The record pirate takes advantage of the public's acceptance of artists and record company labels that have been developed by the record company through the expenditure of great effort, time, skill, ingenuity, and money. The legitimate record company creates a sound recording and a market for it; the record pirate parasitically uses it to the detriment of all the creative elements embodied in a commercially successful sound recording. The record pirate is not concerned with the quality of his unauthorized duplications. His only concern is with making as much money on his misappropriation as quickly as he can, so long as the legitimate record retains its popularity. There are many losers-the record company, the performing artists, the composers, the talent unions, the federal and state treasuries; but the ultimate loser is the consumer who may buy the bogus record in good faith believing it to be the genuine article. If the quality of reproduction is poor or if the record wears quickly, it is the consumer who gets stuck, and it is the legitimate record company who bears the onus of the sale of bad records.

The RCA Victor Record Division has zealously in the past protected its creative contribution to and proprietary rights in sound recordings and will continue to do so. While S. 597 clearly establishes a new Federal remedy the undoubtedly unintentional ambiguity of the Bill should be dispelled and clarified. Clarification is a simple and easily achieved matter. Sound recordings have been included in the list of protected works in S. 597. Sound recordings, like all other unpublished copyrightable works created before January 1, 1969, should be treated as unpublished works and should come under the Bill on its effective date. This can be accomplished by the specific additions to § 303 of S. 597 as proposed by the RIAA.

(2) (a) S. 597 provides for a compulsory license royalty rate of 21⁄2 cents or 1⁄2 cent per minute of playing time, whichever amount is greater, instead of the present statutory rate of 2 cents, and the present industry practice of 4 cent per minute of playing time on extended works, in practice, primarily classical works. Thus the Bill if enacted would increase the statutory royalties paid by the record producers to music publishers by 25 per cent on popular music and 100 per cent on classical music.

There is no justification on the record before your Subcommittee for the proposed increase. The issue is a clear one: Does the present 2 cent statutory royalty rate, and industry custom of payment of 14 cent per minute of playing time lead to a fair and equitable division of the royalty dollar between music publishers and the record producers? The uncontroverted record is that the music publishers have done extremely well under the present rates, indeed better than any of the other elements, including the record companies, which make a creative contribution to the production of a sound recording.

Prior to the House Judiciary Subcommittee's hearings in June 1965, the RIAA engaged Professor John Desmond Glover of the Harvard Business School to undertake a study of the entire record industry. Professor Glover undertook, and completed this study, and personally presented an exhaustive and factual report to, and testified before the House Subcommittee. Professor Glover's report disclosed that record producers' payments to music publishers, as a percentage of net sales, steadily increased from 1955 to 1964, the period covered by his study. In 1955 payments constituted 8% of the record companies' net sales; in 1964 they were 11.1%. Payments by the RCA Victor Record Division have continued to rise since then. However while the music publishers' share of the royalty dollar has been increasing, the record companies' share has been sharply decreasing. In 1955, record companies' profits after taxes were 3.6%. In 1964 they had fallen to 1.7%. Yet 1964 was at that time the highest sales year in the industry's history. Moreover the record companies' combined return on investment also declined during the period of the study. In 1955 the return on net worth was 5.5%. In 1964 it had dropped to 3.8%. This should be contrasted with the average return on investment in all industry of 9.4%.

The present low margins in the record industry have resulted in large part from intense price competition within the industry and a radical change in its distribution structure during the period covered by Professor Glover's study. This squeezing of margins at the retail and distribution levels resulted in great pressure on the record companies to lower prices to the middlemen. Record companies compete vigorously with each other and inevitably many of them, including the RCA Victor Record Division, lowered their prices. They did so while maintaining product quality, but without being able to cut costs correspondingly.

