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EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 22, 1996

.1103

[English]

The Chairman: I declare open this session of the Standing Committee on Canadian Heritage, which is being convened to continue the study of Bill C-32, an act to amend the Copyright Act.

[Translation]

The presentations continue.

[English]

Before us today we have Mr. Brian Chater, president of the Canadian Independent Record Production Association, or CIRPA.

Mr. Chater, you have 45 minutes. The briefer your remarks, the more time there will be for members to dialogue with you. The floor is yours.

Mr. Brian Chater (President, Canadian Independent Record Production Association): Good morning, Mr. Chairman and committee members. The Canadian Independent Record Production Association appreciates the opportunity to appear before the committee this morning with regard to Bill C-32, the copyright revision bill. As president of the association, I am responsible for the day-to-day operations.

CIRPA represents Canadian-owned companies that produce records in English. They range from small independent companies that produce a few records for a particular niche market to companies grossing several million dollars annually.

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Although it should be said that most of our members are towards the low end of the financial spectrum, nevertheless, as Statistics Canada figures clearly show, they are responsible every year for over 70% of Canadian content releases.

Our members represent artists that range from worldwide successes such as Rush to critical and commercial successes such as Loreena McKennitt to a host of new artists who hope to emulate these successes in the future.

CIRPA wishes to commend the government for the introduction of Bill C-32. To paraphrase one of our members, Sam the Record Man, ``They said it, they did it, and we appreciate the fact that they did!''

Very briefly, let me tell what CIRPA does. We have three main mandates from our members. The first, as is clear today, is to represent their interests at all levels of government in both the legislative and policy areas. The second is to help them market and sell their products worldwide. The third is to supply information and provide education to enable them to survive and effectively compete in today's increasingly and rapidly changing modern world.

These changes are presenting major opportunities and major potential pitfalls for our members. It is CIRPA's job to do our best to ensure that our members can fulfil their aims. Later on in our presentation we will be giving you some concrete examples of the day-to-day realities for CIRPA and its members.

CIRPA has followed the hearing to date with considerable interest. While this is, of course, a process to amend the law, CIRPA feels the day-to-day issues that flow from this process have perhaps not been addressed as much as we would like. Therefore, in our presentation we intend to try to give you a flavour of the business environment that currently exists and how it will change if this act is passed, not just from the creator and copyright owners' perspective but also from the major users' perspective.

It is often said that copyright is a difficult, complex subject. This is certainly a point of view. However, CIRPA inclines toward the opposite view that, in essence, copyright is very simple. It is a property right, and as such, users who benefit from using this property, whether public or private, should pay for such use. Simply put, if you use it, pay for it.

CIRPA believes this is what copyright is all about, yet there are clearly issues of how much, how to collect and how to make payment effectively to those whose property is being used. These issues can be complex, especially in today's and tomorrow's world.

To repeat, CIRPA feels the principle of copyright is simplicity itself. If you use it, pay for it, and everything else - to paraphrase Mr. Fowler on another subject - is merely window dressing. To put it more clearly, it is designing effective methods to ensure this goal is reached.

In the view of CIRPA, the only real question is how much a particular use is worth. As you will hear throughout this presentation, we feel this is a matter for free and fair negotiation between the parties concerned, whether it is an individual or a collective negotiation.

The system of government and the society we enjoy in Canada is based on concepts we all adhere to. A major concept is that of property rights - the ownership of these rights and the ability of property owners to receive payment for the use of their property by others. What are we really talking about when it comes to intellectual property rights? This is a critical question. Are they central to the future prosperity of Canada or are they peripheral? CIRPA believes the answer is very clear. They are at the very centre of our future prosperity.

As the president of the Conference Board of Canada recently stated:

A recent report on the Irish music industry discussed the importance of copyright in the following terms:

To quote a view from the United States, in 1986 a U.S. senator said:

We will now turn to our brief. We do not intend to discuss the whole brief in detail, but in the short time available to us we wish to highlight a few of the issues that in the view of CIRPA are of critical importance to the whole process. We will then review some of the day-to-day realities that exist today for both our members and the users of our property.

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The issues we will address this morning are those of neighbouring rights and sound recording issues and government-directed exemptions, private copying issues, ephemeral exceptions, and the ongoing process.

First I'll deal with neighbouring rights and sound recording issues. As you have read in our brief, CIRPA is categorically opposed to the various sections of the bill that, instead of granting an unrestricted right to payment fees or property, contain many restraints and criteria that effectively limit the amount that can be negotiated for the use of creators' works.

This is also an issue in the section of the bill regarding private copying, and CIRPA has the same reservations with regard to these sections of the bill. It is gravely concerned that some of these proposed exemptions ought to be permanent, no matter what happens in the future.

This approach to copyright law has been a consistent CIRPA position over many years and one that we feel is clearly justified by the results of the retransmission act.

As an example, we would refer you to the process and passage of this act. The act flowed from the free trade negotiations between Canada and the United States -

The Chairman: Hold on a minute. The translator can't pick up what you are saying, because you are going too fast. Do you have a French version of your document?

Mr. Chater: No.

The Chairman: Could you keep it slow so they can pick it up?

Mr. Chater: Okay.

The act flowed from the free trade negotiations between Canada and the United States and from the fact that Prime Minister Brian Mulroney promised this would be introduced, even before serious negotiations began. The reality was clear that a law that closely followed the U.S. criteria would result from these negotiations, and indeed this turned out to be the case.

CIRPA filed a detailed brief at those hearings, the gist of which was that while it fully supported the principle of payment for use of property, we have major reservations regarding the wording of the bill, particularly with who qualified to receive payment.

In essence, the major flaw was that the bill basically followed the U.S. approach. Local signals did not qualify for payment. Only distant signals as defined under the act qualified for payment by any given cable system.

While it could be argued that the value of local signals might be less than distant signals to a cable subscriber or system, the exclusion of all local signals was a major error, morally, legally, and in a simple business context.

CIRPA pointed out very strongly that the results would be very predictable. Local signals were almost always Canadian, and distant signals were almost always American. Therefore, copyright owners would lose, particularly Canadian copyright owners.

In its haste to pass that bill, the government chose to ignore the obvious, and the result has been easy to see. It has created an unfair and anti-Canadian piece of legislation that clearly biased payment against Canadian owners.

While the context and precepts of Bill C-32 are different, in the view of CIRPA the principle we enunciated is the same. There should be no advantages given to either side or restrictions on fair negotiation for rights contained in the bill.

CIRPA would also like to make the point that this is a new right, and rights owners are entitled to a fair payment for use. However, this payment should in no way result in any derogation of current rights holders' payments.

You'll be hearing about the same retransmission bill in a different context from Monsieur Pilon. Just so you are clear, CIRPA's objection to the bill is with what it excludes, not with the regime that was set up.

The second issue is private copying. As we have stated in our brief, CIRPA has several concerns with these sections of the bill. We reiterate our concerns with the suggestion that certain named criteria be considered in any decision made by the board.

I will quote from a recent paper by a respected Ottawa lawyer who was employed by government for many years in the field of copyright and is now in private practice in the field. He addressed the issue of the previously mentioned retransmission right in a discussion regarding the board's jurisdiction and the amounts granted.

CIRPA is of the view that the government very properly created the Copyright Board, in the 1988 Bill C-60, to act as an independent arbiter. The board functions in an open, effective and fair manner and has proven itself to have an excellent grasp of the many complex issues involved in the field of intellectual property negotiations and over the years to have rendered fair decisions that were in the public interest.

