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Additionally, of course, the broadeast station must bear the risk that no adver. ti er will be found for the program.

('onclusion.---The broadcast station whose signal is carried is sometimes in. jured by the distant rabie system (arriage. When the station is not injured it is because it is able to resist paying the program supplier for the distant community, the advertiser may switch its business to a competitor of the broadcast get paid by the advertiser for the distant community, (iii) Effect on the Adrertiser in the Program Carried in the Distant ('onimunity

The advertiser will try to avoid paying for the cable television system's use of the program in the distant market. Whether the advertiser will succeed will depend on its bargaining position vis-a-vis the station. That position will be affected by whether other advertising outlets are available to the advertiser. Faced by a demand from the broadcast station for payment for the distant commuity and or because it finds an advertiser for the program and manage to station (to another broadcast station if there is one, perhaps whose signal is not carried in the distant community) to avoid paying for the distant market. However, in some cases the advertiser will have to pay for advertising coverage which the adrertiser does not want and which will do it no good, e..., when the advertiser does not offer the advertised goods or services in the distant market."

Conclusion. The adrertiser is sometimes injured by the distant cable system carriage. When the advertiser is not injured it is because the advertiser is able to resist paying the station for the distant community and/or because the advertiver benefits from the advertising in the distant community.

To summarize, the effect of the free ride by cable television on these parties, eich of whom must bargain in the marketplace, is: There is always an initial economic injury to the program supplier. He tries to pass the burden to the television station he licenses whose signal is carried in the distant cable com. munity. The station, in turn, tries to pass the burden to the advertiser who may or may not benefit by the distant community carriage. The marketplace bargaining process is distorted. Those who bargain in the marketplace must involuntarily take into account, take risks for, sometimes are injured by, the deliberate oper. ations of an irresponsible entity which does not have to enter the marketplace at all. The cable system bears no burden at all and remains immune from the necessity of paying for its own vital operation-the importation and retransmission of programs contained in broadcast signals.

CONCLUSION CBS believes the (Committee should give short shrift to Teleprompter's eleventhhour scheme either to forestall copyright law revision entirely-thus preserving the present state of copyright anarchy in the cable television field from which cable television henetitor to eliminate entirely the possibility that under the revised law copyright payments by cable television for its compulsory license irond ever reach a reasonable level. ('BS supports the present compromise oompulsory license provisions for cable television of Section 111, on the condition that the Copyright Royalty Tribunal would be available as provided by Section N01(b) to assure the possibility that future royalty rates might be reasonable. Sincerely yours,

ROBERT V. Evans, l'ice President and General ('ounsel.

To: The Honorable Robert E. Kastenmeier.
From: Jack Valenti, President, The Motion Picture Association of America, Inc.,

and President, The Association of Motion Picture and Television Producers. Re: The Teleprompter Inc. proposal to the copyright bill, H.R. 2.223.

This memorandum is in response to your letter on November 4, 197.), inriting our comments on a proposal submitted informally to the staff of your Subconmittee, by Teleprompter, Inc., as a possible amendment to certain sections of the pending Copyright Bill, H.R. 2223.

• When the advertient's goods or services are not Avnllable in the distant market at all. or are not avaiinble on the same terms advertised, the arisertises mir be iniurad in an. other way by the advertising coverage there the advertimer may have to contend with the wrath of disappointed potential customers,

1951

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lopmola erroneously exempts such signals because it ignores ti T&: mo:ept of a separate payment for each commercial use. 1. if made a part of the Copyright Bill, would give the Con you . an appropriate basis for claiming jurisdiction over H.R. 222 ning paper formula has any validity, the Company is free to submit ** tip its consideration in making rate adjustments. The formu et highlight two essential facts: it recognizes the substantial pe el broadcasting revenues devoted to procuring programs, ai

cable's liability for copyright. > organe would give cable systems a shield of apparent copyright liabili 6:77, alows them to continue to act as parasites, living off the broa

? dir.pyright holders. terinisioo Industry has become "big business" and is on the way +44 much bigger. The Department of Commerce estimated 1974 cal