The economic reality is clear. The low margins at all levels of record production and marketing leave little or no room for absorption of a 25% and 100% increase in royalty payments to music publishers on popular and classical music recordings, respectively. The record companies simply cannot afford such an increase. The alternatives open to the RCA Victor Record Division are price increases or reduction of the quality and amount of recorded music on a record released to the public. In either case it would be the consumer who would suffer. Inherent in this is the fact that if a price increase could not effectively be passed on, then the resultant profit squeeze would inexorably eliminate the feasibility of continuing to make available to the public broad categories of recordings which today and in the past have required substantially greater investment, but which the RCA Victor Record Division, and many other record companies, invest in, and release, in the public interest; foremost in these categories are classical recordings and recordings of serious works of contemporary composers.

The RCA Victor Record Division releases approximately one hundred classical recordings a year. These more costly recordings have earned us many accolades and awards in our industry but they have not been as profitable as other recordings. We have also undertaken and consummated projects to foster the development of the performing arts in the United States, and to help preserve in permanent form not only the classics but the memory of historical figures of our times. For example, in 1964 we recorded the Mozart Requiem Mass with Erich Leinsdorf conducting The Boston Symphony and a 180-voice chorale, and have been donating our normal manufacturer proceeds to the John F. Kennedy Memorial Library in Boston. In 1963, by special arrangement with the United States Department of Defense and the then National Cultural Center for The Performing Arts, a division of the Smithsonian Institution, we produced the first commercial recordings ever made by the four United States Armed Forces Military Bands for sale to the public, and have been donating our usual proceeds to the Cultural Center, since then renamed The John F. Kennedy Center for The Performing Arts.

Obviously the imposition of an increased royalty rate on the record producers will necessitate a reassessment of the future activity of the RCA Victor Record Division in these areas. The record before you is clear that the consumer, the artists and the music publishers, but not the record producers, have all benefitted from the decline in margins and selling prices throughout the record industry, as amply demonstrated by Professor Glover's report. The publishers' "inflation argument" seeking to justify higher rates presented before the House Subcommittee is spurious. In 1909, the year of enactment of our present basic Copyright Law, the 2 cent statutory rate represented 5 per cent of the wholesale price of a record. Professor Glover's study disclosed a threefold increase despite the fact that the prices of records and the profits of the record companies have declined. Moreover the record industry voluntarily agreed to pay the music publishers a royalty of 4 cent per minute of playing time for extended works such as classical music. Yet the House Judiciary Committee in approving the Copyright Bill which formed the basis for S. 597's proposed increase to 1/2 cent per minute of playing time, penalizes the record producer for having agreed voluntarily to make additional payments for classical music.

The issue of whether or not to increase the royalty rate is simply one of evaluating the equities of record producers and music publishers under the present and proposed rate. Return on investment for record companies is low; the evidence on the record is that the music publishers have done extremely well under the present system, but they have consistently declined to furnish comparable data to judge the profitability of their operations. Such data is vital to a judgment of the economic equities, and in their absence any increase in the royalty rate is, I submit, a wholly unjustified additional burden on the record producers and marketers.

(b) Under the present language of S. 597 royalties are payable on records "made" whether or not the records are released by the manufacturer. Thus royalty payments to music publishers can be required on records which merely go into inventory, which may later be destroyed, and from which the manufacturer gains no economic benefit whatever. Record producing and marketing involves a high degree of uncertainty in the area of product acceptance because the public's music tastes are ephemeral, faddish, and unpredictable. In this respect the record industry is similar to other industries involving fashion merchandising. The product life is short. Record manufacturers must be pre

pared for, and capitalize quickly on a particular trend that may disappear overnight.

Distributors' orders must be met almost immediately, so they may supply and service the dealers responding to the public's fancy, before it evaporates. Overproduction is inherent. Generous return privileges must be offered so that small retailers and distributors will not be forced out of business through inventory losses. Typically, as in the case of records where imitation is easy, aggressive price competition prevails. And, often the best way to identify a new trend, or fad, is to offer new forms of merchandise to the public and wait for its reaction. This is a costly form of market research. Nor are these realities of the record business matters of which the music publishers are unaware. Today as a matter of general practice, most license agreements between music publishers and record companies provide as the royalty basis records made and distributed. It is this general practice which the RIAA has proposed be enacted. I urge your Subcommittee to adopt and incorporate this long accepted principle in the overall copyright revision.

