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the House Committee on Patents that "we want you to put us on the same basis and equality as every other creator of literary work.” But these pleas-even more fitting today—fell on deaf ears. The 2-cent rate and the compulsory licensing provision, inserted into the 1909 act for fear of a monopoly, today has no relevance. In the 1961 Report of the Register of Copyrights this point is particularly well made:
"In the situation prevailing in 1909, the public interest was thought to require the compulsory license to forestall the danger of a monopoly in musical recordings. The compulsory license is no longer needed for that purpose, and we see no other public interest that now requires its retention."
Over the years, the Register of Copyrights has been concerned with this subject. As early as 1928 the then Register, Mr. Thorvald Solberg, pleaded with the Congress to “take out the excrescence of the statutory royalty" from the copyright law.
The 2-cent fee in today's economy is inequitable, archaic, unrealistic, and uneconomic. One can even call it incompatible with our basic economic concepts in that is substitutes Government fiat for what should be private enterprise bargain ing and decision making and it does so in a sector which certainly does not fall in the national security or public utility or international diplomacy categories.
These provisions should be eliminated from the law. It can well be asked whether this is not rank discrimination against the creative part of an industry that today is of importance to our culture and to our economy. Why, one can ask again, has this particular industry been so distinctively singled out for such unique treatment?
The statutory price fixing clearly prevents the law of supply and demand from operating. Stated another way, the unique legislated fee effectively prerents the free market from setting the price for music royalties. How fair can such a system be to the composer and to the publisher? Or to the competitors in the record industry? As the Register of Copyrights argued in his 1961 report, “The compulsory license provisions are rather severe in their effect upon the copyright owner."
Also, the 2-cent statutory fee must be reconsidered because of the fact that it was enacted into law 56 years ago. There is no common set of elements which unite these periods. What might have been a fair price in 1909 certainly cannot be said to be a fair price or proper undertaking in 1965 or next year.
Although I believe that both the statutory fee and compulsory licensing should go, as an economist, I also believe that a sound and conclusive argument can be made to eliminate the statutory fee, with or without eliminating the compulsory license provision. This was the position taken by the composers and publishers (and, I might stress, by the Register of Copyrights) many times since the 1909 statute was enacted. To expedite action, my clients came up with a reasonable and realistic compromise. This is to raise the statutory rate to 3 cents, or 1 cent per minute of playing time or fraction thereof, whichever is higher. Although preferring complete deletion, the Register of Copyrights adopted the suggested compromise.
But the recording companies have refused to accept even this compromise. They stick rigidly to the 2-cent ceiling and plead poverty.
Let us turn now to an examination of the consequences should the statutory price for mechanical licensing be increased from 2 to 3 cents. For convenience, I shall concentrate my analysis under three headings :
I. The increase and record prices.
III. The increase and equity. Let me say frankly that an increase in the statutory royalty for mechanical reproduction could conceivably result in increased record prices for the consumer; but by no means necessarily, or even probably. The prices of cars may or may not be increased when steel prices rise or wage rates increase, depending on a great many factors. There are more instances of the absorption of rising unit prices for a given input through greater efficiencies, than there are instances of passing along higher wages or higher prices of other inputs. When one of their costs, the mechanical royalty, is increased, the record companies may well be able to absorb these costs. The answers cannot be ascertained without far more detailed data than are available. Some comments on record company prosperity will be presented later in this submission.
Even if a 3-cent statutory fet for mechanical reproduction were universally applicable and even if the rise had to be passed on to the consumer, in the competitive record field I would expect any increase in retail prices to be minor. The extra cent in the ceiling, if fully acquired by the music publishers, might add 2 or 3 percent to total costs of the record companies. More likely, the increase would be less and could likely be largely absorbed.
Whether any price rise in records in turn would restrict the variety of musical offerings or restrict opportunities for new composers is highly conjectural, and there is no basis for assuming it would do so. On the contrary, a 3-cent fee would provide an added incentive for new composers to become more active. While higher financial rewards would be expected to induce more compositions, it would be foolhardy to seek to quantify qualitative changes.
Let us look at performance royalties. These are not governed by a statutory fee and we certainly see no signs of competitive impairment. The royalties vary considerably and neither the music industry nor the public have suffered. More likely all have benefited from the competition.
