profits drastically, as we have seen, even fewer revenues than now would 3. Possible Elimination of Smaller, Marginal Record Makers The increase in statutory license royalties would have a greater impact on small record makers than on the large ones, for the small firms tend to have smaller profit margins and thus less flexibility in coping with cost increases. With lower profits, the small record makers could absorb even less of a statutory rate increase than the more profitable firms. Thus, a substantial increase in the mechanical royalties rate might reduce the number of firms in the industry. This is scarcely a desired or desirable effect. 4. "Concentration" in the Recording Industry Allegations which have been made as to excess concentration in the recording industry are not well founded. It is true that there are large firms in this industry, as there are in any industry where there are economies of scale. In 1970, the top four firms in the industry accounted for 62% of the total value of shipments in the industry. A substantial portion of this volume is represented by the product of small, independent record companies, which merely distribute through these larger organizations. But the Federal Trade Commission defines an industry as "highly concentrated" if 75% or more of shipments are accounted for by the top four firms. Thus, by that definition, the recording industry falls short of being "highly concentrated". The Commission also gets concerned when the overall trend in "concentration" is rising. However, as Exhibit 15 shows, there has been a decline in the percentage of record shipments attributed to the top four, to the top eight, to the top twenty firms over the last 23 years for which Commerce Department data are available. These shares are volatile from year to year, as musical tastes change and as new entrants pour into the industry. But a trend was clear: In 1947, the top four firms had 79% of the industry's shipments; by 1970; the share of the top four had fallen to 62%. Source: Annual Survey of Manufacturers: Concentration Ratios, U.S. Department The Top Four firms had 79% of the industry's shipments in 1947, but in The Top Eight firms had 87% of the industry's shipments in 1947, but in 57-786 76 pt.3-7 80 - perhaps another This is an industry characterized by ease of entry. This is reflected in the rise of the independent record producer in recent years. All he or she needs is an idea and a little money not much. He can rent a recording studio. He can rent a sound team. A record manufacturer company will press his records for him. A record company perhaps a third outfit will undertake to distribute his or her records. This is actually what is happening. Independent producers are proliferating; some of these are performing artists who can achieve both financial and artistic results to their liking by producing their own masters. - - The number of independent record producers listed in Billboard rose from 380 in September 1969 to 1,482 in September 1974, an increase of nearly 300% in just 5 years.* Conversely, 12 leading recording companies, in a telephone survey conducted by RIAA in 1975, reported that they had 94 inhouse producers in 1965, but only 54 in-house producers in 1975 -- a 60% decline in 10 years. It is important to realize that a higher statutory license rate may endanger this socially desirable trend toward proliferation of the entities in this industry. For the smaller firms, gaining distribution today is like competing in the grocery or discount store business I before you even get - a chance to compete for the buyer's dollar, your product competes for "shelf space" with everyone else's. For those outlets in which you do gain distribution, it is important that your product sell as well as anybody else's, or you will lose that space and distribution. For the smaller firms, which are already struggling for marketing appeal, a price increase due to a higher statutory license rate, or other defensive measures of the sorts we have been describing, might make it more difficult for them to sell their products. Few small firms could afford to absorb any increase in their mechanical license payments. Surely, reducing the threshold of survival for smaller record makers can not be one of the intended results of the bill before this Subcommittee. These figures are based on the listing of independent producers in 81 II. THE IMPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY (CONT'D) E. THE HIGHER STATUTORY RATE WOULD BECOME THE STANDARD RATE, More than 99% of all royalty rates are at the statutory rate or |