CHART B NUMBER OF RECORDED SELECTIONS DISTRIBUTED BY RATE CLASS Between 1.5 and Between 100 CHART C NUMBER OF RECORDED SELECTIONS DISTRIBUTED BY RATE CLASS Recorded Between 1.5 and O No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 Legend PUBLISHERS Table 9 presents the percentage distribution of number of recordings and table 10 presents the percentage breakdown of payments separately for the three record companies and for each of the six largest music publishers receiving royalties from each record company. Each chart presents data for a separate record company, and within each chart there are six columns showing percentge breakdowns of the number of recordings for each publisher. The variations among record companies and among publishers for each record company are startling. For instance, for Record Companies I, II, and III, 24.0, 38.6, and 57.6 percent, respectively, of the selections manufactured and sold provided for a 2-cent royalty payment. The proportion under 11⁄2 cents per recording varied from 36.5 and 37.7 percent for Record Companies I and II, respectively, down to 4.6 percent for Record Company III. The range among the publishing companies under each record company was even wider. For instance, Record Company I data revealed two publishing companies for which less than 20 percent of the recordings were paid at more than a 11⁄2-cent rate, whereas for two publishing companies, at least 40 percent of the recordings carried rates in excess of 12 cents. The picture needs only to be looked at, record company by record company, and publishing company within each record company, to reveal how diversified the patterns are. If ever there was any doubt that the 2-cent rate is a ceiling and not a fixed rate, these data offer overwhelming proof to completely remove that doubt. The charts merely serve to present graphically what is shown in table 9. The different shadings reflect differences in rates, and the patchwork of each chart is indicative of the wide range of differences between publishing companies as well as between record companies. If one were to look at these charts without knowing just what phenomena were being graphically presented, one would find it difficult to believe that these distributions apply to an industry which a witness for the record manufacturers characterized as one in which "the present provisions of the copyright law establish the fees actually paid in practically all instances." The total number of recordings for which each of the three record companies paid the six leading publishers was 31.6 million, including royalty payments of $476,800 during the second quarter of 1965. This is an average of 12 cents per selection sold and not 2 cents. The aggregate cost, therefore, was at 12 cents and not 2 cents as claimed by the record people. There were, of course, variations among the three record companies since the percentage of dollars paid at 2 cents was 36.1 percent for Record Company I, 52.6 percent for Record Company II, and 62.7 percent for Record Company III. These firms produced and sold all types of records-45's, 33's, singles, albumsand all old types of songs and music (classical, popular, jazz, folk, etc.), using a number of labels and price levels, including record club albums. As one would expect, variations appeared because of the product mix as among low-priced albums, "freebies", record clubs and the like. The analysis of the royalty payments supports the analysis of the royalty rates. Both offer convincing proof if wide variations in royalty arrangements and that the statutory fee is truly a ceiling and not a fixed price. IMPACT OF A HIGHER STATUTORY CEILING FOR MECHANICAL ROYALTY LICENSES The music record industry encompasses record manufacturers, publishers, composers and writers, performing artists and musicians, distributors, and retailers. Thus, it is like most other industries in having a variety of participants, suppliers and distributors. Also, it is no different from dozens of other important industries in that it is subject to the competitive forces and pressures of the market place. There is, however, one notable exception both within the industry and as compared with other industries. The copyright holder of the selection or song, which is the raison d'etre of the industry, is subject to compulsory licensing and has had a legislative ceiling imposed on the price he can receive for his service. The royalty should directly reflect the give and take of the market place, like payments to the other contributors to the finished product— namely, a saleable record. Short of the rational decision to terminate both the compulsory licensing provision and the statutory royalty ceiling rate, the least that should be done in revising this segment of the legislation is to raise substantially the ceiling rate so as to provide more room for bargaining in the market place. As has been amply demonstrated, there has been and is considerable bargaining between publishers and record manufacturers, but the range is severely confined by the ancient 2-cent ceiling. If the Congress retains the present provisions for compulsory licensing, then the ceiling rate should serve only one purpose. It should be a rate available only when and if the parties cannot succeed in arriving at a market-place price through bargaining. Clearly, the rate should be high enough to allow and encourage private negotiation, but not so high as to make the compulsory licensing provision meaningless, assuming again that the Congress wants to retain this odd provision. I would urge the Congress to raise the ceiling substantially and allow the fresh air of competition and the free market place to enter into this segment of the music industry. A higher ceiling would permit wider variation in royalty rates on different compositions. It would supply greater encouragement to would-be composers and writers to enter this profession, and it would provide possibilities of greater rewards to those composers and writers who have proved their creative talents. It is a widely recognized practice to pay higher performance fees to the better known and to the more talented performing artists. In this way the market reflects their greater economic worth. A much more restricted opportunity has been available to the publisher, the composer, and the writer, all of whom must now bargain within the constraints of a 2-cent maximum set in 1909. With respect to the matter of competition and pricing, one of the most interesting observations was made by a leader in the record manufacturing business, Mr. Clive J. Davis, Vice President and General Manager of CBS Records, who will appear before this Senate Committee tomorrow. In the keynote speech before the NARM convention in Los Angeles, California on March 6, 1967, Mr. Davis made the following remarks: "However, not surprisingly, the public, as much as any of us, does not want to lose, and the record shows they are willing to pay in order not to do so. We keep hearng that they won't pay more for our product. Frankly, that's nonsense. This is the pat answer-the easy way