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Average subscriber gross, $72.70 per year. (1) for 1,170 subscribers in model system.--(2) per subscriber net after operating expenses for year 1972 (3) for 1,170 subscribers, net in model system.. (4) less 1% copyright fee proposed on gross receipts --

$85, 059.00

-7. 73 9, 044. 10 --850. 59

New gross after copyright-----------(5) Equivalent 1% off gross as percentage of net income (percent)

8, 193. 51

9. 40

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MODEL SYSTEM--No. 2 (A SYSTEM WITH OR WITHOUT MICROWAVE SERVICE) (A) Total systems studied in report, 191. (B) Total sytems studied for this model system, 191 (100%). (C) Model system has 850 subscribers and is typically 6-7 years olds. (D) Expenses category :

Dollars spent per subscriber per year (1) System manager.--

$11. 38 (2) System technician (s).

8. 03 (3) System installer(s)

7. CO (4) Secretary (ies)

4. 39 (5) Office rent.-

1. 32 (6) Head end rent.-

0.62 (7) Electricity ------

151 (8) Insurance and taxes.--(9) Franchise fee payments.(10) Pole rental.---(11) Vehicle operating expenses (12) Subscriptions and dues--(13) Legal and accounting--

1. 73 (14) Repairs to system.-

4. 11 (15) Telephone service-----

0 69 (16) Travel expenses.---(17) Office Supplies-----

0.79 (18) Billing and collections

1. 12 (19) Advertising (20) Miscellaneous

1.00

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U. 42

0.74

$56. 81

Total expenses per subscriber. Average Subscriber Gross, $64.15 per year. (1) for 850 Subscribers in model system-----(2) per subscriber net after operating expenses for year 1972.(3) for 850 subscribers, net in model system ----(4) less 1% copyright fee proposed on gross receipts ------

New gross after copy rights---(5) Equivalent 1% off gross as percentage of net income (percent)-

$54, 527, 50

-7.34 6, 239.00

545. 27 5, 593. 73

-8.97

SAMPLE SYSTEMS STUDY

To determine what changes, if any, occur in the net-profit category, as a function of system size (i.e, number of subscribers and gross revenues), a sampling of the total of 191 systems was performed.

Systems were broken down into several easy-to-handle categories, and a representative sample within each sub-group category taken. Gross proceeds within the category, net expenses, net profit (1) and net profit-per-subscriber were measured. They follow :

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I Net expenses: Includes direct operating expenses and does not include (A) principal (debt) retirement; payment of interest on any outstanding principal debt; (C) capital expenditures for new expansion, additions.

It is readily apparent from the above that system size has a very direct bear. ing on cash flow generated by the system. It should also be noted that the per Por Subscriber) column (far right) does not represent profit; that out of this remaining cash flow after expenses the system must retire its debt (both principal and interesi) and make capital expansions to increase the system's reach in an ever growing community, (opyright 1% fee-How It (hanges Sample Systems Profit or (1088)

The previous page detailed a study of sample systems by system size. The far right hand column showed the net profit (or loss) per subscriber within each system-size category as income was reported for the calendar year 1972.

We will now compare these figures with the added burden of a 16 copyright fee.

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in each case, the 1% of gross revenues copyright fee proposed has a much larger impact on the NET income (after operating expenses but before debt retirement and capital expansions) than the 1% would imply. This impact, as measured in this study, is as follows:

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Note: Systems of over 2,000 subscribers in our study had an average return of $12.92 per subscriber before copynght! and $12 32 per subscriber after copyright, a 4.7 percent reduction in net revenues because of the I percent copyright lia. buinty. The largest system so studied had 5,800 subscribers.

SYNOPSIS

(ATA was requested to prepare this study so that the subcommittee on Patents, Trade Marks and Copyrights might have factual, current data on the true financial picture of the small, independent (ommunity Antenna System Operator.

To the best of our knowledge, this type of hard, factual data has never before been gathered into one concise study by the CATV industry. To a very large measure, the results of this study have depended almost entirely upon the open willingness of the small, independent operator to provide this "raw data " in effect. CATA asked 1,000 system operators to divulge their own, contidential financial information. And to divulge it not only to CATA, but to a group that was proposing to "tax" part of their gross receipts!

(ATA is providing not only this synopsis study of this survey, but the raw survey forms as completed and turned in by the ('ommunity Antenna System operators. ('ATA believes its synopsis tabulations to be correct, but invites retabulation by the Subcommittee.

The study clearly shows that small CATV systems are performing a service far greater than had previously been imagined. The synopsis shows that the typical system with fewer than 500 subscribers is actually losing money ($7.62) in its annual operations each year. We don't suggest that (A) the study is incorrect, or, that (B) this is not true. We do know, however, that when a man builds a very small system to serve typically fewer homes than 300 cable homes, he takes upon his own shoulders those responsibilities of the system manager,

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the system technician, the system installer and often the system secretary ... all rolled into one person. This reduces the out of pocket expenditure but makes for very-very long days for the typical small operator,

And if there is a case to be made for relief from the proposed copyright fee schedule for the so-called independent, small operator, it should be with the understanding that the small operator does not hire the vast majority of his work done for him; he does it himself. And that as a full time resident of his community, he is "Mr. Television" to his community; a man devoted to the bringing of quality television signals to his isolated community he lives in and serves.

