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 6.1 increase in the price consumers pay for recordings A $46 million 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 remained unchanged. If not passed on to consumers, such an increase in royalties would wipe out 94% 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 income. 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-tax profits from 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 themselves, they would be under pressure to take defensive measures. Several possibilities come to mind: an increase in prices; fewer bands on average record; reduced overtime royalties on tunes; more 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 makers would take a variety of defensive actions, in various combinations and proportions, according to their several judgments of how best to protect themselves and their interests. The most obvious defensive action - although not necessarily the sost likely or most practical measure -- would be for recording companies to increase their prices to the trade. The distributors buying the wares of record makers, in turn, could be expected to pass any price increase along to retailers, who then would charge a higher price to consumers At each stage in the distribution thain, tot on. would the ligner license rovalty 63 seed to be passed on, but the higher operating costs generated by the roy- Thus, if the effect of the higher mechanical rovalty were expressed „crease would be most widely felt. In the case of popular LP's, Exhibit 9 illustrates how much prices to consumers could be expected to rise in consequence of a change in the statutory rate from le per selection to 2-1/24 per selection (or 1/2¢/minute of Jiaring time, to je per selection (or 3,44/minute of playing time). Typical prices and gross margins along the line from recording company to independent distributor to distributor-serviced retailer to consumer are shown. Figures for rack jobber-serviced outlets would be similar. As can be seen, the average price to a consumer of a popular LP would go from $3 ** to 15 91 (with the 2-1, 2e rate), or to 16 12 (with the Je rate). The 11 9: price represents a 2 49 increase over the $5 price, and the 16 12 Dr. a representa a s ; increase. has a „ncrease is, indeed, a substantia. Ja tetail sales of recordings 43°4 were estimated to be 12 2 billion at list prices. However, since most winds are sold at about 14 of list price, consumers actually said about ...on for recordings If allowance is made for recordings of nonncrease in retai, pri、et (Pula ost .ans DOT'S 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 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 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 scare of record revenues than the share of any of the other parties who are surely no ess :eserving a light of beir But that is what Section 1.5 mique contributions to recorded music 4.2. 2003 would 10 the This conclusion must be reinforced by the fact that sub-sing 35 :: THE DIPACT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY A. THE S RATE WOULD GIVE A LARGE AND UNJUSTIFIED WINDFALL TO the If the statutory license royalty were increased to 3e, with 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 such more financial benefit from recorded music than recording companies do, themselves, a higher statutory royalty of at least le per tune has been written into the bill before you. An increase in the statutory royalty from 2 to Je does not sound like very much. However, this seemingly trivial "penny increase" would have a be of 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 lot. The actual increase would be considerably Larger, for H R. 2223 calls for payment to the copyright owner of not just le per tame, but of je per tune, or 1/4 per minute of playing time, or fraction thereof, for each tune, white er is greater. Thus a composition for a rate of 1-3 46, a cur a rate of e but a piece.as*.ng S-8itute tune would cal. for 4-. 2. for he and 10 m. 56 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 24 per license and released tune was paid, the average record in this sample would have called for a royalty of 204. 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 224. 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 3e 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 35e, an increase of 591 over the current rate. (See Exhibit 6). What would this increase in the mechanical royalty rate mean in teras 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 ard 1973) were bad. As jaɔwn in Tunisit ", the wollar poreise of the 1st ke la mechanic. royalty sales would have ranged from a low of about $45 5 million to a high of about $46 million, for a total of about 5:30 ) million for the four years This would amount to an annua, average of anout son mo..ion. In terms of the cut mich these increased rovalties to the music publusaIng industr“ would have taken from the pre-tax profita or the recording inaus $7 |