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doubtedly be reflected by a smaller copyright payment to music copyright proprietors should some rate system based upon a percentage of income be adopted. It certainly appears to be self-evident that secondary transmissions by smaller systems are, in substance and form, identical to secondary transmissions by larger systems in context of the theory of licensing public performances for profit in both the Copyright Law of 1909 and, thus far, the proposed new Revision Bill S. 644.
III. FORMULA FOR A STATUTORY RATE
SESAC has been the only one of the three major licensing organizations not to charge radio and television stations on the basis of a percentage of their gross receipts. SESAC's rates in the area of television are based in the main on the television station's advertising rate and the population of the market area served by the station. In the area of radio licensing, SESAC's annual fees are based upon factors which reflect the radio station's profit potential. These factors are the station's location, the size of the community served, the hours of operation, the advertising rates and, most important of all, the power classification of the station. In order to promote uniformity in the area of licensing cable television, SESAC has advised representatives of the cable television industry that it will accept a formula ba sed upon a percentage rate as opposed to a flat fee rate.
SESAC favors the principle of compulsory arbitration failing private agreement on copyright fees for music. SESAC does not favor the principle of compulsory licensing. SESAC is of the opinion that the availability of compulsory arbitration will insure the negotiation of a fair and reasonable rate for the use of music. Such a rate should be predicated upon a percentage of all revenue received by a cable system and not solely upon subscriber income.
The flexibility and acceptability of a voluntary schedule of fees rather than statutory rates, is I believe, quite apparent. However, should there be a statutory rate formula in S 644 applicable to non-music copyright proprietors, it is suggested that such a formula should provide for a percentage of the gross income of all revenues received by the cable system. As to the two alternatives set forth in Mr. Brennan's letter of December 15, 1971 it would appear that the first alternative of a percentage of a single graduated formula wins by default. I fail to see the justification of making additional charges for the number of distant signals carried by a particular system without regard to qualitative content of the signal or the profit potential caused by importing such signal. By taking a percentage of all revenues derived by the cable system, it would seem that all factors are considered, including the number of distant signals carried. Presumably a system carrying an abundance of distant signals would be more attractive to the consumer and therefore result in greater revenue to the system and thus a higher copyright fee.
In conclusion, SESAC feels that music should most certainly be treated separately from other types of program material. With the safeguard of compulsory arbitration, all that is truly necessary in S 644 would be a statutory provision for such compulsory arbitration in the absence of a voluntary negotiation of rate by and between the cable system and the music copyright proprietor. Payment of royalties for the use of music should be made directly to the licensor of the performing rights. Only in this manner, will the Senate allow for the economic, streamlined method of making available substantial repertories to the cable industry for any and all type of use, i.e., both secondary transmissions and the origination of programing by the cable system. A compulsory license in the statute dealing with secondary transmissions will not solve the issue of licensing primary transmissions on the part of the cable system. We submit that a completely voluntary negotiation between industries backed up by compulsory arbitration is the solution. Respectfully submitted.
ALBERT F. CIANCIMINO,
Counsel, SESAC Inc. Mr. BRENNAN. The National Cable Television Association has been allocated 40 minutes.
Would you identify yourself for the record ?
Mr. FOSTER. Mr. Chairman, my name is David Foster. I am president of the National Cable Television Association. On my immediate right here is Mr. Stuart Feldstein, who is general counsel of the association. On his right is Dr. Bridger Mitchell, an economist who will be presenting some testimony regarding the economic facts surrounding the livelihood of the cable television industry. And on my left is Mr. George Barco, who will give the third segment of our testimony. Mr. Barco is a cable system operator and a distinguished member of the Pennsylvania Bar. We felt that it was most important at this time to let you have the viewpoint of an actual cable television operator, someone who is facing the economic facts of our industry.
Senator McCLELLAN. Who is the gentleman immediately on your right.
Mr. FOSTER. Mr. Stuart Feldstein is NCTA's general counsel. He will not be making a presentation but will be available to answer questions.
Mr. Chairman, I have submitted a rather lengthy statement, which I would like to include in the record. I will not read this statement at this time, but rather will speak to some of the points that have been raised by the prior presentations.
Senator MCCLELLAN. You want all of these submitted? They are extensive statements.
Mr. FOSTER. Yes.
They may be received and made a part of the record. You have 40 minutes. If we have any questions, we will try to do that on our time. We want to give you the opportunity to make your presentation here, but we want to move along, to expedite it.
