"I BELIEVE" TABLE 8.-Number of licensed authorizations at various royalty rates during 1963-66 Source: Harry Fox Office, mechanical license file. Licenses issued by Cromwell Music Co. Looking first at "Stardust," a tune written in the mid-1930's and one that has become a standard in the field, we found that 213 licenses had been issued since 1963. Of these, 73 were issued to Canadian record companies. One license was not identifiable. Using the remaining 139 licenses granted to American record companies, we tabulated the rates structures as they appeared in the licenses. The monolithic 2-cent rate suggested by Mr. Glover did not materialize. About one-third of the licenses called for royalty rates below 2 cents. Over one-fifth of the licenses were for 1 cent. Even licenses at the 2-cent rate were by no means "standard," as a review of the tables clearly shows. There were 2-cent licenses in which lower rates for extended and long-playing recordings were permitted. There were 2-cent licenses which allowed 12-cent rates for LP records retailing at $2.50. Some record companies were given a reduction to 12 cents for $1.25 LP's, and some were given the 12-cent rate on 99-cent LP's. Different rates were given to different record companies for the same tune. In addition, almost 30 percent of the licenses were of the four-rate variety with the extended play and long play licensing privileges which, as we have seen, are often paid at less than 2-cent rates. Nowhere could we find evidence of common patterns for one selection. Rather, there was widespread evidence of a wide variety of agreements for the same tune in similar uses. Even the so-called 11⁄2-cent rate for record clubs varied considerably, with some companies obtaining record club rates at 14 cents and even 1 cent. In fact, the 1-cent rates are numerous. The data definitely reveal case-bycase negotiations even for one tune. Despite the fact that "Downtown" is a tune of recent vintage, Table 7 clearly shows that the types of variations are similar to those for "Stardust" and "I Believe." Of the 53 licenses issued since 1964, 51 were issued in 1965, of which nearly 20 percent were specifically written at below 2 cents. One-third were multiple-rate licenses, and royalties actually paid under these licenses will certainly include many renditions at less than 2 cents. Some of the 2-cent rate licenses had specific concessions for low-priced LP's. Again, the evidence reveals that there is no standard or monolithic structure or rate schedule in the licenses, let alone in the royalty payments. We deliberately selected "I Believe" because the record makers' exhibits make much of this selection. Even though it has been in use as long as "Stardust," it is evident that "I Believe" shows different rate characteristics. For example, its licenses show fewer specific rates below the statutory ceiling. Cromwell Music Company, the publisher of "I Believe," is one of the largest music publishing firms in the country and is reputed to follow a policy of resisting the licensing of records below the statutory ceiling, except for certain concessions on lower priced records. In fact, Cromwell is probably outstanding in the publishing business on this point rather than representative or typical. Table 8 reveals that of the 75 licenses issued for "I Believe" since 1963, 41 percent were at the multiple rate and 37 percent were specifically written only at the 2-cent statutory rate. Almost 15 percent were written at a 2-cent rate with special provisions for exended and long-playing records. The fact that variations in "I Believe" licenses are less than for "Stardust," merely establishes that negotiation policies and practices vary among specific publishers. There is no single standard. In fact, it is the very evidence of diversified bargaining between the record companies and the music publishers that demonstrates the fact that the statutory rate is a ceiling rate. The foregoing data on the recent licensing history of three well-known tunes are based on license information. As has already been demonstrated, licenses granted at the statutory ceiling, coupled with permissible releases at lower rates, invariably have a substantial proportion of royalty payments made at the lower rate levels. It can be seen that publishers of hit songs do not "stand pat" or that they can successfully insist on the statutory ceiling. Rather, there is substantial evidence of give and take, which is the very essence of bargaining and negotiation. The various presentations we have made indicate quite clearly and unequivocably that diversity of rates is common. We decided to push this inquiry one step further by analyzing this diversity of royalty payments by different record companies to various publishers. STUDY OF ROYALTY RATE STRUCTURE-ANALYSIS OF ACTUAL RATES PAID The publishers proposed that Robert R. Nathan Associates, Inc., undertake a comprehensive study of royalty rates and of the rate-making process in order to determine levels and patterns of royalty arrangements between music publishers and recording companies. Such a survey was needed to permit an objective appraisal of operations under the existing ceiling and a basis for evaluating the probable impact of increasing the ceiling from 2 cents to 3 cents. Our historical and qualitative analyses have clearly proved that rate variation has become increasingly frequent over the years since 1909, to the point where it is the established practive in the industry. In fact, as we have shown, the 2-cent rate has been increasingly eroded over the years. A statistically valid analysis of the volume of business represented by the 2-cent rate and by other rates was needed to confirm whether or not the 2-cent rate is a ceiling or a fixed royalty fee. To obtain a statistically valid portrayal of the existing rate structure, in 1965 Robret R. Nathan Associates, Inc., and the Controller of the Harry Fox Office secured the services of Dr. Louis H. Bean, prominent statistical analyst and economist, to devise an appropriate procedure for conducting a sample survey of rates. From the results of that survey we were able to develop for the first time a quantitative measure of the extent of the variations in actual royalty payments from