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In case you think the previous sentence is somewhat sycophantic, let me immediately say that CIRPA has by no means always been happy with the decisions. However, we believe the fault lies with creators in not convincing the board of our case, not in the board decisions themselves. Now we have to resolve to do a better job in future.

CIRPA fully supports the concept of an independent arbiter that takes all arguments and the public interest into account before deciding an issue. It is for this reason we are very troubled with the approach contained in proposed sections 68 and 83 of this bill and the implications that flow from them.

CIRPA's other major concerns with the proposed bill regarding private copying are twofold. First, we are very concerned that any rights changes in this bill are clearly restricted to current technologies and applications, and in no way should be construed as allowing unrestricted public access to new technologies as they come on stream. This is of concern given the fact that every indication is that these technologies will clearly allow one-on-one transactional capabilities in the not-too-distant future.

CIRPA wishes to be very clear that its member regard the current approach as a transitional one that addresses only specific technologies in existence today, particularly given all of the technological advances that are currently in process.

Second, CIRPA members are concerned with the quantum involved and the reality of receiving adequate recompense for the use of creative rights involved. CIRPA is fully prepared to marshal its arguments and present its case at the Copyright Board, but it's also cognizant of the realities involved. It wishes to make it clear that its members are absolutely of the view that any such rate granted by the board during this transitional period in technology should not be construed as setting any precedents whatsoever vis-à-vis the future worth of creative works by other uses and technologies.

To conclude this section of our remarks, may we briefly address the issue of exceptions being requested, particularly by radio broadcasters, and the issuing of a continuing review process.

The broadcasters are strongly pushing for an exception to cover areas they say are potentially a big problem for them and could cost them a great deal of money. We will restrict our remarks solely to the issues raised by radio.

The issues of transfer from one medium to another for purposes of efficiency at radio stations have been a factor for decades. The mediums of transfer have changed - from cartridge to hard disc, for example - but the principle remains the same. To our knowledge, no rights owner has ever sued a radio station for uses such as this, even though the right to do so has always been in existence, and nor do CIRPA members envisage doing so in the future. CIRPA is more than willing to engage in constructive dialogue with the broadcaster to reach a written agreement to this effect. To our knowledge, the broadcasters have never approached us for such a request, but this is to let you know we are more than open to such an approach.

Finally, there is the issue of phase three and ongoing revision. CIRPA would earnestly entreat the government, and indeed all political parties, to proceed immediately with the ongoing revision process to address the issues that are still outstanding on the copyright agenda and the new ones that will surely arise as technology advances.

In the view of CIRPA and its members, this ongoing process will be critical to Canada's future prosperity and well-being in the next century. As we stated at the beginning of our presentation, CIRPA would now like to give you a few business insights with regard to some of the issues raised in our briefs and the briefs of others.

As you know, CIRPA is totally opposed to restrictions on the right of free negotiation. We are discussing the following matters to give you a sense of day-to-day realities.

First, in terms of the independent sector, let's take a look at CIRPA and its members. Our membership is currently over 150 companies. While concentrated in Ontario, our members come from almost every province and territory from coast to coast. The only omissions are Prince Edward Island and the Northwest Territories. Our board of directors also reflects this geographical spread.

At this point I would like to clarify that CIRPA's mandate deals with anglophone releases. Francophone releases come under the aegis of ADISQ, whom you'll be hearing from shortly. However, I also wish to reassure you that this is not a matter of two solitudes but solely one of efficiency and practicality. Robert, Solange and I confer regularly by phone, probably twice a week. We meet on a regular basis to discuss joint strategies and approaches in a variety of areas, from policy to legislation to marketing.

Prior to this appearance I took the opportunity to review our membership files for the past10 years, and some interesting facts emerged. The actual number of members in 1986 was about 150. It subsequently began to decline. Only now, in 1996, has CIRPA gotten back to 150 members once again. Even this has been due to a very vigorous membership campaign in the last 12 months.

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Equally interesting is a review of the company names for 1986, which elicits the fact that only about 26% of CIRPA members then are still CIRPA members today. These numbers clearly show the major financial difficulties the independent sector encounters in just surviving in this industry in Canada.

Although CIRPA does not collect individual financial figures from our members, the overall picture today is much the same. If we review our current membership, the majority are very small businesses whose earnings are substantially less than most small radio stations let alone the large ones or the chains. This reality is clearly shown in the attached document, using Statistics Canada figures for the years 1989-1994, which are the latest available.

As you can see from the numbers, the total revenues and profit levels for independents increased substantially in 1992-93 and 1993-94 due to major success by one or two TV marketing companies. The continuing reality for most of our members is the day-to-day battle for existence, and in this situation every penny counts toward the bottom line.

As you can see from the chart, Canadian companies still release the majority of Canadian-content singles, in excess of 70%, and are major contributors to the cultural milieu and commercial success of Canadian artists both in Canada and around the world.

I'm sorry to sound like a broken record, but once again CIRPA wishes to reiterate the fact that it's totally opposed to restrictions between users and creators for use. However, the reality is that this bill contains such provisions, and CIRPA must address these provisions.

I'm sure you've heard a lot from broadcasters about their difficult financial situation. There are a couple of issues that don't seem to have been raised that I would like to bring to your attention. Matters of particular concern to CIRPA with regard to radio are, first, the financial reality of radio, particularly the value of the licence, and two, the role of the CRTC in the changing finances of radio and the licensing process.

The first issue CIRPA wishes to raise is the value of the licence to broadcasters, also known as the ``stick value''. The figures used by Statistics Canada and the CRTC are annual revenues and expenses on a year-over-year basis. They represent the earnings and expenses for a given year. What they do not represent is the asset value of the licence, which can be very substantial.

Here is an example from CRTC public files. A station in Edmonton, independently owned, was recently purchased for $4 million. The purchase price consisted of $575,000 allocated to equipment and fixed assets and $3.425 million allocated to goodwill.

According to the five-year financial projections appended to the application, the purchaser expects that its net loss after taxes will amount to $609,000 in the first year, $499,000 in the second year, $273,000 in the third year, $29,000 in the fourth year, and it will finally become profitable in the fifth year in the amount of $153,000.

The station will lose money for several years after purchase, yet a major chain is willing to pay $4 million to acquire the licence, most of which is not for tangible assets but for goodwill. The fact is, while the station is indeed losing money every year, the asset, the licence itself, has a substantial intrinsic value and at the same time, with good management, will appreciate in value every year. However, nowhere is this fact to be seen in the yearly figures. Things are not always quite what they seem in the world of radio.

As you know, the Canadian Radio-television and Telecommunications Commission regulates broadcasting in Canada. An example of recent commission policy that has had the biggest impact on broadcaster revenues is that of the Canadian talent development decisions. As this is a commission process, and one that is a regulatory issue, you may not be fully aware of the situation. Perhaps a few words of explanation are in order.

By virtue of the licensing process in Canada, and the protection they enjoy from the commission regarding new licensees entering markets, the policy has been that all stations have been required to make commitments to Canadian talent development during the licensing process.

In 1995 these commitments totalled $11 million annually in direct costs. Of this $11 million,$7 million was for licence renewal applications and $4 million was in the context of applications for new licences.

In 1995 the commission issued a public notice indicating it was willing to consider a CAB proposal to lower the $7-million figure to $1.8 million. This public notice was the start of a lengthy process that terminated with the issuing of a public notice and licence renewal decisions in August of 1996, which confirmed the commission had agreed to this request. The effect of this decision by the commission is it effectively cuts radio broadcast costs by $5.2 million a year - a substantial gain by any measure.

