REPORT TO THE PRESIDENT ON EXCISE TAX REDUCTION FROM THE COUNCIL OF Approximate percentage of sellers who passed on Federal excise tax cut by Manufacturers' excise tax: New automobiles-- Optional auto equipment (factory installed). Air conditioners_. Television sets.. Refrigerator-Freezers Ranges Movie cameras. Typewriters Adding machines_. Percentage of manufacturers who passed on tax cut 100 100 100 100 100 100 95 100 100 100 150 Small TV replacement tubes- Phonograph records_--_. 1 Excise tax was partially passed on by all major manufacturers, but as stated in the accompanying September 22, 1965 press release: "Manufacturers' prices of phonograph records net of tax were raised by about half the amount of the tax reduction, limiting the possible pass-through to consumers." One would gather from Mr. Arnold's remarks that the excise tax repeal was intended for the benefit of the stockholders, contrary to the Congressional intent of reducing the burden on consumers. The record companies claim only the less prosperous firms failed to pass on the cost savings-they present no proof of this highly questionable assertion. On the contrary, it is more plausible that the pace setters in the industry, the large record companies, made only a partial price adjustment and the others followed suit. The adversary commentary has other significance. We refer to pages 872-873 of the House Hearings, containing certain data compiled from their survey of 20 "sample" firms. As a deduction from gross sales there was $17,472,000 for Federal excise taxes. Among other costs they list copyright royalties of $25,234,000. According to their data, therefore, the Federal excise tax burden in 1964 was equal to 69 percent of copyright royalty cost. Such excise taxes constituted about 7 percent of net sales (House Hearings, page 872). The Federal Government has stated that only about half of the tax savings was passed on, so that wholesale prices (net of tax) were increased about 31⁄2 percent. This is not an inconsiderable amount when compared with even the highly exaggerated financial impact of a higher royalty ceiling predicted by the record advocates. Finally, Mr. Arnold's remark that "taxes come and go" is an absurdity and entirely irrelevant-when a new tax is imposed, prices are always raised. Their flippant attitude is exposed by the remark that "the argument that the consumer of the products of a quasi-public utility should pay higher rates merely because some present tax advantage permit him to pay more without going bankrupt, has no place in rate regulation." HOUSE REPORT The special counsel for the record companies in his statement before this Subcommittee on March 21, 1967, attempted by partial citation to make it appear that the House Committee agreed with the Glover findings but erroneously recommended an increase in the statutory royalty rate. Nothing could be further from the truth. Mr. Arnold cites three sections of the Glover analysis purporting to prove dire consequences to the industry and then cites a passage in the House Report to show they agreed. But they did not accept the three sections as stated by Glover. The House Report never made reference to such Glover conclusions that variety of recordings would be restricted, quality of the music would deteriorate, competition would be impaired, new composers would have fewer recording possibilities, and that the number of new recordings would be seriously depressed. Furthermore, where Glover argues that an increase would be inequitable, the House Report thinks that equity requires consideration of the position of the copyright owners, stating: "On the other hand, these factors would have to be weighed against the unfairness to copyright owners in preventing bargaining above a fixed maximum amount." The reader is misled by Mr. Arnold's omission from his House citation (Arnold, March 21, 1967, page 12) of the part just quoted above. Mr. Arnold then argues that the House Report erroneously recommended a rate increase to a 22-cent royalty rate, and on page 13 discussing the criteria that the House Committee Report used, Mr. Arnold starts quoting only in the middle of point 5 and includes point 6. However, the first part of point 5, which Mr. Arnold neglected to quote, is of paramount importance: "The competing statistical studies of existing license rates indicate that although three-fourths of the licenses call for a royalty of 2 cents per record sold, two-thirds of all royalty payments and one-half of the dollar amount paid, are for less than 2 cents. There is no reason to assume that these substantial deviations below the maximum would change if the statutory rate were increased; if they did it would not be because of statutory compulsion but because of pressure from market values and bargaining power." The reason why Mr. Arnold skipped this significant portion is that the House Committee clearly accepted our proof of variable royalty rates below the ceiling as a result of negotiations and bargaining. MONOPOLY POWER The myth of music publishers monopoly power asserted by the record makers should be evident. William Blaisdell, author of Study #6 (Economic Aspects of the Compulsory License), one of a series of copyright studies prepared for this Committee had this to say: "The relationship between record producers and other parts of the music industry are highly complex and widespread. Both RCA Victor Division and the Columbia Record Company are closely affiliated, respectively, with the NBC and CBS broadcasting interests, which in turn own music publishers. This gives these two 'majors' a distinctive position in the industry in that they can offer special inducements to recording artists in the form of radio television appearances which are considered to be of major importance both in the sale of records and in the professional advancement of recording artists in the amusement industry." "In this framework, the music publisher has not been able to exact from record producers the full statutory fee for most types of recording, and at times he has been willing to forego the fee entirely in order to get the public 'exposure' which a recording by a 'big name artist' will give. The most he can hope for is that the composition will prove to be popular, and that a number of recording companies will produce recordings which will result in ample mechanical performing royalties." Mr. Arnold's threats of future mergers of publishing and record firms fail to recognize that this has already taken place, with both movie and record firms having control of significant elements in music publishing-in fact, the 1965 annual reports of MCA and