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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
6.1% 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 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 protec: themselves and their interests.

The most obvious derensive action -- although not necessarily the most likely or most practical measure -- would be for recording companies to increase their prices to the trade. The distributors buying the wares of record aakers, in turn, could be expec:ed to pass any price increase along :0 retailers, who then would charge a higher price to consumers. At each stage in the distr:but-on chain, not only would the 'uigner :icense royalty

need to be passed on, but the higher operating costs generated by the roy-
alty increase would be passed on, too. For example, with higher prices for
recordings, the dollar cost of marketers' inventories would rise and, with
it, the cost of insuring and financing those inventories; the dollar invest-
sent in accounts receivable would increase; the dollar loss on bad debts
vould rise; the tax base would rise, etc. All these additional dollar costs
would have to be recovered, in addition to the direct increase in the cost
of recordings due to an increase in the copyright royalty.

Thus, if the effect of the higher mechanical royalty were expressed solely in terms of higher prices, the cost to the consumers of a 3€ rate would be far, far more than the $47 million cost in 1974 to the record nakers. At the consumer level is where the brunt of the statutory race increase 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 2€ per selection to 2-1/2¢ per selection (or 1//minute of playing time) to 3¢ per selection (or 3//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 $5.77 to $5.91 (with the 2-1/2¢ rate), or to $6.12 (with the 36 rate). The $5.91 price represents a 2.4% increase over the $5.77 price, and the $6.12 price represents a 6.1% increase.

Such an increase is, indeed, a substantial sum. Retail sales of recordings in 1974 were estimated to be $2.2 billion at list prices. However, since most records are sold at about 3/4 of list price, consumers actually paid about $1.: billion for recordings. If allowance is aage for recordings of aoncopyrighted music, 1 5.1% increase in retail prices could cost consumers

common list price for a popuiar u? 11 bum is 6.28. he ecrual selling price consumers is, on che average, 35.*. jee liso .midit ), footnotes wiina

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57-786 0 . 76 - pt.3 - 6

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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. nearly $100 zillion. (See Exhibit 10). This would be a sizeable sum to load on the consumers just to provide copyright owners with a windfall gain which does not appear to be warranted.

As was pointed out a few moments ago, an increase in prices charged by record makers to the trade, and so on downstream to consumers, is only one of several possible effects of an increase in the statutory fee. No aatter how the total effects of the increase might work themselves out -higher prices, fewer offerings, less innovation, fewer and/or shorter bands on LP albums -- the consumer, along with all other interested par. ties except copyright owners, would be affected very adversely. An esti. mated "cost" of $100 million very inadequately expresses that 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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