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broadcasters—which felt that it was unfair to permit cable systems to carry the same programs as they do without having to bargain and pay for them--and the copyright owners—who wanted to put an end to the use of their product without receiving royalties therefrom-was broken by all parties consenting to the “Consensus Agreement” of November, 1971. This Consensus Agreement was accepted and signed by the National Cable Television Association (NCTA), the National Association of Broadcasters (NAB), and the Committee of Copyright Owners (CCO).
Under the Consensus Agreement (Appendix I), most of the distant signal carriage restrictions imposed by the FCC on cable systems were to be lifted. CATV systems were to be permitted to import programs from distant stations subject to certain limitations depending on the size of the market into which the importation was to take place and subject to the non-duplication by cable systems of programs available in the same market from local television stations.
Furthermore, the parties to the Consensus Agreement pledged themselves “to support separate CATV copyright legislation as described (in the Consensus Agreement], and to seek its early passage”. The copyright legislation to be supported by the parties according to the Consensus Agreement would include "liability to copyright” and a compulsory license to cable systems to retransmit copyrighted programs without negotiating with the owners of the programs. The compulsory license was to cover all local signals as well as a certain number of distant signals authorized "under the FCC's initial package" (which initial package was described in the Consensus Agreement). Signals carried by cable systems at the time the Consensus Agreement goes into effect were to be "grandfathered" and independently owned systems then in existence with fewer than 3,500 subscribers were to be omitted from liability to copyright.
One of the essential controversies which the Consensus Agreement was intended to solve, was the question of fees payable to the copyright owners under the compulsory license. Since the copyright owners had found the fee schedule which had been first set forth in the committee print of December, 1966 of the Copyright Revision Bill S. 543, 91st Cong., 1st Sess., wholly unsatisfactory, an increase in the amounts of these fees had been the subject matter of fruitless discussions between the parties. It was because of the wide divergence of views between the parties on this point that the Consensus Agreement specifically provided for an alternative method of setting these fees in the event that the parties should be unable to agree thereon. More specifically the Consensus Agreement provided :
“Unless a schedule of fees covering the compulsory licenses or some other payment mechanisms can be agreed upon between the copyright owners and the CATV owners in time for inclusion in the new copyright statute, the legislation would simply provide for compulsory arbitration failing private agreement on copyright fees." (Italics supplied)
This Consensus was found to be in the public interest both by the FCC and by the Chairman of the Subcommittee on Patents, Trademarks and Copyrights of the Senate Committee on the Judiciary. Thus, in the Cable Television Report and Order, 37 Fed. Reg. 13843 (1972) par. 65, the FCC said in adopting its new cable rules :
“We believe that adoption of the Censensus Agreement will markedly serve the public interest :
"(i) First the agreement will facilitate the passage of cable copyright legislation. It is essential that cable be brought within the television programming distribution market. There have been several attempts to do so, but all have foundered on the opposition of one or more of the three industries involved. It is for this reason that Congress and the Commission have long urged the parties to compromise their differences.
"(ii) Passage of copyright legislation will in turn erase an uncertainty that now impairs cable's ability to attract the capital investment needed for
substantial growth. ... "It is important to emphasize that for full effectiveness the Consensus Agreement requires Congressional approval, not just that of the Commission. The rules will, of course, be put into effect promptly. Without Congressional validation, how. ever, we would have to re-examine some aspects of the program. Congress we beliere will share our conclusion that implementation of the agreement clearly serves the public interest." (See exchange of letters between Chairman Burcli and Senator McClellan attached as Appendix E)
In the letter to the Chairman of the FCC dated January 31, 1972 and incorporated as an appendix into the FCC's report on the new rules, Senator McClellan, Chairman of the Subcommittee on Patents, Trademarks and Copyrights, said:
“As I have stated in several reports to the Senate in recent years, the CATV question is the only significant obstacle to final action by the Congress on a copyright bill. I urged the parties to negotiate in good faith to determine if they could reach agreement on both the communications and copyright aspects of the CATV question. I commend the parties for the efforts they have made, and believe that the agreement that has been reached is in the public interest and reflects a reasonable compromise of the positions of the various parties.”
A copy of said letter is attached hereto as Appendix II.
Promptly after the adoption of the Consensus Agreement the negotiating committees of CCO and of the National Cable Television Association (NCTA) met in order to work out a mutually satisfactory license fee schedule. These meetings. however, did not lead to an agreement between the parties as to the amount of fees.
On the other hand, the lifting by the FCC of the restrictions on the importation of distant signals contemplated by the Consensus Agreement was implemented by the Cable Television Report and Order and a set of regulations was released by the FCC on February 3, 1972 to become effective on March 31, 1972. In said Report and Order (Dkt. No. 18397A, par. 64) the FCC stated that “if, as we judge, the terms (of the Consensus Agreement] are within reasonable limits and the agreement is of public benefit, then it should be implemented in its entirety”.