ABC records reveal further acquisitions affecting such musical publishers as Leeds Music, Porgie Music, Cole, and LeMor Music. We see nothing to be gained in debating the record advocates' contention of being the major depository of creativity-nor the false accusation that we think record companies are only "pretzel bakers". The services of all of those involved in this interrelated business are essential. Their economic reward should be judged by the market place. Mr. Thomas Blaisdell's findings well state the situation in his Study #6 prepared for this Subcommittee: "The record producers must have a continuous flow of new tunes to prosper. The music publishers must license a continuous flow of new tunes for recording to reap the benefit of their copyrights. The two are so interdependent both in relation to their antecedents (e.g., the music publishers' relationship with the songwriters or the relationship between record producers and the broadcasters) and in relation to each other, that powerful as they both are there seems to be little chance that either would be in a position to dominate the other if compulsory license for recorded music were abandoned." Mr. STEPHEN G. HAASER, NATIONAL NEWSPAPER ASSOCIATION, Chief Clerk, Subcommittee on Patents, Trademarks, and Copyrights, Committee on the Judiciary, U.S. Senate, Washington, D.C. Dear Mr. HAASER: Thank you so much for providing us with a transcript of testimony before the Subcommittee on April 4. We have marked a single correction on page 831. Responding to Senator Burdick's proffer of the opportunity to expand on my statement, I should like to add into the record the following: "The National Newspaper Association wishes also to endorse the proposal of Printing Industries of America for amendment of Section 301 of the bill. This amendment, which was presented in the testimony of Mr. Donald B. Thrush on April 12, provides for preservation of common law rights of action in state courts with respect to preliminary advertising and printing layouts prior to their sale to prospective customers. The problems which Mr. Thrush outlined can be faced by our members also, both as creators of advertising for newspaper reproduction, and as commercial printers in their communities." Your assistance in arranging my appearances so as to fit my flight schedule was most appreciated. Sincerely, WALTER B. POTTER, President. NATIONAL RESTAURANT ASSOCIATION, Senator JOHN L. MCCLELLAN, DEAR MR. CHAIRMAN: On behalf of the National Restaurant Association, I am writing to request a change in the proposed Copyright Act revision insofar as it relates to possible copyright infringement in the use of television sets in restaurants, taverns, and hotels. Our concern is aroused because the removal of Section 111 from the bill on the floor of the House of Representatives severely restricted the beneficial effect of the exemption provided in subsection (5) of Section 110 of S. 597. The effect of this House Amendment is to jeopardize the exemption contemplated for television sets in restaurants, taverns, and hotels when such sets utilize master antenna systems or other devices merely to strengthen the television signal received by those sets. This harmful and, we believe, unintended effect results from the fact that the use of a master antenna or other signal booster might be held to be a secondary transmission of the television signal thus causing the restaurant, tavern or hotel owner to be liable as one who produced the entertainment event in question. We understand that the House of Representatives removed Section 111 from its bill, H.R. 2512, because of concern for certain of the problems relating to Community Antenna Television. Such was the principal subject matter of Section 111 although it did contain language necessary to provide the full favorable exemption for the use of radio and television sets in restaurants, taverns, and hotels. We believe that the problem can be resolved by amending Section 110(5) (B) of S. 597 in the following way: At line 19 on page 11, strike the period (.) and insert after the word "public," the following: "by means of a device other than one merely intended to improve the signal received by the apparatus in question for hearing and/or viewing on the premises." Such an amendment, we believe, would assure the operation of the exemption intended for the use of radio and television sets as merely ancillary entertainment facilities in public places. It would assure that the intended exemption apply to all sets so used and not make the exemption depend on the absence of devices used simply to improve reception. Such an amendment would, at the same time, not permit any retransmission of a signal without subjecting the one doing so to liability for copyright infringement. The National Restaurant Association also specifically endorses the amendment to Section 116 of H.R. 2512 relating to the use of coin-operated phono-record players which the House of Representatives approved and urges that the Senate bill be amended to conform to the version adopted by the House of Representatives on this point. Respectfully yours, IRA H. NUNN, Washington Counsel. Mr. THOMAS C. BRENNAN, NATIONAL SCIENCE FOUNDATION, Chief Counsel, Subcommittee on Patents, Trademarks, and Copyrights, U.S. Senate, Washington, D.C. DEAR MR. BRENNAN: Dr. Leland J. Haworth, Director of the National Science Foundation, has asked me to provide comments respecting the questions posed in Senator McClellan's letter of May 5, 1967, on the subject of pending copyright legislation. We do not see that the terms of S. 597 will have any specific effect on the National Science Foundation's internal computer operations. The Foundation's computer is maintained and operated in order to process data required for the purpose of grants and contracts administration, program management, and to provide tabulations and data helpful in policy formulation. The data that are involved in this process are produced in the course of agency operations and do not entail the use of copyrighted material. In recent discussions of the effect of the pending copyright legislation there has accrued evidence of considerable concern lest the effect of this legislation hinder the development of information storage and retrieval systems which increasingly depend upon progress in the computer technology. Our further comments are directed to this area of concern. Several specific issues have evoked apprehension as to the possible restrictive effects from the pending legislation. At the risk of oversimplification, I would summarize them as follows: 1. Concern that a possibility of infringing copyright by reproducing a copyrighted work on magnetic tape for input into a computer will impede necessary research and experimentation for development of storage and retrieval systems. (Section 106) 2. Concern that the limitation to transmit copyrighted materials by broadcast or TV within a radius of 100 miles for educational purposes (per Section 110), while reasonable for educational TV, could be interpreted as hindering the development of computer-aided instruction of the non-broadcast kind. where the individual recipient interacts with, and effectively controls the transmission. 