And that if ... and that is a big if ... he is able to make any rate of return on his investment, it is solely because he is providing, has provided, and will continue to provide a fair service for a fair rate. And because he is not afraid, or unwilling, to perform that service 18 hours per day, 365 per year.

The study completed here indicates that there is ample reason for an exemption for Community Antenna Television System operators with fewer than 3,500 subscribers. The net rate of return per subscriber, as detailed herein, and before any repayment of indebtedness principal, interest or additional capital expansions, is such that systems with fewer than 3,500 subscribers are typically just treading water.

And directly contrary to the off-repeated view that "small CATV systems are goldmines" (a few undoubtedly are... but the average one is not, as this study plainly shows), the small, independent CATV systems need all of the relief that they can get.

CATA respectfully urges the Subcommittee on Patents, Trade Marks and Copyrights to carefully consider this study in making any final determination for copyright liabilities for CATV systems; and suggests that if systems with fewer than 3,500 subscribers could be re-classified as Community Antenna Systems and be therefore exempted from a copyright fee schedule, that such be done.

OBS, INC.,

New York, N.Y., November 19, 1975. Hon. ROBERT W. KASTENMEIER, Chairman, Subcommittee on Courts, Civil Liberties and the Administration of

Justice, Congress of the United States, Committee on the Judiciary, House

of Representatives, Washington, D.C. Dear Mr. KASTEN MEIER : In your letter of November 4 you invite me to give the Subcommittee my views on the proposal by Teleprompter Corporation to amend Section 111 of H.R. 2223.

At the outset let me note that this action by Teleprompter appears designed either to forestall copyright law revision entirely-thus preserving in the cable television field the present state of copyright anarchy from which only cable television benefits-or to eliminate entirely the possibility that under the revised law copyright payments by cable television for its compulsory license would ever reach a reasonable level. To appreciate the thrust of Teleprompter's proposal, it is necessary to understand the basic unfairness-vis-a-vis broadcastingwhich lies at the heart of cable television's operation. That unfairness works in the following way.

In any given community the local cable system and the local television broadcast station are natural competitors against one another for audience. But under the present copyright law the only competition between them is unfair competition. To attract audience both offer the program schedule of the television station. The television station is subject to the normal operation of the copyright law and must secure permission to use the programs. The cable system neither secures permission nor does it pay.

The cable television system also attracts paying subscribers with the programs contained in the signals of any other local broadcast television stations; the cable system pays nothing for them.

It imports distant broadcast signals; it pays nothing for the programs contained in them.

The cable television system also attracts paying suhscribers with the programs more frequently making a special charge (generally on a per-channel basis) to its subscribers for those programs. When it originates, it also has a uniqne advantage-even though under the present copyright structure the cable system has to secure permission and make a negotiated payment. The unique advantage derives from the fact that if it is successful under the present copyright structure in negotiating against the local station for a program, it alone acquires the right to utilize that program. The local station does not get a free ride. On the other hand, if the local station is successful in the competition to acquire the program, the cable system which lost in the competition can carry the program as it is contained in the broadcast signal. The cable system gets a free ride.

It is in the economic interest of the cable system to enhance the attractiveness to its subscribers, and to its potential subscribers, of what it uniquely carries compared to what is available to those subscribers over the air from local teleVision stations. The more attractive the cable television system can make its unique services, i.e., its own cable program originations and the imported distant signals, the more subscribers the system will get and the smaller will be the audience of the local television station. The smaller the audience the local tele. Vision stations has, the weaker the service it is able to render. The weaker the local television service, the stronger the position of the cable system. The weaker the local television station, if it is a network affiliate, the weaker the television network.

This one-way unfair competition of cable television with broadcasting is the inevitable result of the absence of copyright protection against cable television use for the programs contained in broadcast signals.

CBS' POSITION CBS' position is that cable television systems should be required to bargain in the marketplace for the copyrighted programs contained in both local and distant broadcast signals, just as broadcast stations do. Subjecting cable tele. vision systems to the normal operation of the television marketplace would not insolve the ('ongress or any governmental agency in setting rates for the cable television's use of programs. Those rates would be set in the marketplace by gire-and-take bargaining between the copyright owner and the user. That would eliminate the unfair competition I have referred to,

Verertheless, in my testimony on June 12 before the Subcommittee, I gave qualified support to the compulsory license provisions for cable television in Section 111. The reason, as I stated then, is that CBS has “reluctantly concluded that there is just no possibility that the Congress will pass legislation subjecting cable television to the full operation of the law." Because CBS believes it critical that the principle of statutory copyright liability for cable system carriage of copyrighted programs contained in broadcast signals be established, (BS supported the compromise on the condition that the ('opyright Royalty Tribunal would be available as provided by Section 801 (b) to assure the possibility that future royalty rates might be reasonable.