the statutory 2-cent rate. A large and adequate pool of data for the study was available from the Harry Fox Office since, as agent and trustee for music publishers, 70 to 75 percent of all mechanical royalties are paid through that office. The first step in selecting the sample was an examination of the records of payment by record companies maintained in the Fox Office. Three basic decisions were made: the selection of the time period to be sampled, and the selection of record companies and music publishers to be included in the sample, The second quarter of 1965 was selected as the time period for the analysis, representing the most recent payment figures available when the study was undertaken. To obtain a large sample of total sales of the record industry, the three largest record companies were selected. Their royalty payments accounted for 49 percent of the total payments through the Harry Fox Office in the second quarter of 1965. From a listing of all publishers receiving royalties from these three record firms, the six companies receiving the largest payments from each of the three record companies were selected. These six companies, which were different for each record firm, received from 22.4 to 27.4 percent of the total quarterly payments made by each of the largest three record companies to the largest royalty-receiving music publishers, an average of 24.4 percent. It is an interesting commentary on the nonconcentrated nature of music publishing that total royalty payments from each of the three largest record companies to the six largest publishers varied only slightly from the 24.4 percent average of total royalties paid by each record company. This is hardly an area of economic activity which could be characterized as monopolistic. As indicated above, the three largest record companies account for just about half of all royalty payments made through the Harry Fox Office. These contrasts speak eloquently of the location of economic power between music publishers and record companies. The basic data for this statistical analysis thus consisted of 18 sets of detailed sales information as reported by record companies to the Harry Fox Office for the second quarter of 1965, accounting for one-fourth of the total royalty payments made by the three record companies whose total royalty payments, in turn, represented almost one-half the total payments by all record companies reporting through the Harry Fox Office. Since the six largest publishers for each of the three record companies varied, 13 different music publishers were included in our sample. The sample, therefore, accounts for over 12 percent of the total payments received by the Harry Fox Office for the second quarter of 1965-an uncommonly large sample for statistical analysis. Both the number of selections and the value of the royalty payments for each selection were tabulated and classified by the size of the royalty fee actually paid. In the interest of comprehensive coverage, it was decided to tabulate all sales of all selections included in the 18 quarterly reports. The total tabulation covered more than 31.6 million selections on which mechanical royalty fees were paid, ranging from 2 cents to less than 1⁄2 cent. Of the 31.6 million selections for which royalties were paid during the quarter, only 11.2 million, or 35.4 percent, were paid a royalty of 2 cents. The greater volume of recordings, 20.4 million, or 64.6 percent, were paid royalties of less than 2 cents per selection produced and sold. Slightly more than half of the recordings with royalties of under 2 cents carried a rate of 11⁄2 cents or more. The remainder, almost one-third, paid less than 1%1⁄2 cents. The breakdown, by number of recordings and percent in each range of rate, follows: Number and percentage of recorded selections, by royalty rate paid A number of these may be "splits,"; i.e., when more than 1 music publisher owns a share of the copyright, the fee is split. But the extent of this practice is not believed to affect the analysis significantly. The amount of money actually paid, broken down by royalty rate paid, as taken directly from the statements of the record companies submitted to the Harry Fox Office, was also tabulated. Naturally, a higher proportion of total value than of recordings is in the higher rate categories. By value, over half, or 52.1 percent, of all royalty payments were paid by the record companies on recordings carrying less than the 2-cent fee. The breakdown, by value and percent in each rate range, follows: Many, if not the bulk of the 64.6 percent of recorded selections on which royalty fees of less than 2 cents per selection manufactured and sold were paid, fell below the 2-cent level because of one or more of the industry-wide practices described above. But, this in no way contradicts the most significant fact that almost two-thirds of all recorded selections on which copyright royalties were paid carried a fee of less than the 2-cent statutory, and that these negotiated fees accounted for more than half of all royalties paid by the record companies. All these varied fees were initially negotiated and then tended to spread throughout the industry. It should also be remembered that almost no royalties are paid on a manufactured base alone, indicating a practically total departure from the statutory provision. The massive volume of data tabulated on rates show conclusively that not only is there a wide range of rates below 2 cents, but also that the rate pattern varies from one record company to another and even within the transactions of the same record company with different publishers. It is this persistent variation which serves to demonstrate conclusively that standardization at the 2-cent ceiling is a myth. The distributions of both recordings and payments by rate categories for each record company and for each of the six largest publishing companies receiving royalty payments from each record company are shown in tables 9 and 10. The data in table 9 are presented graphically in Charts A, B, and C. The tables and charts are as follows: TABLE 9.-Percentage distribution of selections recorded, at various rate levels TABLE 10.-Percentage distribution of total royalty payments, at various rate levels |