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COPYRIGHT LAW REVISION

THURSDAY, SEPTEMBER 11, 1975

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON COURTS, CIVIL LIBERTIES,

AND THE ADMINISTRATION OF JUSTICE
OF THE COMMITTEE ON THE JUDICIARY,

Washington, D.C. The subcommittee met, pursuant to recess, at 10:07 a.m., in room 2.126, Rayburn House Office Building, Hon. George E. Danielson presiding.

Present: Representatives Danielson, Drinan, Pattison and Wiggins.

Also present : Herbert Fuchs, counsel; and Thomas E. Mooney, associate counsel.

Mr. DANIELson. The hour of 10 o'clock having arrived, the subcommittee will be in order.

I apologize, first of all, for being 7 minutes late here. I am a member of the whip organization, and we meet on Thursday mornings, and it is hard to get here much earlier.

Today we are meeting once more on the copyright law revision bills. Today's hearing will relate principally to section 115 of H.R. 2.23. It involves a proposed increase in the mechanical royalty rate under the compulsory license for making and distribution of phonorecords of copyrighted music.

Section 1(e) of the existing copyright law provides a statutory royalty of 2 cents per tune per record. The pending revision bill, II.R. 2.323, increases this figure to 3 cents per record, as provided in the Senate bills S. 1361 in the 93d ('ongress and S. 22.

Understandably, record companies oppose the recommended increase, and music publishers defend it. Both sides have enlisted the help of economic consultants from whom we will hear.

Our first witness today is Mr. Stanley M. Gortikov, president of the Recording Industry Association of America, Inc., accompanied by James F. Fitzpatrick, Esq.

Jssrs. Gortikov and Fitzpatrick are at the witness table. They have been allowed 10 minutes.

Would you please proceed?

TESTIMONY OF STANLEY M. GORTIKOV, PRESIDENT, RECORDING

INDUSTRY ASSOCIATION OF AMERICA, INC., ACCOMPANIED BY JAMES F. FITZPATRICK Mr. GORTIKOV. Mr. Chairman, I have a comprehensive written statement, which I will enter into the record. I will now summarize it.

Mr. DANIELSON. Without objection, the statement will be entered.
It is not this one?
Mr. GORtikov. No, sir, it is another one.

Mr. DANIELSON. All right. It will be entered in the record, without objection, and would you please summarize?

[The prepared statement of Stanley M. Gortikov follows:]

STATEMENT OF STANLEY M. GORTIKOV, PRESIDENT, RECORDING INDUSTRY

ASSOCIATION OF AMERICA, Inc.

INTRODUCTION

My name is Stanley Gortikov. I am president of the Recording Industry Association of America. Our member companies create and market about 85% of the recorded music sold in the United States. I have firsthand knowledge of the commercial and creative aspects of the recording industry, having previously served as president of Capitol Records, a major recording company.

THE PROPOSED CHANGE IS EXCESSIVE

We strongly object to the proposed "Mechanical Royalty" rate increase in Section 115. The "Mechanical Royalty" is the amount a music publishing company can charge a recording company for use of a composer's tune in a sound recording.

Section 115 proposes a statutory increase in the mechanical royalty from 2¢ to 3e. This increase is glossed over as “only a penny" increase. However, that seemingly innocuous “penny" involves added payments of about $ 17 million per year to the music publishing industry, an increase of 59%.

The $ 17 million "penny" payment is the biggest money issue in this bill and the major commercial and consumer question before this committee. It is :

More than 11 times greater than the $1.0 million annual payment by jukeboxes provided for in Section 116.

More than 7 times greater than cable television's hotly-contested payments to broadcasters of $6.7 million per year.

Almost 5 times greater than the estinated $10 million for performance royalties to recording vocalists, musicians, and record companies.

More than twice all of those payments combined.

AN INCREASE IS NOT JUSTIFIED

The economic facts, detailed by Dr. John Glover and the Cambridge Research Institute, show there is no reason for an increase. Music publishers and composers are doing handsomely at the present rate. Their income from mechanical royalties has more than doubled in the past 10 years because of increased sales, which more than offsets inflation.

Significantly, in the 10-year debate over Copyright Revision, (up to today, at least ) the publishers have not presented any data on their profits which would justify an increase. Yet, with no such supportive documentation to date, they ask for an additional $47 million per year.

That proposed "penny" increase in itself is inflationary and will stick the public with an increase in record prices of almost $100 million per year. That penny increase is punitive both to our industry and to the consumer. It will impose harsh burdens on small fledgling record companies. It could further discourage the already risky business of recording classics, jazz, and experimental music-all important cultural contributions of sound recordings.

Moreover, the public interest is being well served at the present rate. There is no monopoly on music, and plenty of music is available to the public. And these originally were the major ('ongressional objectives in establishing the compulsory licensing system, and the 2¢ rate.