On February 14, 1972, Mr. John Gwin, Chairman of the Board of the NCTA addressed a letter to Mr. David Horowitz, Chairman of CCO, pointing out that the Consensus Agreement obligated all of the agreeing parties to support implementation of all of the provisions of the Consensus Agreement and requesting the support of CCO in opposing any reconsideration of the FCC's Report and Order's unfreezing the carriage of distant signals. This letter was answered by Mr. Horowitz on February 18, 1972 expressing full accord with the need to support implementation of all of the provisions of the agreement and requesting that NCCA support its provisions dealing with arbitration of license fees in view of the parties' fruitless efforts to agree on a fee schedule. A copy of that correspondence between Mr. Gwin and Mr. Horowitz is enclosed herewith and marked Appendix III.
Subsequent to the exchange of this correspondence, Mr. Horowitz advised Chairman Burch that in view of the fact that all parties had agreed to support copyright legislation and in view of the exchange of letters between Chairman Burch and Chairman McClellan, CCO was satisfied that legislation would be promptly enacted implementing the Consensus Agreement and that accordingly, CCO in order to break the deadlock and enable CATV to build its facilities in the major markets, would not ask for a delay in the becoming effective of the new FCC rules but would support them in reliance on the compromise struck between the interested industries. 3. The "Unfreezing" of Distant Signals and subsequent Repudiation by NCTA of
the Arbitration Clause of the Consensus Agreement The new FCC rules went into effect on March 31, 1972 and the "unfreezing" of the restraints on the importation of distant signals resulted in a spectacular ex. pansion of the cable industry. According to a report in CATV weekly magazine of May 7, 1973, based on official FCC statistics, the "cable television industry recorded a one year jump of 21.5% in subscribers served and 24.6% in operating systems between January 1, 1971 and January 2, 1972." The same statistics reveal that the industry served 6,085,532 subscribers on the 1st of 1972 compared with 5,008,580 a year earlier. Comparative figures for the number of communities served by systems for the same period are 5,006 in 1972 compared to 4,017 in 1971. This trend was accelerated during 1972 and 1973 although it has not as yet been fully reflected in the available statistics. In data published in the Television Factbook No. 43 and the addenda thereto published in Television Digest, it appears that as of the beginning of 1973 the number of subscribers served has further increased to 7.300,000, and that the number of communities serviced as of July 26, 1973 had risen to 6,010.
* Appendix E annexed to the FCC's Cable Television Report and Order, 37 Fed. Reg 13848 (1972).
After the cable industry had thus received substantially all of the benefits provided for it by the Consensus Agreement and while it enjoyed an explosive growth in its newly gained freedom, the attitude of its negotiators for the license fees payable to copyright owners stiffened notably as soon as the regulatory restraints were removed. Indeed, since that time and in spite of the inability of negotiators for NCTA and CCO to agree on a fee schedule, NCTA has shown an increased reluctance to support the arbitration clause of the Consensus Agreement.
This does not mean that the efforts to reach agreement on a fee schedule were suspended. For most of the year of 1972, representatives of CCO and NCTA labored through long detailed and exhausting sessions, consuming hundreds of man-hours, both at plenary and at technical subcommittee meetings of experts, in an attempt to find agreement on a fee schedule. Notwithstanding these efforts the parties were unable to reach such agreement.
In July, 1972, the representatives of CCO and NCTA determined that if no agreement on a fee schedule was reached by September 30, 1972, the negotiations would be terminated. This deadline was extended several times until the last meeting between these representatives on November 6, 1972 at which time both sides expressed the view that the gap between the positions of the parties as to what fees would be reasonable, continued to be so wide that further negotiations on a fee schedule would be senseless. CCO thereupon proposed an arbitration procedure for insertion into the bill to implement the Consensus Agreement in this respect.
At the conclusion of said meeting of November 6, 1972 the XCTA Committee stated that it would consider CCO's proposal and submit it to its executive committee at a meeting to be held on November 20, 1972. The VCTA negotiators further promised to advise CCO immediately after said meeting of its executive committee as to what its response to the CCO proposal would be in view of the need for speedy action because of the impending consideration of the copyright bill in the Congress. NCTA however failed to advise CCO of its executive committee's response to the arbitration proposals discussed at the November 6 meeting.