The economic fact is that mechanical royalties are only one element of cost in the total operation of record production. In the competitive system, if one element of costs rises, any company will try to reduce other costs. What exists in the record industry is the traditional free or competitive pricing mechanism for singers, bands, instrumentalists, raw materials used in record production and technical devices—for everything except the mechanical royalty. All of these costs compete with each other in the cost-price struggle, except for the royalties.
Neither the elimination of the statutory fee nor an increase in the royalty payment could really lead to a significant impairment of competition in the record industry. In fields analogous to the music publishing industry, such as book publishing, the complete absence of a statutory fee has led to royalties far higher than the 2-cent fee; yet these have surely not produced a noticeable concentration in that industry. In fact, competition probably has been sharpened. Book publishers seem to become more and more vigorous in seeking out and encouraging competent authors and in offering attractive royalty arrangements to encourage authors. This kind of competition is healthy economics and also benefits the arts and sciences.
It is a fact that the price of records has decreased greatly since 1909. But that is no basis for the conclusion that the mechanical fee should remain the same. The intellectual output of composers and the entrepreneurial services and costs of music publishers have not become cheaper. On the contrary, their costs have risen over the years since the 2-cent level was fixed by law for mechanical royalties. Living costs of composers have gone up. Wage rates have risen and prices of supplies, travel, and of other services have increased for publishers. The productivity in the record industry has certainly increased greatly. The industry today is more profitable than it ever was. A few quotations are relevant.
The report of the 1965 annual meeting of RCA shareholders states "In the past 5 years, the ratio of RCA profits to sales doubled-from 2.3 percent in 1960 to 4.6 percent in 1964. In terms of dollars alone, profits increased by 135 percent during this 5-year period.”
This same report also says "The RCA Victor Record Division, another longtime member of the RCA family, is currently enjoying its greatest consumer acceptance in history. First-quarter sales were at an all-time high, and earnings for the first quarter were substantially greater than last year. This trend is expected to continue throughout the remainder of 1965."
A July 1965 news release from the Record Industry Association of America says "Manufacturers' sales of phonograph records in 1964 set a new all-time high * * * an increase of 9.2 percent over the industry's dollar volume in 1963 * * * The 1964 annual report of ABC-Paramount Records states that the company,
one of the leading companies in its field, had another good year with sales somewhat above the 1963 level."
The 1964 annual report of Capitol Records discusses “* * * the encouraging increase in the profits of Capitol Records, Inc."
The 1964 annual report of Columbia Records notes that “1964 was the most successful year in the history of Columbia Records" and also says "With its unmatched artistic and physical resources, this division anticipates another excellent year in 1965.".
* * *.”
The 1964 annual report for Disneyland states “Our Phonographic Record Division continues to grow in volume and profit."
The 1964 annual report of MGM Records says “Record operations were profitable last year
The 1964 annual report for Warner Bros. includes the following two quotations:
“Warner Bros. Records, Inc., is continuing to advance in the recording field and is retaining its present position of major importance in the record business.
“Optimistic business conditions continue to prevail for the entire record industry, but Warner Bros. is accelerating its rate of growth at a much faster pace than many of its competitors.”
These are hardly illustrative of a poor industry which can plead poverty as a reason for asking that an antiquated and inequitable statutory fee be retained at 2 cents per composition after more than a half century of no change.
We come to the matter of equity. It is meaningless to compare net profits of the record companies with gross payments to music publishers for mechanical royalties as measures of rewards or relative compensation. This kind of statistical exercise is worse than trying to add apples and peanuts. It is more like trying to add oranges and frogs' legs. Net profits and gross payments are two different things.
If one were to compare the net profits after taxes of the music publishing industry to the gross revenues of the record industry, the former would be an infinitesimal fraction of the latter and would appear to reflect abject poverty for the former and great prosperity for the latter. But, this would be not only meaningless, but deceptive.
