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ROBERT R. NATHAN ASSOCIATES, INC.,

Washington, D.C., October 24, 1975. Congressman ROBERT KASTENMEIER, Rayburn House Office Building, Washington, D.C.

DEAR CONGRESSMAN KASTENMEIER : I testified on September 11, 1975, before the Subcommittee on Courts, Civil Liberties, and the Administration of Justice of the Committee on the Judiciary on behalf of the National Music Publishers' Association. During this testimony Congressman Wiggins asked for my evaluation of Exhibit E on page 13 of the summary statement of John D. Glover on behalf of the Recording Industry Association of America (RIAA). This exhibit is titled "Mechanical royalties paid per released tune outpace inflation and median family income, 1963 vs. 1972." I had not seen this exhibit prior to the hearing of September 11, and thus I was not able to provide an evaluation of it at that time.

I have now had an opportunity to analyze this exhibit and the supporting material in the full statement by John D. Glover. I believe that this exhibit is very misleading. There are two general reasons for my belief :

(A) Questions about the exhibit itself

(B) Omission of important factors relevant to the Subcommittee's consideration of this matter.

With regard to (A), in order to calculate mechanical royalties paid per released tune, obviously it is necessary to have data on total royalty payments and on the number of released tunes. We do not have sufficient data to estimate the total amount of royalties actually paid. However, we believe that the estimates presented by Mr. Glover overstate the level of royalty payments in recent years. On page 43 of his statement Mr. Glover estimates that total mechanical royalties paid by U.S. record makers were $78.2 million in 1972. But even if all royalties were paid at the 2¢ ceiling rate (which they are not, as shown conclusively in the joint statement of the American Guild of Authors and Composers (AGAC) and the National Music Publishers Association (NMPA), and confirmed by data in Mr. Glover's analysis), total payments could not have amounted to more than $62.7 million in 1972, which is $15.5 million less than Mr. Glover's estimate."

Regarding the number of releases, Mr. Glover cites Billboard as the source, but no dates are given, thus I have been unable to examine the validity of his statistics on this.

It appears that Mr. Glover may have purposely selected 1963 and 1972 as the years for comparison in order to be able to draw the conclusions he desired. Accepting for the moment Mr. Glover's data on total royalty payments, the conclusions differ dramatically if more relevant points of comparison are used. For example, over the last three years for which data are available : Consumer Price Index has risen by 30 percent.? Median family income has risen by 25 percent. Record prices have risen by 28 percent. Record sales have risen by 26 percent.

Record companies' profits have risen by 42 percent (by the industry's own data, on page 157 of Mr. Glover's statement).

Royalties have risen by only 2.6 percent (based on the data on page 54 of Mr. Glover's statement). If the number of releases has remained approximately constant, then royalties per release would also have risen by only 2-3 percent.

It is especially misleading to make statements about inflation using data no more recent than 1972. In the last 10 years the Consumer Price Index has risen by 73 percent, nearly twice the 37 percent shown by Mr. Glover in Exhibit E.

1 In the 1973–74 International Music-Record Directory, Billboard made the following estimates for 1972. from RIAA date : 277 million record albums and tapes sold : 183 million single records sold.

With 10 songs per album or tape, 2 songs per single record, and a maximum royalty of 2¢ per song : $55.4 million maximum royalties on albums and tapes ; $7.3 million maximum royalties on single records ; $62.7 million maximum royalties. ? As reported by the Bureau of Labor Statistics.

U.S. Department of Commerce, Bureau of the Census, Current Population Reports, Series P-60. No. 99. July 1975, table 2, p. 7.

Of the Billboard list of 200 best selling albums for Jan. 15, 1972, 81 were listed at $4.98, 110 at $5.98. and 9 at $6.98, yielding an averda ge $5.62. On the Billboard list for Jan. 4. 1975 i was listed at $3.98, 23 at $5.98, 157 at $6.98, 5 at $7.98, 1 at $8.95, 5 at $9.98, 6 at $11.98. and 2 at $12.98. yielding an average of $7.17.