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We hope the two brief foregoing sections on the Canadian recording industry and the Canadian radio industry have given you a bit of a feel and a sense for what is happening day to day business-wise for both creators and users.

In the view of CIRPA and its members, strong intellectual property laws will be a necessity in the world of tomorrow. Indeed, the new nexus is knowledge. There is no doubt it will be the resource of highest value and the key component of progress in the new information age. Indeed, society is already fast reorganizing around people who can increase productivity and innovation through knowledge.

Who is the richest man in America? It is Bill Gates. The nine-letter key to wealth and power tomorrow will be ``knowledge''.

CIRPA members are part of this new paradigm, but in order to be able to conduct business effectively and make a realistic return on the investment we need strong and fair laws. We feel that our position on this matter is more than reasonable. We merely ask for fair and equitable return for our labour in a climate of free negotiation between users and creators.

In the view of CIRPA, not to enact laws to allow for this solely for reasons of user convenience, ability to pay, or like considerations has the potential to have a major long-term negative effect for Canada, both culturally and economically. Indeed, such an approach might be characterized as short-term gain for long-term pain.

While you may have felt that all we have are complaints about this bill, this is indeed not the case. As everyone knows, copyright is both difficult and time-consuming as an exercise. We are indeed happy to be discussing the reality of this bill, and we commend the government once again for its introduction.

Thank you, Mr. Chairman.

The Chairman: As we started five minutes late, we'll have questions until ten to eleven.

[Translation]

We will begin with a first five-minute round.

Mr. Plamondon.

Mr. Plamondon (Richelieu): Thank you for your presentation. I think that your brief gives us a very legalistic viewpoint. You talked extensively about exclusive rights. You demand an exclusive right rather than a right to remuneration. Could you tell me more about the difference between the two?

Second, if it is an exclusive right, then how, practically speaking, can it work? Can every radio station obtain a license to broadcast music or a song? How would it work if priority were given, as you suggest, to exclusive rights?

[English]

Mr. Chater: In answer to your question, in a collective situation a right to remuneration, as we said in our brief, is certainly feasible in today's world. In the real world the realistic difference in a collective situation between an exclusive right and a right to remuneration is not that great. What it in effect does, though, in our view it in another way reintroduces the compulsory licence that was removed in 1988 in many circumstances.

Let me give you, if I can, an analogy. It's perhaps easy to understand. I go next door to my neighbour and I say ``I'd like to borrow your car.'' He will say to me ``I have the exclusive right with that car. You can only do that with my permission. If I so desire, I will let you use it.'' With the right to remuneration, I could go to my neighbour and say ``Okay, I'm going to pay you $20, and I'm allowed to use it by law.'' In simple terms, that's the difference.

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In real terms, in day-to-day business in collectivity, it doesn't have it.... It's workable. Our concern is that principle of exclusive rights in the future, when we will go back to dealing much more because technology will allow us one-on-one individual negotiations.... Technology will allow you to do that. Then, a right to remuneration would be a very damaging right.

In other words, a particular individual user could say they're going to pay x dollars and they're going to use it. Even if we knew that user was not going to pay in future, was going to damage the product, or whatever, we would not have the right to restrict that usage.

It's a bit difficult to explain.

[Translation]

Mr. Plamondon: I'm satisfied with that answer. Now, I would like you to tell me more about your opposition to the $1,250,000 exemption. In your brief, you say that stations will soon have other revenue. I would like you to tell me about revenue other than the advertising revenue that you refer to. I would also like you to tell me if you have another practical approach to suggest this $1,250,000 exemption.

As you know, in politics you never win it all. The government has mentioned $1,250,000. Would you be happy with another amount? Could you set a scale similar to the one the ADISQ referred to in other briefs and that its representatives will probably tell us more about today? In other words, what would be an acceptable middle ground for the government and for you?

[English]

Mr. Chater: I can just explain that point on this. Our concern is that, in simple terms, we feel we're dealing in a property right here that should be dealt with as any other property right. Obviously, in the real world there will be accommodations made. One would not expect we will be going around putting outrageous demands particularly upon small stations. We have concerns, as we said in our brief, that in Bill C-60 the independent arbiter and the Copyright Board is there to take into account the public interest, apart from the interest of the players involved.

This we see as a very valuable tool, as an arbitrator of last resort, if you like, failing the parties agreeing. But we feel this is the appropriate place for discussions as to the quantum, the value of any particular amount where there'd be an exemption of 1.25 or 1.5 or 0.75 or whatever. We feel this is the place for the discussion. In this respect, if I can use a baseboard analogy, you can play the game but you're not allowed a shortstop.

[Translation]

Mr. Plamondon: You object in principle and you think it should be left up to negotiation. Is that it?

[English]

Mr. Chater: Yes. You're exactly right: our principle is open negotiation between parties.

[Translation]

Mr. Plamondon: You said that revenue has to be provided for other than advertising revenue. What were you referring to?

[English]

Mr. Chater: There are stations who already have sites on the Internet. There is, as I'm sure you've heard from the broadcasters, a new method of distribution coming - digital distribution, digital radio. The reality of digital radio is that it will allow other streams, if you like, of information to be sent out with that signal, not necessarily to do with radio, but of commercial enterprises. Alternative streams could flow from a new type of distribution system.

[Translation]

Mr. Plamondon: Why are you opposed to the Copyright Board being a political responsibility, in other words being the responsibility of the minister?

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[English]

Mr. Chater: We feel again that in fact the government is creating property rights in this situation, or revising them, whatever the particular circumstances are. We feel that property rights are such that they should be, in our society, open to negotiation between the parties, subject to the public interest being observed, which we feel is clear to the Copyright Board. We feel that is the appropriate place for these issues to be raised if an agreement cannot be reached.

It's a CIRPA view that a right may be created, but what it's worth is a very different issue. That is for us to argue. If we argue a bad case, that's our problem. We lost. We should have the option to argue, if you like, free of restraint and without any exceptions to the basic principle of what we're talking about. With the use of my piece of property by a user for an end, either for profit or for use as a public entity or whatever, there should be, in our view, no restrictions at the initial point.

Obviously, the reality of business and life is that, as you said, you can't always get what you want. The reality is that we, in a business sense, will be restricted to how much we can receive by the realities of the marketplace.

Mr. Abbott (Kootenay East): Because of the short time, I'll try to keep my questions short. Maybe we can get a lot of questions in.

To confirm, your organization is opposed to ephemeral exemptions for the broadcast industry, is that correct?

Mr. Chater: Correct.

Mr. Abbott: On page 8 of your presentation today you said:

As I understood it, from prior testimony before this committee, SODRAC in fact has done this. So it's not a matter of one not thinking that one is going to do so; the fact is that it is going on now in the public domain.

Mr. Chater: I think there's a slight difference, but you may correct me. I'm not fully aware of SODRAC's claim, but the particular point to which we're referring here has solely to do with radio, not television. There's the issue of, as I said, the day-to-day transfer business of making a cartridge in the old days. Now you make it and put it on a hard disk. We have no objection to that. It's part of business.

Mr. Abbott: This is what you say on page 2:

Without that exception, would you agree that it is possible there might be a change in the thought process of CIRPA such that at some future point you might say that if you are going to change the medium, you've used it, so you're going to pay for it? What economic value had passed for them in changing the medium?