K100,000 and predicts that 1975 cable revenues will be thre 19tai dollars. (l'.8. Industrial Outlook, 1975, U.S. Department

* 311-312) of the searhedule in H.R. 2223, cable would pay less than 1% of its re twy fumming-the one product which is indispensable to it. Yet, Te

.'"1 wedges in its explanatory memorandum that broude isting po mymi that much of its revenues for program material. The NERA rep

a percent of broadcasting revenues in 1974 was devoted to progr

The members of this Association, the members of the Association of M e Picture and Television Producers, Inc., and the Committee of copyright (R?? who together represent the major copyright owners of materials that are *re over television and cable in the l'uited States, appreciate your courtesy on viting our views.

The Teleprompter proposal, wholly apart from its merits or demerits, has pro surfaced after the conclusion of the Subcommittee's formal hearing* 11:11,'. public witnesses. None of the parties concerned with and affected by spet 111 and chapter 8 of the bill, have had the opportunity to testify before the Stilwet mittee in open session on the one hand to explain and justify the proposal and on the other to analyze it and present its alleged deficiencies.

We have nevertheless, upon receiving your letter, sought to comply in the mi pe that this memorandum and its attachments, will be carefully colaldered thy By Members of the Subcommittee, and of course be made a part of the profile record.

We have engaged the services of a distinguished constitutional Authority analyze and comment upon the legal question rained as part of the Teitformen proposal.

Additionally, we have requested one of the most resperted and widely manne nized economic research firms in the Nation to analyze the mechanics and are of the Teleprompter formula in an effort to determine how it would oportal whether it is a practicable and workable idea in the marketplace, and wha! *. be its economic and fiscal effect on various classes of cable systems, on pra proprietors, and on the public interest.

The Teleprompter proposal consists of three parts :

(a) a memorandum by Professor Ernest Gellborn of the l’nirersity of V! ginia concluding that certain provisions of HR. 13 concerning cus rubbi Royalty Tribunal are vulnerable to constitutional attack under the due pian. clause";

(b) texts of amendments to the bill which would eliminate the Tr***** jurisdiction over cable copyright liability and the initial rate schedule in the inda and substitute for them a rather complicated cable-copyright fort'la; ala

(c) a memorandum by the Teleprompter (oriwration purporti iu pigiai the formula. Here is our response to your letter:

1. With respect to the Gellhorn legal memorandum, we submit a memora prepared by Professor Louis H. Pollak. Albert M Greenfield Profesor TAS at the t'niversity of Pennsylvania Law School, formerly Ibean of the lale LA School, and a recognized authority on constitutional law. This lerul brie Professor Pollak expresses the opinion that the prorisions of the bill to a Professor Gellhorn tokes erreption are constitutional

2. With rest to the Teleprompter proposal. we submit a detailed and es haustive analysis of that proposal by Vational Rearch Asswiates, Inc.

This analysis has determined that the Teleprompter formula:

Will tend to shift copyright liability from the larger systeme to the s un Rystem. It does this by exempting many larger cable systems frutas TILNE liability. punhink the burden of otrricht imments to smaller and Dr. *** Size systems, Myments which in a number of instants are larger thab they would y under HLR *3.

Will erempe substantial numbers of cable systems and their retenue all vipyright liability

Will return the orirall copyright liability of the Teleprompter (*ran' by some 13 perront

la ambiguous, and internally illogical, and would be a formidable administr tire burden

The Teleprompter proposal also has the additional de lences

1 The text of the Teleprompter amendments to carry out the formula 1111# with the trxt of the ruplannery memorandum 'I hey entradict earth

? A major element of the Telegranter forintia is the rate basta Hriber f*** of ruble stretns) which may be a valid element in totar . tha but which is unlikely to be valid in the marketplary in the future

3 The formuin is defient in pirmping network signals and local Nica froncs right lentility

(a) The formula erre 1Pyrms such vietinis bernum it tenore the *** on which tele! 10 adsertisins fees are cutputed and ruby rigled pri are nekoliated with buyers

RA report points out that the Teleprompter company's own copyri

T lp noduced by more than $135,000 annually if its formula 1er 1.bill's graduated rate schedule. The Teleprompter syste

ti permit of the nation's total cable systems. Thus, if a projection # Post formula were to be made to all cable systems, a 13 percent s.