STATEMENT OF DAVID FOSTER, PRESIDENT, NATIONAL CABLE
TELEVISION ASSOCIATION; ACCOMPANIED BY DR. BRIDGER MITCHELL, ECONOMIST; GEORGE J. BARCO, COUNSEL, PENNSYLVANIA CABLE TELEVISION ASSOCIATION; AND STUART FELDSTEIN, GENERAL COUNSEL TO NCTA
Mr. FOSTER. I should also note, Mr. Chairman, that in the audience today are a very large number of cable system operators. I would say most of them are smaller operators, what we call our mom and pop operations. We say that with no lack of respect because many of these actually are mom and pop operations where the husband in the family is the technician for the system, and the wife keeps the books and answers the phone. These are people that are really concerned about the impact of copyright legislation.
Let me first answer the question that you asked Mr. Valenti about his views on copyright schedules and fee schedules that differ from the ones included in S. 1361. Let me say that although we are supporting S. 1361, on page 35 of my testimony I have indicated that the facts that we have been able to develop with the research that Dr. Mitchell has done and the input that we have had from our cable operators, indicate that a fee schedule of 50 percent lower than the fee schedule included in S. 1361 would be more appropriate.
As I have said, we are supporting the bill because we think it is a bill that can pass the Senate and thus, we can get on with this copyright issue. We have stated that we support the bill and we believe that all of the facts that will be developed will support that lower fee schedule.
Senator McCLELLAN. What do you base that on? Just the idea that you want to get out of it as politely as you can?
I want something concrete here to show us if we can. I asked the other side if they were prepared to document or submit what they consider to be reasonable fees. They haven't.
I wonder if you have come now with something concrete, that you could submit to us, other than you say, well, you support the bill. In other words, show why the fees should not be more.
Mr. FOSTER. Dr. Mitchell has a rather detailed testimony and I believe that he will develop some facts along that line. He will demonstrate that the fee schedule that is in the bill will have a very serious economic impact on the industry and, in many cases, will take profitable cable operations from black ink into red ink.
Senator McCLELLAN. All right. Proceed.
Mr. FOSTER. For the first 5 minutes of Mr. Valenti's testimony, I thought that the National Cable Television Association was here to defend a breach of contract suit, but let's be very clear about this one point.
Senator McCLELLAN. What about that consensus agreement?
Mr. Foster. Mr. Chairman, we have supported the concept of cable television's paving reasonable copyright fees since 1968. You will recall in 1968 that the Supreme Court decided that cable TV operators did not have to pay copyright fees.
Senator MCCLELLAN. That was on local broadcasting, wasn't it?
Mr. FOSTER. Yes, sir. That was essentially the decision of the court. But not withstanding that decision, the National Cable Television Association has continually adopted as its official position that the industry should pay reasonable copyright fees. We did that long before the consensus agreement and we feel that was the basic, undergirding intent of the consensus agreement to work for the early passage of copyright legislation.
We feel that S. 1361 represents that kind of copyright legislation that can be passed at an early date so that we can get on to the more pressing issues facing this industry.
Now let's talk a little bit about what has happened since the consensus agreement, since we have been negotiating with the motion picture interests, with music interests. But I will speak primarily about the motion picture interests. Continually since the consensus agreement—at intervals as often as once every week or as often as once a month-we met in extensive negotiating sessions to try to determine whether or not there could be a meeting of the minds between the parties on what might be a reasonable copyright fee.
Both parties hired expensive knowledgeable economists with a long list of credentials to try to develop facts and circumstances which would provide some realistic basis for those negotiations. We found that the parties positions were far apart and that no factual data that was available to us could bring the parties any closer together.
Why was that the case? Primarily because cable television is still in its infancy. It is a very, very small industry. It is primarily operating in rural areas, in smalltown areas, and the major big-city markets which is really what we are talking about here in terms of the future of these copyright papers—have not yet been wired. And those small areas close to the big-city markets that have been wired do not provide us with the kind of economic data that would provide a basis for a reasonable negotiation. So after many months of those negotiations, we came to the conclusion that there was no factual basis and, therefore, it was appropriate to turn this matter over to the wisdom of this committee and the Senate to come up with a fee schedule. By setting down an initial fee schedule in the bill, the concept of arbitration could then come into effect at a time when we would, hopefully, have some hard factual data based upon the experiences derived over the next 3 years.