Mr. Chater: Obviously, there is, in our view, a minimal economic value in this instance and in this particular marketplace. We don't see any substantive value whatever to it. This is merely a transfer from A to B for a purpose of convenience.

Mr. Abbott: But their concern, as they expressed it, is that without this exception, they could be caught on it. They expressed to us that if they can't tape local artists in concert for play later, there may be a detrimental effect on the careers of those local performers. For example, if they may have to play artists live, then fewer people can actually hear them. They're just concerned about having to go through the whole process of clearing rights. Wouldn't it be simplified if there was an ephemeral exemption?

Mr. Chater: No, we don't think so. It's for the same reason we said all the way through. We prefer to have the right. Then, as we said in here, we are more than willing today, or tomorrow, to sit down and negotiate with the program to say that this is, in effect, a non-issue for us.

I stand to be corrected. I'm sure CRIA can discuss it when they get here, but I believe that in the AVA licences, in effect for videos, stations are allowed to use 30 seconds for promotional purposes.

To answer your other point, with regard to the issue of taping artists, in many cases the artist already has a recording contract. Again, speaking as a member, it would be in my best business interest to ensure that access to the public was available through a taping. Therefore, it would not be a good idea to charge for it.

Mr. Abbott: Say we don't take the representations of the broadcasters as a threat; say we take it totally at face value. Shouldn't we be concerned about the potential detrimental effects to the smaller artists by not including an ephemeral exemption for broadcasters?

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Mr. Chater: In the real world, I can't see that there would be any, because again, the availability would be there and the broadcaster would have a blanket agreement, or whatever we negotiated, if they feel they needed one.

As I say, I've been in this job for ten years, and I can't recall a radio broadcaster ever saying to me that we should have an exemption because there is a problem.

Mr. Abbott: I suppose at the risk of getting into an argument, which is not my intention, the testimony we have heard to this point is that the ephemeral exemption has not been included up to this time and that there are certain legal situations that are currently outstanding.

Speaking for myself, I'm concerned that if this issue isn't resolved then it's just going to hang there. You're saying that this is certainly not from your side. Is that what I'm hearing?

Mr. Chater: No, I would be more than happy to have it for our members. I can't speak for everybody else, but obviously for our members there is nothing outstanding, and we would be more than happy to resolve this. We feel this can be done in the context of a business decision, if you like, company on company, or user with creator. This is an issue that can be solved quite simply, and we are more than willing to do so.

As I said, to my knowledge, none of our members have ever sued anybody for this right, and have no intention of doing so. But if the broadcasters need an area of comfort, we'd be more than happy to give it to them. To us, it's a simple negotiation.

Mr. Abbott: One final quick question. The minister was talking about the fact that the average income for performing artists was $13,000 a year. Do you feel comfortable with that number? How is that number arrived at?

Mr. Chater: I believe that's a Statistics Canada number. As you know, Statistics Canada collects all sorts of figures and all sorts of things. It's one of the figures they have for various artists, book writers, musicians or whomever.

Mr. Abbott: It seemed a little difficult, because there were some foreign-controlled counterparts in here. I wonder if those numbers are really reflective.

Mr. Chater: By definition, the artist is a Canadian. They would be a citizen, living in this country, paying taxes and so on and so forth. I would assume the figures for artists are within the bounds of being as close as you can get them. They are pretty real.

Mr. Abbott: This is my second final question. It seems to me that if a person has a recording contract, then they would probably be making more money than that. Could this figure include people who don't have recording contracts? In other words, they would be the very casual, who would really drag the average down, wouldn't they?

Mr. Chater: To address that question, yes, you could be right. The answer is that I don't know. Equally, the answer is that I can tell you from experience, having been in the business a long time, that most recording artists don't make much money. If you had kids, you wouldn't advise them to go in the record business, or artist business - put it that way. There are better ones to be in, believe me.

The Chairman: Ms Phinney.

Ms Phinney (Hamilton Mountain): Thank you Mr. Chairman.

On page 5 of your presentation, you talked about the retransmission act. You said the major flaw was that it followed the United States approach. On the next page, you say that it's an unfair and anti-Canadian piece of legislation. In the next sentence after that, still on page 6, you say that Bill C-32 is basically the same.

Mr. Chater: No, just the principle -

Ms Phinney: You think that in principle it's an anti-Canadian piece of legislation.

Mr. Chater: No, it's the principle of restricting copyright owners. Let me maybe expand that a bit. In the retransmission bill, the definition of a distant signal was the B contour, plus 32 kilometres. What that means in effect is this. If a B contour is probably 30 or 40 kilometres out from the centre of the transmitter, plus a bit more, it's effectively say 50 or 60 kilometres from the central point the transmission.

Obviously, in any given major Canadian city almost all the other Canadian transmissions are local. Therefore, by definition, the only distant signals are going to be American 99% of the time.

That's what I meant by anti-Canadian. What I meant in this - I'm sorry I wasn't clear - is that it is not an anti-Canadian bill; it just makes differences between owners or creates user and owner problems that, in our view, should be a matter for negotiation. I'm sorry that it's not well put.

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Ms Phinney: If this Bill C-32 was passed as it is, what would be the impact on your organization? Maybe we should keep the status quo.

Mr. Chater: We obviously wouldn't agree to that. In our view - as I say, we've said it consistently - we feel these are various rights of property, if you will, that should be recompensed. The question of how much it should be is an entirely different issue.

What will it do to our membership? It will certainly improve the financial possibilities. Who knows how much? Time will tell.

As I say in our brief, one of our member's problems is a big problem, which is in the independent sector, as you will see from these numbers. In 1996, 26% of our 86 members are still here. A big problem for them is finding financing, doing the job properly and selling product.

I'm sure it comes as no great surprise to you that for anything in the knowledge-based industry, banks look at various scots. You don't have a piece of property or something solid, only an idea. It's changing now, but it hasn't. It has always been a problem, along with competing industries and everything else, to get that capital inflow, if you like. This is the investment needed to make things work. We've always competed in a worldwide business. The music business, like it or lump it, has always been worldwide.

One of the things that I said we do at CIRPA is to organize marketing trips so our members could benefit. Last year we went to France, Hong Kong, and Cologne, Germany. The basic benefit to our members, and by extension to Canadian taxpayers, was that the money they brought back was quite substantial. This is a very big part of that business.

Just so you get a sense of it, the Canadian record business is about 3% of the world market. It's actually becoming less. It's going through a bad period at the moment. The reality is that Asia is growing so fast that the Asian market will shoot up, so the percentages will obviously move. The U.S., for example, has gone from 50% of the world market in 1985 down to 33% by now. It's going that way not because there's any less, but because the market worldwide is getting bigger.

Ms Phinney: I'm just looking at your sheet that indicates your average profits before taxes. This has been going up. So with this bill it would go up considerably.

Mr. Chater: We hope it will go up considerably more. As I say, we are a bit - how shall I put it - ephemeral. I'm not making a joke here, but we are a bit ephemeral.

Ms Phinney: Thank you.

Mr. Chater: Thank you.

The Chairman: We're almost out of time. Mr. Bélanger will ask a very quick question.

Mr. Bélanger (Ottawa - Vanier): I have two quick questions. On the new technologies, throughout your brief and in the presentation today, you expressed the wish that this levy, if there's to be one, would be applied to other technologies or vehicles. Perhaps you would like to suggest which ones.

Second, I want to go back to something my colleague from the Reform Party was asking in terms of the little, if any, value that you said this morning you attribute to the transfer of medium in the radio stations. You say you would be prepared to negotiate, but if there's no value, what would you negotiate?