Upon inquiry from CCO, NCTA advised CCO that the response would have to await the meeting of the full NCTA Board on December 13 and 14, 1972. On December 16, 1972, I talked with the President of the NCTA. He told me that NCTA had decided not to accept the copyright owners' proposal. (CO's proposal. he said, was referred back to the NCTA negotiating committee, and they would submit a counter proposal to us. That proposal, however, was never submitted. At about the same time the Chairman of the NCTA negotiating committee, Jr. Alfred Stern, advised the Chairman of the CCO negotiating committee, Mr. David Horowitz, that the NCTA Board has rejected the proposal of CCO for the arbitration and that it would not submit any counter-proposals on the subject since it was unwilling to support arbitration regardless of the provisions of the Consensus Agreement and that NCTA would support instead the fee schedule contained in g 111 of the Committee Print of December, 1969 of S. 644.
The copyright owners find themselves in a situation now where they have made substantial concessions in a compromise which has been implemented only insofar as the major benefits for the cable industry are concerned but where the reciprocal promises made by the cable industry have been repudiated unilaterally by XCTA.
II, THE INADEQUACY OF THE FEE SCHEDULE IN S. 1361 The fee schedule of $ 111(d) (b) of S. 1361 first appeared in the committee print dated December 10, 1969 for a predecessor bill (S. 543, 91st ('ong., 1st Sess ). An earlier predecessor bill, HR 2512 (90th Cong., 1st Sess.), had provided for negotiations between copyright owners and cable systems with penalties of loss of royalties or a trebling thereof in the event of unreasonable demands or offers. The fixed-rate schedule was thereafter inserted into the aforesaid committee print, into the successor bill S. 644 and into the present bill, S. 1361, without any prior hearings on the reasonableness of this scliedule.
We are not aware of any economic evidence before the Subcommittee prior to the insertion of the fee schedule or of any fact-finding effort to ascertain whether the scheduled fees would correspond even approximately to the reasonable value of the use of their programs by cable systems and whether they would be reasonably compensatory of the losses expected to be suffered by the copyright owners. In fact, these fees are grossly inadequate and represent only a small fraction of what the copyright owners feel would be fair and compensatory fees,
Attached hereto and marked Appendix IV is a computation based on the fee schedule contained in $ 111 indicating that the fees payable by the cable industries for the year 1971 pursuant to that schedule would have amounted to a total of only $7,630,000. If an exemption of systems with less than 3,500 subscribers had been applied (see below under III 5.), this amount would have been even lower. These license fees would have to be shared by program suppliers, networks, broadcasters, music performing societies, and others. Indeed while $ 111 at first sight gives the impression that cable systems with large revenues would pay a royalty rate of 5%, the progressive rate from 1% to 5% in reality yields license fees at an effective rate of only 1.93% of the gross revenues of the cable industry. This low effective rate results from the fact that the scale of marginal rates progresses in successive steps from one to five percent based on quarterly revenue segments of the systems. Thus, even large systems with huge revenues pay less than 5% because the 1% royalty applies to their first segment of $40,000 of their quarterly revenues, 2% to the next $40,000, etc. so that the 5% royalty is applicable only to that segment of their revenues which is in excess of $160,000 quarterly of $640,000 annually.
To put these figures into perspective, it should be mentioned that according to FCC published figures the total broadcast revenues for the television industry during 1971 amounted to $2,750.3 Million Dollars while total programming expenditures amounted to 1,488.5 Million Dollars or a ratio of $54.1%. During that same year the cable industry with gross revenues of about 400 Million Dollars would have paid $7,630,000 under the schedule of g 111 (and even less if an exemption for small systems had been applied) or less than 2% of their gross revenues. (See Appendix IV).
That the cable industry is economically well able to pay much larger fees has been demonstrated in the aforementioned study entitled “The Profitability of Cable Television Systems and Effects of Copyright Fee Payments" by Robert W. Crandall and Lionel L. Fray, 1972. Copies of said study accompany my instant statement as a special appendix. In said study it is shown that cable systems could afford to pay more than 15% of their revenues for copyright fees and still earn enough profits to attract sufficient capital to sustain their growth. The calculations made in said study also suggest that cable owners would prosper, that their profits would be sufficiently above the level required by investors and that they should not find copyright fees in the aforesaid amount an impediment to their future growth.
This of course does not mean that 15% is actually what cable systems should ray as just and reasonable license fees for the use of copyrighted programs. It shows, however, that the assertion voiced by cable interests that the fee schedule in $ 111 represents the maximum which they could afford to pay, is unwarranted or, at least, subject to substantial disagreement among experts in the field.
I respectfully submit to you that the percentages set forth in the schedule of $ 111 having been set without thorough fact finding and economic evaluation, are a priori figures without any rational relationship to the value of the programs to any of the more than 3,000 CATV systems, which vary greatly in the number of their subscribers, the number of channels, the programs carried by them, the circumstances of their operations and many other factors which should be taken into consideration. They are bound to be unfair either to a substantial part of the CATV industry, or to the program suppliers, or, which is more likely, to both. We believe that the basic principle should be that CATV should pay, and the program suppliers should receive, "just and reasonable" royalties, and that the statute provide for an appropriate procedure for the setting of such fees.
