probably were, is immaterial to the calculation of the 59%. The calculation If we had not taken account of the current practice of paying 1/2¢ per minute over five minutes, the percentage increase shown would be greater than 59%. As it is, since as we understand this playing time practice is not universal, probably we are slightly understating the percentage increase of 59%. As to the fact that singles were excluded from the sample, two points are in order. First, their exclusion tends, if anything, to understate what the calculated percentage increase (59%) would be were they to be included in the sample. This is so because there is only one tune per side on a single; on an LP, a longer band (incurring the playing time provision of H.R. 2223) subtracts from the playing time available for other bands on the same side. Second, LP's taken by themselves constitute a large and significant portion of total unit sales of recordings. We do not know precisely what portion, but we do know that LP's accounted for about 62% of dollar sales in 1974. Were tapes to have been included in the sample, the results probably would have been little different. Tunes released are essentially the same as those on records (LP's in the main, we understand). And, far fewer licenses on tape are at less than 24, we are told; the mechanical royalty rate, tune by tune, otherwise is very similar to, or exactly the same as, the rate for LP's. Note that 1973 data were employed. The results could be somewhat different if 1974 data were examined. Exhibit 7 - FINANCIAL IMPACTS OF PROPOSED INCREASED MECHANICAL This exhibit applies the 59% figure developed in Exhibit 6 to total mechanical royalties paid during the four-year period, 1971-1974. Totals 159 arrived at in the exhibit are self-explanatory and are discussed in the text. The emphasis in this exhibit is on the effect of a 59% increase in mechanical royalty payments on U.S. recording company pre-tax profits from all sources. Exhibit 8 MECHANICAL ROYALTIES COMPARED TO RECORDING INDUSTRY This exhibit shows in similar fashion the effect of the proposed 3¢ rate on pre-tax domestic recording industry profits (line 11, Exhibit 5-C, p. 49). Mechanical royalties are paid on the basis of recordings made and sold in the U.S. As the exhibit illustrates, the potential impact of a higher rate on domestic profits is disastrous. 160 This exhibit is self-explanatory. However, it is important to recognize that the prices and dollar margins presented are only illustrations, based on a $6.98 list price record. The average price paid by consumers on all records is much less than the average $5.77 they pay for a $6.98 record. The exhibit also shows the more moderate impact on the consumer price a mechanical rate increase of 1/2¢ would have, as compared to the proposed 1¢ increase. It must be recognized that a cost increase at the producer level cannot be passed along without increases along the way. The increase in cost to middlemen that would result from an increase in the mechanical royalty being passed on by recording companies would lead to still further increases by middlemen in order that they be able to maintain their margins. Such further increases would be justified by the additional costs they would incur, such as for insurance, inventories, financing, bad debts, and the like. 57-786 76 pt. 3 12 Exhibit 10 COST TO CONSUMERS OF A 3¢ STATUTORY LICENSE RATE (RIAA estimates of This exhibit, with footnotes, is self-explanatory. retail sales of recordings, at list prices, are made annually.) Statistics for this exhibit are derived from the principal financial survey, as explained in the footnotes to the exhibit. Exhibit 12 TUNES AND PLAYING TIME OF TOP 150 The exhibit, with footnotes, is self-explanatory. 161 Date in this exhibit are based on an analysis of results that were an integral part of the 1973 financial survey. (See Technical Appendix, on Exhibit 5). The distribution of sales by volume is from Form # (5) of the questionnaire. The breakeven information is from Form (4), and is summarized on the following page: Exhibit 3, cont. BREAKEVEN ANALYSIS 1972 (Figures are in $ except for item 5, which is in units) 0.225 0.083 0.233 0.110 3. Variable Manufacturing and Shipping Costs 4. Average Investment in Fixed Overhead per Release 5. Required Number of Records which have to be Sold $1.830 380 45,678 60,584 22, 131 24, 092 34, 371 *These costs are charged to the records which are manufactured before the tapes. Tapes are produced only when No explanation was given by the reporting company of why a negative number was given for "fixed manufacturing and recording costs" for classical tapes or no figure, was given for "fixed depreciation costs" for such tapes. Source: CRI's 1973 survey of recording companies. Exhibit 14 RECORD RETURNS, 1969-1974 The industry has long had a practice of allowing free returns of unsold merchandise to manufacturers. This exhibit summarized the dollar magnitude of this activity. The exhibit shows clearly that the trend toward reduced concentration which began at the end of World War II has continued since the 1965 hearings. Concentration in the recording industry is declining. 163 The final six exhibits provide specific, new information on what has come to be known as the "ceiling vs. rate" issue. To obtain the data contained in these exhibits, CRI undertook a comprehensive study of all licenses issued in 1974 by two companies and for which data were available at the time of the study. The nature of the study is spelled out in detail in pp. 82-118 of the main report. As an aid to understanding this section of the report, the following guide to the exhibits might prove useful: (1) tabular Basically, the exhibits fall into two main groups - was a single, a regular price LP, a budget-label release, or a |