and Eubie Blake, and on behalf of the music publishers Mr. Robert Nathan and Mr. Ralph Peer. These gentlemen were identified on the fact sheet that was previously submitted to you, along with our comprehensive statement which we have submitted for the record.

Mr. DANIELSON. Mr. Feist, so that all of us can make sure that we know what we are following, it is my understanding that you and your associates have supplied this statement, which I am holding up. Mr. FEIST. That is correct.

Mr. DANIELSON. Now, what you are really doing is extracting some of the pearls of this statement?

Mr. FEIST. The individual witnesses will comment on the statement, itself.

Let me say, by way of introduction, as Mr. Drinan has indicated, the Federal Government should not be telling us what to request when we negotiate with a record company. We are not selling oil; we are selling creative genius. But if it is too late to unscramble these eggs, and the Government must fix some ceiling, then please set it high enough to allow some room for bargaining. The higher the ceiling, the more bargaining there can be.

Most songs are not licensed at the ceiling level, and will not be under the new ceiling. Three times over the past ten years, I have sat in congressional hearings and heard the record companies make the same predictions of doom that they have made today. All of the statistics that you have just heard expect you to overlook two facts, first, that the royalty in the statute is a ceiling, and increasing that ceiling only increases the range for bargaining, and not the rate actually paid for every song. Second, at your hearings 10 years ago, the record industry predicted that a 1-cent increase in the ceiling would push them to increase the price for an album by 20 cents. Since then, without any change in the laws, they have increased the price of each album by $3 or more, without any of their dire predictions coming true. Nor has any of the 112 percent increase in the price the public pays per recorded song gone to the creators of that song, although where would the $2 billion business be without us all?

Ten years ago, this subcommittee approved the 21⁄2 ceiling, 211⁄2 cents. A song that sold 25,000 recordings could not even earn $700 for its creator; nevertheless, all we ask today is a ceiling with the same purchasing power as 21 would have provided 10 years ago. That means at least 4 cents. Even a 4-cent ceiling would give us less real earning power, and a smaller share of list prices than it gave us 10 years ago. But at least a 4-cent ceiling would give the creators of American music some hope of negotiating a fair return.

Mr. Nathan is our next witness.

Mr. DANIELSON. This is Robert R. Nathan, of Robert R. Nathan Associates, Inc., consultant economist.

TESTIMONY OF ROBERT R. NATHAN, ECONOMIST AND ATTORNEY; PRESIDENT, ROBERT R. NATHAN ASSOCIATES; FORMER VICE PRESIDENT, AMERICAN STATISTICAL ASSOCIATION; FORMER VICE PRESIDENT, NATIONAL ECONOMISTS CLUB; MEMBER, TIME MAGAZINE BOARD OF ECONOMISTS; CHAIRMAN, PLANNING COMMITTEE, WAR PRODUCTION BOARD; DEPUTY DIRECTOR, OFFICE OF WAR MOBILIZATION AND RECONVERSION

Mr. NATHAN. Thank you, sir.

Mr. Chairman, and members of the committee. I have had the pleasure of working with the music publishers on this issue and others for a number of years, and I did have the opportunity to appear here when this issue was first presented.

And let me say very strongly, as an economist, that in my judg ment, the Government determination of a ceiling rate has no place in our general economic environment. I agree wholeheartedly with one statement in Mr. Gortikov's presentation this morning: there is no monopoly on music, and plenty of music is available to the public. Thus the setting of a ceiling in 1909, 66 years ago, provides no rational basis and no sound reason for the continuation of that ceiling at this time or, as far as I can see, for the foreseeable future.

From the economic point of view, given the tens of thousands of composers, and perhaps hundreds of thousands of would-be composers in this country, and given the large number of record companies although the record industry is highly concentrated, relative to music publishing and many other industries-there is no monopoly, and no other understandable or justifiable reason for continuing this practice. We ought to ask ourselves and I think Congressman Pattison did-why the ceiling, why the provision?

Mr. PATTISON. Mr. Drinan asked that.

Mr. NATHAN. There is not a national security reason, nor do I see any other reason. Now, if this committee, and if the Senate and the Congress jointly were to decide to continue this provision, which I find not justified from an economic point of view, then it seems to me the next best thing-not the best, but the next best thing-would be to open up the opportunity for increased ranges of bargaining. That is primarily why we recommend very strongly that if continuation of the ceiling rate is called for, as provided in legislation, then the range for bargaining ought to be increased, very substantially. That is a fundamental position which I would like to emphasize strongly.