Mr. Chater: As for the first question, here is our concern with new technology. Let me again explain this in our day-to-day real world.

We have talked with technology producers like Bell and Cancom and what have you. They all envision that three or four years down the road, or maybe sooner, we'll all be able to deal much more one on one. In other words, you could well get a bill from Bell for uses that are not just for phones. You might have called so and so for sixteen seconds, but you used two minutes of this music, five minutes of that film, or whatever. It will be very feasible.

What we are concerned about is that this particular bill does not in effect legalize all uses, only specific uses that are currently extra - i.e., home taping and private copying in the sense that we have a machine that makes copies.

We would not wish to see down the road that somebody came along and found an exemption so that this is legalized. You can't negotiate with them one on one, so they'll just take it and use it. Our concern is for the wording to be carefully rendered, if you like, so as to not allow that somebody down the road who says that the law says this now.... This new technology that you didn't envisage five years ago has -

Mr. Bélanger: Would you favour that the levy, if there's to be one, would be applied to video cassettes, computer disks, or any other vehicle that would be used to copy?

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Mr. Chater: It's not my bailiwick, but if you ask me personally, I've always supported video cassettes being part of that package. But that's a personal opinion. I agree from a service point of view. Obviously, we're happy with what we have.

On the second question, yes, it wouldn't be much money, but we'd prefer that we were able to negotiate it. Whether it's $10 or $50,000, we are concerned that there is a way to do this in the real business world. The board of business will allow you to negotiate a deal, so why put an exemption to solve a problem that isn't there, or we say will not be there? It is resolvable by business.

Mr. Arseneault (Restigouche - Chaleur): Our time is not up, so perhaps I could ask another question. Are you aware of any countries that have a transfer-of-medium exception?

Mr. Chater: There are quite a few, yes.

Mr. Arseneault: There are? Does the United States have one?

Mr. Chater: The United States I believe has it. I think the U.K. does. I believe France does, but I'm not quite sure on that. From our point of view, the problem with an exception is that it's ungovernable. I'm sure you'll hear more on this from other players.

Mr. Arseneault: Is it in legislation?

Mr. Chater: Yes, it's in legislation.

Mr. Arseneault: I'm not aware of it. I'm surprised you would say that.

Mr. Chater: I assume this is a fact. I'm not sure, but it can be checked.

Mr. Arseneault: Could you check and see if that information is correct? Perhaps you could table that information with the committee at a later date.

Mr. Chater: Yes.

Mr. Arseneault: Thank you.

The Chairman: Thank you, Mr. Chater, for appearing before us. We appreciate it. Merci

[Translation]

Before we move on to the next group,

[English]

we'll just break for a few minutes.

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[Translation]

The Chairman: It is exactly 12 o'clock and we will continue until 12:45. I would now like to introduce Mr. Robert Pilon, vice-president, Public Affairs and Ms Solange Drouin, General Director and Legal Counsel, from the Association québécoise de l'industrie du disque, du spectacle et de la vidéo.

Mr. Pilon.

Mr. Robert Pilon (Vice-President, Public Affairs, Association québécoise de l'industrie du disque, du spectacle et de la vidéo): Good afternoon, members of the committee. We would like to thank you for inviting us to participate in the committee's work on Bill C-32.

The ADISQ feels that parliamentary committees play an extremely important role in our democratic system. Amendments can be made to bills after consulting the stakeholders. We hope that that will be the case this time.

We do not have much time, but we tabled an additional brief that includes several tables and graphs. We will quickly cover, with the use of large graphs, our main conclusions and analyses about the economic impact Bill C-32 will have on the rights holders, and we will also submit a compromised proposal, that is amendments that we feel would be more reasonable.

Unfortunately, our brief has still not been completely translated. We have made arrangements with the clerk and her staff. However, the tables have already been translated. We will include the English translation in our tables. I hope that within the next few days you will receive an English version of the brief. I will try to speak slowly, because this is a rather technical issue.

I should point out that the ADISQ has not chosen an easy path. We could have come here this morning to tell you that we are unhappy with the bill, etc., but we would rather say that this bill, in terms of its principles, apart from the issue of exceptions - my colleague will come back to that - and the use of a system for private copying and of neighbouring rights, is excellent. This is a first in North America. We have already congratulated the ministers responsible for this bill.

Basically, and this is the crux of our presentation, the exemptions in this act, as well as some other legal provision contained in the bill which my colleague will speak to, will pose a number of problems, and in our view, this legislation will not translate into a viable system for the stakeholders unless the bill is amended.

This bill provides for a fair remuneration system for public broadcasting of sound recordings. That means radio stations will have to pay royalties on some of their advertizing revenues. Unfortunately, under certain clauses of the bill, a portion of those revenues are exempt.

We first took the example of a station with revenues of $4 million, which you see in chart 2.1. Basically, two types of exemptions are being proposed. First of all, the station loses nothing on the first $1,225,000 of revenue. Our entire analysis is based on the five-year introductory period provided for in the bill. So the first $1,225,000 would be completely exempt.

Secondly, for revenues above $1,225,000, 80% of those will be exempt for the first year, 60% for the second year, then 40%, 20% and 0 per cent. Therefore, on average, over five years, there will be $1,250,000 of exempted revenues and then $1,100,000 of exemptions, for a total of $2,350,000 of exempted revenues, on average over five years. That means a 59% exemption for which no royalties will be paid to performers, producers or musicians. This is a major problem.

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Chart 2.5 shows the overall effect of those exemptions. Canada's 495 radio stations are shown here. As you can see, there are a lot of smaller stations with revenues of between 0 and $250,000, between $250,000 and $500,000, etc.

Here, you have every station with revenues of less than $1,250,000, and here, all the stations with more than that. So, all those revenues will be totally exempt. Here, there will be the gradual introductory exemption, which means that on average, over five years, anything below the red line will be exempt.

So, there is the basic exemption, then 25%, 28% and 53% of exempted revenues, and finally, the 19% exemption for gradual introduction, for a grand total of 72% of revenues that will be exempt. The system provided for in this legislation will therefore apply to only 28% of radio stations' revenues in Canada.

This chart summarizes the situation: a basic exemption of 53% on average over five years; a 19% exemption for the phase in, for a total exemption of 72%; smaller stations will be entirely exempt; larger stations with revenues of over $1,250,000 will get a 62% exemption.

We assumed a royalty rate of 1.5% on non exempt revenues, which is perhaps somewhat idealist, which is approximately half of SOCAN's current rate.

So, if you apply 1,5% to the 28% that are not exempt, this is what you get: $1.1 million for the first year, $2.1 million for the second year; $3.2 million for the third year, and so forth, for an average of $3.2 million per year on $754 million worth of revenues. That is not even 0.05 per cent.

We therefore think this bill will pose real problems. We think it would be a mistake to set up a system which, when you take everything into account, would generate such a small income.

We would therefore suggest a compromise. I will let my colleague, Ms Solange Drouin, present our proposal.

Ms Solange Drouin (General Manager and Legal Counsel, Association québécoise de l'industrie du disque, du spectacle et de la vidéo): Thank you, Robert.

When drafting our compromise, we first looked at the profit margin in each category.

In our first analysis, we took into account the profit margin for every category of radio stations. We'll get back to that later, when my colleague Robert Pilon presents the compromise.

We then thought the logical step would be to look at the Copyright Board. As you know, that board - and I know it is to appear before you within the next two weeks - is currently responsible for royalties on public broadcasting.