(3) S. 597, although vesting for the first time a limited copyright in sound recordings, expressly denies to sound recordings the exclusive right vested in all other works, such as motion pictures and literary, musical and dramatic works, to perform the copyrighted work publicly. The RCA Victor Record Division therefore vigorously supports the RIAA proposal to place sound recordings on a parity with other art forms, and for an equal sharing of performance right income with performing artists.

The right of public performance in sound recordings is widely accepted in other countries around the world even though it has not yet become part of United States law. In the hearings before the House Judiciary Committee the granting of public performance rights was strongly urged by industry and union representatives. The Committee's report (89th Congress, 2d Session, Report No. 2237) states, at page 94:

* individual representatives of the industry spoke strongly in favor of recognizing full rights of public performance in sound recordings. They condemned the bill as inequitable in denying public performance rights to record producers who, they argued, are responsible for the most creative and valuable elements of sound recordings today. They recommended recognition of full performing rights in sound recordings, with ownership being divided between the record producer and the various performers involved."

The Committee then observed that (at page 94):

"Although there was little direct response to these arguments, it was apparent that any serious effort to amend the bill to recognize even a qualified right of public performance in sound recordings would be met with concerted opposition. * This conclusion in no way disparages the creativity and value of the contributions of performers and record producers to sound recordings, or forecloses the possibility of a full consideration of the question by a future Congress." (Emphasis supplied)

I urge your Subcommittee to adopt the proposal to grant to the record producer a full copyright in sound recordings, including the right to public performance. Such right is fully justified. Users obtain an inequitable benefit by substituting records for live performances and accordingly should be required to pay a reasonable compensation to the producer of the sound recordings over and above any compensation they may have to pay for the use of copyrighted musical compositions. Commercial phonograph records are intended primarily for private use as home entertainment. Electronic methods of recording, reproduction and transmission of recorded sound make it possible for radio stations, jukebox operators, wired music services, etc., to create commercial enterprises built upon the use of phonograph records and derive substantial profits from them without any payment other than the comparatively nominal sums required to purchase the records. During the House Subcommittee Hearings a representative of the jukebox operators stated as follows:

"The truth is that we do not use hit songs-we use hit records.

"There are many factors in the total popularity of a record, and the song itself is many times of minor importance. The most important factors vary in predominance from record to record and any one of them may be of prime importance on a particular recording. These are the artist (singer, instrumentalist, or group), either an established name or one with a new, unique or attractive sound; the song or tune, but never in its original state; the arranger

who embellishes the composition, or orchestrates the work and decides how the total musical sounds will be arrived at, and whose style is recognizable in the result; the engineers who control acoustics and make electronic alterations in the sounds as they are changed from sound waves to the resulting recording; and the very important area of exposure and promotion to the public." Statement of William Cannon, House Hearings, Copyright Revision, 89th Congress, 1st Session, pp. 565-6 (1965).

The free use of records without compensation to the record producer is no less important to others. Classical records, the production and distribution costs of which greatly exceed those of other recordings, are constantly played on radio, particularly FM sponsored programs.

That the record producer makes a creative contribution is accepted. S. 597 recognizes this. But there is no basis for the inequity of omitting the right of public performance, and then compounding the inequity by providing for an increase in the royalty rate to music publishers. Those who write music know acutely the importance of records to their economic success. The President of the American Guild of Authors and Composers, in commenting on the negotiations with the music publishers for a new contract, recently stated:

"Years ago a publisher bought a song, plugged it and got it performed, in eventual hopes of getting a record. Now a song is nothing without a record at the start." (New York Times, August 8, 1966)

The record before you is abundantly clear. I urge this Subcommittee to adopt the amendment introduced by Senator Harrison Williams which grants a full copyright in the sound recording, including both duplication and public performance rights, and which retains the present statutory royalty rate of 2 cents, and the present practice of payment of 14 cent per minute of playing time on extended works, for records made and distributed. Such an amendment is fully justified. The approach of S. 597 is not.