Terreurs nationally would take place. The effect is to cut nea

the initial annual copyright revenue provided by the gradua ****: bill Pry d sereral crucial facts:

Pri je original McClellan fee schedule was arbitrarily cut in half. ! !!.! Trypptiptor has its way, the already reduced fee schedule wo

** tame, by at least 13 percent. * **?' intrard, the total liability for copyright for all copyright o s

and TV material, but also sports and music) would be ab als, for an industry with rerenues today of some $700 mil

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ISCOSITSING AND COMPLEX AND CONFLICTS WITH THE EXPLANAT

STATEMENT

L ut of the Teleprompter formula is that copyright is to be 573 'be mase of signals a cable system is not required to carry. "1. smala programs) that the Federal Communications Com

*system to carry are to be exempt from copyright liab 7967Iplanatory memorandum says something else : local sig

ir thropy right while non-network distant signals will be sul

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" I be friotaula text and the explanation contradict each other. He's pleri8100 market and other factors, some cable systems ar

ut what would normally be classed as distant signals. At the * systpins carry, but are not required to carry, local sig immels text fails to distinguish betureen local and distant signals 1. pinight liabiluy for some local signals and at times ere

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**'91, and inconsistency is also apparent when basic subsc

Lad by cops right owner's percentage share and the to *** T 10 The fesult inverts percentages into whole numbers ****.tural cipright liability for a number of cable systems, CL 8 . Struly protest such a formula.

piradierint exists. The second element of the formula is bas ? ?? ndio as well as television) revenues and program expe

art memerandum speaks in terms of television revenue Ins. While this additional conflict is obviously not fatal, it

(b) The formula erroneously exempts such signals because it ignores the copyright concept of a separate payment for each commercial use.

4. The formula, if made a part of the Copyright Bill, would give the Com. merce Committees an appropriate basis for claiming jurisdiction over H.R. 2223.

If the Teleprompter formula has any validity, the company is free to submit it to the Tribunal for its consideration in making rate adjustments. The formula does, however, highlight two essential facts: It recognizes the substantial per. centage of television broadcasting revenues devoted to procuring programs, and it acknowledges cable's liability for copyright.

The formula would give cable systems a shield of apparent copyright liability but, in practice, allows them to continue to act as parasites, living off the broadcast industry and copyright holders.

The cable television industry has become "big business" and is on the way to becoming much much bigger. The Department of Commerce estimated 1974 cable revenues as $59.000.000 and predicts that 1975 cable revenues will be threequarters of a billion dollars. (C.S. Industrial Outlook, 1975, C.8. Department of ('ommerce, pp. 311-312)

Under the fee schedule in II.R. 2223, cable would pay 1088 than 1% of its rere. nure for programming--the one product which is indispensable to it. Yet, Teleprompter acknowledges in its explanatory memorandum that brondrinting prj8 thirty times that much of its revenues for program material. The NERA report states that 28 percent of broadcasting revenues in 1974 was devoted to program procurement.

The NERA report points out that the Teleprompter company's own copyright payments would be reduced by more than $135.000 annually if its formula replaced the pending bill's graduated rate schedule. The Teleprompter systems represent 4.5 percent of the nation's total cable systems. Thus, If a projection of the Teleprompter formula were to be made to all cable systems, a 13 percent slice in total copyright revenues nationally would take place. The effect is to cut nearly $1 million from the initial annual copyright revenue provided by the graduated rate scale in the bill.

Please keep in mind several crucial facts:
Fact 1: The original McClellan fee schedule was arbitrarily cut in half.

Fact 2: If Teleprompter has its way, the already reduced fee schedule would be cut still further, by at least 13 percent.

