Thank you.

Mr. DANIELSON. Thank you, Mr. Glover.

We will now move on to Mr. Michael Kapp, president of Warner Special Products, Inc.

TESTIMONY OF MICHAEL KAPP, PRESIDENT, WARNER SPECIAL PRODUCTS, INC.

Mr. KAPP. Good morning, my name is Michael Kapp. I am president of Warner Special Products, Inc.

During much of my 20 years in the recording industry, I have been directly responsible for all details of music licensing and mechanical royalty rates.

I am an executive with one of the largest groups of recording companies in the industry today-Warner Bros. and Reprise Records, Atlantic and Atco Records, and Elektra and Asylum Records; all Warner Communications companies.

I have read and heard claims of the music publishers that:

1. Mechanical royalty rates are "negotiated" between publishers and record companies and the current 2-cent statutory rate is merely a "ceiling" for negotiation.

2. Therefore, an increase in the statutory rate to 3 cents would have only a modest effect on the industry, since the change would merely create "more room for bargaining."

I am incensed at how misleading these claims are and will try to show that since No. 1 is inaccurate, No. 2 is therefore false.

Our companies annually secure approximately 4,000 mechanical licenses for regular priced recordings. Of those, a close estimate is that 86 percent were granted at or even above the statutory rate. Of the remainder, over 13 percent are licensed on a per album basis, because the recording artist is also the composer and publisher. Within his artist contract, he and the recording company have agreed to a fixed number of cents per album, such as 20 cents, 22 cents, 24 cents, regardless of the number of songs used. Therefore, the actual rate per song-slightly above or below 2 cents-depends entirely on the total number of songs on that record.

From this you can see, virtually all of our regularly priced records today-specifically, 99.1 percent-are licensed at or very near the statutory rate.

It is true that licenses are issued at a royalty rate below 2 cents; however, these records fall routinely into regular categories universally accepted in the trade. Standardized rates below the 2-cent level are granted on recordings that are usually lower priced, such as: budget records, records sold via television, records sold through record clubs, records sold as premiums. All of us in the business know that license rates for these records will be below 2 cents, just as all of us know that rates for regular priced recordings will be essentially the statutory rate.

If the statutory rate goes up to 3 cents, then regular priced records will pay 3 cents; and standardized rates off the 3 cents will be for those lower priced records. Business will go on just as before, only at the higher rates. There will not be much bargaining over rates because there is not much now.

Thank you.

Mr. DANIELSON. Thank you, Mr. Kapp.

And the anchorman, the concluding witness on this side of the debate will be Mr. John Cohen, member of the board of directors of the National Association of Recording Merchandisers.

Could you proceed, Mr. Cohen?

[The prepared statement of John Cohen follows:]

STATEMENT OF JOHN COHEN, PRESIDENT, DISC RECORDS Co., AND MEMBER, BOARD OF DIRECTORS, NATIONAL ASSOCIATION OF RECORDING MERCHANDISERS, INC. My name is John Cohen. I am president of Disc Records Company which operates forty retail record stores in fourteen States. In addition, I am a member of the Board of Directors of the National Association of Recording Merchandisers, whose regular membership consists of hundreds of retailers and distributors of sound recordings throughout the United States.

Our segment of the recording industry has grave concern about any increase in the "mechanical royalty" rate. If the rate goes from 2 cents to 3 cents, as proposed, we are faced with the possibility that the recording companies will be unable to absorb the increase and that, therefore, the increase will be passed on through the chain of distribution. Speaking for our organization as typical retailers, in such an eventuality, I can assure you that we would be unable to absorb the increased wholesale price which would result. Our company operates on a gross margin of 40% and a net profit of only 3% after taxes. We would, therefore, be compelled to pass on the increased cost to the consumer.

So far in 1975, no doubt due to the depressed economy, the number of sound recordings sold by our stores has decreased as has the total dollar volume of our sales. I am confident that an increase of 30-35 cents per average LP recording, which would appear to be the added burden to the consumer if the royalty rate is increased to 3 cents and if passed on, would further decrease the number of recordings that we sell. Not only would that affect our business, but it would mean that the availability of sound recordings to the consuming public would decrease. Interestingly enough, this is not a matter which affects only the young people as 60% of the sound recordings that we sell are purchased by adults.

