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of the administration to accept the terms of the Consensus Agreement. I feel it only fair to say that the cable industry was offered as an alternative only the indefinite extension of the FCC's "freeze" or the equally unattractive possibility of extensive and unproductive congressional hearings.

After reviewing my notes, I feel it imperative to offer the above comments at this time and ask that they be included in the record.

Very respectfully yours,

DAVID H. FOSTER.

SUUPLEMENTAL COMMENTS OF NATIONAL CABLE TELEVISION ASSOCIATION, INC.

During testimony on S. 1361 on August 1, 1973, several questions were asked of NCTA witnesses which required some research to answer. Chairman McClellan directed NCTA to submit the answers to the Subcommittee in written form. We have attempted to do so herein.

1. The effect of the graduated fee scheduled in Section III on the nation's three largest cable television systems (two in New York City and one in San Diego); and the effect of doubling that fee schedule

The three largest cable systems in the United States in terms of the number of subscribers served are Mission Cable TV, Inc., San Diego, California; TelePrompTer Manhattan CATV Corp., New York City; and Sterling Manhattan Cable TV, New York City. At the outset, it should be noted that of the three CATV systems only the San Diego system is reported to be at all profitable.

NCTA has obtained from these companies the total revenues from subscriber service fees for the most recent quarter in the 1973 calendar year for which data were available. NCTA calculated the copyright fee payments that would be required were the fee schedule in Section III in effect at the time, and made a further calculation to determine the effect on revenues of a doubling of the proposed fee schedule:

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Assuming the quarterly revenues to be constant for the purpose of projecting a full year's payment of copyright fees-actually understating the true annual effect, inasmuch as subscriber revenues would increase each quarter from subscriber additions-the annual payments by the three systems, under the fee schedule in Section 111, would range from $166,380 to $192,000; under a doubling of the fee schedule, copyright payments would range from $332,760 to $384,000. Collectively these three systems would pay at least a half million dollars in copyright fees for the current calendar year under the schedule in Section 111, and more than a million dollars were the schedule doubled.

The imposition of high copyright fees on these cable systems and on those presently under construction or proposed to be built in the major markets will have an adverse impact on the earnings of those systems now or soon-to-be operational, and may well deter cable construction in undeveloped markets.

2. The effect of doubling the fee schedule in Section 111 on the rate of return on total capital of projected major market CATV systems

In his testimony of August 1, NCTA President David H. Foster cited a study by Dr. Bridger Mitchell on the impact of copyright fee proposals on major market CATV systems in which he found that the effect of the fee schedule in Section 111 would be to reduce the rate of return on total capital a full percentage point for profitable or near profitable systems. Responsive to the Subcommittee's desire that NCTA provide pertinent data on the effect of a doubling of the fee schedule in Section 111, Dr. Mitchell has calculated that, under a doubling of fee payments:

(A) Large systems on the edge of major markets which, without any copyright liability, will earn a 10-13% rate of return, would have that rate reduced to 7.5-11.0%-a reduction on total capital of two or more full percentage points.

As NCTA pointed out in its earlier testimony, even a one point reduction in rate of return would be devastating to the cable television industry's investment environment since a 10% return is considered the minimum acceptable.

(B) Intermediate size systems on the edge of major markets, which Dr. Mitchell found would be only marginally profitable without any copyright liability at all, would thus be severely threatened by a doubling of the proposed fee schedule.

(C) Of course, since all systems in the center major markets are not projected as being profitable at the present time, any copyright fee would make profitability so remote as to preclude development. Dr. Mitchell's figures follow:

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3. The effect of doubling the fee schedule in Section 111 on the pre-tax income of the major cable television companies

As NCTA pointed out in the testimony of David H. Foster on August 1, the effect of copyright payments on the earnings of the major cable television companies is crucial to the major market development of cable television, An increase in the statutory fee schedule could halt CATV's development.

NCTA's written testimony showed the effect of copyright payments, under the present fee schedule in Section 111, on the pre-tax income of eight of the largest cable television companies in the nation. Pre-tax income of those companies would be reduced by copyright fee payments, under the present Section 111, from 7.5% to 32% with an average of 19%.

If the fee schedule in Section 111 were doubled (to range from 2% to 10%), the pre-tax income of those companies would be reduced by copyright fee payments from 15% to 64% with an average of nearly 40%. Assuming the corporate tax rate, income, after taxes, could be reduced as much as 80%.