With Bill C-32, the Copyright Board will also be responsible for royalties on neighbouring rights. Thus far, the Board has standardized a number of rates for royalties to authors, when their works are publicly broadcast. For instance, there are rates for radio, television, bars and restaurants. In fact, restaurant representatives appeared before you two weeks ago. There are rates for all that.

One of them is particularly interesting. We used it to formulate our proposal. I am referring to the rate which is commonly known as rate 17. It is based on the retransmission rate, but since we are short of time, I will focus on rate 17.

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This is a recent rate. It pertains to musical works that are included in Canadian television programs and specialized American programs as well as pay television. For instance, it sets out the rate payable by cable companies for the services they provide, particularly pay television services on the SuperChannel and SuperÉcran, specialized services such as Musique Plus and MuchMusic, as well as American stations such as Arts and Entertainment.

Cable companies are therefore responsible for paying that rate, but the Board decided that to calculate the amount paid by the cable companies, it would take into account the size of each cable companies system in order to factor in development costs which might be different depending on the size of the company.

So there are three rates: one for small systems, one for medium-sized and one for the larger ones.

The rate for smaller systems, a small system being defined as a system with 2,000 subscribers or less, is $10 per year. It's a token sum that the cable company must pay for all its channels. That token sum is very small and certainly will not threaten the survival of those small cable companies, those with 2,000 subscribers or less.

The other rate tier affects medium-sized systems, those with 6,000 subscribers or less. For that category, the Board has a gradual range that varies depending on the size of the system. In order to justify preferential treatment for a given category besides smaller systems, the Board said it would take into account the fact that development problems do not disappear just because you have more than 2,000 subscribers, that there could be problems even for larger systems.

Therefore in 1995, the range provided for in the rate currently applied, and which is challenged on another basis, is as follows: the rate provides for 3.2 cents per subscriber for a system of 2,000 to 2,500 subscribers; 3.8 cents per subscriber for a system of 2,500 to 3,000 subscribers; and 7 cents per subscriber for a system that serves between 5,500 and 6,000 subscribers. Therefore, there is a specific rate for medium-sized systems. Beyond 6,000 subscribers, only one rate applies to all systems, including major cable companies. It is 7.6 cents per month per subscriber.

The rate for retransmission - I won't explain it now, but if you wish to put questions to the Board, I invite you to do so when they appear - is set more or less according to the same structure. In our opinion, this is a very good structure because it takes into account the specific reality of certain cable systems.

I will now give the floor to my colleague Robert Pilon who will explain our compromise proposal in more detail.

Mr. Pilon: In our previous brief and again in this complementary brief, we mentioned that as all rights holders in the world, be they artists, musicians or producers, we are opposed in principle to exceptions or exemptions. This is an important philosophical issue.

However, we do realize that small stations experience financial difficulties. Allow me to draw a comparison. We're well aware, for example, that in schools in lower-income neighbourhoods, milk is distributed. Are farmers or dairy producers asked to pay for that milk? No. Society decided that milk should be distributed to poor children in under-privileged neighbourhoods. Society collectively assumes the cost of this distribution. It does not ask producers to assume it.

Therefore, as a matter of principle, even for small stations experiencing financial difficulties, we fail to understand why we, the rights holders, are being asked to assume the cost of a social measure that should be borne by society as a whole. Society as a whole should provide subsidies. If we believe that it is an important social value for Canadians to maintain local radio service in small towns, well, then let's help them. Let's not ask one category of citizens, music rights holders, to assume that cost alone. That is our position. We've been awaiting this legislation for 10 years. We are therefore ready, for the first five introductory years - and I do specify five years - to offer a compromise the effect of which would be to completely exempt small stations, except for the token amount of $100. After that time, there would be a full review.

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Our definition of small stations is slightly different from that contained in Bill C-32. Secondly, as my colleague explained, inspired by the models of rate 17 and the retransmission rate, we feel it would be appropriate to have a three-tier system, that is a system that would recognize the considerable financial hardship of small stations, especially those whose income is $750,000, and would benefit from a complete exemption.

With regard to large stations with revenue over $2,500,000, which really have a very high profit margin even during a recession, we feel there is no reason to offer them a basic exemption. We suggest a gradual introductory system over three years rather than five. There is no reason to grand a basic exemption, even for $1,250,000, to large stations.

Between the fully exempted small stations and the large stations that would only benefit from an exemption during the gradual introductory period, there are intermediate stations whose financial situation is relatively precarious. We think that such stations could be offered a declining scale.

Figure 2.13 explains what this would represent. We are presenting a system that would apply with two scales: one scale for the first three years of implementation of the bill, year 1, year 2 and year 3, and another scale for years 4 and 5. Thus, during years, 1, 2 and 3, all stations with revenue up to$1 million would be fully exempt. Afterwards, the exemption would decrease. For those with revenue over $2,500,000, there would be no basic exemption for the third and fourth years of the implementation of the legislation.

Therefore, this measure introduces stability for three years, and during the fourth and fifth years, all stations with revenues under $750,000 would be fully exempt after which there would be a decrease in scale. There would be three categories of exemptions: small stations are exempt, medium-sized ones have a partial and decreasing exemption and large ones have no basic exemption.

If you compare the proposal that we're presenting here this morning and the exemption provisions contained in Bill C-32, this is the overall result over five years. As we said earlier, Bill C-32 provides for a total exemption of 72% on average. In practice, that's an average of 91% exemption the first year, 81% the second year and 72%, 62% and 53% for the three subsequent years.

Our proposal is still extremely generous at the outset: 77% exemption the first year for the entire industry, and then 54%, 31%, 22% and 22% for an average of 42% exemption. We're not telling you to reduce the level of exemption from 72% to 4%. We are saying, and this is reasonable, to reduce it from 72% to 42%.

We still have two tables to examine, first the one on the impact, not from the standpoint of broadcasters, but from that of the rights holders: artists, musicians, singers and producers. In terms of royalties, what will be the impact of the exemption provisions contained in Bill C-32? The committee could also decide to suggest that the House approve the proposals we are making here this morning as amendments.

Assuming steady revenues - we can discuss that later - we made other projections with growth rates of 1, 2 and 3%. There is not much change. We could send this to the committee if you wish. If there was no exemption, 1.5% - that's our assumption - of $754 million would produce $11,3 million a year. That is not an extraordinary sum. For all artists, musicians and producers in Canada and countries in Europe, that would represent $11.3 million.

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With the exemptions contained in the government's bill, this would be reduced to $1.1 million the first year, etc, which works out to $3,2 million on average. That means that the cost of the exemptions granted is $8.1 million.

In our proposal, this works out to $2.6 million the first year, $5.2 million the second year,$7,8 million the third year, $8.8 million the fourth year and $8.8 million also the fifth year, that is, an average of $6.6 million. Therefore, the relief granted to broadcasters, which is still relatively generous as you can see, is $4.7 million.

This graph is an interesting one. There are the same data, but I think they put things in perspective. Even by reducing the exemption from 72 to 42%, the payments that radio stations will have to make on their total revenues will remain minuscule. Even with our proposal, where we go from an average of $3.2 to $6.6 million a year, this does not even represent 1% of the total revenues of the radio industry. There you are.

Ms Drouin: I'm sure you will agree that $3.2 million on average on advertizing revenues of $750 million a year is quite minimal. But unfortunately, in addition to all the provisions that allow for generous exemptions for radio stations and cut off 72% of their income to performing artists and producers, other provisions of the bill may aggravate the situation even further.

