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as I shall point out in a moment, do not sell very well. In fact, they sell very badly.

Mr. DANIELSON. But if you have a tune that is an absolute flat out failure, but it is coupled with this Phoenix tune that Mr. Gortikov shows, he is still going to get the 2 cents.

Dr. GLOVER. He gets it just as much as the lead tune on the album, and it may be a band that you hope you will get through quickly so you can go on. But he gets 2 cents also.

This we believe is really a proper unit of measure because this approximates what you get for a license or for a released tune.

So, to summarize the inflation argument, the fact of the matter is that on a percentage basis, it is more than they got originally. It is not as much as they got some time ago. But that depends. These things come and go and good years and bad years come and go, just as record profits go up and down, as I shall go on to say in a few moments. The total dollar amount, of course, has increased enormously since the copyright law was established and has increased enormously in these last several years. So that the aggregate income going to copyright owners-many of them, obviously, are not composers-has increased very substantially. And in fact it has gone up a lot faster.

Now, we take a look at the impacts here. If the royalty rate goes up, as is proposed in pending legislation, this would be about a 59-percent increase. This would push up the total aggregate payments by $47 or $50 million. That is the size of the increase. Now obviously that size of an increase would have some kind of an impact. One impact, of course, is to push down your own profits.

Profits of the industry are not large enough to conform to that, as we will show in just a moment. So, if they were fully absorbed, this would essentially cut out about two-fifths of the industry's profits, and almost 100 percent of the industry's profits from records made and sold in the United States. The rest is the income from foreign record companies, using American made masters.

If this total increase is passed along in the form of a price increase, this will, as I have indicated by the margins downstream to distributors, wholesalers, rackjobbers, retailers and the like, represent an increase of about 100 million. In fact, that is such a substantial amount. it is not easy to do, and no doubt, the industry would look for other alternatives.

They would, first of all, not like to to cut into existing profits. They would like not to pass it on fullv, to consumers. So, they would in fact be looking for other possibilities.

I might just point out, before we go on what some of these other alternatives are.

One alternative, of course, is to decrease the amounts of music on a record. And, this has indeed happened as a response to trving to keep the prices down. An opposite course is to play longer pieces of music if that is compatible with the esthetics. And there are other minor forms of economy.

I would like to take a look at the matter of the breakeven point. When I was here before, we showed you at that time that on popular LP's they took about 7.800 copies before you got your breakeven point. That figure is now up to 61,000; 61,000 copies before you got your original investment back. In 1963, in fact, 61 percent of the records released did not, in fact, even get their cost back, let alone make any money. And that figure has now risen to 77 percent. So, you have a 77 percent chance of not getting your money back, let alone making any money. And, in fact, what happens, of course, in this industry as in other industries, it is those few records that are successful that carry the lot. When it comes to classical music--this is the real economic disaster area.

In 1963, there were 9,700 copies that broke even. This is now up to 2,000. In 1963, 87 percent of the records did not cover their costs. And this is now up to 95 percent. So, 95 percent of all the classical music offered to the American public is offered at a substantial loss.

And in the aggregate it is run at a loss. This is a loss area. And it makes no contribution to the industry's profits.

Now, I would like to emphasize the point that raising the statutory rate by 2 cents--and it sounds very small-this of course is a substantial increase in the price of the record, and the cost of the record. What it means is that it reduces your chances of making any money. And consequently, what you will do, the major response is to cut out your risky or your more innovative kinds of music, whether it is innovative on behalf of the composer, or the arranger, or the artist, or the musician, or the offering by the record company itself.

Mr. DANIELSOx. I wish to advise you, Mr. Glover, that you have consumed 15 minutes. We cheated on you and took a couple of minutes. So, that is sort of a warning.

Dr. GLOVER. Thank you. There was one last point, which the publishing interests makes a great deal of. It is very complicated and very technical. They argue that increasing this rate merely increases a ceiling under which bargaining can take place. We have indicated 10 years ago and we have indicated again that there is no such thing as bargaining. There are 50,000 releases, there are hundreds of record companies, there are scores of publishing companies. The industry does not, in fact, sit down and haggle and bargain on a case-by-case basis as in the bazaar in Damascus. This isn't highly individualized99 percent of these records come through at standard rates or standard variations which are club variations, overtime variations, artist discounts, quantity discounts, and the like.