TELEPROMPTER'S PROPOSAL

Section 111 now includes and has long included provisions which, taken together with other sections of the bill, would subject cable television to cops. right liability for the carriage of the programs contained in broadcast signals but which would give cable television the inestimable advantage of having a compulsory license to carry those signals at rates which cannot be regarded as more than nominal. Vevertheless, at the eleventh-hour, Teleprompter now makes an ill-concealed attempt to reduce its liabilitr drastically without reducing cable television's ability to carry both local and distant broadcast signals.

Teleprompter proposes to make a distinction between local and distant signals (for purposes of payment but not of permitted use). It proposes that cable pay nothing for the programs contained in local signals. It attempts to justify this exemption by saying on p. 1 of its Memorandum that "everyone seems to agree that, as a matter of pure logic, there is no justification for imposing copyright liability on cable's retransmission of local signals." This is not an argument. It is no more than an observation. And it is false, ('opyright proprietors certainly do not agree that there is no justification for copyright payments by cable systems that sell their subscribers retransmitted copyrighted programs contained in local broadcasts. Broadcasters certainly do not agree. Building on this false foundation, Teleprompter then indicates on n. 2 of its Memorandum that "the entire nation is really local' to the network." Teleprompter concludes from this in the next sentence that "a copyright owner who sells his product to a network anticipates that the product will be viewed throughout the entire country and is compensated accordingly." What Teleprompter unblushingly claims is that somebody else, like it or not, pays the bill for cable television's free ride. As a matter of elemental fairness, cable television should pay for its own ride. Under Teleprompter's scheme somebody else would continue to pay for it.

The Teleprompter scheme would enable cable television to continue to use local broadcast signals and network signals without any payment for them in order to build an audience and a revenue base to enable cable to import distant broadcast signals and to originate its own programs with which to undermine the audience and the revenue base of local competing broadcast stations,

Having disposed to its own satisfaction of the necessity for payments for local programming and for network programming, Teleprompter indicates on p. 4 of its Memorandum that in recommending its formula for payment for a distant signal, Teleprompter is "extremely generous" because its formula “completely ignores the benefit to the originating station (and thus to the copyright owner) of cable's carriage of distant signals."

Because of the completely oversimplified and misleading nature of Teleprompter's cavalier claim that cable confers such a benefit, it is necessary at this point to include an analysis of a hypothetical, though typical, distant program importation situation so as to make clear the effect of the cable television system's free ride not only on the cable-carried distant station, but also on the economic interests of the other parties affected by the importation.

ANALYSIS OF THE EFFECTS OF CABLE TELEVISION SYSTEM IMPORTATION

One purpose of our analysis is to discover in a general way who pays the bill for the distant cable television system's free ride. Another purpose is to observe the distortion caused by the free ride to our general economic system as it applies in this anomalous area. (i) Effect on the Program Supplier

Obviously, the carriage of a program by a cable system severely limits the possibilities of sale of that program to a television station in the market. So, unless the program supplier is compensated for it, the supplier is always injured by the use of his program in any market or potential market-and every cable television system community is a market or potential market for the program supplier.' The program supplier must look to the television station whose signal is carried in the distant market for any compensation the supplier may get for the cable system use there. This is so because under the governing copyright structure the program supplier's only license negotiation for the use of its program is with that television station. The supplier cannot even seek to be paid where it should-the supplier does not have any legal means to force any payment from the cable television system. Whether the supplier will succeed in getting the television station to pay for the cable system use will depend on the strength of the supplier's bargaining position vis-a-vis the broadcast station. In some situations the supplier will succeed, in some the supplier will not.

Conclusion.--The program supplier is injured by the distant cable system carriage unless the supplier is able to secure payment from the broadcast station the supplier licenses and whose signal is carried in the distant community. (ii) Effect on the Broadcast Station Whose Signal is carried By the Cable Tele

vision System in the Distant Community The broadcast station, in contracting for the program, will try to avoid paying the program supplier for the cable television system's use of the program in the distant market. Whether the station will succeed will depend on its bargaining position vis-a-vis the program supplier. In turn, when the broadcast station deals with a potential advertiser it will try to get a payment from the advertiser for the distant market coverage. Whether the station will succeed will depend on its bargaining position vis-a-vis the advertiser. One factor significantly affecting the bargaining will be whether the advertiser has an outlet in the distant market for its goods or services, for without such an outlet the advertiser will derive no benefit there from the increased viewer exposure to the advertisement.

d that the program supplier is not iniured by the cable system carriage in a community where there is no television station, the answer is that the cable television system itself is a potential customer of the program supplier. Cable television systems originate programs of their own and free carriage by the cable television system of the program in question eliminates the possibility of a sale by the program supplier of the right to the cable system to cablecast the program.

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