Gross payments for mechanical royalties do represent a cost to record companies. All other conditions remaining the same, which almost never is the case, a rise in royalty payments would bring a commensurate fall in profits before taxes and a smaller drop in profits after taxes. But, as said earlier, there is an endless combination of circumstances which enters into and affects cost-price relationships. Very often a cost for an input will rise and there will be no increase in price and no cut in profits, or even a rise in profits. In any case there are many elements to be taken into account between gross revenues and net profits. This applies to musical publishers as well as to record companies. It is irresponsible to even imply that gross receipts of music publishers are anywhere near the same as net profits.
Let us look at the functions of a music publisher. Probably his most important contribution to the music industry is his ability to discover, recognize, and encourage new and creative talent. To do this requires professional and intellectual qualifications of a high order.
Just as the record companies have many production, distribution, and administrative costs, so music publishers encounter many expenditures in providing essential services to the music industry. A listing of these services, each of which is a business cost, is revealing. The common first link in the chain from the creative songwriting team to the record maker is a retainer paid by the music publisher as a kind of bonus to many of the songwriting teams. The more successful the writing team, the higher is the retainer. It is not unusual to pay up to $20,000 as a retainer to a songwriting team.
Also paid to the team by the publisher is an advance against (hopefully) future royalties. The annual writeoff of royalty advances is a heavy recurring cost to music publishers, said to run into many hundreds of thousands of dollars. The publisher very often pays for the office overhead of the writing team as they do their work-office space, telephone, secretarial service, heat, light, etc.
Let us suppose that a songwriting team comes up with a tune that the highly paid professional music staff on the payroll of the publisher believes might sell. The next sizable cost to the music publisher is the making of a demonstration record (demo). At one time, the promotion of a composition to a record company could be done with only a singer and a piano accompaniment. Today, however, the music publisher must make the demonstration record and this involves deciding on the arrangement best suited to the song and paying top artists to make the demo recording. Once the exclusive task of the record manufacturer, today the artists and repertory function (A & R) is frequently the responsibility of the music publisher. Good artists command a percentage of the music publisher's share of future royalties—as much as 50 percent.
Once the demo is out, it is the responsibility of the music publisher to find a recording company that will manufacture the record. This again calls for professional sales talent expensive to the publisher.
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Our song is now recorded, but the contribution of the music publisher is far from finished. He must expose the record to radio stations and other potential users. To do this, he employs expensive professional music salesmen to call on diskjockeys throughout the country. These salesmen also expose the record to motion-picture producers. As a rule, the publisher will purchase records for promotional mailings, domestically and internationally.
Sometimes the publisher shares advertising costs with the record company. He also advertises his songs independently.
From a half to two-thirds of the Harry Fox Office fee of 342 percent of sales is borne by the publisher. Along with the composers and writers, the publisher pays the costs of ASCAP and BMI.
Many legal and auditing fees are paid by the music publisher, which fees are often sizable because of the non-reporting or under-reporting of the numbers of records sold by some of the less reputable and less permanent record companies. And remember, gentlemen, that all these costs are incurred by the publisher after the payment of half and often more than half of gross royalties to the songwriting team.
Thus the publishing firms serve uniquely as generators of professional writing and composing talent. But they are far more than that. They serve as a kind of funnel that channels the output of talented and creative people into ultimate production.
The music publisher has been aptly described as the business partner in a marriage. He is a wet nurse not only to the writing team, but also to performing artists. It is he who nurses a musical idea through the successive stages of "manufacturing" and selling. He is an essential link between the music orig. inators and the record companies. Just as the music publisher needs the record manufacturer in today's music industry, so the record company needs the publisher. Both perform essential functions in bringing music to the consumer.
I am afraid that the tale of woe to the effect that the poor record companies are barely holding their collective heads above water just does not stand up under examination. As the recent Library of Congress study puts it, “* the record industry has been a growing industry * * * there has been a remarkable increase in record sales and attractive profit possibilities."
Over the long pull since the 1909 bill became law, the record manufacturing business has grown and prospered. It weathered serious storms in the twenties and in the thirties. It still is growing more rapidly than either our population or the gross national product. It has been, and is today, a competitive growth industry. The record companies have learned to live and prosper with radio, the movies, and television. With such a background of adaptability, I have no doubt that they could take a 1-cent increase in the fee for mechanical royalties in stride. But a 1-cent increase in the statutory fee would not bring an automatic 1-cent increase in all mechanical royalties. It would be an increase in the ceiling and the actual rise in payments would likely be less and would be more likely to be absorbable by the record companies.