Mr. ARNOLD. Then I would like to call on Mr. Clive Davis, vice president and general manager of CBS Records.

STATEMENT OF CLIVE J. DAVIS

Mr. DAVIS. My name is Clive J. Davis. I am vice president and general manager of CBS Records, a division of the Columbia Broadcasting System, Inc. I am expressing here today the views of that division on three aspects of the proposed copyright revision which directly affect it. I will not comment on the remaining areas covered by the bill.

The first area on which I would like to speak concerns the statutory copyright royalty contained in section 115 (c) of the proposed legislation. This provision would have the effect of increasing the copyright royalties paid by the record industry to music publishers by 25 percent on popular music and 100 percent on classical music. It would raise the present statutory rate from 2 to 2.5 cents per composition and it provides for payment of one-half cent per minute of playing time in the case of longer works. The present law provides solely for the payment of 2 cents per composition and does not make special provision for longer works. However, it should be pointed out that the record industry has long since voluntarily adopted the practice of paying on the basis of one-fourth cent per minute of playing time in the case of longer works. It has not insisted on its legal rights to pay 2 cents per composition regardless of length.

I urge you to pay special attention to the proposed change in the compulsory license rate, which, if effected, will cause serious damage to the entire recording industry. One can be easily deceived in considering this issue since the proposed increases may not sound dramatic, particularly since the present 2-cent rate has been in the statute since

1909. After all, one can always say that the value of money has decreased sharply in the intervening period. Indeed, the report of the House Judiciary Committee approving the copyright revision bill in the closing days of the 89th Congress, Report No. 2237, noted the fact that 2 cents in 1909 is worth well over 6 cents today. The committee indicated further that it would be surprising, although not impossible, if exactly the same amount found appropriate in 1909 were found still to be appropriate today. However, in our view such a result is not at all surprising.

I submit to you that this is a superficial analysis.

The fact is that the current copyright rate has been a moving and flexible one, adjusting to the many technological and marketing revolutions that have taken place within the record industry since 1909. The rate has not remained the same but has operated fairly and equitable through the years.

For example, the long-playing record was first introduced in 1948 by Columbia Records. Today, a company like Columbia accounts for something like 75 to 80 percent of its dollar sales of records from longplaying records. Thus, in discussing a raise in the copyright royalty rate, we are not speaking of a raise in royalty rate for one composition per record, but in the great preponderance of instances, we are talking about a raise in rate for usually 12 compositions for each record and for each popular record containing 12 compositions, we are talking about an increase from 24 to 30 cents per record.

Now let us carefully analyze what are the actual economic facts. What has happened since 1909 to affect publishers? How do the publishers fare today as compared to the others of the creative contributors to records? I would like to go into these facts now.

At the current 24-cent rate, music publishers already receive more than any other single creative entity, more than performing artists and more than the unions. Contracts are negotiated yearly, establishing a fair quid pro quo for a performing artist's service. Their compensation is barely more than half of what the music publishers presently receive.

For example, a featured royalty artists on a "popular" record receives about 15 cents royalty per record bearing a $3.79 suggested list price. This includes Barbra Streisand, Doris Day, and almost every other top royalty artists. Newer artists receive even a lower royalty.

Further, because of the advent of the long-playing album, music publishers and songwriters are today receiving an enormously greater proportion of the record purchaser's dollar than they did in 1909. Reports show that in 1909, the purchaser paid between $1.50 and $7 for a record embodying one or two compositions. Today the consumer pays between $2 and $3.79 for a record carrying usually 12 compositions. This, then, is the true relationship between 1909 and today in terms of the publisher's share of the dollars spent for records: Publishers received between 2 and 4 cents for a record. selling at between $1.50 and $7 in 1909. Today, the music publisher receives 24 cents for best-selling albums, which sell for no more than $3.79 in the case of a monaural popular long-playing record. Moreover, in terms of the record manufacturer's selling price to wholesalers, the