3. Concern that limitation on use of computers in reproducing works in archival collections imposes a needless barrier to the organization for storage and retrieval of manuscript and other archival materials. (Section 108) 4. Concern that the traditional functions of abstracting and indexing may become constrained by virtue of defining abstracts and indexes as “derivative work." (Section 106) It is our impression that central to all of these issues is the assumption that the computer may be used in a manner that involves converting the entire text of a document, of an article in a journal, or of an entire book, into a machinereadable form for storage in a computer; that the computer may be programmed to search that entire text and can then automatically produce an abstract, an index to the contents of the text, or reproduce the entire text or selected portions. If this assumption is correct, one can readily see that a computer that operates in the manner thus described can become an invaluable aid in organizing, storing. retrieving, and disseminating information to the benefit of the broad community of scholars, scientists, and students; that the very process of research. and the application of research results to advance our technology will be enhanced. At the same time, while all these benefits are secured by virtue of the computer's versatility and power, traditional services and functions of the putlishing organizations may be seriously impaired unless those organizations are assured protection of their equities in works published for sale to this same community of scholars, scientists, and students. It is therefore only fair to observe that the power and capabilities of the computer as described above have not yet been realized in the sense that computers can now be employed to function in this maner and to do so in a practical. effective, and economical fashion. Any computer system that has utilized the full text of documents or other published works has done so, up to the present, only in connection with research and experimental development. Although a computer can rapidly reproduce a document which has been stored in its memory in a machine-readable form, the computer has not yet demonstrated that this type of reproduction is more economical than edition printing. Preparation of abstracts and indexes on the basis of computer processing of full texts in its memory is still a matter of continuing research. For this reason, there is considerable agreement, in our opinion, on the following points: 1. New copyright legislation should not result in any language or reflection of the intent of the Congress, that will impede research and development related to computer storage and information systems. 2. Operators of information systems and publishers of copyrighted works. as well as authors and users, have expressed the need for an easy means of securing clearance and determination of fees for use of copyrighted materials. 3. A period of study of these problems in which the contending parties participate will be most useful, if such study is pursued with the assurance that the Congress will review the results and provide legislative remedies if such are needed. The above points, summarily stated, may benefit from the following additional comments. It is evident that none of the concern that has been experienced or expressed is directed at the terms of S. 597 itself. The Bill presently under consideration does not once use the term "computer." Rather, the concern has been with the interpretation of S. 597, as reflected in the Report of March 8, 1967, of the Committee on the Judiciary to accompany H.R. 2512. ("Copyright Law Revision," Report No. 83.) Thus, the concern appears more a matter of the intent of the Congress, as embodied in the report accompanying the legislation. Close reading of this report reflects the awareness of the Congress of the needs of the protagonists with contending views and conflicting interests. It reflects an awareness on the part of the Congress of the need to harmonize differences, an understanding that the problems and issues themselves require specification and sharpening in order to permit legislative resolution, and an appreciation that premature legislation could generate more harm than help. Under these circumstances, the emphasis on study involving the contending parties, themselves appears warranted. This is all the more so, since the computer technology, whose contribution to these problems is so crucial, is itself undergoing extremely rapid change. In summary, it appears to us that the pending copyright legislation will probably not affect the present non-experimental utilization of computers in information storage and retrieval systems. Solutions to problems that emerge from further developments in, and applications of, the computer technology should be approached jointly by the several interested parties. The expression of Congressional interest, and encouragement of support of such efforts by the Congress will undoubtedly facilitate these efforts. Finally, it is to be hoped that the concern of those active in research and development of computer applications to information storage and retrieval will be eased. The Congress may achieve this by clarifying its intent that copyright should not constrain or impede research and development with respect to computer and information storage and retrieval systems. The Bureau of the Budget has advised us that it has no objection to the submission of this report from the standpoint of the Administration's program. Sincerely, BURTON W. ATKINSON, Head. U.S. SENATE, Subject: S. 597, Revision of the copyright law. DEAR MR. CHAIRMAN: Although many of the changes in the Copyright Act proposed by S. 597 are commendable, several provisions appear to be contrary to the spirit of Section 8 of Article 1 of the Constitution. This section expressly states that "The Congress shall have power... to promote the progress of science and the useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." With due regard to |