Mr. PATTERSON. We will give it most serious thought and submit it, Mr. Chairman. Thank you. (The material requested above was subsequently received and is as follows:) Hon. JOHN L. MCCLELLAN, KIRKLAND, ELLIS, HODSON, CHAFETZ & MASTERS, Washington, D.C., April 3, 1967. Chairman, Subcommittee on Patents, Trademarks, and Copyrights, Washington, D.C. DEAR CHAIRMAN MCCLELLAN : During the course of this Subcommittee's public hearings on S. 597, I appeared together with Herbert J. Miller, Jr. to testify on March 17, 1967, on behalf of the sole domestic manufacturers of coin-operated phonographs, The Wurlitzer Company, The Seeburg Corp., Rock-Ola Manufacturing Co. and Rowe Manufacturing Co. I welcome this opportunity to present my views in response to a specific inquiry to me by Acting Chairman, Senator Quentin N. Burdick on March 17, 1967, during the public hearings on S. 597. The question posed by the Senator was: "Assuming that this Committee has been persuaded that copyright owners are entitled to some royalties from coin-operated phonographs, what would you recommend as an appropriate amount of royalty?" This letter constitutes my reply to the Senator's question. I would like to emphasize, however, that my comments, while reflecting the views of these manufacturers, may not necessarily coincide with the views of the jukebox operators themselves or their representatives. An answer to Senator Burdick's question would be much simpler if there presently existed an industry which was similar to the jukebox industry in all significant respects and which was presently paying royalties to the performing rights societies. The rate paid by such an industry might provide a valid basis for the development of a reasonable royalty rate for the nation's jukebox operators. Unfortunately, there simply is no industry which even approaches those requirements. The difficulty in developing a reasonable rate proposal is further complicated by the traditional secrecy with which the performing rights societies cloak the details of their receipts and disbursements. They disclose very little financial data from which I or anyone else can prepare any rate comparison with confidence. What little information I have gathered is unverified data from trade journals and general statements made at different times by counsel and their representatives of the performing rights societies. Without reliable data, any analysis of industry royalty rates by necessity can only be approximate and tentative. Nonetheless, on the basis of the information available to me at this time, I have attempted to make a useful comparison. To begin, a recent issue of Billboard stated that ASCAP received $45,681,587 from licensing revenues in 1966, with $6,092,967 of that coming from overseas. The best figures I have from BMI is its admission of receipts of 40 per cent of ASCAP. No more specific data of their 1966 receipts has, to the best of my knowledge, been publicized. Neither society has disclosed any such data in their testimony before your Subcommittee. A report of a House Select Committee on Small Business, following its investigation of ASCAP, disclosed that of the entire revenue received by it during the year 1957, 36.31% was from radio and 52.10% was from television, for a total of 88.41% from broadcasting. Bars, grills, taverns, and restaurants contributed 3.10% of ASCAP's receipts; nightclubs and lounges, 2.7%; hotels, 1.54%; dance halls, ballrooms, and skating rinks, 1.0%; wired music, 1.09%, and symphonic and concert, 0.33%. Miscellaneous sources contributed 2.22%. One industry's royalty rates which could be used for comparison purposes is the radio and television broadcasting industry. However, Herman Finkelstein in his testimony on March 20, 1967, before this Subcommittee indicated that "Broadcasters pay a little over 2 percent [of their adjusted gross revenues]". He did not mention that the radio industry is currently challenging in the Federal District Court for the Southern District of New York the present 2% rate which is claimed to be too high or in the face of this challenge ASCAP has voluntarily agreed to a reduction of the existing rate. According to the ASCAP standard Local Station Blanket Radio License, the 2.125% license fee is based on the "net receipts from sponsors after deduction." The "deduction" from revenues is up to 15% for advertising commissions and 15% for sales commissions. All compensation (above a minimum stated in the License) paid to the following personnel is also deductible: (a) master of ceremonies or disk jockey on a musical program, (b) vocalist or instrumentalist engaged for a specific program, (c) featured newscaster and news commentator, (d) featured sportscaster, (e) master of ceremonies on an entertainment program, or (f) announcer. The BMI standard Statement of License Fee permits similar deductions. Consequently, ASCAP and BMI each permit a deduction excess of 30% of broadcasting