Fact 3: If that occurred, the total liability for copyright for all copyright owners (not just films and TV material, but also sports and music) would be about $6 million annually, for an industry with revenues today of some $700 million annually.

1. THE FORMULA IS CONFUSING AND COMPLEX AND CONFLICTS WITH THE EXPLANATORY

STATEMENT

A crucial element of the Teleprompter formula is that copyright is to be imposed only in the case of signals a cable system is not required to carry. Put another way, all signals (programs) that the Federal Communications Commission requires a cable system to carry are to be exempt from copyright liability. But Teleprompter's explanatory memorandum says something else : local signals will be exempt from copyright while non-network distant signals will be subject to copyright.

Obviously, the formula text and the explanation contradict each other. Depending on the television market and other factors, some cable systems are re quired to carry what would normally be classed as distant signals. At the same time, some cable systems carry, but are not required to carry, local siguals. Thus, the formula test fails to distinguish between local and distant signals and, in fact, imporc8 copyright liability for some local signals and at timex erempts distant signals.

This contradiction and inconsistency is also apparent when basic subscriber revenues are multiplied by copyright owner's percentage share and the total is multiplied by 100. The result converts percentages into whole numbers which produces astronomical copyright liability for a number of cable systems, ('learly such systems would strongly protest such a formula

One other contradiction exists. The second element of the formula is based on all broadcasting (radio as well as television) revenues and program expenses. Yet the explanatory memorandum speaks in terms of television revenues and broadcast expenses. While this additional conflict is obviously not fatal, it does

evidence the lack of careful consideration that went into putting the Telegre feet package together.

Another example of the complexity of the formula is the burden that wi! on the FCC in certifying once every three months which signals are silm liability and the “popularity" of each of those signals on a coun't. . basis. With more than half of the 3.200 cable systems subject ( !!. ity, and assuming an average of two distant signals per each jstelli, the

could be required to make 14.080 determinations annuallly, each of which be the subject of a dispute.

Finally, the formula gives cable television a special incentive to tu!:4,19 FCC to increase the number of required signals. Such a provedure gral!! additional signals with which to attract cable subscribers but the dirts! " be a reduction in copyright liability. In other words, cable will enjoy a die benefit one of which is circumvention of copyright.

esc mrriers ("just and reasonable", 47 U.S.C. $ 205); the Federal hot on for natural gas company rates ("just and reasonable", 15

inn the Interstate ('ommerce Commission for common carriers of ve Dones and property 1"just and reasonable", 49 U.S.C. $1(5); the Civil

Band for air carriers, ("just and reasonable", 49 U.S.C. $ 1374); > Maritime Commission for vessels in commerce ("just and reason

SC117; and the Postal Service and Postal Rate Commission for m. Ta trasinalve and equitable". 39 U.S.C. $ 3621).

be Tribunal may be delegated authority constitutionally, to change 31ax Ana policy matter, the Tribunal should have the authority to potongan ' rate base for cable copyright because Congress has neither the

Derise to determine a fair rate base. The marketplace, especially for W ind and what may be a fair rate base today is not likely to be

Reus (hanges may be made in subscriber rates having the effect

stering from copyright liability, revenues that are properly uns urid.ng the basic cable service to subscribers.

II. USING BASIC CABLE SUBSCRIBER FEES AS A PERMANENT ELEMENT O! THI

IS INVALID

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*IENT LA IS DEFICIENT IN EXEMPTING NETWORK SIGNALS AND LOCAL SIGNALI

FROY COPYRIGHT LIABILITY

il Troneously crempts neticork and local signals because i I'M im schich adrertising fees are computed and copyrighted pro te cted with buyers.

in maker formula excludes network signals and required signal *Se ability on the assumption that advertisers pay broadcaster hie r and broadcasters, in turn, pass on this compensation for cabl * * Die bolders. These assumptions are false, and the formula

a detient in this respect. 1&posty [M, Fot Pay for ('able Corerage *70 end adrertising time buyers assert that cable coverage is no