The second issue that I would like to discuss rather briefly-and I have a chart to demonstrate it in a moment-is the nature of this ceiling rate. Ten years ago, my associates and I undertook an extensive survey of a large number of licenses handled through the Harry Fox Agency, which accounts for some two-thirds of the total funds that are paid as mechanical rovalties, and we found then a very substantial range of arrangements between the publishers and the record companies.

Now, I do not care how you sweep this thing under the rug, there is no question there are very substantial ranges, and even in the presentation of Dr. Glover this morning, if you look, you will find that approximately half of the arrangements are below the 2 cents ceiling. One can call these stereotyped or categorize them in some other way, but basically, there are very substantial portions of the total amount of royalties that are paid, the total number of the licenses that are negotiated, and the recordings or selections sold, that are set at substantially below 2 cents. There is bargaining.

In 1965, when we undertook this study, we found that the average rovalty rate was 1.51 cents, and now it is 1.62 cents, so the average is still well below 2 cents. There is bargaining. Every publisher to whom I have ever talked will tell you that bargaining goes on, and they can speak for themselves.

The main issue that is presented here, with respect to a variation from the 22-cent royalty ceiling which the Congress enacted 8 years ago now, concerns the matter of inflation that has taken place since then. I would emphasize again that I am talking here about a rate, a royalty rate, not aggregate numbers. If one tried to compare, say the price index with aggregate numbers, one finds that in any growing or expanding area, the aggregate numbers will go far beyond the price index. It is a meaningless comparison. For instance, if one went back to 1909, and studied the automobile industry, I would be surprised if automobile sales today are not a thousand, or many thousand times over what they were in 1909. To say that the cost of living has gone up sixfold, whereas automobile sales have increased a thousandfold, means that the automobile prices ought to be where they were in 1909, is, I think, a meaningless comparison. Here, we are talking about a rate, which is a price, which is a unit cost, and the royalty rate, I think has to be looked upon in that perspective.

Now, if I may turn just briefly to the charts. The first chart I haveand by the way, I am only showing here only some of the charts from the numbers that are included in this presentation for you. But here we see a chart, the Consumer Price Index from 1965 through July 1975. You see a phenomenon which is just as disturbing, I am sure, to every member of this committee as it is to most citizens in the United States: we have had a very serious inflation in this country. Prices have risen very substantially, to an unprecedented degree in the entire peacetime history of this country.

Since 1965, when testimony was presented on this issue before this committee, we have had an increase, of some 72 percent in consumer prices. I also did a projection for January 1976 on, I think, the unrealistic expectation when I did this that the bill might be enacted and implemented by then. We would expect about a 78-percent price increase from 1965 to January 1976. Or if we looked at the series on any other basis, we find a very substantial amount of inflation.

Now, if I may turn to another chart. Here we find Chart No. 4. It is entitled Purchasing Power in July 1975, and in January 1976, of the 212-cents royalty ceiling rate, either in 1965 dollars, when the testimony was presented before this committee in 1965 prices, and in 1967 dollars, when the 21/2-cents royalty rate was enacted. Let's look at just 1967; we find that in July of 1975, 21⁄2 cents enacted in 1967 will now buy only 1.54 cents of the same goods and services as at that time. In other words, the buying power of that 22 cents, in those prices, has shrunk to about 112 cents. Roughly, the same thing would be true next January. So we see what has happened in terms of inflation.

Now, the next chart is chart No. 3. I reversed these. This shows, gentlemen, the key element that we are proposing here, namely that if the 22 cents in 1967 were considered an adequate ceiling rate of payment in terms of its command over goods and services, then that 211⁄2 cents is hopelessly inadequate today, because of rising prices.

If we looked again at only 1967, if today this Congress said we want to preserve that 212 cents we enacted in 1967, and wanted to have the same buying power, in July 1975, the ceiling would need to be 4.1 cents per selection. Next January, it would need to be 4.2 cents. So here we see the ravages of inflation in terms of the impact. This is why we are saying, in a meaningful sense, that a 4-cent-plus ceiling royalty is needed for reasonable terms.

Now, if I may move on to the next chart, chart No. 6, very briefly, which chart shows the percentage of selections and total payments and licenses which fall below the 2 cents ceiling. Here, I would like to emphasize that we did not include a superficial sample. We took the top three record companies which accounted for more than 40 percent of the payments through the Harry Fox Agency which, I said, in turn account for some two-thirds of the total mechanical royalty payments. We included in our sample something in the nature of 145 million selections, namely the actual sale of musical compositions. If there happen to be 10 selections on every album, and this was nothing but albums in the sample, then we would have included in our sample a total of 14.5 million sold albums.