5 From $1,744 million in 1971 to $2,200 in 1974, as reported on p. 6 of the Billboard 1975-76 International Music-Record Directory.

In fact, Mr. Glover admits that his estimates of royalties per tune are not accurate (page 41). He believes that his estimate of the trend is accurate, but obviously one cannot obtain an accurate estimate of a trend from two inaccurate estimates of the level of royalties per tune.

It is very important to note that in his calculation of royalties per release Mr. Glover includes royalties paid in 1972 on tapes released (page 43) but does not include the number of tapes released. This obviously and substantially overstates royalties per release in 1972. It also overstates the trend in royalties per release, because tapes were not available in 1963 but they accounted for 28 percent of total record and tape sales in 1972. That is a big factor in rendering the Glover figures invalid.

As eloquently stated by composers Marvin Hamlisch and Eubie Blake in their testimony before the Subcommittee, even the royalties paid on a best seller have been and continue to be woefully inadequate, whether the song be “I'm Just Wild about Harry" in 1921 or “The Way We Were” in 1971.

With regard to (B), Mr. Glover omitted the following important facts, which should be taken into account by the Subcommittee:

(1) In terms of purchasing power, royalties per songwriter have fallen by more than 40 percent in the last ten years (as indicated in column 14 of the summary table in the statement of AGAC and NMPA).

(2) The total dollar volume of record sales has nearly tripled in the last ten years (as indicated in column 11 of the summary table in the statement of AGAC and NMPA).

(3) List price per song on a typical album has risen by 112 percent in the last ten years (as indicated in column 9 of the summary table in the statement of AGAC and NMPA). The actual retail price per song on a typical album has risen by 142 percent in the last ten years. The price per song on a typical album which is charged to distributors by record companies has risen by 136 percent in the last ten years. Thus, however one looks at it, record prices have risen sharply. During this time, the mechanical royalty ceiling has remained fixed at 2¢, and the average royalty actually paid has risen only 7 percent, from 1.51¢ to 1.62€, (as indicated in column 4 of the summary table in the statement of YMPA and AGAC). Sincerely,

ROBERT R. NATHAN,

President.

NOVEMBER 6, 1975.

SUPPLEMENTARY STATEMENT OF THE AMERICAN GUILD OF AUTHORS AND COMPOSERS

AND THE NATIONAL MUSIC PUBLISHERS ASSOCIATION

SUBMITTED TO THE HOUSE JUDICIARY SUBCOMMITTEE ON COPYRIGHT WITH REGARD

TO SEC. 115 OF H.R. 2223

As promised during the hearing on September 11, 1975, we have reviewed the “report” on Sec. 115 of H.R. 2223 submitted on that date by John D, Glover on behalf of the Recording Industry Association of America (RIAA). With all due respect to Dr. Glover and his employers, we submit that this "report" provides no basis for a meaningful analysis of the economic issues inherent in the Sec. 115 dispute. 1. The use of irrelevant data

A. Dr. Glover attempts to use 1909 as a base year for those calculations that thereby favor his employers. This borders on the absurd. No reliable data for 1909, consistent with either 1975 statistical information or with the modern structure of the music industry, can be derived from available sources. Were we to follow that path, we would note that a 12 cent ceiling would be necessary today to restore the purchasing power of a 2 cent ceiling in 1909.

On p. 53 of the 1965 statement of John D. Glover on behalf of the Record Industry Association of America, it was indicated that an album listed at $3.98 typically was sold at retail for $2.83, or 24¢ per song on the prevailing 12-song album. On p. 65 of the 1975 statement of John D. Glover, it is stated that an album listed at $6.98 typically sold at retail for $5.77, or 584 per song on the prevailing 10-song album.

On p. 59 of the 1965 statement of John D. Glover on behalf of the Record Industry Association of America, it was indicated that an album listed at $3.98 typically was sold by the record company to the distributor for $1.70, or 14¢ per song on the prevailing 12song album. On p. 65 of the 1975 statement of John D. Glover, it is stated that an album listed at $6.98 typically is sold by the record company to the distributor for $3.33 or 33€ per song on the prevailing 10-song albumn.

