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II.

THE IMPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY (CONT'D)

B.

THE HIGHER STATUTORY RATE COULD COST CONSUMERS NEARLY $100 MILLION

The increase in the statutory license rate could cause a
6.16 increase in the price consumers pay for recordings
and thus Could cost consumers nearly $100 million.

A $46 sillion average annual increase in mechanical royalty payments would consume almost one-half of the pre-tax profits from all sources of U.S. record makers, if their other costs and their prices rena ined unchanged. If not passed on to consumers, such an increase in royalties would wipe out 941 of the $50 million in pre-tax profits which the U.S. recording industry realized in 1974 from recording sales, before foreign fee income and other miscellaneous incose. And 1974 was a good year for the industry in terms of those profits. In the years 1971 and 1973, the proposed increase, alone, in the mechanical royalties would have been greater than the pre-ta profits froa those records.

Obviously, the record makers could not absorb such a substantial increase in their costs. The profits simply haven't been there. To protect thenselves, they would be under pressure to take defensive measures. Several possibilities come to aind: an increase in prices; fever bands on average record; reduced overtime royalties on tunes; sore public domain music; reduction in number of tunes used and releases put out; reduction in the number of more innovative and riskier releases. These are just a few of the possibilities. In the event of an increase such as proposed, the several record sakers would take a variety of defensive actions, in various combinations and proportions, according to their several judgments of how best to protect themseives and their laterests.

The most covious serensive action -- 2. though not necessar::y the most likely or post practical measure -- would be or recording companies to increase their prices to the trade. The distributors buying the vares of record makers, in tun, coula be expec?ed to pass any price incrsuse aiong

a retailers, who then would bare a higher price to consumers 40 sacs stage m e sistr but.onaia, not n ow the liner canse sova.tv

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med to be passed on, but the higher operating costs generated by the roy. tity !xroase would be passed on, too. For example, with higher prices for record:991, the dollar cost of marketers' Inventories would rise and, with 1t, the cost of Insuring and financing those inventories; the dollar investut u kesunts receivable would increase; the dollar loss on bad debts ... rise, the tax base would rise, etc. All these additional dollar costs

have to be recovered, in addition to the direct increase in the cost of recording due to an increase in the copyright royalty.

average annual increase in mechanical royalty parant st one-half of the pre-lax profits from all sources of

if their other costs and their prices resised when consumers, such an increase in royalties would wipe ion in pre-tax profits which the '.$. iscord: industry in recording sales, before foreign tre iace and other se. And 19*4 was a good year for the industry u m n the years 1971 and 19'3, the proposed mouse, 1.200. yaities would have been greater than the 200:"upos

1, the ef!ect of the higher sechanical royalty were expressed *...! Ak terns of higher prices, the cost to the consumers of . 5€ rate wao. Dlar, far more thaa the $47 sillion cost in 1994 to the record mie At the corner level is where the brunt of the statutory rate kras veld be post widely felt.

In the case of popuiar LP's, Exhibit illustrates how such prices to ***ncocid b erpected to rise in consequence of a change in the statuthe rate froe de ger selection to :-1/24 per selection (or 1/2'sinute of Jarington, te * per selection or J, 4¢'inute of playing fise). Typical 1.4 and grous margins along the line from recording company to independent entrar to distributor-serviced retaller to consumer are shown. Figures for rx saber serviced outlets vould be similar

'ecord makers couid not absord such a subs:2!!.
· The profits simp:y haven't been there to per

be under pressure to take defensin masura sem
je to sind: 48 increase la prica, lower hands
d overtin. royalties ar tubes, me p..

tunes used and releases pur out, redat: in the ive and risku er releases. There are just a few of the event of an increase such as proposed, the arm. . a variety of detras:n k... Le marium Ksening to their swangers of an

A be seen, the average price to a consumer of « popular LP* would i frum $ * to $9 91 (with tre 2-12 rate), or to $6 12 with the 3e rate)

15 16 represents a 1 41 Increase over the $S ** price, and the $6 :: p. revets • 1 xras.

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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

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 oi recorded nusic is attributable in large measure to unique performances; to arrangenents; to accompaniment; to advances in electronic technoiogy and recording artistry; to marketing; to innovation and risk-taking oy record nakers and to their narketing efforts, including very large outlays for advertising, designed to bring new recordings to the attention of musicloving publics.

Conclusion

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 par:icula: share oi decori revenues ...an the snare of any di the scher parties wno ire surely no:985 cosernag :1310 of her: inique contributions :o recorded nus:c. But that is vnat Sect on :15 ) 2.2. 22:3 vould io.

This conclusion aust be reinforced jy she iac: chat pubi:shing companies and other uspyright owners are 1:ady derring acre i he :001. peneis :s om recorded us:c ....uaing perzormance fees isom Commerc:ai se si ecoras d an .ne coraing cousc" :-seis.

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THE IMPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY

THE 34 RATE NOULD GIVE A LARGE AND UNJUSTIFIED WINDFALL TO
COPYRIQIT OWNERS

If the statutory license royalty were increased to 3t, with
a 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 stayering burden to the record industry.

Although the income of music copyright owners from recordings has grown fa: faster than inflation, even under the provisions of the 1909 law, and even though copyright owne:s derive such more financial benefi: fron recorded music than recording companies do, thenselves, a higher statutory royalty or at least Je per tune has been written into the bill before you.

An increase in the statutory royalty from 24 to 3¢ does not sound like very much. However, this seemingly trivial "penny increase" would have a sajor 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 3e per tune, but of 34 per tune, or 314¢ per minute of playing time, or fraction thereof, for each cune, whichever is greater. Thus. I composition running four ainutes or less would incur 1 :14: or je. But a piece 'astiag zor han four ainutas rouid requbec: :3 in incea :95: 1 's-anute' mine voula sali for a rate oi 3-3/46; 1 "5-sinute" cune would ca!! :or 1-1/2}; a "*-912utes tune would call for payment jt 3-1/?e; and an 9-minute' ine would cal: for se, ind so on. The proposed race based on playing cine is sone ching jew; that concept is 200 provided :or in the xisting ugdyt:ght iww. The proposed rate is i substanti! increase per re videspread current :0:antar' „ndust: T10:09 or zaang :?: per inute hii tine's riav..ng me over hive wnuces.

57

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 randon 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.

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 2r.d 1973) were bad.

is jnown in Ech:310 ", tre dollar increase of the 594 uke . nec...anical royalty sales would have ranged from a low of about $15.5 211:on to a high of about $46.3 million, for a total of about 3133.1 billion for the four years. This would amount to an annual average of 2oou: 3-6 million.

In terms oi che cut which these increased royaicies co the music pubiisaing industsy would have taken from uhe pre-cax profis gi ne recording naus

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