During that period of time, we will be paying copyright fees and we will have experienced the copyright payment concept. The allocation of those fees can be worked out. The economic impact of those fees on our industry will become apparent. And we think that it is then the appropriate time for the satutory tribunal to do its work.
If that tribunal were to be convened today, it would have the same difficulties that the parties had during the past 2 years trying to conduct negotiations—they would simply be speculating as to the future of this industry, but they wouldn't be dealing with anything except one economist theorizing from one direction and another economist theorizing from the opposite direction. What would come up would be certainly no more valid, and I suspect a lot less valid, than the wisdom of the Senate.
And, therefore, we are supporting the concept of S. 1361 that the fee schedule to be imposed at this time with arbitration or a statutory tribunal, whichever you want to call it, coming into play at a time when we have evidence to deal with.
Now let's talk about what the cable television industry really is, because I think we have to have a very clear picture of that to understand what these copyright payments mean. I am now talking about the community antenna aspect of the cable television industry.
What do we do? Well, we put up an antenna at some point on top of a mountain, and from that antenna we receive television broadcast signals off the air. We don't alter those signals in any way other than to improve the quality of the signal. We then put it on a cable, a wire which goes into a family's home and into their television set.
We cannot alter the programing content in any way. We cannot put any commercials on those stations. We cannot take off any commercials. We cannot take off any programs unless we are required to do so by the rules of the FCC.
If we are carrying a channel, and it's carrying a program that we don't want to carry, we must still carry it. We have no selection process at all. We must take what they give us and all we can do is improve the quality of that signal and deliver it to some homes that wouldn't otherwise have seen that signal. That sponsored message that paid the full price of that program is now being carried to a home which ordinarily would not receive that broadcast signal.
Senator McCLELLAN. In effect, you mean to say that your service is to extend the coverage!
Mr. FOSTER. Yes, Mr. Chairman. As a matter of fact, some people have suggested and not at all facetiously-that the broadcasters
ought to pay us for carrying those signals into areas where they would not otherwise go. We are giving their sponsors a break.
Senator MCCLELLAN. Do they have any effect on what they charge for advertising?
Mr. FOSTER. In many cases, Mr. Chairman, we understand that it does. We understand that they base their audience rating on the cable system population and thus increase the price they charge for the commercials.
I think you can understand that against that background, where we have no choice of what programs we carry, all we do is improve the quality of that program and extend it beyond a geographical range.
Under the circumstances, you can understand why it has been difficult for the cable television industry to accept the concept of paying copyright fees. To us, it sounds like-I use a phrase that Fred Ford invented—I'm glad that Fred is here today—“two tickets for one show.” Somebody has already bought the ticket to the show, and now we're being asked to buy it again.
Now, Mr. Chairman, we have accepted that concept, the concept of paying reasonable fees. But I think against that background, you can understand why we feel that those fees should be minimal at the outset, and that the economics of the marketplace show what they might be in the future.
Now let me address a couple of points before I turn the microphone over to my associates. There is not an exemption in the bill for small systems. Many of the small systems operators who are here today will be urging you, and have urged you in correspondence that I know they have sent you, to exempt all systems under 3,500 subscribers. These are the small growing systems. They have particularly difficult economics associated with them.
The motion picture people have told us time and time again that they are not looking at the small systems for the revenues. They are looking for the large, big city systems that are yet to be built.
And therefore, it is our official position, Mr. Chairman, that the small systems under 3,500 subscribers should be exempt from the payment of copyright fees. On the other hand, we do not feel that either nonprofit or governmental systems should be exempt. We feel that since they are directly competitive with free enterprise cable systems, they should pay the same kind of copyright fees.
Before I hand over the microphone, Senator Burdick, I would like to answer the question that you asked about why we should have a compulsory license with one flat fee across the board for the industry. The average television station carries approximately 5,000 programs per year. Let's say that the average cable television system carries five television stations. That would mean that the individual cable system operator would have to negotiate a copyright fee for about 25,000 individual programs.
He has no choice as to whether he has to carry those 25,000 programs. He can't say, I don't want to carry this one. It's a worthless program. He has to carry it under any circumstances.
Therefore, we feel that across the board compulsory license is the way to go. I think that you can imagine how difficult it would be for some poor cable operator down in Arkansas with 500 subscribers to have to come down to Mr. Nizer's office in New York and negotiate