It is perfectly clear that this is so and in fact there are some licenses now being written which simply say that if the statutory rate is increased the fee paid will go up accordingly. And it cannot be otherwise. Otherwise, all kinds of problems of price discrimination would occurs a company charging more or less to smaller or larger record companies and record companies paying in smaller or larger amounts. In fact, we work in a nondiscriminatory, uniform way for very good, sound economic reasons. And it will under any future rates.

This next chart simply shows that in 1963, 99.4 percent of the licenses were paid at the standard rate or standard variations uniformly available to all companies. This figure in 1974 is 99.2 percent. So, the fact is that it is a rate, it has been a rate and it will always be a rate, for some period, for sound reasons. So, in summary, publishers' income has in fact out paced inflation very substantially. And a higher rate would hurt consumers, it would hurt recording artists and musicians, and it would have a disastrous effect on the profits of the record industry.

Thank you.
Mr. DANIELSON. Thank you, Mr. Glover.

We will now move on to Mr. Michael Kapp, president of Warner Special Products, Inc.

TESTIMONY OF MICHAEL KAPP, PRESIDENT, WARNER SPECIAL

PRODUCTS, INC. Mr. Kapp. Good morning, my name is Michael Kapp. I am president of Warner Special Products, Inc.

During much of my 20 years in the recording industry, I have been directly responsible for all details of music licensing and mechanical royalty rates.

I am an executive with one of the largest groups of recording companies in the industry today-Warner Bros. and Reprise Records, Atlantic and Atco Records, and Elektra and Asylum Records; all Warner Communications companies.

I have read and heard claims of the music publishers that:

1. Mechanical royalty rates are “negotiated” between publishers and record companies and the current 2-cent statutory rate is merely a “ceiling" for negotiation.

2. Therefore, an increase in the statutory rate to 3 cents would have only a modest effect on the industry, since the change would merely create “more room for bargaining."

I am incensed at how misleading these claims are and will try to show that since No. 1 is inaccurate, No. 2 is therefore false.

Our companies annually secure approximately 4,000 mechanical licenses for regular priced recordings. Of those, a close estimate is that 86 percent were granted at or even above the statutory rate. Of the remainder, over 13 percent are licensed on a per album basis, because the recording artist is also the composer and publisher. Within his artist contract, he and the recording company have agreed to a fixed number of cents per album, such as 20 cents, 22 cents, 24 cents, regardless of the number of songs used. Therefore, the actual rate per song-slightly above or below 2 cents-depends entirely on the total number of songs on that record.

From this you can see, virtually all of our regularly priced records today-specifically, 99.1 percent--are licensed at or very near the statutory rate.

It is true that licenses are issued at a royalty rate below 2 cents; however, these records fall routinely into regular categories universally accepted in the trade. Standardized rates below the 2-cent level are granted on recordings that are usually lower priced, such as: budget records, records sold via television, records sold through record clubs, records sold as premiums. All of us in the business know that license rates for these records will be below 2 cents, just as all of us know that rates for regular priced recordings will be essentially the statutory rate.

If the statutory rate goes up to 3 cents, then regular priced records will pay 3 cents; and standardized rates off the 3 cents will be for those lower priced records. Business will go on just as before, only at the higher rates. There will not be much bargaining over rates because there is not much now.

Thank you.
Mr. DANIELSON. Thank you, Mr. Kapp.

And the anchorman, the concluding witness on this side of the debate will be Mr. John Cohen, member of the board of directors of the National Association of Recording Merchandisers.

Could you proceed, Mr. Cohen?
[The prepared statement of John ('ohen follows:]

STATEMENT OF JOHN COHEN, PRESIDENT, Disc RECORDS CO., AND MEMBER, Board

OF DIRECTORS, NATIONAL ASSOCIATION OF RECORDING MERCHANDISERS, INC.

My name is John Cohen. I am president of Disc Records Company which operates forty retail record stores in fourteen States. In addition, I am a member of the Board of Directors of the National Association of Recording Merchandisers, whose regular membership consists of hundreds of retailers and distributors of sound recordings throughout the United States.

Our segment of the recording industry has grave concern about any increase in the "mechanical royalty' rate. If the rate goes from 2 cents to 3 cents, as proposed, we are faced with the possibility that the recording companies will be unable to absorb the increase and that, therefore, the increase will be passed on through the chain of distribution. Speaking for our organization as typical retailers, in such an eventuality, I can assure you that we would be unable to absorb the increased wholesale price which would result. Our company operates on a gross margin of 40% and a net profit of only 3% after taxes. We would, therefore, be compelled to pass on the increased cost to the consumer.

