797 IV. PRODUCING AND SELLING RECORDS The preceding case study of the hit "I Believe" states most favorably the relative income position of the record company. The record company is in a far less favorable position in the typical situation. This is because, among other reasons, copyright license fees are paid whether or not the record company earns a profit. Exhibit 10 shows that to break even on a 45 RPM "single" a company has to sell, on the average, about 11, 200 copies. In a year's time, over 70% of all single releases by record companies failed to reach the break-even point. Over 60% of the releases of all "singles" didn't even come close; they sold less than 4,000. The break-even volume for "popular" LP's is, on the average, about 7, 800 copies. Over 60% of the releases of About 50% all "popular" LP's failed to reach the break-even. didn't come close; they sold under 4,000. Even for profitable companies, a small fraction of all releases of popular 45 RPM's and LP's generates the bulk of the funds that carry the losses suffered on the large majority of recordings. Only a few companies release classical music. This is a very unprofitable kind of business. The culturally important classical part of the business is carried by funds generated by popular records, primarily LP's. The break-even for "classical" LP's, on the average, is about 9, 700 copies. 87% of the classical releases failed to break even. They lost money. About 60% sold fewer than 2,000 copies per release. The odds are The record business is a risky business. against the companies, especially the smaller or weaker companies. An increase in copyright license fees would raise the odds still higher. There would be severe pressure on companies to cut out the more experimental and, therefore, risky releases. The number and variety of offerings would be reduced. Increasing the risks of the business and reducing profitability would generate great pressure to squeeze out the less profitable enterprises. It would jeopardize the source of financial support that carries the whole of recorded classical music. See Exhibit 10. Note: Exhibit 10 is based upon a sample of six companies' releases. These releases accounted for 32% of the total releases during the sample year, 1963. V. FINANCIAL RESULTS OF RECORD COMPANIES PROFITS, COPYRIGHT FEES, ARTIST ROYALTIES, FUND PAYMENTS - During 1964, copyright license fee payments by 20 leading record companies were about six times the record companies' net profit after taxes. These 20 companies include all of the major companies. The sample does not include literally hundreds of small companies, many of which have insufficient activity to generate profits. Inclusion of any or all of these companies would not materially change the results shown herein. Copyright fees were the largest single type of payment to any of the groups contributing creative talents to the production of records. For example, during 1964, copyright license fees were $25.2 million; artists' royalties paid by the sample companies were $21.2 million. The net profit after taxes of these record companies was $4.0 million during 1964. The record companies cannot absorb an increase in the statutory copyright license fee. An increase in the fee would have to be passed on. During 1964, record companies included in the sample paid out $25. 2 million to copyright holders. A 50% increase in payments to copyright holders under consideration would add $12.6 million. But, the net profits of these companies were only $4.0 million. Obviously, the increase in royalties could not come out of profits. - As a percentage of record companies' net sales, copyright license fees are increasing. Between 1955 and 1964, copyright license fees rose from 8. 0% to 11. 1% of net sales. Artists' royalties also showed a similar trend, rising from 7. 4% to 9. 3% of net sales from 1955 to 1964. During the same period, the net profit after taxes of record companies fell from 3. 6% to 1.7% of net sales. Thus, while record company profits have been declining, payments to copyright holders have been increasing. Comments on Exhibit 11 Exhibit 11 shows that from 1955 to 1964, copyright license fees increased as a percentage of record manufacturers' sales. In addition, payments to artists' and musicians' and vocalists' funds also increased. During this same period, the net profits after taxes of record manufacturers declined as a percentage of net sales. In summary: The drop in profitability from 3.6% in 1955 to 1.7% in 1964 resulted in large part from two related developments: (1) the introduction of long playing records resulting from technological innovation by record companies; and, (2) a reduction of manufacturers' gross margins in response to pressures all along the line on marketers to reduce distribution costs as a result of mass merchandising of records at lower retail prices. The 11. 1% of record companies net sales represented by copyright license fees in 1964 is particularly significant in light of the fact the present law originally anticipated a copyright license fee of about 5.0 per cent of the manufacturer's price. (See Exhibit 20.) During recent years, the return on investment of record manufacturers was low when compared to the risks involved in record manufacturing. For 1964, return on investment was about 3.8%. In order to earn this return, record manufacturers did many things: invest in arrangements and talent; operate or rent studios; invest in manufacturing facilities; design record jackets; establish and maintain inventories; and, promote and sell records. Note: These trends are based upon data provided by six companies for 1954; increasing to 20 for 1964. During 1954, these six companies accounted for about 44. 8% of the total industry's excise taxes, based on record companies' dollar sales volume to wholesalers. These six companies are included in the sample companies through 1964. During 1963, excise taxes paid by 19 companies in the sample amounted to 59.0% of total excise taxes paid by the industry. (continued on next page) |