industry gross revenues before assessment of royalties. Radio and television had total gross revenues of more than 24 billion dollars for calendar year 1965 according to data released October 18, 1966, by the Federal Communications Commission. We can approximate that ASCAP's domestic revenues of $39,588,620 included approximately (based on the 88.41 percentage from the 1958 House Report) $34,997,340 from radio and television, Thus, the royalties paid by the broadcasting industries to ASCAP were only 1.2 per cent of the total revenue of broadcasting during 1965. For all performing rights societies the figure is probably 2% of gross revenue. It is obvious that the royalty base used for the ASCAP 2.125 per cent fee is not the full annual revenue of radio and industry but a figure one billion dollars less when the deductions of approximately 36% are taken into account. The royalty base appears to be only 64 per cent of the annual revenue of the broadcasting industries. We can reasonably assume that BMI uses approximately the same base figure but with a royalty rate of about one-half that of ASCAP. Assuming that the jukebox operators' share of the annual gross revenue is approximately $225,000,000 and applying to that figure the aggregate royalty rate for all performing rights societies which we have computed at 2%, the total annual revenue should be approximately $4,500,000. This royalty fee should, in turn, be reduced to take into consideration the substantial mechanical royalties paid by the jukebox operators. Jukebox operators purchase on the average of 230 works per machine per year. Under Section 115's two and one-half cent royalty, the operators would pay a mechanical royalty of $2,702,500. The net comparative royalty fee resolves at approximately $1.8 million. In view of the fact that jukebox operators have been operating under an exemption since 1909, any greater jump in royalty would have a substantial and undesirable economic impact on the jukebox industry. The figure of $1.8 million then would be the royalty which is approximately $4.50 per box annually. However, agreement on a royalty base and agreement on a royalty percentage does not alone permit a determination of a reasonable royalty. The amount of jukebox royalty cannot be completely settled until the method of royalty payment is first agreed upon. For example, under Section 116 as it is presently written, MOA representatives estimate that collection costs alone would be $6,088 for every 70 jukeboxes, or approximately $40.9 million for all jukeboxes in the U.S., in addition to the $9,216,000 which the House Committee expects in royalties. From an industry which, in the aggregate, has an estimated gross revenue of about $450,000,000 the over $50 million cost of collection and royalty is greatly disproportionate. The costs of collection alone far exceed the bounds of a reasonable royalty. For these reasons, I would like to recommend a substitute for Section 116 which would require virtually no collection or policing costs by the jukebox operators. Thus, the aggregate royalty of the jukebox operator would be passed on to the copyright owners virtually undiminished, except for the normal administration costs incurred by the performance rights societies in distributing monies to their members. On this basis, and only on this basis, am I able to make any recommendation as to royalty fee. In his statement before this Subcommittee, Mr. Finkelstein expounded his preference that in determining a jukebox royalty a comparison be made with the rates paid by banks, factories, offices, etc., which are “3%1⁄2 per cent of the gross amount paid to Muzak by the subscriber. The rate is higher for restaurants and other places of refreshment and entertainment-$27 per year for each establishment where the music is installed." I do not agree with his suggestion. The operating distinctions between a jukebox and an installed, permanently playing Muzak amplifier are too great to allow the same royalty rates to apply. Each jukebox represents an average investment or about $1,350. It represents a continued significant maintenance cost involving the replacement of records, the replacement of broken parts, and the cost and maintenance of a truck to transport the jukeboxes from location to location and to service the machines, and the high depreciation on jukeboxes. An additional consideration is the fact that a jukebox plays music only when money is inserted into it. In contrast, a Muzak box is nothing more than an amplifier hanging on the wall of the location, comparable to a radio or television set. The amplifier does not allow a selection of music by the customer. It plays constantly. The same record or tape can be used at the Muzak central location for all of its speakers in the city. Nothing has to be repaired or replaced. The cost of maintaining a Muzak system is insignificant when compared to the cost of maintaining and servicing a jukebox. Finally, as I mentioned, in conjunction with my above recommendations, I would like to propose a substitute for Section 116, which Mr. Miller and I have drafted. Our proposal is appended to this letter. At your convenience, we would be most pleased to discuss it with you. Its advantages are obvious: it is simple, it imposes virtually no administrative expenses upon the Register of Copyrights; it is economically uncomplicated, understandable and adaptable. I commend it to your consideration. Very truly yours, PERRY S. PATTERSON. $116. Scope of exclusive rights in nondramatic musical works: Public performances by means of coin-operated phonorecord players. (a) LIMITATIONS ON EXCLUSIVE RIGHT.