Exhibit 3, cont.

352
60,584

*These costs are charged to the records which are manufactured before the tapes. Tapes are produced only when

a record of the music has been successful.

The industry has long had a practice of allowing free returns of unsold merchandise to manufacturers. This exhibit summarized the dollar magnitude of

this activity.

Exhibit 15

CONCENTRATION IN THE PHONOGRAPH
RECORD INDUSTRY 1947-1970

The exhibit shows clearly that the trend toward reduced concentration which began at the end of World War II has continued since the 1965 hearings. Concentration in the recording industry is declining.

163

The final six exhibits provide specific, new information on what has come to be known as the "ceiling vs. rate" issue.

To obtain the data contained in these exhibits, CRI undertook a comprehensive study of all licenses issued in 1974 by two companies and for which data were available at the time of the study. The nature of the study is spelled out in detail in pp. 82-118 of the main report.

As an aid to understanding this section of the report, the following guide to the exhibits might prove useful:

-

Basically, the exhibits fall into two main groups (1) tabular
listings of the mechanical rates paid, record by record; and,
(2) statistical distributions of the rates. These groupings are
further subdivided by type of record i.e., whether the record

-

was a single, a regular price LP, a budget-label release, or a
"club" record.

Looking at the total of tunes studies, the frequency dis-
tribution of rates by price, type of record, and reason for
discount is summarized in Exhibit 21 on page 118. Similar
information, excluding club records which are paid at a very
standardized variation from the 24 rate, is summarized in
Exhibit 16 on page 90. Exhibits 17, 18-A, 19, and 20 on
pages 99-113, and 115-116 tabulate the rates record by record
and are discussed in detail in the text.

Exhibit 18-B on page 94 demonstrates explicitly the standard
variations from the 2¢ rate which were found in the sample. As
discussed in the text, these discounts from the statutory rate
were found to be for standard, recognizable reasons which are
regular everyday practice in the industry.

A study of licensing needs to be based upon a sample of licenses. Studies based on samples of records sold are interesting but they are not directly relevant to an examination of the licensing process. For example: in a study of licensing 100 licenses are examined; 98 are at 24, and 2 are at 1.5¢. The picture of licensing rates derived is quite different than if the sample were to be weighted by the fact that one of the 1.5¢ licensed recordings was a particularly outstanding seller.

In any event, licensing routinely occurs before anyone knows what the volume of sales will be for a particular licensed recording; consequently, the opportunity for sales volume (which comes after) to affect the pricing of a license transaction (which comes before) is highly limited.

The percentage distribution of various rate categories reported from the
CRI study of licenses has not been distorted by weighting for sales volume.
To provide a comprehensive picture, all licenses signed by two leading firms
during most of 1974 were included in the study.

We estimate that the two cooperating recording companies sold over 50 million records in 1974, more than one-sixth of total industry volume. On this basis, we believe the experiences exhibited in the sample data are reasonably and substantially typical of industry practice.

164

Dr. GLOVER. If we may turn to exhibit A, this summarizes the first part of our presentation. We will show that, in fact, copyright owners' income has outpaced inflation by a very substantial margin, and we shall show that an increased statutory rate would hurt consumers, recording artists, musicians, and recordmakers without any just cause. We shall show that their income has increased faster than the consumer price index and another very common measure of economic welfare, which is median family income.

A number of effects would take place under an increased statutory rate. One would be the pressure to increase prices. If the total effect of this increase in royalty took itself out in the form of increased prices, it would raise the ultimate cost of the 2-cent increase as proposed in the section to over $100 million. As Mr. Gortikov said, if it went to 4 cents, it would be roughly doubled.

The profits of recordmakers would be under great, not minor, pressures. In fact, the proposed increase is equal to about the profits which are made by the record companies on the manufacture and sale of records in the United States.

Recordmaking is a very risky business, as I am sure you are all aware. We hear a great deal about the hits. We do not hear a great deal about the failures. In fact, as I shall show, a large fraction of the records do not even cover their costs, let alone make any profits. Accordingly, this would raise the break-even point and increase the chance of risk, with a depressing effect on the offerings of new, experimental, and high-risk music.

