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4. CATV revenues are based on the use of copyrighted programs and CATV should pay its fair share for their use. Copyright owners will not receive double royalties from payment of copyright fees.
5. Several of the changes proposed by NCTA for the text to Section 111 of S. 1361 are unwarranted, especially those dealing with the definition of cable systems and with the exemption from copyright liability of CATV's retrans. mission of scrambled signals such as those used for closed circuit broadcasts and pay-TV.
Attached to this supplemental statement as an Appendix "A" is a memorandum prepared by Dr. Robert W. Crandall, Associate Professor of Economics at the Massachusetts Institute of Technology and by Mr. Lionel L. Fray of Temple, Barker & Sloane, Inc., management and economic counsel. These two gentlemen are the authors of the study commissioned by CCO entitled “The Profitability of Cable Television Systems and Effects of Copyright Fee Payment,” which we submitted to the Subcommittee on August 1, 1973 as a special appendix to our statement. Professor Crandall and Mr. Fray were present at the hearing of August 1, 1973 and their memorandum (Appendix "A") addresses itself to the questions of an economic or statistical nature raised by the Chairman and comments on some of the views on economic matters expressed by witnesses at said hearing.
1. NCTA HAS REPUDIATED THE CONSENSUS AGREEMENT WHILE SEEKING TO RETAIN
In his testimony on August 1, 1973, Mr. David Foster, President of the National Cable Television Association (“NCTA"), referred to the Consensus Agreement as the “so-called 'OTP Compromise' ”. Such attempt by means of terminology to give the impression of only limited governmental sponsorship and support for the Consensus Agreement, cannot, of course, erase or extenuate the embarrassment which NCTA experiences as the result of the repudiation of its solemnly given word and signature to that agreement. Indeed, it cannot be denied that the Consensus Agreement received the expressed approval not only of the Office of Telecommunications Policy (OTP) but also of the Federal Communications Communication ("FCC') and of the Chairman of this Subcommittee,
The history and sponsorship of the Consensus Agreement has been fully explained by FCC Chairman Dean Burch when he said in his concurring state. ment accompanying the Cable Television Report and Order:
'I joined OTP ... in an effort to secure a consensus among the industries that would lead to resolution of the cable/copyright issue, de-escalate the level of violence, and thus greatly serve the public interest.
"[The FCC] debated the details of the agreement. We debated the necessity of implementing it in its entirety. We debated its probable impact on the passage of cable/copyright legislation, and the critical importance of such legislation to cable's assured future.
"We went over every square inch of the ground--and then went over it again. And, in the end, we voted : a majority of the Commissioners explicitly decided that the public interest would be served by the Commission's implementation of the agreement."
Mr. Foster also overlooks the correspondence between Chairman Burch and Chairman McClellan which preceded the implementation of the Consensus Agreement by the FCC. In that correspondence Chairman Burch stated in his letter to Chairman McClellan dated January 26, 1972 that "a primary factor in [the FCC's) judgment as to the course of action that would best serve the public interest is the probability that Commission implementation of the Consensus Agreement will, in fact, facilitate the passage of cable copyright legis. lation." In his reply to said letter, Chairman McClellan wrote on January 31, 1972: "I commend the parties for the efforts they have made, and believe that the agreement that has ben reached is in the public interest and reflects a reasonable compromise of the positions of the various parties.” Copies of the correspondence between Mr. Dean Burch and Senator McClellan were attached to our statement filed on August 1, 1973 as Appendix 2.
Mr. Foster asserts "that the Congress was not a party to this so-called compromise, nor to our knowledge was it consulted with, nor is it bound by the terms, in any way." Mr. Foster misses the point here. The question is not whether Congress is bound by the terms of the agreement—which of course it is not but rather whether NCTA has pledged its support of the agreement as part of a package deal under which NCTA received significant benefits and whether in good faith, it should be permitted to withdraw its support for a provision which constituted a concession on its part, namely that the amount of fees under the compulsory license be set by arbitration in the absence of an agreement thereon by the parties.
We respectfully submit that in opposing arbitration, NCTA has violated the letter and the spirit of the Consensus Agreement. It should not be permitted to retain the benefits of an agreement the obligations of which it has repudiated.
2. NCTA HAS FAILED TO DEMONSTRATE ANY RATIONAL BASIS FOR REJECTING
ARBITRATION OF THE FEE QU'ESTION In all the sound and fury directed by the spokesmen of the cable industry against the initial setting of fees by the Copyright Royalty Tribunal, not a single valid argument has been presented against the fairness of doing so. Thus, in asserting an alleged present unavailability of sufficient empiric data, the CATV spokesmen overlook the fact that even according to the most optimistic forecasts, the bill S. 1361 will not be enacted until the end of 1974 so that the Tribunal will not be able to start its hearings until 1975. By that time and certainly by the time the Tribunal will reach its decision, more than three years will have passed since the time when the freeze on cable systems in the top 100 markets was lifted by the FCC (i.e., March 31, 1972). It is obvious that the Tribunal at that time will have at its disposal all necessary data and certainly more data than the Subcommittee would have to go by today if it had to set fees now.