-In the case of a nondramatic musical work embodied in a phonorecord, the exclusive right under clause (4) of section 106 to perform the work publicly by means of a coin-operated phonorecord player is limited as follows: (1) The proprietor of the establishment in which the public performance takes place is not liable for infringement with respect to such public performance unless: (A) he is the operator of the phonorecord player; or (B) he refuses or fails, within one month after receipt by registered or certified mail of a request, at a time during which the certificate required by subclause (1) (A) of subsection (b) is not affixed to the phonorecord player, by the copyright owner, to make full disclosure, by registered or certified mail, of the identity of the operator of the phonorecord player. (2) The operator of the coin-operated phonorecord player may obtain a compulsory license to perform the work publicly on that phonorecord player by recording the application, affixing the certificate, and paying the royalties provided by subsection (b). (b) RECORDATION OF COIN-OPERATED PHONORECORD PLAYER, AFFIXATION OF CERTIFICATE, AND ROYALTY PAYABLE UNDER COMPULSORY LICENSE. (1) Any operator who wishes to obtain a compulsory license for the public performance of nondramatic musical works on a coin-operated phonorecord player shall fulfill the following requirements: (A) Before or within one month after such performances are made available on a particular phonorecord player, and during the month of January in each succeeding year that such performances are made available in that particular phonorecord player, he shall record in the Copyright Office, in accordance with requirements that the Register of Copyrights shall prescribe by regulation, an application containing the name and address of the operator of the phonorecord player, and he shall deposit with the Register of Copyrights a royalty fee of Four Dollars and Fifty Cents ($4.50) for that particular phonorecord player. (B) Within ten days of receipt of an application and a royalty fee pursuant to subclause (A), the Register of Copyrights shall issue to the applicant a certificate for the phonorecord player. (C) He shall affix to the particular phonorecord player, in a position where it can be readily examined by the public, the certificate, issued by the Register of Copyrights under subclause (B), of the latest application made by him under subclause (A) of this clause with respect to that phonorecord player. (2) Failure to record the application, to affix the certificate or pay the royalty required by clause (1) of this subsection renders the public performance actionable as an act of infringement under section 501 and fully subject to the remedies provided by section 502 through 506. (c) DISTRIBUTION OF ROYALTIES.— (1) Annually, on the last day in January when the court is in session, the Register of Copyrights shall file an action in the nature of an interpleader with the United States District Court for the District of Columbia for the purpose of distributing the royalty fees deposited with the Register during the preceding year to copyright owners or their agents asserting claims thereto, as follows: (A) To every copyright owner not affiliated with a performing rights society the court shall distribute the pro rata share of the deposited royalty fees to which such copyright owner proves his entitlement; and (B) To the performing rights societies the court shall distribute the remainder of the deposited royalty fees in such pro rata shares as they shall by agreement stipulate among themselves, or, if they fail to agree by the January 31 date after the filing of the interpleader, the pro rata shares to which such performing rights societies prove their entitlement. (2) The court shall, upon the filing of the interpleader and the turning over of the deposited royalty fees by the Register of Copyrights, discharge the Register of Copyrights from any further liability with respect to the collection, holding, and distributing of the royalty fees for the year during which said interpleader was filed. (3) With respect to the collection, holding, and distributing of the deposited royalty fees, the Register of Copyrights shall be a passive trustee, whose sole function is to receive applications, issue certificates, receive deposited royalty fees, distribute the royalty fees in accordance with clause (1) and (2), and prescribe regulations relating thereto. (d) CRIMINAL PENALTIES.