the reasons:

The share of the total revenues from record sales that goes to
copyright owners is more than generous. It is higher than that pro-
vided by Congress when it granted copyrights in musical compositions
and, at the same time, instituted compulsory licensing of such
compositions.

The aggregate dollar revenues paid by the recording industry to
copyright owners for copyright royalties have been increasing much
faster than inflation.

The dollar revenues generated per license and per tune have increased
much faster than inflation.

The increase in the compulsory rate to 3¢, an' more, as proposed
in Section 115 of H.R. 2223, if passed on to wholesalers,
tailers, and buyers would have a burdensome dollar impact on

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consumers.

If not passed on, the aggregate dollar value of the increase would
be so large that it could not be absorbed out of profits. For
many companies, especially smaller companies, the increase in
royalties payable would be greater than their profits. Record

producers would be faced with serious problems.
These fact notwithstanding, there is one final argument put forth by
publishing companies, copyright owners, and their representatives that must
be addressed and dismissed.

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Publishing companies and other copyright owners and their representatives have tried to waive any serious, documented discussion of the impacts of increasing the statutory royalty.rate. They have argued that there is no way of knowing what the effects on payments and on the recording industry would be if any. They suggest that even the present 24 rate is merely a "ceiling" and that, because of bargaining between record people and publishing companies, the actual royalty rate paid is often less than 2¢. They have said that raising the rate above 2¢ would merely be permissive, and that it would merely give "more room for bargaining" between publishing companies and record makers. They have said that "the 3¢ would merely be a ceiling" - a higher "ceiling" above which this bargaining could not go. They have said that the outcomes of all these "negotiations" would be subject to bargaining on the basis of the "relative positions" of copyright owners and recording companies, case by case. They have implied and have argued that the large najority of licenses granted would be bargained down to rates less than the statutory rate.

The picture suggested by this argument, of numbers of publishers and recording companies there are hundreds of each all sitting down together, haggling and. negotiating rates and bargaining on the strengths of their relative positions, case by case, for each of more than 50,000 licenses granted in a representative year is a beguiling one. And it is a grave misportrayal of how the industry has worked, now works, and must work.

The statutory, compulsory license rate is, and has been, the standard rate, which, along with standard, recognized non-discriminatory variations therefron, accounts for practically all license rates paid. The present statutory rate is not a "ceiling". It is the standard rate. In fact, some rates are paid that are above that standard; but these, also, are at standard, established variations above the statutory rate.

Such standard variations provide for lower rates for such uses as socalled "budget records" and records distributed by record clubs, and for higher standard rates on musical renditions that run for more than

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5 minutes. Most of these variations are issued by means of standard licenses, issued routinely and practically automatically by a licensing agency used in common by most publishers. This is a point to which we shall return in a moment.

It was almost exactly 10 years ago that I presented here incontrovertible evidence that the vast majority of the rates paid to publishing companies were at 24 and that, with rare exceptions, the rest were at standard variations from the 'statutory rate. These rates were not the results of "bargaining" or "negotiation" case by case. They were the outcomes of prevailing and necessary industry practice.

To make the point again, and to lay this ghost of "bargaining" to rest once and for all, I shall in a moment give you added, very recent evidence that shows that the practice of 10 years ago is inevitably still the practice today. This is no mere happenstance. But before doing so, let me explain briefly why it is that the industry does and must operate on the basis of standard license rates and standard variations, and cannot operate on the basis of case-by-case bargaining. When this is understood, it will be seen why the present statutory rate is the standard rate and why any new statutory rate would, in turn, become the new standard.

First, as I pointed out a moment ago, some 50,000 licenses may be granted in a representative year. It is simply not feasible for publishing companies and recording companies to bargain together for each of these many, wany licenses. A major recording firm may obtain, and a major publishing company may grant, a score or more licenses on a working day. As a practical matter, there must be, and there is, some administrative mechanism for handling this problem.

And that mechanism is based on standard contracts that incorporate standard conditions under which licenses are granted and standard rates which, together with standard variations, account for practically all rates, with only a few exceptions. These standard, prevailing rates are not "bargained". Only very seldom, as I showed ten years ago and as I shall show again, are unusual arrangements "bargained" out and entered into. Any other procedure would simply be impractical.

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In passing, let me point out very briefly a source of semantic confusion as to the process of what is sometimes called "negotiation" of license rates for use of copyright music in mechanical reproduction. In theory, there are two avenues to obtaining a license: either through the route of "negotiation" or through the "compulsory" route. According to the theory of the copyright law, a person wanting to use a tune in mechanical reproduction of music can try to "negotiate" a license from the copyright owner. Then, if a copyright owner is uncooperative or intractable, any party wanting to record a tune that has once been recorded may simply go ahead and do so and pay royalties at the compulsory statutory rate of 2¢ under conditions and procedures prescribed by the Register of Copyrights. In fact, the administrative and procedural mechanics of the compulsory route are cumbersome for all parties, and are only very rarely used. Instcad, publishing companies have set up routine procedures for going the route of "negotiation". By definition and usage in the trade, any license that is issued under any procedure other than the "compulsory" provision is said to be "negotiated", even if -- and this is crucial to understanding how the industry works the license is actually issued under the most routine, the most automatic procedure. Tens of thousands of licenses are issued every year absolutely routinely, absolutely automatically. 8 And because they are not issued under the "compulsory" procedurc they are by definition "negotiated". The fact that they are thus labeled in the trade should not mislead one to suppose for a moment that they were in an real sense haggled over .or "bargained for".

This leads us to the second point in understanding why any new proposed statutory rate would, in turn, become the standard rate,

8In fact, many -- probably most -- licenses are applied for and granted in this routine fashion after the fact of recording, not before, as one would expect if there were any real negotiation.

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