Far from being an argument against entrusting the Royalty Tribunal with the rate-setting task from the outset, the alleged present unavailability of economic data if it in fact existed, would be an argument against setting the rates now in the bill. In any event, as shown in the memorandum of Professor Crandall and Mr. Fray (Appendix A attached hereto), ample data are available at the present time to support an appropriate fact-finding and rate-setting procedure before the Tribunal. The Tribunal will have the opportunity to hear and sift the data which the experts for all parties will present to it and will be in the position to set rates based on the consideration and evaluation of the economic evidence before it, an opportunity which this Subcommittee will not have had because of limitations of time.
The only other argument presented by Mr. Foster against arbitration is the “precedent for compulsory licensing since ASCAP, BMI and SESAC contractually grant them to networks, local broadcasters and others for all musical works." But as Mr. Foster concedes by his insertion of the word "contractually" and as the representatives of the music performance societies testified at the hearing on August 1, 1973, these music performance licenses are indeed contractual licenses, not compulsory ones, and the license fee therefor is set by agreement between the parties subject to supervision by the U.S. District Court. This is a far cry from what the cable industry urges the Congress to do. Indeed, this procedure to set music performance fees is very close to the one which the cable industry pledged itself to support by the Consensus Agreement but is now unwilling to support.
Accordingly, a closer examination of the only two arguments presented by cable spokesmen in opposition to arbitration reveals that these arguments actually support arbitration as the most practical and fairest method to do justice to all concerned.
It is interesting to note that with respect to distant signals, Mr. George J. Barco, General Counsel of the Pennsylvania Cable Television Association, in his statement filed with the Subcommittee, agrees with the position of the Copyright Owners on arbitration of payment for such signals when he concedes that “providing reception of distance signals transported by microwave or otherwise, being a matter of choice and a calculated risk for the CATV companies that choose to do so, is properly subject to a bargaining process or for the ultimate arbitration arrangement."
The procedure of having the initial rates set by the Tribunal has such obvious merit and no discernible disadvantages, that the opposition thereto by the cable industry remains shrouded in mystery and incomprehensible to the impartial observer. Indeed, the only rational explanation of this opposition is that the cable industry, in light of its intimate knowledge of its own prosperous economic and financial affairs, has formed the selfish opinion that the fees set in the bill are so low that the Tribunal after hearing the evidence is certain to set it at a substantially higher rate. Such self-serving opposition to a fair method of re. solving a controversy and such attempt to secure for itself an unreasonably low rate for the initial period and one prejudicial to the copyright owners for future adjustments, should not be countenanced especially in view of the cable in. dustry's consent to arbitration in the Consensus Agreement.
3. CABLE SYSTEMS CAN EASILY AFFORD TO PAY JUST AND REASONABLE ROYALTIES
WITHOUT RAISING FEES TO SUBSCRIBERS. CCO HAS NEVER SUGGESTED THAT SUBSCRIBERS' FEES SHOULD BE RAISED IN ORDER TO PAY COPYRIGHT ROYALTIES
At the hearing, Mr. Barco accused CCO of having suggested to the negotiators for the cable industry that they should pass on the copyright fees which they may have to pay to their own subscribers. We submit that this accusation is just a smokescreen to deflect public attention from the huge profits of cable operators who are reluctant to pay even a small share thereof to those who create
the programs which cable systems sell to their subscribers. To set the record straight : At no time has it been the position of CCO that subscribers' fees should be raised or would have to be raised in order to pay copyright fees. Indeed, such position would have been wholly inconsistent with the demonstration to the negotiating committee of the NCTA made by the copyright owners with the aid of their economic consultants, that the income of the CATV industry would be ample to pay the license fees sought by the copyright owners. (See the Crandall Fray study on “The Profitability of Cable Television Systems and Effects of Copyright Fee Payments" mentioned above.)
It is noteworthy that in pleading his case, Mr. Barco mentions substantial increases in basic costs incurred by the cable industry such as “pole attachment fees" paid to telephone companies which he states are being increased currently from 40% to 70% across the nation. Mr. Barco fails to explain why the cable industry stands ready to absorb these costs but mobilizes such violent resistance to the payment of compensatory copyright fees.
