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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 nechanical 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 dosent the importance of tunes, Compositions, and the unique contributions of composers. Equaliy, Sowever, it is clear that the success over the past twenty years and growth of recorded music is attributable in large beasure to unique perfariances; to arrangesents; to accompaniment; to advances in elec:ronic ::ennoiogy and recording artistry; to aarketing; to innova:.on and risk-taking by record zakers and to thei: narketing efforts, including very : 1.3e outrays for advertising, designed to bring new recordings to the aftertion of music. loving publics.

Conclusion

There is no obvious reason of justice or of economics for Congress, by legislation, to attempt to increase .. by almost 605 -- the share of the proceeds of record sales going to the music publishing industry -which inciudes susic pubiishing companies, other copyright owners, and composers. There is no more economic reason 9: Congress to attempt to nase at par.1.1: scars of core -avenues an e are 3 day

i ne :ther part.. no ar vreo 5$ aser: A -410 er: inique contributions : recorded mus:: But at :na: sec::on :.5 i 1.7. 12:3 vould 10

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11TH DOAT OF AN INCREASE IN THE STATUTORY MECHANICAL ROYALTY

anto account both mechanical royalties together a period ords -- which are certainly not less than one-ha!! » nical royalties and probably considerably more the :

industry derives considerably prester dollar bene!..ba nes the recording industry, itself.

A. De 3 RATE OLD GIVE A LARGE AND UNJUSTIFIED WINDFALL TO

comia ONVERS

11 the statutory license royalty were increased to 54, with

er 1:aux ra:. Por ters:10mg Over minutes long the entrar vai per record would rise i cui 31 Se DUIW .one sussi an**9.SITY and

1:4019: 30 19:16 re-21 SOY

the Music Publishing Industry to Recorded 5. areasonable to inquire into the contributors : 14 try to the creation, production, risk-u: seu e the point need not be labored: $o se e u mi. ould wish to downpiay for 1 sopeat the aper:32ct 28 the unique contribut:ons of sepesers kods", bet he success over the pas: :-enty years and yout: 3:0:-butable in large seasurt to 9:port:m. o accoopan: sent; to advances in ..*:-1: ??... *

to market 11), to inova::m and risku. sazketing efforts, weiding inty.orge vindt het om

Bu d to bring new recordings to the 13:1.

Althout Lace of music copyright owners hoe recordings has grown he futro tras u ation, vea Ander the provisions of the 1909 law, and even Da mgugat omers ferir buch sore l.nanc:4! bene!!! from recorded mus.c tras cert a s: 4, :tensees, higher statutory raya! :) 9: at least I tas nas been vriten isto the bi!! before you,

Ang karnase is the statutory royalty from ?¢ to se does not sound like **TY RCM However, this seemingly trivial penny increases would have a

o act on the earnings of the music, the publishing Industry and other cut it seers, on the prices consumers pay for recordings, and

to boly on the mount and kind of music recorded.

to the first place, raising the nominal statutory rate from 2 to 3e ***ents an increase of Sct. The actual increase would be considerably **. for NR. 2:23 calls for payment to the copyright owner of not just se per time, but of de yer tune, or 34€ per aiute of playing time, or ".. beroof. for each time,

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pus reason of justice or of economia form
: empt to increase -- by dinost out on the share of

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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 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 24 per license and released tune was paid, the aver. age 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 sechanical royalty paid on the records in this sampie is estimated to have been about 22€.

De statutory royalty that, in contrast, would nave been payable under tre new rates proposed to this Subcommittee by the publishing companies was compute! based on 5€ per tune or 3/4¢ per minute of playing time, whichever was greater. By actual count, the satutcry mechanical royalty for the average LP in this study, under the new provisions, would have been 35c, an increase of 531 over the current rate. (See Exhibit 6).

What would this increase in the mechanical royalty rate sean 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 sechanical royalty rates on the two industries in each of the past four years, 1971-1974, of which two (:972 and :9*4) were good from the standpoint of recording industry profits, and two 1991 ard :9*) were bad.

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