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arrived at in the exhibit are self-explanatory and are discussed in the text. The enphasis in this exhibit is on the effect of a 598 increase in mechanical royalty payments on U.S. recording company pre-tax profits from all sources.

Exhibit 8 -- MECHANICAL ROYALTIES COMPARED TO RECORDING INDUSTRY

PRE-TAX PROFITS FROM RECORDS MADE AND SOLD IN THE
UNITED STATES, 1971-1974

This exhibit shows in similar fashion the effect of the proposed 3¢ rate on pre-tax donestic recording industry profits (line 11, Exhibit 5-C, p. 49). Mechanical royalties are paid on the basis of recordings made and sold in the U.S. As the exhibit illustrates, the potential impact of a higher rate on domestic profits is disastrous.

Exhibit 9 -- IMPACT OF A COPYRIGHT ROYALTY INCREASE

ON CONSUMER PRICE

This exhibit is self-explanatory. However, it is important to recognize that the prices and dollar margins presented are only illustrations, based on a $6.98 list price record. The average price paid by consumers on all records is much less than the average $5.77 they pay for a $6.98 record.

The exhibit also shows the more moderate impact on the consumer price a mechanical rate increase of 1/24 would have, as compared to the proposed 14 increase.

It must be recognized that a cost increase at the producer level cannot be passed along without increases along the way. The increase in cost to ziddlemen that would result from an increase in the mechanical royalty being passed on by recording companies would lcad to still further increases by aiddlemen in order that they be able to maintain their margins. Such further increases would be justified by the additional costs they would incur, such as for insurance, inventories, financing, bad debts, and the like.

57-786 0.76 - pt.3 - 12

161

Exhibit 10 -- COST TO COYSEVERS OF A 3 STATUTORY LICES. RATE

This exhibit, with footnotes, is self-explanatory. (RIAA estimates of retail sales of recordings, at list prices, are made annually.)

Exhibit 11 -- IMPACT OF A COPYRIGHT FEE INCREASE

ON JUKE BOX ONERS

Statistics for this exhibit are derived from the principal financial survey, as explained in the footnotes to the exhibit.

Exhibit 12 .. TUNES AND PLAYING TIME OF TOP 150

LE ALELL RICORDS

The exhibit, with footnotes, is self-explanatory.

Exhibit 13 -- Beroep MAYERS UNIT SALES PER RELEASE AND

BKIAALVEN POR Vis 193

Date in this exhibit are based on an analysis of results that were as integral part of the 19'3 financial survey. (See Technical Appendix, on Ext bits). The distribution of sales by volume is from Fon (5) of the questionnaire. The breakeven infonation is from for . (4). and is summarized on the following page:

[xhibit

, cont.

BREAKEVEN ANALYSIS 1972
(Figures are in $ except for item 5, which is in units)

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1. Net Factory Selling Price per Record
2. Less Total Variable Costs per Record

- Artists Royalties
- Fund Payments
- Copyright License Fees
- Variable Manufacturing and Shipping Costs
- Variable A&R, Studio Recording, and Talent Costs

- Variable Selling, Promotion, and General Costs
3. Contribution to Fixed Overhead and Profit (1 minus 2)
4. Average Investment in Fixed Overhead per Release

- Fixed A&R, Studio, Recording, and Talent Costs
- Unrecouped Artist Royalties and Bonus Payment
- Fixed Manufacturing and Shipping Costs
- Fixed Selling. Promotion, and General Costs.

- Fixed Depreciation Costs
5. Required Number of Records which have to be Sold

per Release to Break Even in Terms of Average
In vestment in Fixed Overhead per Release (

43)

$0.484
$0.328
0.085
0.009
0.037
0. 142
0.005
0.050
$0.158
$7, 212
1,591
1,503

430
3,635

52
45,678

Classical
_LP's
$2.934
$1.637
0.486
0.048
0.083
0.644
0.047
0, 329
$1.297
$28.714
11,819
1, 143
1, 147
14, 231 .

371
22,131

$1. 130

0.150
$1.830
$62, 900
24, 700

$68, 497
15, 348
16,053

4, 143
32,604

352
60,584

0. 1 35
$1.805
$44, 199
10,195
6, 002

1. 150
26. 473

380
24,092

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* These costs are charged to the records which are manufactured before the tapes. Tapes are produced only when
a record of the music has been successful.

No explanation was given by the reporting company of why a negative number was given for "fixed manufacturing
and recording costs" for classical tapes or no figure . was given for "fixed depreciation costs" for such tapes,
Source: CRI's 1973 survey of recording companies.

163

Exhibit 14 -- RECORD RETURNS, 1969-1974

The industry has long had a practice of allowing free returns of unsold merchandise to manufacturers. This exhibit summarized the dollar magnitude of this activity.

Exhibit 15 -. CONCENTRATION IN THE PHONOGRAPH

RECORD INDUSTRY 1947-1970

The exhibit shows clearly that the trend toward reduced concentration which began at the end of World War II has continued since the 1965 hearings. Concentration in the recording industry is declining.

Exhibits 16-21 -- DISTRIBUTION OF ROYALTY RATES

PAID ON COPYRIGHTS BY TYPE OF
RECORD ON RECORDS RELEASED BY
TWO COMPANIES IN 1974 PERIODS

The final six exhibits provide specific, new information on what has come to be known as the "ceiling vs. rate" issue.

To obtain the data contained in these exhibits, CRI undertook a comprehensive study of all licenses issued in 1974 by two companies and for which data were available at the time of the study. The nature of the study is spelled out in detail in pp. 82-118 of the main report.

As an aid to understanding this section of the report, the following guide to the exhibits might prove useful:

Basically, the exhibits fall into two main groups -- (1) tabular
listings of the mechanical rates paid, record by record; and,
(2) statistical distributions of the rates. These groupings are
further subdivided by type of record -- i.e., whether the record
was a single, a regular price LP, a budget-label release, or a
"club" record.

164

Looking at the total of tunes studies, the frequency dis.
tribution of rates by price, type of record, and reason for
discount is summarized in Exhibit 21 on page 118. Similar
information, excluding club records which are paid at a very
standardised variation from the 24 rate, is sunaarized in
Eriba16 on page 90. Exhibits 17, 18-A, 19, and 20 on
pages 99-113, and 115-116 tabulate the rates record by record
and are discussed in detall in the text.

Lahibit 18- on page 94 demonstrates explicitly the standard
variations from the 24 rate which were found in the sample. As
discussed in the text, these discounts from the statutory rate
were found to be for standard, recognizable reasons which are
Torlar neryday practice in the industry.

A study of licensing needs to be based upon a sample of licenses. Studies deset ce samples of records sold are interesting but they are not directly rele. **** t® # **** nation of the licensing process. For example: in a study of 1. #1.8 190 licrases are examined; 98 are at 24, and 2 are at 1.54. The

...nt of 11censing rates derived is quite different than in the sample were
to be w.g**ed by the fact that one of the 1.5& licensed recordings was a
par*.-- #?outstanding seller.

In my event, licensing routinely occurs before anyone knows what the

of males will be for • particular licensed recording: consequently, the perut.fy for sales volume (which comes after) to affect the pricing of # *** transaction (which comes before) is highly limited.

1 percentage distribution of various rate categories reported from the ai stoly of licenses has not been distorted by weighting for sales volume. 1 pr.to a comprehensive picture. #11 licenses signed by two leading lins fr.4 ment of 19'4 were included in the study.

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