If the fee schedule were raised, a reduction of pre-tax income in this magnitude would threaten to completely shut off the already limited flow of investment funds to all but the very largest and financially strongest companies.

4. The amount of "copyright fees" paid by television stations for the broadcast use of copyrighted materials

Television stations include "copyright fees" paid to owners of syndicated programs in the total price when they buy the use of a product (a motion picture or a "package" of motion picture films, a single television program or a series of programs) under varying terms of usage. The total price may vary to reflect such matters as the number of times the product can be televised within certain periods of time, etc. Included in the purchase price, which is generally arrived at in bargaining between the station and the distributor (with the price varying by the size of the market, the bargaining ability of the station, the desire of the distributor's agent to make a quick sale, and any number of other reasons), are various costs associated with the distribution of the product and the profit to the program owner. The extent of the Profit depends a great deal upon the quality of the product (and its potential value in attracting audiences), and the ability of the distributor to extract high prices from the television stations.

NCTA's analysis shows that the owners of syndicated programs realized a gross income of $179.6 million in 1971 from sales to television stations (this is based on FCC figures). After subtracting the costs of distribution, advertising, talent, etc., approximately $50 million in profit remains. This represents a profit margin to the copyright owner in excess of 25%.

The concept of cable television liability (imposition of a "copyright fee" based on a percentage of gross revenues from basic subscriber service fees) is a new

and distinct way for the copyright owner to obtain a greater profit, above that received from television stations for the broadcast use of his product (which, in most instances is readily available to cable subscribers who, even without a cable connection, could receive the program directly from a home antenna). Because cable television improves signal quality and audience range, advertisers are charged higher rates by the broadcaster and the broadcasters can share his added income with the copyright owner. However, cable television operators receive no compensation from the broadcaster for expanding his coverage.

5. Profitability of the three national television networks and television stations vs. cable television system revenues

In May of 1973, the FCC released data on the 1972 revenues and profits of the three national television networks and their 15 owned and operated stations. The FCC data shows that profits before federal income tax were $213.4 million (an increase of 47.2 percent over 1971).

Similar data on all other television stations for the year 1972 is not currently available from the FCC. However, 1971 data released by the Commission in August 1972, showed profits before federal income tax of $244.3 million for 673 television stations.

Because there is not available a central authoritative source of information on the profitiability of cable television systems, no comparisons can be drawn between network/television station profits and CATV profits.

However, in 1972, the estimated gross revenues (from subscriber fees, installation fees and other income) of the approximately 2,900 cable systems then in operation, was $438,100,000.

Thus, the combined pre-tax profits of the three television networks and their 15 owned and operated television stations in 1972 ($213.4 million) and the 1971 pre-tax profits of 673 television stations ($244.3 million) exceeded the total 1972 revenues of the 2,900 CATV systems by nearly $20 million.

It is ironic that the television industry and the copyright owners, whose combined profits dwarf the entire revenues of the cable television industry and which already reflect financial benefit derived from CATV through expanded audience coverage, should seek to extract an even greater profit from this emerging industry in the form of unreasonable payments for copyright liability.

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NATIONAL CABLE TELEVISION ASSOCIATION, INC.,
Washington, D.C., August 29, 1973.

Hon. JOHN L. MCCLELLAN,
New Senate Office Building,
Washington, D.C.

DEAR SENATOR MCCLELLAN: Enclosed are schedules of CATV industry copyright payments under the fee schedule proposed in S. 1361, as compared to the effect of doubling that schedule. Enclosed also is an addendum of selected data on the profitability of television program syndicators, the three national television networks and television stations. Although this information is similar to that prevously submitted, we believe that it points up the serious economic impact of copyright payments in the cable television industry as compared to the tremendous economic strength and profitability of the television broadcasting industry. For this reason we believe and respectfully request that this information be inserted in the record of the hearings on S. 1361.

You will note that the data in the addendum were based primarily on 1971 statistics published by the Federal Communications Commission. Since the preparation of the addendum, the FCC has published comparable figures for 1972, which show that total television broadcasting revenues were 3.18 billion dollars with pre-tax profits of 552 million dollars. These profits represented an increase of 42% over 1971 and were cited by the broadcasting industry as a return to "more normal levels." Put in the simplest terms, these profits exceeded the total cable industry's revenues for 1972 by more than 110 million dollars. Needless to say, the broadcasting industry has never offered to reimburse the cable industry for that portion of its profits derived from the additional audiences made possible by CATV.