Is Eve wrighed in determining national network or spot progra

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The first element of the formula is basic subsriherrerentes privebs ara system. The Teleprompter proposal would therefore lock into law, as 'b« n'e base, an element which is not likely to be a valid base for the future

As admitted in oral argument before the Supreme Court in Unlied sales V. Midwest Video (406 .s. 649, 1972, reported in 10 LAW Week 3 arba adt'ertising retenues increase basic subscriber fees can be down BA 01 adrertising rerenues prill be usid to provide baxir muhariber sert *

Another means of reducing basic subscriber fees is through the use of pai (35 For example, a cable system (an harply reduce a $15 a month all calor *** scription fee as an inducement to the basic cable suivriler to l It" cable user for fees that range from $9 to $12 per month for the pay cable ' * Inderd, at the 1975 National Cable Television convention in Spa Orlea filha ce participants explained this jolies as an effertise meals of surit para se subscribers whose higher sulma'ription rate would sharply increa*** table as revenues.

These are just two methods of circumventing puright limbilir unler Le Teleprompter formula. Doubtless, cuble sistems will find other T::$ ls Duo denigrate cable systems for doing so. They have a product to tell, and thus * use means available to them to promote cable in the marketplace. Rul!PW owners should not be penalized, and cable copyright ligbility firmly bers berduse the methods of marrhandising ouble filer 1810*change

The Register of (opyrights testified for fore the Suluommitteest: "Muot 1875, that she does not favor giving the Tribunal the power (as IR ently does) to change the rate bane from baie suriler rient, feat. bane: "In our opinion, this is a legislative function that would laut le dea : (Draft of Second Supplementary Report of the Register, Chapter 1. A

The Register did not mate whether her opinion is d ujen (11.'. grmunds or policy reasons. On either has bei ineurt.

Professor Pollak, in his attached memorandum, has already made plegre pe any doubt that rate-making is a funi non mi ha de may be dele guled Mir la antly, the standard of reasonableness", irithout any further embe line **

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mp fre major purchasers of national advertising time on tl ***Insaling some $131.5 millions annually, affirm that there is i

!!21, no ecific charge in the rate card or any allocation in t] 4** *** g for cable coverage.

*****P. Fire president-communications for Nabisco, Inc., and form 1: Awwwiation of National Advertisers, says that advertisers ha

*** frut indeed in the audience reached over cable through import

EAR Pirkham, Chairman Executive Committee of Ted Bates & ( omnes advertising agency with $136.5 million in television advertisi

:r,&i said that in his company the subject of cable coverage is i ***

with any of bis advertising clients. War, manager of media planning for Colgate-Palmolive-Pe

liet of national television advertising, says that cable covers mense with in their busing (of advertising) and selling (their produ

I

art time president and director of broadcasting for Foote, Con

n genies that buss time for Lerer Bros., which spends eller fort telerixion advertising, says that in none of his agen

kiral telaision advertising) is cable coverage considered be price of the spot or program purchased is based solely

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authority. See page 6 of Professor Pollak's mensorandurn, aitaksine and cases rites therein)

A A licy matter, there is no justification for not del..' to thar 17.' 8. the authority to determine an appropriate rate fi * T. Surp*. 'rt bad

ind that preveribing rate in solis irra! ste, ktorraus e foto step in determining a fair rute of retinu:

(1) the determination of the rate lan and

11 the midjustment of the rate whetule. See Fly Satural Gas Pif*:D ! 315 1 5 ,5 1!12)

In short, the administrative agen4y is met sulted to determine the rate in adjusting mutes, and thus rute la art. (htig. froin situation to sw'. I l'erm41 1 Pra Rate ('1**3*** 1**. ] *ij

( intently cont rats frund that market situations bet.gr adat 1 dl het line the expertin or time to deterre n!lui se aid loat! ! 1 lenteflat authority to adm ira! agent i rettet Usats a **** Puf restenes Bramples of the feet

ud ti tip for wire ar

Tula dinator for Proctor and Gamble, the largest dollar voli desiatiment in the country, says that P & G considers it impossibl *? putrentage of their advertising budget for cable coverage.(

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a delitional details.) blender Pet Paid for Cable Corerage

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porrident

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*** prident for national sales for the NBC Network st a! be "never even discusses cable coverage" (with "n ad

la mall ter having been asked any questions about it.