57-786–76—pt. 3— 17

B. Dr. Glover also uses supposed 1909 statistics to support his claim that the price per recorded tune is down and the copyright owner's share up. The more relevant question is what happened to these admittedly important yardsticks as a result of the traumatic changes of the last 10 years since the House passed the 2.5 cent ceiling. We acknowledge the undue conservatism of our previous statement (in column 9 of our "summary table") that the price per song on a typical album had risen by 112 percent over the last 10 years. That referred to list prices. According to Dr. Glovers' own data, in the last 10 years the actual retail price per song on a typical album has risen by 142 percent, and the price charged by record companies to distributors has risen by 136 percent.

C. Dr. Glover attempts to conceal the low level of mechanical royalty rates by including the income of composers and publishers from other sources, such as performance fees and foreign royalties. He failed to tell the Subcommittee how these figures were relevant, how he arrived at his estimates or why some of his mathematics were garbled.*

D. Dr. Glover attempts to plead poverty for the RIAA by citing questionable figures (see Item 5D, page 9) about recordings that fail to make a profit. Even if his data were accurate, it would be irrelevant in view of the record industry's stated policy of recovering through a few best selling records their losses on any others. In fact, there is limited overall risk in the record industry, as indicated by the steady uptrend of sales year after year, even in periods of recession. There are a lot more impoverished song writers, and a lot more songs which fail to be recorded at all, no matter how much time and effort their authors and publishers invest in them. 2. The use of unreliable data

Dr. Glover attempts to base most of his analysis on a "survey" of record companies conducted by his own company, the Cambridge Research Institute. Yet the letter accompanying the questionnaire was an open invitation to submit biased information. It is thus small wonder that he concludes that total mechanical royalty profits for 1973 were $77–82 million, despite the fact that, even if all royalties were paid at the ceiling rate (which his own report confirms not to be the case)—total payments for 1973 according to the RIAA's own data at the time could not have exceeded $66.1 million." 3. The use of unsubstantiated assumptions

A. Dr. Glover's key allegation that an increase in the royalty ceiling from 2 cents to 3 cents would automatically lead to an increase in royalty payments of $47 million 20—is based on the assumption that all royalty rates would rise by 50 percent or even more. There is absolutely no basis for assuming that all payments would rise proportionately with any change in the ceiling level, or

1P. 6 of the Glover statement of 1975.

2 On p. 53 of the 1965 statement of John D, Glover on behalf of the RIAA it was indicated that an album listed at $3.98 typically was sold at retail for $2.83, or 24 cents per song on the prevailing 12 song album; on p. 65 of Dr. Glover's 1975 statement it is stated that an album listed at $6.98 typically is sold at retail for $5.77, or 58 cents per song on the prevailing 10 song album. On p. 59 of Dr. Glover's 1965 statement it was indicated that an album listed at $3.98 typically was sold by the record company to th distributor for $1.70, or 14 cents per song on the prevailing 12 song album : on p. 65 of Dr. Glover's 1975 statement it is stated that an album listed at $6.98 typically is sold by the record company to the distributor for $3.33, or 33 cents per song on the prevailing 10 song album.

& Performance fees, it should be added, do not depend on th existence of recordings. While performances on local radio today are almost invariably from recordings, if there were no recordings. these nerformances would either be live or from the electrical transcriptions which in the 1930's and 1940's were the mechanical means by which radio stations broadcast music.

4 On p. 39 of his statement, the percentage increase in the last two rows of the fourth column is overstated by 100 percent. The corresponding references on pp. 40 and 41 are also in error.

Pp. 20-21. 73–77, 162. & On a popnlar album selling 1 million copies, the record company's profit is $1.06 million, according to the data on p. 162 of Mr. Glover's statement.

* Record companies were told in advance that the very purpose of the survey was to "Illustrate the severe impact on the record industry of raising mechanical fees." P, 128. & P. 39.