We show here that the percentage of selections in the fourth quarter of 1974 below 2 cents was 54 percent. That means that the number at 2 cents, and there are, as Dr. Glover pointed out correctly, a few over 2 cents because of payments on a time basis rather than on a cent basis, that 46 percent were at 2 cents or above and 54 percent below 2 cents. And if you look at the total royalty payments, 40.2 percent are under the 2-cent level. That is so because there is a weighting factor, all those at 2 cents would be weighted more in the money column than they would in the number column.

Then we have the number of licenses: 67.6 percent are under 2 cents. And gentleman, we are very happy to give you every detail of that sample to present to your staff or anyone else you would like: the tabulations, the computations, the results in greatest details. We feel that the establishment of this as a ceiling is very clear and definitive. Now this next chart, chart No. 5, shows the breakdown of selections, by rate. Here you see that 46 percent I quoted before: 3.4 percent of selections were over 2 cents and 42.6 percent were at 2 cents. And that adds up to 46 percent. Then we find that between 1.5 cents and 2 cents we have 2 percent; at 1.5 cents we have 29 percent; between 1 and 1.5 cents we have 1.7 percent; at 1 cent we have 10.8 percent; and under 1 cent we have 10.4 percent. If this can be characterized as nice and simple and orderly variations with everything except standard variations at 2 cents, then I must say I do not know how to read charts or numbers, and I am not willing to concede that. It is quite clear that what we have here is a ceiling and not a rate. Now if I may move on to the next chart, chart 8, we also took a careful look at what has happened to the prices of records. We took the 200 top albums in Billboard, except in 1965 with 150 top albums, and we looked at what the most prevalent price is, what economists and statisticians call the mode. We found that $3.98 was the most prevalent price in 1965, $4.79 in 1967, $5.98 in 1974, and the latest figure this year is $6.98. This gives us a pretty good idea of what has happened in terms of list prices.

I must say we have looked for and have no evidence whatsoever that would lead us to conclude that discounts as a percentage of the list price are any greater today than they were 10 years ago. In my judgment, given the nature of the inflationary process, I would expect that the discounts from the list prices would be lower today than they were then. And therefore if we did have the actual discounted prices, I think, we would find an even larger price increase than we find in the list prices.

Now, we have just one other chart, chart 12; this shows the royalties per album at the 2-cent ceiling, as a percentage of the most prevalent album price. For instance, in 1965 you will recall that the prevailing price, the most predominant price, was $3.98, and at that time even if we use the ceiling royalty rate of 2 cents, that would be 24 cents with 12 songs per album. And 24 cents would be 6 percent of $3.98.

Now if we move to the present time, we find the most prevalent album price is $6.98, and we also find the most prevalent number of compositions per album is down to 10. Therefore if we take the $6.98 and divide it by 10 compositions, the average price per composition is roughtly 70 cents; the royalty rate of 2 cents comes to 2.9 percent of 70 cents.

This shows royalties at the ceiling rate as a percentage of the most prevalent album price dropped by more than one-half.

Now, I want to try to summarize what this particular set of charts means to us. First of all, Mr. Chairman and members of the committee, the repetition of figures does not prove wrong figures to be correct. I must say I cannot understand, in a situation like this, where you have a ceiling and variations substantially below the ceiling, how anybody can take a 1-cent increase from a 2-cent royalty to a 3-cent royalty and say that the increase in royalties will be $47 million because you literally apply 1 cent to every composition and you just add it up assuming that every composition is going to be increased 1 cent. Today we have half of the records with a payment at less than 2 cents. I find nothing in economic experience, nothing in economic theory which would indicate that every single negotiation would lead to a 1-cent increase. I am sure the record manufacturers are not so generous in their undertakings that the prices they pay today are higher than what they need or want to pay. As the publishers will tell you, they do bargain to the fullest extent that they can, and succeed in substantial measure.

Saying that if there were a 1-cent increase, it would result in a $47 million increase and repeating that several times, does not make that figure correct. I might say that Mr. Gortikov sells himself short. He said, if it is 1 cent, it is $17 million, and he said it was $84 million at 2 cents, but double $47 million equals $94 million.

Mr. DANIELSON. And he corrected himself.

Mr. NATHAN. The second point, gentlemen, is that you would not get anything like $47 million. But even if you did, you would not get more than double that through the various distributive channels; in that case you would have a cost of $47 million resulting in an increase of $50 million in profits, and I do not think that is quite the way our system works.

So to briefly summarize, let me say this. What we have here is a unique phenomenon that has no place in our pattern of economics. I think it should be removed entirely. But if we must come to the conclusion that if this royalty arrangement, which is a ceiling, is not removed, then the logic is to open it up so that the marketplace, competition, bargaining can work its way through this whole process.

I see no basis, no criteria, no considerations on which one could logically come to a price determination through the legislative procedure. You gentlemen sitting here today have had evidence presented