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In addition, the industry had profits before taxes from income sources other than making, manufacturing, and selling records, of an amount about equal to foreign fee income. (Profits after taxes, or course, were much less than the indicated pre-tax profits probably something like half. or

jess.)

Income to Copyright Owners from Records

Copyright owners are in a position somewhat similar to that of preferred stockholders when it comes to income from records: their mechanical fees get paid, record by record or, rather, license by license -- irrespective of whether individual records, or record makers make any money or not. With only one set-back, in the very poor year of 1973, mechanical rovalties going to publishing companies have increased every year since 1967. Going back still farther, mechanical rovalties have increased every rear since the aid „950's, excepting, our data shows, only the year 1962.

summary, the mechanica, rovalties paid to the publishing industry over the past four

the recording industry ears have been as follows

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The percentage of the recording industry's revenues from records that goes to the publishing industry averages nore than the before-tax profit that goes to the record makers! Over the past 4 years, an average of 7.9% of revenues has gone to the publishing industry as compared to 7.1% of pretax profits to record makers. In dollar terms, mechanical royalties paid to the publishing industry over the four years came to $311.8 million as compared to the pre-tax profits to the recording industry from records of $279.9 million.

It would be interesting to compare the net profits after taxes which the two industries derive from records. The net profits after taxes for the recording industry are estimated in Exhibit 5. Unfortunately, the publishing industry has refused to provide the necessary data despite requests from Congress. In the absence of such disclosure, the best that can be done is to compare mechanical royalties before taxes with record companies' profits from records, also before taxes. Actually, the comparison is not it a reasonable. The publishing companies incur little or no expenses in connection with recorded music other than to collect the mechanical royalties. Even more important, the comparison completely sets aside the very large performance fees the puoiisning haust erves recorded music. Again, about the only cost incurred in that connection s the collection of the fees.

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Taking into account both mechanical royalties together with performance fees from records which are certainly not less than one-half of the dollar value of mechanical royalties and probably considerably more than that the publishing industry derives considerably greater dollar benefits from records than does the recording industry, itself.

Contribution of the Music Publishing Industry to Recorded Music

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It is not unreasonable to inquire into the contribution of the music publishing industry to the creation, production, risk-taking and marketing of recorded music. The point need not be labored: No one who loves musical experiences would wish to downplay for a moment the importance of tunes, compositions, and the unique contributions of composers. Equally, however, it is clear that the success over the past twenty years and growth of recorded music is attributable in large measure to unique performances; to arrangements; to accompaniment; to advances in electronic technology and recording artistry; to marketing; to innovation and risk-taking by record makers and to their marketing efforts, including very large outlays for advertising, designed to bring new recordings to the attention of musicloving publics.

Conclusion

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There is no obvious reason of justice or of economics for Congress, by legislation, to attempt to increase by almost 60% -- the share of the proceeds of record sales going to the music publishing industry -which includes music publishing companies, other copyright owners, and composers. There is no more economic reason for Congress to attempt to increase that particular share of record revenues than the share of any of the other parties who are surely no less deserving light of their unique contributions to recorded music. But that is what Section 115 of H.R. 2223 would io.

This conclusion must be reinforced by the fact that publishing companies and other copyright owners are already deriving more of the total benefits from recorded music -- nc.uding performance fees from commercial use of records than the recording indust itself.

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II.

THE IMPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY

A. THE 3 RATE WOULD GIVE A LARGE AND UNJUSTIFIED WINDFALL TO
COPYRIGHT OWNERS

If the statutory license royalty were increased to 3e, with
higher statutory rate for renditions over 4 minutes long,
the average royalty per record would rise about 59%. Total
license royalty payments would rise by amounts which would
be enormous windfalls to the music publishing industry and
a staggering burden to the record industry.

Although the income of music copyright owners from recordings has grown far faster than inflation, even under the provisions of the 1909 law, and even though copyright owners derive zuch more financial benefit from recorded music than recording companies do, themselves, a higher statutory royalty of at least Je per tune has been written into the bill before you.

An increase in the statutory royalty from 2 to 3 does not sound like very much. However, this seemingly trivial "penny increase" would have a major impact on the earnings of the music, the publishing industry and other copyright owners, on the prices consumers pay for recordings, and quite likely on the amount and kind of music recorded.

In the first place, raising the nominal statutory rate from 24 to 34 represents an increase of 50%. The actual increase would be considerably larger, for H.R. 2223 calls for payment to the copyright owner of not just 34 per tune, but of 3¢ per tune, or 3/4¢ per minute of playing time, or fraction thereof, for each tune, whichever is greater. Thus, a composition running four ainutes or less would incur a rate of je. But a piece Lasting more than four minutes would be subject to in idded :ost: 1 'S-ainute une would call for a rate of 3-3/4e; a "5-minute" tune would call for 1-1/2; "minute" tune would call for payment of 3-1/4e; and an "3-minute" tune would call for Se, and so on. The proposed rate based on playing time is something new; that concept is not provided for in the existing :opyright law. The proposed rate is a substantial increase over the widespread current folntary Industry practice or paying 2. per ainute of ine's plaving time over five minutes.

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To study the impact of the "3 rate" on the typical hit record and on the recording industry, an analysis was made of the Top 150 LP albums listed in Billboard magazine on March 3, 1973, selected as random illustration. Because some albums contained two records, a total of 165 records with 1,653 tunes were examined. If, for purposes of calculation, one assumes that the current statutory rate of 2¢ per license and released tune was paid, the average record in this sample would have called for a royalty of 20¢. If allowance is made for royalties currently paid in excess of 24 as a result of an additional "per minute" rate, the average mechanical royalty paid on the records in this sample is estimated to have been about 22¢.

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The statutory royalty that, in contrast, would have been payable under the new rates proposed to this Subcommittee by the publishing companies was computed based on 3 per tune or 3/4¢ per minute of playing time, whichever was greater. By actual count, the statutory mechanical royalty for the average LP in this study, under the new provisions, would have been 35, an increase of 59% over the current rate. (See Exhibit 6).

What would this increase in the mechanical royalty rate mean in terms of its impact on the profits and revenues of the publishing and recording industries? Obviously, the answer would depend upon whether one were talking about a good or a poor year.

In Exhibit 7 some data are set forth which gauge what would have been the impacts of the proposed increase of mechanical royalty rates on the two industries in each of the past four years, 1971-1974, of which two (1972 and 1974) were good from the standpoint of recording industry profits, and two (1971 and 1973) were bad.

As shown in Exhibit, the dollar increase of the 39% hike in mechanical royalty sales would have ranged from a low of about $45.5 million to a high of about $46.8 million, for a total of about $133.0 million for the four years. This would amount to an annual average of about 346 million.

In terms of the cut which these increased royalties to the music publishing industry would have taken from the pre-tax profits of the recording inaus

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