The determination of what fees are reasonable and should be paid by cable systems in fairness to themselves and to copyright owners depends on many factors obviously not taken into consideration when the fee schedule was fisrt inserted into the Committee Print of 1969. Such factors may include, among others, the location of the cable system, the number and origin of the signals it carriers, the value of the programs carried by the system, the size of the system, penetration of its franchised areas, saturation of the television market in which it operates, age and stage of development of the system, investments necessary to construct the facility, amortization of its capital investment, allocation of the investment in its plant to retransmission of broadcasts as distinguished from other activities of the system and literally thousands of variables on which the advice of economic experts should be sought.
It is apparent that a (Congressional committee or subcommittee should not be burdened with such complicated and time consuming tasks of economic factfinding and rate making. The setting of fee schedules based on complex economic data is, of course, not unknown in our society and economic system. Indeed, the questions faced here are very close to the ratemaking process engaged in by federal and state agencies setting rates for common carriers in transportation and communications and for such utilities as electric power and gas. Such administrative ratemaking procedures have been delegated traditionally by the Congress and the states to public utility commissions and similar administrative bodies which determine rate schedules fair both to the public and to investors in order to improve service. Even if arbitration had not been specifically provided for in the Consensus Agreement, its adoption is called for as the most sensible and fair method of resolving the question of what license fees are fair and reasonable.
Accordingly, it is the position of the copyright owners that the copyright revision bill should contain a provision for arbitration of the copyright fees payable under the compulsory license.
The Copyright Revision Bill (S. 1361, $$ 801 et seq.) provides for the establishment in the Library of Congress of a special Royalty Tribunal charged "to make determinations concerning the adjustment of the copyright royalty rates specified by Sections 111 ..." and other sections. It would appear appropriate that this Tribunal be charged from the outset with the setting of royalties under the compulsory license.
The Copyright Royalty Tribunal would be an objective body and not beholden to either the cable industry or the copyright owners. It would be able to deal equitably and without favoring either side, on the fixing of fees. Indeed, it is possible that the Tribunal may, after its deliberations, determine that the cable operators ought to pay lower fees than what the copyright owners so strongly feel is reasonable. But that is the principal reason for arbitration—it is eminently fair, neither side has an advantage. The Tribunal will hand down its decision after full, complete and possibly mountainous piles of evidence will have been submitted by the parties and experts. In that event neither side can claim that it was short-changed. The fairness of the Tribunal is its most valuable asset.
The question has sometimes been asked of the copyright owners whether the periodic adjustment of the compulsory license fees provided for in the bill (88 801, 802) would not satisfy their concern regarding their inadequacy. At most, it is argued, the fees, if inadequate, would be adjusted at the end of a three-year period. Unfortunately, the practicalities of the situation do not provide sufficient reassurance on this point.
First of all, the initial setting in the bill of a royalty rate amounting to only a fraction of what would be a just and reasonable royalty, would make it extremely difficult for the Royalty Tribunal to multiply that fraction at the time of adjustment in order to reach a rate which the Tribunal might determine to be just and reasonable.
Secondly, regardless of the merits of such increase, it will undoubtedly be strongly resisted by interested parties because, it will be claimed, the cable industry will have adjusted itself economically to this low rate. Such economic misjudgment may well occur in spite of all warnings expressed by the Congress regarding the temporary nature of the original fees.
In any event and even if it were possible to achieve a fair adjustment of the rates after three years, there appears to be no good reason why the copyright owners should be deprived of just and reasonable royalties for an additional three-year period on top of the more than a decade of the free ride which the cable industry has enjoyed in the past.
III. ESSENTIAL CHANGES IN BILL When S. 1361 was introduced by Chairman McClellan in the Congress (Congressional Record, March 26, 1973), he indicated that its cable television provisions would have to be revised in the light of events since December, 1969 when the Committee Print of the predecessor bill was reported out of the Senate Subcommittee on Patent Trademarks and Copyrights to the full Senate Committee on the Judiciary. On behalf of the copyright owners for whom I speak here I respectfully submit several suggestions for changes which they consider essential in order to permit and facilitate the continued production of high quality motion pictures and television programs.” These changes are in addition to those required by the insertion of an arbitration clause:
? We have previously submitted to the Subcommittee a proposed text for $f 111 and 501 which incorporates most of the changes proposed herein. That text, however, did not contain the change proposed for $ 801 of the bill discussed below under subheading 3. Furthermore, a clarifying change has been made in the definition of "cable system" ($ 111(f)(1)(C) deviating slightly from our previously submitted text. I annex hereto as Appendix va copy of our revised text for $$ 111, 501 and 801 containing the proposed changes which the copyright owners consider to be essential.