You have already heard extensive testimony with regard to the absence of the need for an increase in mechanical royalty payments. In our view, that case is persuasive and the additional cost which may thereby be imposed on purchasers of sound recordings would not be warranted. I need not remind this Subcommittee of the heavy burden being borne by the consumer in these inflationary times. Any increase in that burden should be imposed only where a clear and absolute need is shown. Judging from the information we have, an increased burden based on additional mechanical royalty payments is unjustified. Thank you for the opportunity to present this testimony.

TESTIMONY OF JOHN COHEN, MEMBER OF THE BOARD OF DIRECTORS, NATIONAL ASSOCIATION OF RECORDING MERCHANDISERS, INC.; PRESIDENT. DISC RECORDS CO., ACCOMPANIED BY CHARLES RUTTENBERG, COUNSEL

Mr. COHEN. My name is John Cohen. I am president of Disc Records Co. Accompanying me is Charles Ruttenberg, counsel for our association.

I operate 40 retail record stores across the country in 14 States. In addition, I am a member of the board of directors of the National Association of Recording Merchandisers, whose regular membership consists of hundreds of retailers and distributors of sound recordings throughout the United States.

Our segment of the recording industry has grave concern about any increase in the mechanical royalty rate. If the rate goes from 2 cents to 3 cents, as proposed, we are faced with the possibility that

the recording companies will be unable to absorb the increase and that, therefore, the increase will be passed on through the chain of distribution. Speaking for our organization as typical retailers, in such an eventuality, I can assure you that we would be unable to absorb the increased wholesale price which would result.

Our company operates on a gross margin of 40 percent and a net profit of only 3 percent after taxes. We would, therefore, be compelled to pass on the increased cost to the consumer.

So far in 1975, no doubt due to the depressed economy, the number of sound recordings sold by our stores has decreased as has the total dollar volume of our sales. I am confident that an increase of 30 to 35 cents per average LP recording, which would appear to be an added burden to the consumer if the royalty rate is increased to 3 cents and is passed on, would further decrease the number of recordings that we sell.

We also are afraid of being priced out of the youth market. Not only would that affect our business, but it would mean that the availability of sound recordings to the consuming public would decrease. Interestingly enough, this is not a matter which affects only the young people as 60 percent of the sound recordings that we sell are purchased by adults.

You have already heard extensive testimony with regard to the absence of the need for an increase in mechanical royalty payments. In our view, that case is persuasive and the additional cost which may be imposed on purchasers of sound recordings as a result of an increase in the royalty rate would not be warranted. I need not remind this subcommittee of the heavy burden already being borne by the consumer in these inflationary times.

Any increase in that burden should be imposed only where a clear and absolute need is shown. Judging from the information we have, an increased burden based on additional mechanical royalty payments is unjustified.

Thank you for the opportunity to present this testimony.

Mr. DANIELSON. Thank you, Mr. Cohen. That concludes the four witnesses who have been scheduled to testify concerning the opposition to the increase.

We will now open the hearings for questions to these four witnesses. Father Drinan, would you like to lead off?

Mr. DRINAN. Thank you very much. I thank you gentlemen for your appearance.

I wonder if we should discuss first whether we should go back to point zero and wipe out completely the statutory 2 cents that was set in 1909. As I read the history, it was set in order to prevent one piano roll company from obtaining a monopoly over others. And it certainly is anomalous, I do not have to tell you people, to have a 1975 regulated industry of this nature.

In the testimony that is to follow on the other side they suggest that political realities indicate that we simply have to keep the regulation in some way. If you people had your choice, would you deregulate the industry in this regard completely?

Mr. GORTIKOV. No, sir. I would maintain the license and a concomitant of that is a fixed royalty rate at whatever royalty rate is set.

Originally, there was a publisher monopoly as well as a piano roll company monopoly. I think that if the compulsory license were lifted, in other words, if it were completely deregulated, you open the way for putting too much clout in the hands of publishers or in the hands of record companies.

I think that the system has worked well. I think that the main argument, the defense of what is, is that it is working very well. The parties are doing well. I think that there is no reason to change them. And I think that this is the greatest argument for maintaining the compulsory license system: It is doing well.

Mr. DRINAN. Do I understand that in Europe and in other countries the recording artists do, in fact, get a percentage of the record price? Mr. GORTIKOv. Yes; they do.

Mr. DRINAN. Would you elaborate a bit on that?