In terms of bargaining power, the music publishing side of the industry has remained pretty much on a plateau. Within the straitjacket of statutory price fixing and compulsory licensing, the music publishing industry has become a weaker bargainer, Artists as well as recording companies have been setting up their own music publishing companies in line with merger tendencies on the American business scene. Freedom of entry is total in this business, as it should be, but the royalty arrangement should also afford some greater degree and wider range of bargaining.
As you may already have gathered, I hold no particular brief for the exact amount of 3 cents as proposed in the compromise. As an economist, I would much rather see the legal price fixing erased altogether. Those who have lived with this problem for years and decades are convinced the compulsory licensing will not be discarded, largely because of record company opposition. They say that if the compulsory licensing feature persists then the statutory fee also will persist and that therefore there is little point in seeking removal of these arbitrary rigidities. I have no sound basis for denying their views, but I still feel full freedom would be preferable. If full freedom is not feasible then surely greater freedom or less restraint is a minimum that onght to be granted by the Congress.
The reason that I favor any increase, even one as little as 1 cent, is that this will increase the flexibility within which the publishers and record companies can bargain. The 2-cent rate is a ceiling. Many licenses are negotiated at less than 2 cents; none that I know of has ever been above that figure.
In his 1965 report, the Register of Copyrights put this point as follows:
"As we see it, the statutory rate should be at the high end of a range within which the parties can negotiate, now and in the future, for actual payment of a rate that reflects market values at that time.”
If the rate is changed to 3 cents the mechanical fee for all records will not automatically rise to that rate. What a 3-cent ceiling does is to increase the size of the arena in which the forces of the free market will have more of a chance to prevail. Within this arena-admittedly still small-the bargaining between the copyright owners and the mechanical records can become more meaningful in economic terms.
To put my point another way, increasing the fee to 3 cents will open the door further to freer competition. Both sides of the industry will have more freedom for bargaining. The true market value of music copyrights will have a greater chance of being established than is possible today.
In summary, on grounds of equity and economics the 2-cent statutory fee for mechanical royalties should be removed : first, because of price and cost inflation since 1909; secondly, because there is no longer any threat of a monopoly: thirdly, because the structure of the music industry of today bears little or no relation to its structure in 1909; fourthly, because it severely limits the area of bargaining within which all the market forces can have some meaningful degree of influence in determining royalty arrangements; and finally on grounds of equity,
If the statutory fee is retained as proposed in H.R. 4347, it should be increased to permit free market forces more opportunity to determine the value of copyrights. Far from disrupting the music industry, a 3-cent statutory fee would increase the area of permissible competition and would go a long way toward reducing the inequities of a fixed fee legislated back in 1909.
Mr. KASTENMEIER. The Chair would like to make this explanation. The subcommittee has been in executive meeting since 9:30. For this reason the committee is a little tardy in convening this morning.
Mr. NATHAN. Mr. Chairman, members of the committe, when I was asked by the Music Publishers Protective Association to consider an analysis of the economics involved in this matter of statutory fee, I must admit, not having known about the issue, being amazed by this subject matter. I was amazed to learn that there was a segment of our society and our economy in which a fixed fee had been set as long ago as 1909 and that it had been unchanged during that period.
My first discussion with my staff associates led to the same reaction and actually several economists said they did not believe this was the fact. We know of no other situation where by statute a fixed fee is set and held for such a period of time without some provision for occasional reconsideration on the basis of changing circumstances.
We then looked at the genesis of this provision and we found in looking through the hearings records and various reports on the initial undertaking back in 1909 and to prior considerations, that this fixed statutory fee and the compulsory licensing were introduced primarily in the face of a fear of a monopolistic situation and in an environment where the concern for monopoly was almost overwhelming.
It is this environment that ought to be taken into consideration today in looking at this problem. In 1909 there was no talk about the business cycle. In 1909 there was no concern about rates of economic growth. In 1909 there was no concern about comparative growth among countries.
In 1909 I believe there was no confidence in our society that poverty could be attacked as a precise problem and overcome. In 1909 technological changes were quite marked and remarkable but not comparable to what has happened in the interim and is happening today.