TECHNOLOGICAL WINDFALLS FOR PUBLISHERS AND COMPOSERS

The basic case of the publishing industry boils down to the statement that a 24 rate established in 1909 cannot possibly be adequate in 1975 ... and that "only

a prenny" increase is involved. However, as we shall demonstrate, that 2¢ is far different from what it was in 1909.

Erery time a recording company arranges for an artist to record a musical camposition, the record company must pay the niusic publishing company and componer a "mechanical royalty" for every record sold, and this rate was set in the copyright statute in 1909 at 2¢. This royalty was called "mechanical" beCause the state of the recording art at that time utilized "mechanical parts", such as a piano roll ... or a one-time Edison wax cylinder. So 2¢ was paid for one tune, and one tune comprised a recording.

Recorded music next moved into a one-sided disk- still with 2¢ paid for one tune on one record.

Xow started the changes which benefited publishing companies and composers s dramatically, with no additional risk or effort by them;

First, came the two-sided 10" 78 RPM disk which gave the publishing company and composer 4¢, not 2¢, from the sale of one record.

Then, in 148, the vinyl long-playing album was developed, with 10 to 12 tunes on one disk. Publishing companies and composers earned 204 to 24¢ per disk, bot 24 or 4c.

Finally, the ingenuity and risk capital of recording and equipment companies developed the track tape cartridge and cassette. These created an entirely new additional market--about 29% of total record sales-each earning 208 to 248 for the publisher and composer.

MI'LTIPLE RECORDINGS MEAN MULTIPLE INCOME SOURCES

In addition, publishers and composers receive multiple income from the recordings of one composition. Once a given recording artist makes a hit of his version of a musical composition, then usually many other artists also record that nowfamiliar tune. For example, the hit song, "By The Time I Get To Phoenix", was made famous by Glen Campbell. There are currently 81 separately produced records of that song from the U.S. alone, not foreign ... 81 separate sources for that 24 to multiply. “Bridge Over Troubled Waters", was made famous by Simon and Garfunkel's recording and has 80 current separate recordings. And Paul Melartney's hit recording of "Yesterday" has 31 U.S. recorded renditions ... 91 multiple sources of mechanical royalty income.

So a composer's tune, made famous by one recording artist's hit rendition, suddenly can become a major financial asset and catalyst for these multiple sources of income.

INFLATION NO JI'STIFICATION FOR RATE INCREASES

The music publishing companies claim that the rising cost of living justifies the proposed 39% rate increase. Music publishing companies which do the greater share of industry volume are not individual entrepreneurs—or homemakers worrying about the rising cost of bread or beef or gasoline. Instead, many are large corporate owners of copyrights. Publishing companies deal in copyright catalogs as one would buy or sell any investment. Music cops rights are assets of value. The return on these assets has far exceeded any changes in the cost of living.

PUBLISHER FUNCTION IS ESSENTIALLY ADMINISTRATIVE

Publishers certainly cannot argue that they deserve more because they are doing more to make a recording a success. Once, music publishers performed inany more creative, promotional, and marketing functions for their 24 than most do today for their 20¢ or 24¢. Their function today is heavily administrative and clerical; they are largely service entities, conduits for the processing of income and paper transactions. They don't promote as they used to. They don't advertise as they used to. They don't help create demand as they used to. They don't employ field representatives as they used to. These promotional functions necessarily have been taken over by recording companies. As the former president of the American Guild of Authors and Composers commented: “Years ago a publisher bought a song, plugged it, and got it performed, in eventual hopes of getting a record. Now a song is nothing without a record at the start."

Publishing companies deserve to be paid reasonably for their service functions--but certainly not to split an added $47 million a year.

A GROSS INEQUITY

When this Subcommittee heard testimony on this issue a decade ago, it re. jected the publishers' request for a 3¢ rate. At that time it reported out Section 115 with a 25% rate increase to 242€ per tune and 12¢ per minute of playing time. Although the recording industry vigorously opposed that increase, the Revision Bill in that form passed the House in 1967.

The bill remained in the Senate with a 212¢ rate for more than seven years. Last year, without any hearings receiving additional economic evidence, the Senate Judiciary Committee raised the rate to 3¢ per tune, adding a new damaging provision for 34¢ per minute of playing time. This action was taken upon the music publisher's request for an alleged "inflation adjustment''-an argument which was, at best, spurious and, at worst, blatantly misleading.

CONCLUSION

There is no economic justification today, just as there was no justification in 1966 when this Subcommittee last considered this bill, for a 3¢ mechanical rate. Indeed, hard, cold, economic facts demonstrate irrebuttably that the 26 rate is still fully adequate today. Since the public is now being well-served, and since economic facts do not justify any increase, we urge that Section 115 be amended to provide for a continuation of the present 2¢ rate.

Further supporting data is detailed by Dr. John Glover of the Cambridge Research Institute and the Harvard Graduate School of Business Administration.