Mr. GORTIKOV. In some European countries, a percentile of the price is paid and divided by the composers and publishers. Just because Europe does it, does not necessarily make it such a grand proposal to copy for ourselves.

Our system has worked well for us. And unfairness is implicit, I think, in a percentile mode. For example, on this LP here, if the royalties were paid on a percentile basis and if there were 8 publishers and composers on it the same amount of money would accrue to the 8 as would be paid if there were 16 publishers and composers. Some would be getting too much and some too little.

Also, if, back to the compulsory question, if there is a decontrol envisioned, then you might as well decontrol all the way and not have the life plus 50 protection.

Mr. DRINAN. Where is it really different from the book industry? We do not get rid of copyright there and the person who writes a book has his publisher negotiate with the paperback company and his publisher deals with serializations or excerpts from the books without any statutory safeguards.

Mr. GORTIKOV. A book is a definitive work. It is an end product. This piece of music is not an end product. This is a piece of music, which has a price tag, incidentally, of $1.50 on it. It comes alive when a performer does something with it. A book is a definitive work, start to finish, in itself. It declares itself complete.

The imposition of a performance and the creative effort done by a recording company make a musical work come alive and become of commercial value. It also can result in multiple uses and multiple sources of income. It is altogether different from books.

Books may have a multiple use, such as a motion picture or a paperback. But the multiple uses of this song are almost infinite, whereas, for a book they are not.

Mr. DRINAN. Is there any sentiment, either among the composers or the publishers, for deregulation?

Mr. GORTIKOV. Certainly not among record companies and I think composers and publishers should speak for themselves.

Mr. DRINAN. I was hoping that we could get the Federal Government out of something. But we are not getting any votes here at all.

Well, I have listened to your arguments and I will listen to the other side. And I am afraid my 5 minutes are up. So, I yield back whatever time there is. And I thank you gentlemen for appearing.

Mr. DANIELSON. Mr. Wiggins of California.

Mr. WIGGINS. Mr. Chairman, I am not sure my voice is going to hold out for questions, so I will just listen. I think the issues are pretty easily stated, but difficult to resolve.

I yield back my time.

Mr. DANIELSON. Mr. Pattison.

Mr. PATTISON. Father Drinan asked all my questions.

I am interested in this notion that you take a loss on certain records, on 87 percent or 77 percent or whatever happens to be. You do not do that intentionally do you?

Dr. GLOVER. No, sir.

Mr. GORTIKOV. No; the loss is certainly not done intentionally. Every genius in the record industry thinks he has a winner when he records it. But the consumer comes to a different judgment in most cases.

Mr. PATTISON. Well, the notion that follows that is that if you were to be paying a higher price for the mechanical royalty, that this would have an effect on certain kinds of records that you produce. In other words, that you would produce less innovative records, less classical records, less records that maybe do not have as good a chance of succeeding. And I am wondering if in fact you intentionally pick out a record that you think is not going to succeed and produce it because you think that you are doing a young artist a favor or a classical composer a favor, or it is good for the country or something like that. In other words, is that your motivation?

Mr. GORTIKOV. The rationale is that if there is a decline in profit or profit potential-and that is our greatest fear out of this-that decline will make that record company less bullish in its recording practices. What we fear even more, if all this cost is passed on to the consumer, is that there will be a real decline in consumer purchasing.

Now, although a record company approaches every recording session optimistically, it does have degrees of optimism and faith in the various new artists or categories, such as jazz or the classics, where there is a very marginal chance for profit.

So, what I am talking about is an attitudinal result that will be more marginal than ever, if there is a subsequent decline in income. potential.

Mr. PATTISON. In other words, you are saying that your selection process of selecting the works that you are going to form will differ in some way?

Mr. GORTIKOV. Yes.

Mr. PATTISON. But, is that not inconsistent with the notion that you really pick out a record, a performance to put on wax or tape that you intend, in each and every one of those you hope, to make a profit or you would not-a judgment is made that this is going to sell more copies and you are going to make something out of it?

Mr. GORTIKOV. I cannot give a fixed answer. If a record company has five potential new artists to record, it is possible that everybody in that company will be wildly enthusiastic about one of them, and there would be no question about their willingness to record that, and the predictions for success. And they may be right.

Down the scale, for the fifth one on that list, there may be only one producer who has genuine faith in his potential. And that may be the one that is dropped off.