Mr. Barco seems to argue that copyright fees are the proverbial straw that breaks the camel's back. Yet no reason is apparent why the creative element of the television industry should be singled out to be that straw and be called upon to subsidize the new technology. The economic absurdity of this position becomes apparent when we consider that neither the suppliers of equipment to his industry nor the utility companies which furnish it with electric power, nor the franchising municipalities are asked to make similar sacrifices.
Mr. Barco refers to "the vagaries and inordinate demand” of the copyright owners. Such charges seem ill addressed to the copyright owners who are willing to submit the justice and reasonableness of the fees they seek to an independent fact-finding Tribunal for thorough investigation while Mr. Barco finds such factfindings so threatening to his position that he is willing to repudiate an obligation solemnly assumed by his industry in the Consensus Agreement.
4. CATV REVENUES ARE BASED ON THE USE OF COPYRIGHTED PROGRAMS AND CATV
SHOULD PAY ITS FAIR SHARE FOR THEIR USE. COPYRIGHT OWNERS WILL NOT RECEIVE DOUBLE ROYALTIES FROM PAYMENT OF CABLE COPYRIGHT FEES
The contention made by Mr. Foster that royalty payments by CATV represent a “windfall gain" and the assertion of Mr. Barco that because the copyright owner has "already received payment in his contractual arrangements for the broadcasting, paid ultimately by the television viewers--including CATV subscribers—in the advertising costs of purchased products”, are based on a series of economic fallacies.
Advertising carried on television may be of a national, regional, or local nature. No regional or local advertiser is willing to pay a premium over normal advertising rates because its commercials are carried by CATV to far distant markets where the advertiser has no facilities to serve customers. It is obvious that a furniture dealer in Los Angeles or a used car dealer in Chicago will not pay a penny more to a station for broadcasting commercials which are being retransmitted by CATV to Omaha, Nebraska or Wichita, Kansas. For the same reason the station whose programs are thus exported to other markets will not pay increased license fees to the copyright owners for such additional use of the program. At the same time the copyright owner in the many instances not covered by the FCC's non-duplication rules will be rendered unable to grant an exclusive license to the local station for programs already imported into that market by CATV systems.
Consequently, a television station is not willing to pay the program supplier a higher price for programs with local or regional commercials shown outside of the station's own market area. Similarly, national advertisers will place little, if any, value on duplicated coverage of their commercials by CATV when it imports these commercials into a different market and duplicates them with those carried by the local station in that other market.
It is because of these basic economic facts of the television program market that Mr. Foster is not correct when he claims that the “royalties now being paid by broadcasters to copyright owners are based, generally, on the size of the audience reached-including CATV subscribers”. Indeed the Court of Appeals for the Second Circuit in CBS v. Teleprompter, 476 F.2d 338 at p. 342 (fn. 2) rejected a similar argument made by the defendant CATV systems in that case and said that "the amount that a broadcast station is willing to pay for the privilege of exhibiting a copyrighted program is economically tied more to the fees that advertisers are willing to pay to sponsor a program than to some projected audience size.” The Court further observed that no evidence had been presented "to show that regional or local advertisers would be willing to pay greater fees because the sponsored programs will be exhibited in some distant market, or that national advertisers would pay more for the relatively minor increase in audience size that CATV carriage would yield for a network program.” The Court of Appeals concluded that "indeed, economics and common sense would impel one to an opposite conclusion."
As to the use by CATV of programs from local stations the copyright owners are also entitled to receive just and reasonable royalties for the use of such programs by CATV. The fact that the local station has already paid for its own right to broadcast the program should not deprive the copyright owner of his right to collect royalties from CATV. Indeed, the cable system makes its own independent profit from the retransmission and out of these profits should make a fair contribution to the cost of program production.
A compulsory license is an extraordinary legal device demanded by the cable operators and accepted by the copyright owners in the Consensus Agreement because of the asserted administrative difficulty of clearing copyrights for cable systems. In fairness to all parties concerned, the amount of the compulsory license fees should be compensatory and for that purpose should approximate as closely as can be ascertained, the amounts which the beneficiaries of the compulsory license would have paid in a free market without administrative difficulties and without the compulsory license.
It is a fundamental principle of our economic system that if we use someone else's property for our own benefit, we must pay the owner of the property for permitting such use. Applied to the retransmission by CATV of signals for which the broadcaster has already paid a fee for his own use, this means that in a free market where the consent of the copyright owner for the use of the program would have to be bargained for, some payment would certainly be agreed upon between the copyright owner and the cable system in return for the granting of a contractual license. It is the amount of this payment which should be taken into consideration in setting license fees for local signals under the compulsory license.