Up until now, we have not quoted any particular clauses. However, we must now discuss this notorious clause that stipulates that the Board must take certain factors into account in establishing neighbouring rights. We think it is important to stress this so that you will remember and recommend its deletion.

First of all, this clause stipulates that in setting its tariff, the Board must take into account the portion of programming devoted to sound recordings. A second provision stipulates that the Board must take into account the fact that music broadcast over the radio contributes to the sale of sound recordings.

In our opinion, these two criteria have three absolutely disastrous effects. First of all, I will demonstrate the disastrous impact of the tariff set by the Board and, consequently on the royalties that will be collected by performing artists and producers.

The second effect is that this creates a discriminatory, grossly unfair - let's not mince words - and above all pointless treatment of performing artists and producers, not to mention that this is unjustified interference in the jurisdiction of the Copyright Board.

Let me now get back to the disastrous effect of tariffs being set by the Board. This criterion that states that the Board must take into account the proportion of programming occupied by sound recordings means that in practice, the tariff set by the Board, which only applies to 28% of advertising revenues, will never be applied to 100 per cent. Let me explain.

Apart from a few new radio stations services that are not even fully implemented in Canada, a radio station never broadcast 100% music. The total programming of a radio station is made up of news, weather reports, talk shows. The proportion occupied by musical programming varies between 30 and 80%

With this much discussed criterion the Board must require a radio station to pay only if its programming contains at least 50% music programming. Therefore, it will only pay 50 per cent of the tariff. If it's 60%, it will be 60% of the tariff and so forth. Obviously, there is a risk that this criterion will further erode the royalties that may be collected by rights holders.

These criteria are of a constraining nature. The other criterion, which dictates to the Board that it must take into account the fact that music broadcasting contributes to the sale of sound recordings will also have disastrous consequences.

Before going any further, I would like to point out that ADISQ does not deny that in some circumstances, depending on the programming of certain radio stations, there may be variable contributions to varying degrees to the sale of sound recordings. We're not denying that. However, in our opinion, this contribution to the sale of the sound recordings is already taken into account in the neighbouring rights tariff.

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A neighbouring rights tariff is a tariff that generates modest amounts. We're talking about1.5 per cent. My colleague Robert Pilon was saying that we were hoping to get maybe 1.5 per cent from the Board. In our opinion, the fact that radio stations contribute to the sale of sound recordings is already taken into account in that tariff. If this contribution to the sale of recordings was not taken into account, we wouldn't be requesting 1.5% from radio stations but 20, 30 and 50%, which we feel corresponds more closely to the relative contribution of music in radio station programming.

Thus the implementation of these two criteria could result in a substantial reduction of the 1.5% rate. It could bring it down to 0.5% and increase the exemption rate to more than 72%, as high as 90% in some cases.

In our view, this argument itself is enough to convince you to withdraw these two criteria from Bill C-32. If you are not convinced, I think the following argument should dispel any doubts that might remain.

In our view, the application of the criteria to performers and producers alone constitutes unjustified discrimination under the Copyright Act. As you know, the bill requires the Board to take into account criteria for setting neighbouring rights tariffs.

When the Board establishes a tariff for copyright, no criterion is provided in the Act. That means that when the Board analyzes a proposed tariff filed by authors, it need not consider whether it is necessary to take into account the fact that the broadcasting of the music contributes to the sale of sound recordings or the proportion of music played by a radio station. The Board is not required to give consideration to this. However, it must do so when it sets neighbouring rights tariffs. Authors do not fall under these criteria and thus do not face the disastrous consequences I mentioned.

Performers and producers run the risk of being seriously disadvantaged. This amounts to creating two classes of rights holders: a class of authors who are able to collect the full amount of their royalties undiminished by the imposition of criteria under the Act, and a class of performers and producers to whom this right is denied.

It goes without saying that ADISQ is totally against this discrimination contained in Bill C-32. ADISQ would like to reassure committee members by pointing out that in any case, the Board has in the past taken into account certain particular situations although there was no requirement to do so under the law. Nothing prevents the Board from exercising its jurisdiction and conducting its own type of analysis by taking into account certain particular situations. It has already done so in the past.

It took into account specific circumstances relating to the tariff for retransmission and the radio tariff. The Board took particular circumstances into account and eventually established two tariffs: a tariff of 3.2% of advertising revenues where music exceeded 20% and a tariff of 1.4% for stations where music broadcasts accounted for less than 20%. So the Board can in its wisdom determine criteria of this type. We're asking the government to allow the Board to give full exercise to its role, namely the assessment of the economic value of a right.

I'd like to conclude with a few words on exceptions. Bill C-32 creates a great many exceptions. ADISQ is in favour of the removal from Bill C-32 of all these exceptions on behalf of educational institutions, museums and archives so that collective societies can negotiate particular agreements with certain categories of users.

One last word about ephemeral recording. ADISQ would like to congratulate the government for not proposing an exception of this type in the bill and urges the committee not to be influenced by the arguments of broadcasters for such an exception and to give particular attention to the brief submitted by SODRAC requesting that no exemption be allowed for time shifting or ephemeral recordings.

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Thank you. We're now ready to answer your questions.

The Chairman: Mr. Plamondon.

Mr. Plamondon: Your position is very clear and first of all I'd like to congratulate you. I've been a member of different committees for 20 years and I've seldom seen witnesses arrive with such concrete proposals and present them with such conviction.

As a committee, we are in a situation where we must decide if we are to continue with the bill as it is or to accept a proposal that is not based on principle or philosophy. You mention you do have a principle but that you understand that a transition can take place over a period of five years. Your proposal strikes me as being quite justified and I think our committee must definitely take it into account.

I was a bit frightened when you mentioned the subject of talk shows. I wasn't too well informed about that. In other words, the government establishes a criterion based on advertising revenues. A certain percentage of this money is then remitted to performers.

You say that a certain formula comes into play. Let's take the example of a radio station where call-in programs account for 50% of broadcasting and the remainder is music. I don't know what type of amount this would give rise to under your proposal but let's suppose advertising revenues amount to $2 million: that should result in about $100,000 but in fact you would only get $50,000 because half the time is normally devoted to call-in program. Is that what you are suggesting? Is that the criterion that you want to see removed from clause 68?

Mr. Pilon: It would require the Board to take that into consideration.

Mr. Plamondon: Contrary to what is done for copyright affecting authors?

Mr. Pilon: Exactly. So there is the very high risk that the kind of situation you describe would take place. Concretely, Mr. Plamondon, that would mean that instead of having $3.2 million, all the performers, musicians and producers in Canada could find themselves, in the worse case scenario, with only $1 million a year if the Board decided that the tariff has to be cut in half because some stations do not play a great deal of music and then to be cut in half once more because radio stations assist in the sale of records. I'm overstating the case, but not a great deal.

Mr. Plamondon: I suppose it would result in something very complicated to administer.

Mr. Pilon: Of course.

Mr. Plamondon: We'd have to have an official with a chronometer calculating the number of minutes devoted to music, call in shows, news, public affairs programs, etc.

Ms Drouin: I'd like to add that as far as we are concerned, this was a crucial question. So we asked Ms Ysolde Gendreau, who has a doctorate in law and is professor of law at the University of Montreal, to tell us whether this type of criterion was widely practiced in the laws of other countries. We analyzed the legislation in 13 countries, including France and Germany and discovered that only three of them provided for criteria, although they were not of that type.