out. "Let's look at allied fields of entertainment and see what's done there. There's a hit show on Broadway called "Cabaret" and orchestra tickets are now selling for $12.00. Are there problems at the box office? Certainly not! The show is sold out every night with standing room only. When there is a demand for something, the public will pay for it. "Where are the Hal Princes and the David Merricks of our burgeoning record business who will price records individually according to the public's demand for it? After all, records too are part of show business. "At the 500 Club in Atlantic City, the standard cover is $2.00 if the artist is not well-known but get a Sinatra or Sammy Davis in there and the price because of the cost justifiably goes way up-but so do the ropes to hold back the people who are clamoring to get in. When the night club owner risks $25,000 or more a week, business prudence dictates that in order to recoup his expenditure, he must price accordingly. Do we in our industry? Quite the contrary. The records of our hot artists, more expensive to sign and record, frequently become lossleaders and are almost given away. This despite the principle that would say that when you have hit product, you must make money on it to make up for the flops. And do we have flops in our business! "Supply and demand is the key. Where we have priced albums selectively, sales have not been adversely affected. 'Mame' and 'Cabaret' are each list priced at $5.79 mono and $6.79 stereo. So are others of our recent show albums now that severe investment risks are involved plus heavy recording costs. The flops still don't sell and no discount will help them. But people want 'Mame' even at the higher price. There are almost 400,000 sales to date. 'Cabaret' also is an excellent seller. The Rolling Stones had their Greatest Hits album list at $4.79 $5.79. I understand that sales to date are in excess of 1,000,000 albums, higher than many of their albums with a lower list price." I submit that Mr. Davis has made a remarkably clear and persuasive argument for market-place determination of royalty rates as well as for record prices. He proposes that there should be selective pricing of recordings. He suggests different prices depending on sales potential. He contends that the very nature of the record business requires that profits must in large part depend on the "hot sellers." Mr. Davis is a prudent businessman-he merely wants to price his product on the apparent willingness of the consumer to pay. The music publisher only desires the same opportunity. It is already available to the manufacturer and every other participant in the music record industry; the music publisher does not want to be treated differently. He wants to take his chances in the free market, knowing that for some compositions his royalty rates will be lower, and for hit tunes they can be higher. The risks and the rewards can be more closely related, as they are for other creative people and for most American industries. Many publishers have spent years building up the consumers' preference for the selections of their composers and writers. This reputation, and the preferences for selections that the publisher is seeking to sell, gives them greater marketability. The publisher and the composer and writer should not be penalized in their negotiations with the record companies by an arbitrary and rigid ceiling imposed 58 years ago. The publisher is no different from the manufacturer. He has "flops" into which he has invested his time, talent, and money. Even when a record manufacturer records the selection, it may still, to use Mr. Davis' language, be a "flop." Therefore, when the publisher feels he has a possible "hot seller," he should be able to bargain for a royalty more in line with its prospective value in the market place. In fact, royalties can vary with the volume of sales, similar to practices in the book publishing field. The present statutory ceiling is 58 years old. If past experience is any guide, it may be a great many years before Congress will again examine the logic and legitimacy of continuing with a royalty ceiling. Even a substantially higher ceiling set at this time may be inadequate and inequitable over the long run during which technological, market, and the other factors might make such a higher ceiling inequitable and too low. Congress should lean toward a larger rather than a smaller increase in the ceiling rate. Mr. Chairman, this Subcommittee is fully aware of the proposal of the House Subcommittee to raise the statutory royalty ceiling to 2 cents. As Mr. Feist testified earlier today, the music publishers acquiesced in the 3-cent proposal to the House Subcommittee because they thought it was a compromise which had been accepted generally. They did not support the 3-cent rate as a level subject to further compromise. As an economist who favors market-place price determination over arbitrary governmental pricing, I am convinced that the 21⁄2-cent rate is entirely inadequate. It is unrealistic in the context of economic changes that have occurred since 1909; it is far too small to stimulate the meaningful rate bargaining between publishers and record manufacturers that is economically desirable; it is far too low a level to serve the single rational purpose of compulsory licensing; and it persists in retaining an inequitable burden on music publishers. I have grave doubts whether 3 cents is high enough to serve the needs of 1967, let alone the years ahead. Probably 4 cents or even 5 cents would be more appropriate levels. The very difficulty in determining an appropriate rate is a reflection of the illogical nature of the legislation. Of course, if a regulatory body were to be established to determine rates after full hearings were held, maybe a rational rate could be established. But I am confident that this Subcommittee will not, in its wisdom, decide that public convenience and necessity calls for a public utility regulatory body in this field of endeavor. Rather, if you retain compulsory licensing. I would urge that the royalty rate ceiling be raised to at least 3 cents, and preferably higher. PROSPEROUS CONDITION OF THE RECORDING INDUSTRY This industry is a growing, expanding one, with giants of long standing, up-andcoming middle-sized firms, and hundreds if not thousands of smaller record manufacturers. In many ways, the recording industry is a reflection of hundreds of other industries in our competitive society. Furthermore, in our competitive economic environment, there is no guarantee of financial success. Some firms flourish and substantial numbers fall by the wayside. In fact, there is really no reason for all companies to succeed in a free enterprise system. The fact that numerous individuals or firms think they can achieve success in the recording field is indicative that at least they believe they have something different to offer and that the financial prospects are sufficiently attractive that they are willing to take the risks involved. A continuing flow of new entrants reflects encouraging prospects for profits. |