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11. 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
6.15 increase in the price consumers pay for recordings
and thus could cost consumers nearly $100 million.

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 incone. And 1974 was a good year for the industry in teras of those profits. In the years 1971 and 1973, the proposed increase, alone, in the sechanical 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 seasures. Several possibilities come to aind: an increase in prices; fever bands on average record; reduced overtine royalties on tunes; nore public doma in 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 protec: themselves and their interests.

The most obvious ier'ensive act:on -- 1. though not necessar::y the most likely or post practical seasure + vould be !or recording coopanies to increase their prices to the trade. The list:ibutors buying the wares of record makers, ia tun, coula Se expec:ad : pass any price incrsuse a.ong

retai.ers, who then would charge a higher price to consumers. *c sach #tage she 11stribur.on enia, 10€ nay vowed the na zner canse rova.ty

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need to be passed on, but the higher operating costs generated by the roy. *** increase would be passed on, too. For example, with higher prices for

heart:*o*, the dollar cost o! marketers' Inventories would rise and, with It, the cost of Insuring and financing those inventories; the dollar invest. wat ia kcounts receivable would increase; the dollar loss on bad debts

rise, the tax base would rise, etc. All these additional dollar costs

4 av to be recovered, in addition to the direct Increase in the cost af recordings due to an increase in the copyright royalty.

on average annual increase in sechanical royalty paraan most one-half of the pre-tar profits frue 1!1 source of rs, if their other costs and their prices rema:sed arranged

to consumers, such an increase in royalties wosit pe * 11ion in pre-eau profits which the 9.5. ricord: from recording sales, before foreign toe is as the come. And 1974 was a good year for the industry a te

In the years 1971 and 1995, the proposed INTOASE, L. royalties would have been greater than the port ?ul goaleta

, 1t the ef!ect of the higher sechanical rovalty were expressed .. tem of higher prices, the cost to the consurers of a se rate and the far, far more than the $47 million cost in 1974 to the record miatt at the connaer level is where the brunt of the statutory rate

70s vid be tost widely felt.

DI can of popular ip's, Exhibit , illustrates how such prices to pararn could be expected to rise in consequence of a change in the statu. tet* **** from di per selection to 2-1/24 per selection (or 1/2</ainute of 7.** tis, te # per selection (or 1:44, ainute of playing tia). Typical #*.*

: marging along the line from recording company to independent Brat te distributor serviced retailer to consumer are shown. Figures for u b er-serviced outlets would be similar

h can be see, the average pric. to 4 con sunet of a popular * would pr 13 * t. 13 ! (with the 2-1,8¢ rate), or to $6 12 with the se race)

13 ): price represents # 24 increase over the $5 ** price, and the 56 :: *... *ret. . $ :ixrase.

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(11lustrated for $6.98 list long playing hit record sold through independent wholesale

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2 per selection or ' per vinte of playing time, whichever is larger (rate specified in ILR. 281!. passed by the House of Representatives in 1967). ' por telection or 1/44 per minute of playing time, whichever is larger (the rate specified in IR ??21 m s. 27, currently being considered by the Congress). Sve Bahibit 6.

CRI', financial survey of eight major record companies inelicated that in 1974 the average price r! which $ 98 ir
was sold by the companies was $3.33. These companies sold nearly 57 aillion LP's at that price in 191, whicitas
the regular price for LP's in that year. Also, the average gross margin of these companies WAS 351

le.
resul:ing in an average gross margin of $1. 16 per LP sold. A company's cross margin must cover itselling an!
promotion costs as well as its profits. (Source: The CRI financial survey of I3 record connie).

A $6.98 LP record, on the average, is sold to retailers for $3.62 and is sold hy retailers to concerne for $ See "Dealers Average 59 and 681 Disk, Tape Markup". Billboard. March , 1975, p. 3.

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sury 8:00 million. (See Exhibit 10). This would be a sizeable sun to load
on the consumers just to provide copyright owners with a windfall gain
euch does not appear to be warranted.

is was pointed out a few sonents ago, an increase in prices charged
record miers to the trade, and so on downstream to consumers, is only
te od several possible effects of an increase in the statutory fee. No
matter how the total effects of the increase sight work theaselves out ..
.sher prices, fever offerings, less innovation, fever and/or shorter
bends an U albums -the consumer, along with all other interested par.
1.a exept copyright owners, would be affected very adversely An esti.
3815 Cant" of $100 million very inadequately expresses shat burden.

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If prices were raised 6.1% (from Exhibit 9) to cover the increase in the statutory license royalty, the cost to consumers would be:

$1.6 billion x .061 = $97.6 million

The Bureau of Labor Statistics reported that the average
price paid for a $5.98 LP in December 1973 was $4.56.
$5.98 - $4.56 = $1.42, which is 24% of $5.98.

"Billboard's International Buyer's Guide of September 14, 1974 estimated that 6.1% of record sales in 1973 were of classical

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