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

C. THE HIGHER STATUTORY MECHANICAL RATE O.

THE HIGHER STATUTORY MECHANICAL RATE WOULD ALSO BE COSTLY TO
JUKEBOX OWNERS

Increasing the statutory rate to 3¢ could cost jukebox
operators $6.57 per box per year.

If the increase in the statutory rate caused record makers to raise their prices, it would raise the cost of recordings not only to consumers, but also to jukebox owners.

Jukebox operators, as the subcommittee well knows, purchase millions of dollars worth of records each year in order to provide access to current music for the listening public. Correspondingly, they bear the cost of millions of dollars in copyright royalties. As can be seen in Exhibit 11, an increase in the statutory license to 3¢ would imply an additional cost to these operators of $6.57 per box, a substantial increase in their costs. This impact, too, does not seem warranted.

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With 34 rate (specified in S. 22 and H.R. 2223 currently before Congress), a rate of 3//minute would be charged for every minute of a tune's playing time over four minutes. The calculations above are based on the assumption that no 45 RPM records purchased by jukebox owners would have more than four ainutes playing time per tune. If any significant number of the tunes had a longer playing time, the increase in mechanical royalties at the 34 rate would be greater than the figures indicated above. singles (45 RPM's) have a tune on each side, or two tunes/record. CRI's financial survey of 13 leading record companies with 64% of the industry's sales indicated that in 1974 the average gross margin of these companies was 35 of net sales. The gross margin must cover a company's sales, promotional and adninistrative costs as well as its profits. 'Statistics supplied by 13 leading record companies with 64% of the industry's sales indicated that in December 1974 the average price at which a record company sold its 45 RPM records was $0.5475. A RIMA survey of "one-step distributors in early 1975 indicated that the average price at which they sold records to jukebox owners was 70%. Given footnote d, this indicates a gross margin of 211. ***The Jukebox Story' published by the Music Operators of America in 1973, indicates that there are 400,000 to 500,000 jukeboxes in the country. Jukebox owners buy about 75 million records a year at a cost of about $52 million. If 450,000 jukeboxes are assumed to be in operation, then record purchases cost on the average about $115 per year per jukebox, and jukebox owners on the average purchase 167 records per year per jukebox.

II.

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

D.

THE HIGHER RATE MIGHT CAUSE RECORD MAKERS TO RECORD LESS MUSIC

To compensate for an increase in the statutory license rate,
record makers might, among other defensive measures, record
less copyrighted music and might put fewer tunes on a recording.
To compensate for the reduction in their profits, they might
reduce their recordings of classical and experimental music,
on which they generally suffer losses. The higher license
rate night eliminate some of the smaller marginal record
makers. To the extent that these developments take place,
there would be less diversity in the industry and in the re-
cordings offered the public, less employment for musicians
and performing artists, and fewer opportunities for new or
experimental composers to get their music recorded.

If record makers passed on the substantial increase in license royalties which H.R. 2223 would exact, the higher prices charged consumers and jukebox owners for recordings would undoubtedly generate at least some, if not considerable buyer resistance. Sales of recordings might fall, and record makers would be under pressure to seek still further alternate strategies for coping with the $47 million increase in their mechanical Toyalty payments, in order to minimize necessary increases in price at the retail level. Given their inability to absorb the increase out of profits, and still make a return commensurate with risk and investment, still further defensive measures would be sought.

What alternatative measures might a record maker take to ensure his survival if the statutory rate is increased so steeply? .

1. Reducing the Use of Copyrighted Music

Faced with such a dramatic rise in their mechanical royalty payments, record makers might elect to reduce their use of copyrighted music. The most obvious way to reduce the use of copyrighted music is to reduce the number of tunes per record. As an alternative, this is not particularly attractive, but, in judicious combination with other defensive actions, this unfortunate step might have to be taken.

Some cutting down on the number of tunes on a recording has already occurred over the last 10 years. Record makers currently try to keep their mechanical royalties per LP down to a reasonable level. If the royalty for any tune is greater than the statutory rate because of its longer playing time, a record maker may tend to reduce the number of tunes on the recording in order to keep within his total budget for mechanical royalties on the recording. As can be seen in Exhibit 12, the average playing time per tune has risen a whole minute since 1965. This trend is related to changing tastes which enjoy more complex and sophisticated renditions and recordings of music. Record makers have compensated for this longer playing time and the resulting increase in the mechanical royalties per tune in part by cutting down on the number of tunes on an LP.

Because the copyright bill currently before Congress proposes to increase not only the royalty per tune but also to increase the playing time rate and to impose it on any tune longer than four minutes, record makers might try to hold down the playing time of tunes and try to keep as many as possible under four minutes. In sum, the increase in the statutory license rate may cause record makers to record fewer copyrighted tunes and to be more selective about the tunes they do record.

Efforts to reduce the use of copyrighted music on recordings would, of course, hurt publishing companies, composers and other copyright owners, for fewer of their tunes would be recorded. There would be fewer tunes earning mechanical royalties and performance fees from recordings. Popular established composers would still get their tunes recorded, no doubt, but the new tunesmiths and composers of experimental or classical music might face greater obstacles in gaining public exposure.

If the increase in the statutory license royalty caused record makers to put fewer tunes on LP's or tapes, fewer musicians and artists would be

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This analysis is based on the "Top 150" LP albums listed in Billboard on March 6, 1965 and the top 150 of the "Top 200" LP albums listed in Billboard on March 3, 1973. Only the 150 of the "Top 200" albums were studied in 1973 to provide direct comparison with the 1965 list, which consisted of only 150 albums. Because some albums contained two records, a total of 165 records with 1,653 tunes were tined from the 1973 hits.

Although the Top 150 LP's analyzed averaged only 10 tunes per record in 1973, the "typical" LP must have around 11 tunes. According to statistics reported by 8 record companies with about 51% of the industry's sales, in 1972 the average mechanical royalty per popular LP disk was 22.5$ (at the 24 rate). If a flat license rate of 24 per tune were paid, this would indicate that the "typical" LP had 11.25 tunes (22.5 ; 26). Some tunes do pay a license fee based on playing time, as indicated in footnote c below, but some tunes, being from the public domain, call for no copyright royalty at all. (These 8 record companies were among the 13 included in the CRI financial survey.)

Current practice is generally to supplement the 2¢ per tune rate with payment of 1/24 per minute of a tune's playing time over 5 minutes. Hence the actual royalty paid on the sample 1973 LP's probably averaged about 22¢ because of the long playing time of their tunes, and the decrease in the average royalty between 1965 and 1973 was only about 81.

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