ADDENDUM

Data developed by the Recording Industry Association of America indicate that 34.4% of total album unit sales consist of club), mail order, premium and budget record sales. More specifically, the RIAA estimates the following mix of unit sales for 1974:

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RIAA strongly supports the proposed antipiracy amendments set forth in the testimony of the Department of Justice before this Committee on May 8, 1975. We detail our comments on these various proposals below.

The most important amendment makes certain that the copyright revision bill does not preempt the law of 36 states which provide antipiracy protection for pre-1972 sound recordings. The recording industry would seriously have to consider opposing any revision legislation which would unjustifiably deny states this essential weapon against rampant record piracy.

1. Amendment to Section 301(b) to confirm the validity of state antipiracy laure.('ongress granted federal copyright protection to sound recordings fixed on or after February 15, 1972 (P.L. 92-140). The protection for records issued before February 15, 1972 was left to the states. The Supreme Court has confirmed that states have the authority to enact antipiracy laws for sound recordings issued prior to February 15, 1972 and that those records are not in the "public domain." Goldstein v. California, 412 U.S. 546 (1973).

Pursuant to this authority, 32 states today provide protection for sound recordings issued prior to February 15, 1972. States with antipiracy statutes include:

Alaska
Indiana
Nebraska

Pennsylvania
Arizona
Iowa
Nevada

South Carolina
Arkans
Kentucky

New llampshire South Dakota
Louisiana
New Mexico

Tennessee
('onneticut
Maryland
New York

Texas
Florida

Massachusetts North Carolina l'tal
Georgia
Minnesota
Oklahoma

Virginia
Illinois
Mississippi
Oregon

Washington
In addition, in four states there are judicial decisions that the state common
law of unfair competition prohibits record piracy: Michigan, Missouri, New
Jerry, Wisconsin.

Antipira y legislation for pre-February 15, 1972 sound recordings may become la u in other states this year.

The Justice Department is concerned that Section 301 of the bill, which deals with preemption of state laws, be clarified so that no one could claim that the Piston bill supersedes the many existing state antipiracy laws relating to nords issued before February 15, 1972. We strongly support the Justice amendmaent to include a new subsection (1) to Section 301(b) as follows: "(4) Sound reordings fired prior to February 1.5, 1972." The propo-al contained on page * of the Department of Justice testimony is absolutely essential as far as the reund industry is concerned. We believe there is no justification whatever for the ('ongress to preempt the 32-state antipiracy statutes and the judicial deci. wtons of four additional states. The consistent determination both of Congress and of the states has been that record pirates unfairly and improperly appropriate the property. efforts and capital of the legitimate business community. l'irate today divert about $175 million of legitimate record and tape sa lex. About one out of every four tapes sold in a pirate copy of an original hit recording.

The entire legitimate music industry has taken a strong stand against record piracy. The American Federation of Musicians had a vital stake in this question

pause record pirates make no contributions to music trust funds or make any other payments to the musicians creating recordings.

Lawal retailers are placed in a totally unfair position trying to compete with cheap pirate copies. The pirates copy only the best-selling records, skimming the cream of the top.

Further, the preemption of state antipiracy laws would result in the anomalous situation that legitimate record companies would, as a matter of Federal policy, be authorized to copy the pre-1972 catalogue of all of their competitors. This could, of course, lead to a decrease in competition because the valuable property rights reflected in the pre-1972 catalogue of small and medium companies could be expropriated by larger record companies. Significantly, this potential result was persuasire in the decision of this committee to reject a compulsory license for sound recordings. Soe H. Rep. 92 487, 92nd ('ong.1st Sess.. p. 4.

Finally, protection against piracy of pre-1972 recordings is of particular im. portance because older music has been enjoying resurgence. The equity of state law protection for these older recordings is underscored by the fact that 36 states already have antipiracy protection for pre-1972 recordings and many of the remaining states are currently considering such legislation. There is no justification whatsoever to preempt these essential state laws.

2. Deriratire Rights I'nver Sertion 11h. We strongly support the view of the Department of Justice that Section 114 of H.R. 2223 should make explicit that the owner of sound recordings has the right to make a derivative work under Part (2) of Section 108. We believe, as the Department of Justice asserts, that under Sortion 7 of the 1909 Law an owner of a sound recording presently has this right. The recent tare rase confirms record romnany's riots in this regard under the 1909 Law. There has been no showing who these rights should be narrowed or limited under the revision legislation. Indeed, we are concerned, as is the Department of Justice, that unless this potential loophole is expressly closed, there may be a "backdoor" opportunity for record nirates to copy copyrighted sound record. ines hy slightly altering the original consrighted material.

3 Bertion 506(a).-- We agree with the Department of Justice proposal on nages 28 29 of its statement that the term of imprisonment for repeat offenders for record (and movie) piracy should be increased to three years, consistent with the

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