18 Cant to the President of CBS Television Network, and 1 pentent of CBS Television Network Research, concur in Al and agree that (network) sales are now "individual neg

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radio common carriers ("just and reasonable", 47 U.S.C. $ 205); the Federal Power Commission for natural gas company rates ("just and reasonable", 15

.SC. $ 717c); the Interstate Commerce ('ommission for common carriers of passengers and property ("just and reasonable", 49 C.S.C. $1(5): the Civil Aeronautics Board for air carriers, ("just and reasonable", 49 0.S.C. $ 1374); the Federal Maritime Commission for vessels in commerce ("just and reasonable", 46 U.S.C. & 817); and the Postal Service and Postal Rate ('oumission for postal rates ("reasonable and equitable", 39 ('.S.C. $ 3621).

Therefore, the Tribunal may be delegated authority constitutionally, to change the rate base. As a policy matter, the Tribunal should have the authority to determine the rate base for cable copyright because Congress has neither the time nor expertise to determine a fair rate base. The marketplace, especially for cable, is fluid and what may be a fair rate base today is not likely to be reasonable tomorrow. Changes may be made in subscriber rates having the effect of hiding or sheltering from copyright liability, revenues that are properly allocable to providing the basic cable service to subscribers.

III. THE FORMU'LA IS DEFICIENT IN EXEMPTING NETWORK SIGNALS AND LOCAL SIGNALS

FROM COPYRIGHT LIABILITY

A. The formula erroneously crempts netuork and local signale because it ignores the basis on which adrertising fees are computed and copyrighted programs are negotiated writh buyers.

The Teleprompter formula excludes network signals and required signals from copyright liability on the assumption that advertisers pay broadcasters for cable coverage and broadcasters, in turn, pass on this compensation for cable coverage to copyright holders. These assumptions are false, and the formula is therefore also deficient in this respect. 1. Adrertisers Do Not Pay for Cable ('orcrage

Xetwork officials and advertising time buyers assert that cable coverage is not & fnctor and is not weighed in determining national network or spot program purchases

The executives of five major purchasers of national advertising time on the three networks totaling some $434.5 millions annually, affirm that there is no breakout for and no specifie charge in the rate card or any allocation in the advertising budget for cable coverage.

Harry Schroeter, vice president-communications for Nabisco. Inc., and former chairman of the Association of National Advertisers, says that advertisers have very little interest indeed in the audience reached over cable through importation of distant signals.

Richard A. R. Pinkham, Chairman Executive Committee of Ted Bates & ('o. (the sixth largest advertising agency with $136.5 million in television advertising billings in 1974) said that in his company the subject of cable coverage is not considered or discussed with any of his advertising clients.

Harry D. Way, manager of media planning for Colgate Palmolive-Peat, a buyer of $76.5 million of national television advertising, ears that cable coverage is not considered in their buying (of advertising) and selling (their product) operations

Peter Bardach, vice president and director of broadcasting for Foote. Cone & Belding. a mujor agency that buys time for Lever Bros., which spends $81 million annually for television advertising, says that in none of his agency's purchases (of national television advertising) is cable coverage considered or even discussed; the price of the spot or program purchased is based solely on its assumed total circulation.

RL. Condit, media director for Proctor and Gamble, the largest dollar volume television advertiser in the country, says that P & G considers it impossible to quantify any percentage of their advertising budget for cable coverage. (See attachment C for additional details.) 2. Networks Are Not Paid for Cable ('orerage

Max Buck, vice president for national sales for the NBC Network states unequivocally that he "never even discusses (able coverage" (with “nadvertiser): nor does he recall ever having been asked any questions about it.

John Cowden, assistant to the President of ('BS Television Network, and Jay Eliasherg. vice president of CBS Television Network Research, concur in Mr. Buck's statement and agree that (network) sales are now "individual negotia.

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