In the 1974-75 International Music-Record Directory, Billboard reported that the RIAA made the following estimates for 1973: 292 million record albums and tapes sold: 193 million single records sold; with 10 songs per album or tape, 2 songs per single record, and a maximum royalty of 2 cents per song : $58.4 million maximum royalties on albums and tapes : $7.7 million maximum royalties on single records : $66.1 million maximum royalties.

10 Pp. 15-17 et seq.

that all royalty licenses would increase at all, or that even those royalties now at the 2 cent ceiling would all increase by any given amount. By Dr. Glover's logic, an increase of 10 cents in the ceiling rate would increase royalties by $470 million, an increase of $1.00 in the rate would up total royalties by $4.7 billion, etc.

As documented in detail in our statement and confirmed in Dr. Glover's own report on "standard variations," a large proportion of selections is not licensed at the ceiling now. There is no reason to believe that the relative bargaining power of the copyright holders versus the record companies will suddenly change sufficiently to alter this picture, no reason to believe that the record companies will sit by and acquiesce in a rise of all rates to a new ceiling.

B. Dr. Glover then proceeds to allege that this supposed $47 million increase in royalty payments could cost consumers $100 million." This assumes totally without substantiation that every record company, distributor, and retailer would seize on an increase in royalty costs as an opportunity to further fatten their profit margins, that they would succeed in this profiteering, and that their gain from a ceiling increase would thus be substantially greater than ours.

C. Dr. Glover argues that a higher royalty ceiling would reduce the quality as well as the quantity of recorded music, including the number of classical releases. There is no basis for such an assumption. Almost all classical music is in the public domain, and thus not subject to mechanical royalties; and by allowing composers and music publishers the chance to earn a decent income, a higher royalty ceiling will inspire a greater quantity and quality of music available for recording. 4. The use of incomplete data

Dr. Glover attempts to argue that total mechanical royalties have increased faster than the cost of living and median family income.18 Even if his figure for total royalties were correct (it is not, see item 2 above and item 5 below):

A. He has carefully selected base years to yield this conclusion--he might instead examine the last 3 years, during which the Consumer Price Index has risen by 30 percent, median family income by 25 percent, record sales and prices by 26 percent, record companies' profits before taxes by 42 percent, but mechanical royalties by only 2.6 percent, causing a 16 percent decline in their purchasing power:

B. He has chosen to ignore the size of the pool of songwriters and composers among whom these royalties are divided-in truth an increase of more than 100 percent in this pool over the last decade has, combined with inflation, caused a decrease of more than 40 percent in real royalties per writer ; 15 and

C. He has likewise chosen to omit the key yardstick of net record sales, rela. tive to which royalties (according to his own figures) have fallen from 11 percent in 1964 to 9 percent in 1971 and 7 percent in 1974.16 5. The use of inconsistent data and assumptions

A. Dr. Glover argues that the present 2 cent ceiling is not a ceiling but a uniform rate, at the very same time acknowledging the existence of substantial numbers of licenses for less than 2 cents. He dismisses these as simple "standard variations" but requires nearly 40 pages to explain them.

B. Dr. Glover argues that a higher ceiling would decimate record company profits, at the very same time that he assumes they would not use their bargaining position to negotiate for rates below a new ceiling level (see 3A above); he also argues that any increased royalty costs will be not only passed on to the consumer but used as an excuse for increased profit margins (see 3B above), hardly a profit decimating position.

c. Dr. Glover argues that the impoverished record companies made profits in 1973 from recording sales, before taxes, and excluding foreign fees and other income, of only $16.5 million ; 18 but in sworn courtroom testimony, the president

11 Pp. 4. 18–19, 63-67.
12 Pp. 20, 22.
12 PO. 4. 5. 10. 11. 14, 30, 31, et sea,

14 Consumer Price Index: as reported by the Bureau of Labor Statistics : median family income: as reported by the Census Bureau ; record sales: as reported by Bullboard, based on RIAA data, and given at table 16 of our statement: mechanical royalties : on p. 54 of Dr Glover's statement; profits, p. 157 of Dr. Glover's statement.