It should also be kept in mind that in the nation's largest markets, the number of local signals available for carriage by CATV is likely to make the wholesale importation of distant signals unnecessary. At the same time, if the carriage of local signals by CATV were to be exempted from copyright royalties, the large revenues of these metropolitan systems would be immunized from contributing to the cost of program production by reason of the fact that these systems rely primarily on the retransmission of programs from local stations.
Equity requires that all cable systems should carry their fair share of the cost of production of the television programs which they use for their profit, that they should pay a reasonable compulsory license fee reflecting the value of the use of the programs to them including local signals, and that the burden of the cable industry's contribution to the cost of program production should be shared fairly between the various types of CATV systems in large as well as small markets.
5. SPECIFIC PROPOSALS PUT FORWARD BY NCTA FOR AMENDING SECTION 111 OF S. 1361.
In his statement of August 1, 1973, Mr. Foster, put forward certain specific proposals for amending Section 111 of S. 1361. With respect to these proposals we would like to make the following comments:
(a) NCTA proposes certain changes in Section 111 (f) which would affect the definition of the terms "primary transmission," "secondary transmission," and “cable system.” With respect to the definition of the term "cable system," NCTA suggests that it be limited to only those systems "within a political subdivision within which the facility operates.” This definition is of critical importance to the copyright owners. In our initial statement to the Committee we took issue with this approach which would split up a cable system unrealistically whenever it crosses a political boundary and would fragmentize its revenues artificially under the progressive royalty rate. Accordingly, we urged the adoption of the following definition which comports more fully with the realities of the industry and is more logical in determining an appropriate copyright royalty fee:
“For purposes of determining the royalty fee under Subsection (d) (2) (b), two or more cable systems in contiguous communities under common ownership or control or operating from one headend shall be considered as one system."
As respects the proposed changes in the definitions of "primary transmission" and "secondary transmission," NCTA seeks to introduce new concepts and terminology into the language of the bill which are unsupported and which could distort basic meanings throughout the text. At this point in the long evolution of the copyright legislation, we see no reason to depart from the present definitional language absent some clear understanding of the purposes underlying the proposed amendments.
(b) NCTA also suggests that Section 111(b) pertaining to the secondary transmission of a primary transmission to a controlled group should be a matter for regulation by the FCC and should not be included in the copyright law. We disagree strongly with this suggestion.
Section 111(b) provides that the secondary transmission to the public of a primary transmission embodying a performance or a display of a work is subject to full copyright liability if the primary transmission is not made for reception by the public at large but is controlled and limited to reception by particular members of the public. This provision is derived from a provision which was contained in H.R. 2512 which passed the House of Representatives in 1967. House Report No. 83 (90th Congress, 1st Session), p. 56, states the purpose for which this provision was included in the bill :
“There are, however, a number of primary transmissions that are to the 'public' but are not capable of reception by the public at large. Examples include background music services such as Muzak, closed circuit broadcasts to theatres, pay-TV, and CATV itself. Clause (4) of Section 111 (b) makes clear that a community antenna system has no privilege of retransmitting a primary transmission that is not made for reception by the public at large but is controlled and limited to reception by particular members of the public.'
By urging that this provision should be deleted from the bill, NCTA takes the view that the general public should pay for over-the-air subscription programs but cable subscribers should not. Thus, if a sports event or a movie is offered to the public by a pay-television station using "scrambled" or coded signals, cable systems would be enabled by NCTA's proposed deletion to unscramble and redistribute these programs to their subscribers without any additional charge or payment. Such a result is patently unfair to the public as well as to the copyright owner. Indeed, it is the very result which Section 111(b) seeks to avoid.
Further, the claim that this change in Section 111(b) is necessary to meet the rules and regulations of the FCC does not withstand analysis. It is based on the assumption that the requirement of carriage of all local signals by cable systems includes the carriage of “scrambled" pay-television broadcast signals and their "unscrambling" by cable systems. Not only is there nothing in the FCC rules or regulations to support such an interpretation, but the rules are directly to the contrary. Section 76.55 (b) of the FCC rules provides :
“There a television broadcast signal is carried by a cable television system, pursuant to the rules in this subpart, the programs broadcast shall be carried in full, without deletion or alteration of any portion except as required by this part."
Thus, even assuming that the rules can be construed to require cable systems to carry all local signals including such "scrambled" signals as may be emitted by a local pay-television broadcast station, they specifically prohibit the alteration or "unscrambling" of these signals. In short, under the guise of conforming the copyright law to the FCC rules. NCTA is attempting to reap a windfall by permitting the unauthorized secondary transmission of pay-television programs by cable systems.
(e) NCTA suggests that the exemption from copyright liability for hotels,