-Any person who knowingly makes a false representation of a material fact in an application recorded under clause (1) (A) of subsection (b), or who knowingly alters a certificate issued under clause (1)(B) of subsection (b) or knowingly affixes such a certificate to a phonorecord player other than the one it covers, shall be fined not more than $2,500. (e) DEFINITIONS.-As used in this section, the following terms and their variant forms mean the following: (1) A "coin-operated phonorecord player" is a machine or device that: (B) is located in an establishment making no direct or indirect charge for admission; (C) is accompanied by a list of the titles of all the musical works available for performance on it, which list is affixed to the phonorecord player or posted in the establishment in a prominent position where it can be readily examined by the public; and (D) affords a choice of works available for performance and permits the choice to be made by the patrons of establishment in which it is located. (2) An "operator" is any person who, alone or jointly with others: (B) has the power to make a coin-operated phonorecord player available for placement in an establishment for purposes of public performance; or (C) has the power to exercise primary control over the selection of the musical works made available for public performance in a coinoperated phonorecord player. (3) A "performing rights society" is an association or corporation of copyright owners or publishers, such as, Broadcast Music, Inc., SESAC, Inc., and American Society of Composers, Authors and Publishers. Senator BURDICK. Mr. J. H. Wilburn. STATEMENT OF J. H. WILBURN, VICE PRESIDENT, BRADY DISTRIBUTING CO., CHARLOTTE, N.C. Mr. WILBURN. Mr. Chairman and members of the committee, my name is J. H. Wilburn, and I am from Charlotte, N.C. I have been in the jukebox distributing business for over 20 years, and I am now the vice president of the Brady Distributing Co. This company distributes Wurlitzer coin-operated phonographs to over 125 operators throughout North Carolina and South Carolina. Because of the nature of my business I have throughout the years become very familiar with the financial affairs and the other conditions under which the jukebox operators in North and South Carolina must work. I have studied proposed section 116 and, as you know, it requires not only a royalty of about $19.20 per jukebox but in connection with that royalty it requires the jukebox operator to maintain constant inventory of all the records in all his machines. Senator BURDICK. You mean 17, don't you? Mr. WILBURN. No, that is a typographical error. You will get a corrected copy with some few other changes that I made in my statement. The $19.20 figure is based on other testimony this morning. And, to send copies of these inventories every 3 months to copyright owners or their agents entitled to the royalty, and annually to the Register of Copyrights. In my opinion, these requirements will be an overwhelming burden on the average jukebox operator in North and South Carolina, as well as throughout the country. In support of my position I would like to describe for you the conditions under which the average operator labors, and then I would like to describe to you what will happen to this average operator as he tries to comply with section 116. Out of the 125 jukebox operators that my company deals with, a great majority of them are one-man operations in which the owner maintains and operates about 40 machines. Forty machines is about the most that one man can handle. The bulk of the remaining operations are two-man situations with about 70 to 80 machines. There are a few operations involving more than 80 machines, but a very few. I will mainly restrict my statement to the one-man operations, because they will be hardest hit by section 116. In a one-man operation, he is subject to call 18 hours a day. This means that he either subscribes to an answering service or arranges for his wife to stay by the phone all day, all week. In North Carolina the operator's sole income is from his jukeboxes. Pinball games are illegal in North Carolina, and cigarette and other similar vending machines are all operated in North Carolina by large companies such as Macke, Vendo, and Atlantic Tobacco, Co. Although I understand that the national average of weekly revenue per machine is $9.25, many North and South Carolina operators have an average weekly revenue of $4 to $5 per machine, from which they must pay many expenses which severely reduces their salary. For example, the operators must purchase records to stay in business. As a rule, they replace four to five records in each machine every week. |