So far in 1975, no doubt due to the depressed economy, the number of sound recordings sold by our stores has decreased as has the total dollar volume of our sales. I am confident that an increase of 30-35 cents per average LP recording, which would appear to be the added burden to the consumer if the royalty rate is increased to 3 cents and if passed on, would further decrease the number of recordings that we sell. Not only would that affect our business, but it would mean that the availability of sound recordings to the consuming public would decrease. Interestingly enough, this is not a matter which affects only the young people as 60% of the sound recordings that we sell are purchased by adults.

You have already heard extensive testimony with regard to the absence of the need for an increase in mechanical royalty payments. In our view, that case is persuasive and the additional cost which may thereby be imposed on purchasers of sound recordings would not be warranted. I need not remind this Subcommittee of the heavy burden being borne by the consumer in these inflationary times. Any increase in that burden should be imposed only where a clear and absolute need is shown. Judging from the information we have, an increased burden based on additional mechanical royalty payınents is un justified.

Thank you for the opportunity to present this testimony.

TESTIMONY OF JOHN COHEN, MEMBER OF THE BOARD OF DIREC

TORS, NATIONAL ASSOCIATION OF RECORDING MERCHANDISERS, INC.; PRESIDENT, DISC RECORDS CO., ACCOMPANIED BY CHARLES RUTTENBERG, COUNSEL

Mr. Cohen. My name is John Cohen. I am president of Disc Records Co. Accompanying me is Charles Ruttenberg, counsel for our association.

I operate 40 retail record stores across the country in 14 States. In addition, I am a member of the board of directors of the National Association of Recording Merchandisers, whose regular membership consists of hundreds of retailers and distributors of sound recordings throughout the United States.

Our segment of the recording industry has grave concern about any increase in the mechanical royalty rate. If the rate goes from 2 cents to 3 cents, as proposed, we are faced with the possibility that the recording companies will be unable to absorb the increase and that, therefore, the increase will be passed on through the chain of distribution. Speaking for our organization as typical retailers, in such an eventuality, I can assure you that we would be unable to absorb the increased wholesale price which would result.

Our company operates on a gross margin of 40 percent and a net profit of only 3 percent after taxes. We would, therefore, be compelled to pass on the increased cost to the consumer.

So far in 1975, no doubt due to the depressed economy, the number of sound recordings sold by our stores has decreased as has the total dollar volume of our sales. I am confident that an increase of 30 to 35 cents per average LP recording, which would appear to be an added burden to the consumer if the royalty rate is increased to 3 cents and is passed on, would further decrease the number of recordings that we sell.

We also are afraid of being priced out of the youth market. Not only would that affect our business, but it would mean that the availability of sound recordings to the consuming public would decrease. Interestingly enough, this is not a matter which affects only the young people as 60 percent of the sound recordings that we sell are purchased by adults.

You have already heard extensive testimony with regard to the absence of the need for an increase in mechanical royalty payments. In our view, that case is persuasive and the additional cost which may be imposed on purchasers of sound recordings as a result of an increase in the royalty rate would not be warranted. I need not remind this subcommittee of the heavy burden already being borne by the consumer in these inflationary times.

Any increase in that burden should be imposed only where a clear and absolute need is shown. Judging from the information we have, an increased burden based on additional mechanical royalty payments is unjustified.

Thank you for the opportunity to present this testimony. Mr. DANIELSON. Thank you, Mr. Cohen. That concludes the four witnesses who have been scheduled to testify concerning the opposition to the increase.

We will now open the hearings for questions to these four witnesses. Father Drinan, would you like to lead off ? Mr. Drinan. Thank you very much. I thank you gentlemen for your appearance.

I wonder if we should discuss first whether we should go back to point zero and wipe out completely the statutory 2 cents that was set in 1909. As I read the history, it was set in order to prevent one piano roll company from obtaining a monopoly over others. And it certainly is anomalous, I do not have to tell you people, to have a 1975 regulated industry of this nature.

In the testimony that is to follow on the other side they suggest that political realities indicate that we simply have to keep the regulation in some way. If you people had your choice, would you deregwate the industry in this regard completely?

Mr. Gortikov. No, sir. I would maintain the license and a concomitant of that is a fixed royalty rate at whatever royalty rate is set.

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