In consequence, the employment in the industry would fall for artists, musicians, sound technicians, studio personnel, manufacturing personnel, and would have a grave impact, as I said, on the entire industry; and indeed, even on new and unknown composers whose works would present a particularly higher risk.

If we may turn to exhibit B, when the statutory rate was set in 1909, as Mr. Gortikov said, the manufacturer's price was about 40 cents for that reel that he showed you. At that point, the 2 cents represented exactly 5 percent of the record price. The record company receives about 27 cents per tune now, and out of that, the copyright owner still receives his 2 cents. And that represents, now, 712 percent. So, in terms of shares over the years, Congress felt that 5 percent was not a bad share in 1909. And now, copyright owners are, in fact, getting a larger share of those proceeds than they did then.

If we can turn to look at the total in exhibit C, just in recent years, these are the estimated mechanical royalties that have been paid. They have gone up from $38 million to $79 million. In fact, a better figure than the $79 million is probably somewhere in the neighborhood of $83 million, and if you round it off to $80 million, you can see that, in fact, the royalties in those years have more than doubled.

In considering the income received by copyright owners, I think it is entirely appropriate to take into account not only the mechanical royalties that they get directly from the phonograph records, but the performance royalties that they get, especially from radio broadcasts, which are also very substantial, and from which, of course, the record companies derive no income whatever under the present copyright law. They get performance fees, I might also say, in background music, which is a growth industry.

We will now turn to the direct comparison of publisher incomes with price indexes. As you can see, the consumer price index has gone up by 45 percent in roughly that 10- or 11-year period. The median family income has gone up about 93 percent. The proceeds to copyright owners from mechanical royalties alone have substantially more than doubled-and this, I would like to emphasize again, excludes their income from performance royalties from phonograph records, whether it be on radio, television, or whatever.

Another way of looking at this, if we can have the next exhibit, is to see this is on the basis of per tune. Lest it be argued that the increase does not take into account that there are more composers or such, this exhibit shows what has happened per released tune.

There are 50,000 released tunes per year, roughly. For every single band on that record that Mr. Gortikov showed you, there was a separate released tune. If this record is put onto a tape, there is another series of 10 or 12 released tunes. If it is put on quadraphonic sound, there are more released tunes and so on. There are roughly 50,000 released tunes a year.

The income per released tune has gone up from $656 per released tune in 1963 to almost $1,400 in 1972. We were not able to get a later year to give you those figures, but again, you can see that it has gone up even faster; that it has gone up by over 200 percent.

Mr. WIGGINS. Excuse me. So that I can understand the chart, is a record album a single release, or is it a series of 10 releases?

Dr. GLOVER. Ten or twelve, depending on how many there are on there. Each band is a separate released tune and for each form of recording, again, it often requires a separate release.

Mr. DANIELSON. I have a supplemental followup question there. You have a better than doubling there on the mechanical royalty. Is it proper to infer that each tune is released more times, or are there more tunes being released?

Dr. GLOVER. You mean over time?

Mr. DANIELSON. Yes; you have that red column, there.

Dr. GLOVER. There are more releases per tune.

Mr. DANIELSON. In line with Mr. Gortikov's showing of that, some tune got 91, for example?

Dr. GLOVER. Yes. There are more releases per tune.

Mr. DANIELSON. As you have more tunes per mechanical device, per record or tape, the same tunes get used, become fixed more times. Is that the idea?

Dr. GLOVER. Yes, sir. You have more artists and more forms of recording. And then there are followups. Again, as you are well aware if you are a record fancier, or if you watch television, you will see that there are reissues-Nat King Cole's records and so on-which is sort of like a paperback. And again, those also-each one of those represents an additional release.

Mr. DANIELSON. I think what you are trying to tell us is that a given work, a given composition, is released more times at the present. Its probability of being released is greater at the present than it was years

ago.

Dr. GLOVER. That is right.

Which is not to say that everyone who has a tune will succeed in getting it recorded or that it will then be sold. In fact, many records,