With kindest personal regards, I am

Very truly yours,

Enclosure.

DAVID H. FOSTER.

COMPARISON OF CATV INDUSTRY-COPYRIGHT ROYALTY PAYMENTS

A. By the industry, based on 1972 data.

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D. Royalty fees cannot be passed on to CATV subscribers because regulators have denied rate increases and subscribers will not pay additional amounts. Therefore, a high copyright fee schedule will yield no more revenues to copyright owners than a low fee schedule.

ADDENDUM

A. CATV increases coverage area of TV stations and improves picture quality, but the CATV operator does not alter programs or commercials and gets no revenue from advertising on the TV signal. His sole revenue is from subscribers monthly fee (average $5.20 per month).

1. Copyright owners of syndicated TV programs had 1971 sales of

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$179, 600, 000, 00 $53,900,000.00

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B.-TV stations charge advertisers based on TV coverage. The rate cards of 3 New York City newtork stations are

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C.-Copyright owner and television profits are larger than CATV gross revenue.

Note: Data in the addendum were obtained from the following sources: Item A-1, sales from syndicated programs, from "TV Broadcast Financial Data-1971," published by the Federal Communications Commission; data on the profitability of program syndication were obtained from surveys of several knowledgeable industry sources; Items A-2 and A-3 were developed from "TV Broadcast Financial Data-1971"; Item B data were obtained from the 1972-1973 edition of Television Factbook.

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and distinct way for the copyright owner to obtain a greater profit st 9, 1973. received from television stations for the broadcast use of his pro most instances is readily available to cable subscribers who cable connection, could receive the program directly from a cause cable television improves signal quality and audie are charged higher rates by the broadcaster and the br added income with the copyright owner. However, receive no compensation from the broadcaster for ey

5. Profitability of the three national television ne vs. cable television system revenues

In May of 1973, the FCC released data on the three national television networks and their 1 The FCC data shows that profits before fed (an increase of 47.2 percent over 1971).

Similar data on all other television static available from the FCC. However, 1971 August 1972, showed profits before feder television stations.

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ats of the Senvashington, D.C. Ad Hoc Committee July 31, you made at to ascertain what al purposes is" [the mittee is proposing]. this have on the ability s available? If it is seri› be ignored."

I read the opening paraal Media Producers Council NATIONAL AUDIO-VISUAL

mitee might have access to the to and respectfully request that e hearings.

fact that the educational media of their materials by the educaess here that the Ad Hoc Commiters, librarians, educational broadar exceeds statutory "fair use." We egal the limited reproduction prac ng as part of their day-to-day teache been delineated in our testimony. es for copying but rather for protecin fact. As you know from our testieremption, or, in lieu of this, a broadly eight rejection of the Williams & Wilkins imited, multiple copying of short, whole

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and essays for classroom purposes and Paie instructional technology as well as print worse than they now fare under the existe attached news release, publishers are farsay the source of materials is by no means

ut that we give visibility to the authors' works txets for them. One could even make the point should pay teachers for promoting their works in

wem ty to testify before you and the members of your

HAROLD E. WIGREN. mmittee (of Educational Organizations and Instigt Law Revision.

EDUCATIONAL MEDIA PRODUCERS COUNCIL,
Fairfax, Va., May 16, 1973.

**u* BHCATIONAL AUDIO-VISUAL MATERIALS RISES 10.8% IN 1973
2. la dreater use of audio-visual materials continued to character-
win 1972, according to a report to be released May 31 by the
My Producers Council. The EMPC Annual Survey and Analysis
Mba Producers' Sales shows total sales of non-textbook instruc-
Podis mise to $14.7 in 1972, an increase of 10.8% over 1971.
api, ovedneted by an independent market research firm under the
The Milventional Media Producers Council, presents a comprehensive
2o cotal Pdustry software volume and a wide range of statistical data
Dar 217 audiovisual producers. Represented in the survey are small film-
As the exincation market. It includes information gathered from
ANN 2s well as the largest educational publishers, stated EMPC Execu-

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