15 As shown in cols. 13 and 14 of the summary table of our statement.

18 Pp. 47–49. Net record sales are valued at the prices charged by record companies to distributors. As a percentage of retail sales, royalties fell from 5.5 percent in 1964 to 4.5 percent in 1971 and 3.5 percent in 1974.

17 Pp. 4, 5, 17, 22, 30, 31, et seq. 15 P. 53.

of Warner Brothers indicated that these profits on an industry-wide basis were 34 cents per LP or tape," which would amount to total profits of more than $100 million from this source alone.

For years record industry spokesmen in Billboard and elsewhere have proudly pointed to everincreasing levels of volume and profit. (For the most recent example, see Exhibit A attached.) Even by Dr. Glover's own analysis, record company profits before taxes over the last 3 years have risen 42 percent. The fact is that the major record companies are integral parts of huge entertainment conglomerates whose ability to shift profits and costs from one division ot another in a consolidated balance sheet is legendary; and the constantly reiterated claim that the record industry is the only party to this dispute which has "revealed" to the Congress its true profit picture is a complete myth.

D. One final indication of the invalidity of this data: Dr. Glover asserts that the financial break-even point for a popular long-playing (LP) record is much higher than it is for a regular tape; 22 but for years the record industry has claimed that higher prices for tapes over LP's were justified on the ground that the tapes were more expensive to produce.

Conclusion.-Dr. Glover's mass of irrelevant, unreliable, unsubstantiated, incomplete and inconsistent data and assumptions cannot alter or conceal one basic fact: his employers are asking Congress to hold down the ceiling on mechanical royalty negotiations, thereby continuing to permit authors and publishers only a steadily lower rate of return in real dollars and a steadily lower share of record prices and receipts, simply because they do not want to dip into their enormous profits on a hit song to pay the writer of that song.

(From the Wall Street Journal, Thursday, Oct. 30, 1975-p. 1]

Hot PLATTERS The recording industry is busy setting records. After being "brushed by the recession" earlier this year, business is booming, says a spokesman for CBS Inc.'s records division. "This has been the fastest turnaround in the history of the business," he says. The division's sales in the third quarter were a record and 19% above the previous year. Warner Communications Inc.'s recorded music division also had a record third quarter. “We haven't been able to press records fast enough," says a spokesman. RCA Records' third quarter sales were “the best for that period in our history," says Kenneth Glancy, president of the RCA division, MCA Inc. reports its domestic record sales are up 13% so far this year.

Warner cites several reasons for the recent surge. Among them are "a lot of new, good product" being offered on albums in preparation for the big Christmas season, a pickup in the economy and “a lot of buying" by college students this fall.

Industry executives expect the boom to last a while. Says Walter Yetnikoff, president of CBS Records, “All indications are that this pattern of success will continue well into next year.

Mr. DANIELSON. Our next scheduled witness is Ralph Peer II, vice president of Peer Southern Organization, music publishers. · Mr. Peer?

I might say so that we do get through here, Mr. Peer is recognized for 5 minutes.

TESTIMONY OF RALPH PEER, VICE PRESIDENT, PEER-SOUTHERN

ORGANIZATION; DIRECTOR AND OFFICER, NATIONAL MUSIC
PUBLISHERS ASSOCIATION
Mr. PEER. Thank you, sir.

I am very pleased to be here today with two excellent composers who will speak following me. I am Ralph Peer. I am vice president of the

19 Billboard, July 6, 1974, p. 4.

20 The price of an LP at that time was given as $5.98, the price of a tape as $6.97. With 3 LP's for every 2 tapes, the average price per LP or tape would be $6.38. A unit profit of 34 cents would be 5.3 percent of $6.38. Applying this profit percentage to 1973 industry sales of $2,017 million yields a total profit of $107 million.

1 P. 157.
a Pp. 74–76.

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