We are continuing the study and we will be sending in our final conclusions to you. It does not appear that this practice is widely spread internationally.

Mr. Plamondon: I'd like to continue our discussion but I'll turn the floor over to my colleague from the Reform Party.

[English]

The Chairman: Mr. Abbott.

Mr. Abbott: Thank you. For the purposes of this discussion, I don't wish to discuss the validity of the argument in favour of or opposed to neighbouring rights. I want to discuss only your presentation.

It seems to me that in your mind, the only radio stations that have financial problems are small stations - in other words, large stations with high dollar volumes must be making money. I must admit that I disagree with you completely. Taking a look at your figure of 1.2%, let's take a radio station with a volume of say $5 million. That $60,000 per year is not incidental, because that represents two salaried people, does it not? In other words, to say it's only 1.2%.... It is real money. At $5 million, that's $60,000.

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My first point was that to imply that the only radio stations that are having financial difficulties are at the small end I don't think is reflective of real life. I think that big radio stations have every bit as much chance as small radio stations.

Be that as it may, I want to canvass this proposition you've made that a radio station that for sake of discussion only uses 54% of its time for music...that somehow your organization or your artists should nonetheless be, if I understood your proposition correctly, able to have access to 100%. On what basis? I don't understand.

What I'm saying is this. Correct me if I'm wrong. We were talking about the exemption, and your point was that under Bill C-32 your interpretation of it is that if a radio station was playing, for sake of discussion, music 50% of its time, nonetheless under neighbouring rights the artists should be nonetheless entitled to 100% compensation. I don't understand that. I really don't understand. I do understand the concept of property rights, performance rights, intellectual property. I understand that as a concept, but under what right should the performer receive 100% if indeed it was an all-talk radio station?

Mr. Pilon: On the question about the financial difficulties of radio stations, first, let me tell you, Mr. Abbott, that I was pretty impressed. I came here twice before, and you made two interventions, which I recall pretty well, about the dire straits the small radio stations are in. And you mentioned something very interesting about if you compare now with ten years ago, there is very little local programming on local radio stations. Well, why?

Mr. Abbott: Because of the cost squeeze, and I submit that this 1.2% is part of the cost squeeze.

Mr. Pilon: Why? The problem is that more and more those small radio stations are just retransmitting the programming of larger radio stations. We could provide to you a lot of.AAM figures, since we are a subscriber of.AAM. But.AAM, which is controlled by radio stations, suddenly cancelled our subscriptions. We don't know why. So we cannot give you those figures. Well, we could, I guess, if the chairman asked for it.

If you look at the.AAM figures in small and medium-sized markets, apart from the very far north, you will see that the main problem of small radio stations is big stations getting into their market, eating up market share in their market. That's the main reason small radio stations are in difficulty now: the competition by big radio stations.

So I find it pretty ironic to see an association that is controlled by large radio stations come here and say let's save the small radio stations, when those who have been killing the small radio stations during the last ten years are big radio stations owned by very large groups.

Now, let's talk about that $5 million a year station. If you look, it's around page 75 in the brief. There's an annex with the EBIT rate by group of stations, and the group 14, according to the special study done by Stats Can on our request - and those are public figures - will say that for stations with over $4.5 million of advertising revenue a year, their EBIT rate is 22.3%, which is really, really, really high when you compare it with other sectors of the economy.

I agree with you, Mr. Abbott, that maybe $75,000 a year is an important sum of money. I'm not saying it's not an important sum of money. I'm saying that those types of stations, except for a few, won't have difficulty to do that.

And apart from it that, we're talking about property rights here, and property rights, if I recall the blue book of the Reform Party, is a very important thing. We're talking here about an item of a cost of production. This $5 million radio station pays its telephone bill and its rent. Why shouldn't it pay for the music it uses? We're talking here about intellectual property.

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The Chairman: One more answer. Mr. Abbott asked a question about

[Translation]

the 50% and 100% rates.

[English]

Mr. Pilon: Yes. Do you want to go quickly to that, Solange?

[Translation]

Ms Drouin: First of all, the Copyright Board made a distinction when it set the 3.2% rate for authors in the case of radio stations devoting 20% or more of their time to music. The Copyright Board did not make any distinction between 30, 32, 50 and 52 per cent. Any radio station where music accounts for 30, 50 or 60% of broadcasting must remit 3.2% of its advertising revenues to rights holders.

Generally speaking, there is a sort of equalization or evening out. Obviously the larger radio stations will be paying more and broadcasting more music and the smaller stations will be paying less and broadcasting less music but generally speaking, I would say that there is a form of equalization occurring in the industry. Under 20%, it's 1.4% of advertising revenues.

As for broadcasting 100% music... I'd simply like to draw to your attention the fact that SOCAN filed a tariff for that particular situation. SOCAN saw that this situation would arise and that there would be a need for a different tariff for stations broadcasting 100% music. Neighbouring rights will probably also follow.

The Chairman: Mr. Bélanger.

Mr. Bélanger: I'd like you to describe first of all the relationship between the music industry and radio broadcasting and then the relationship between the music industry and television. Do you make a distinction between the way television and radio make use of music?

Mr. Pilon: Mr. Bélanger, I'm tempted to give you an example and to say that the relationship between the record industry and radio broadcasting is similar to the relationship between fashion design and department stores like Eaton's or The Bay. If you are a designer and come out with a new line of fashion, of course you'd like Eaton's and The Bay to make use of your ideas. You might even be willing to give them some samples for three months so that your creations can be displayed in their windows. But you're not going to give them the garments. There will be an agreement and Eaton's will pay you for the clothes you've made.

So this is to the advantage of both parties. Why? Because Eaton's can say it has exclusive rights or that it stocks this popular line of clothing and the designer can say: ``Eaton's the big department store, sells my clothes''. This creates a type of useful synergy. But the existence of this synergy does not justify the fact that one of the two parties can exploit the other and not pay anything. There is a synergy and we take it into account. If we did not take it into account, we would be asking for 10, 15 or 20% as my colleague said previously.

Imagine a radio station, particularly a big FM station, whose programming consists almost exclusively of music. We're only asking for 1.5% of its revenues. If we wanted to have our full share of the station's revenues, particularly the FM stations, we would be asking for a lot more. We recognize their contribution by asking for a very low rate, it's not even 1.5% . What we're asking for is 0.9%. I think that they also must appreciate this fact. Find me a radio broadcaster who will come and claim to this committee that music does not contribute to his revenues. Try and find a single one. Even those with only 20% music will recognize that this is a fact.

Mr. Bélanger: Do you perceive a difference in the way television uses music?

Mr. Pilon: If we're talking about music in general, not necessarily. It depends whether we're talking about music or records. The bill applies to recordings. Obviously radio uses far more recorded music than television. Once again there is a very important distinction. The rate set by SOCAN for television use is 2.1%. We have to be realistic, we'll never get that kind of rate, we'll not even get half of it.

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Why? Because the authors' works are used not only on record but in all live performances on television. This is not the case for producers' rights where the right is limited to the sound recording. So the tariff we will get from television stations will be extremely small, quite obviously. It is not at all proportional to the real situation.

Mr. Bélanger: You've done a calculation for a five-year period. Have you the same calculation for the next five years?

Mr. Pilon: We did not do that particular calculation. However, we did a calculation using a revenue growth rate for those five years. Rather than having a constant rate, we would have a growth rate of about 2.5% or 3%. Generally - and the model still needs to be polished somewhat - this means that rather than having a 72% exemption, we would have a 68% exemption if the growth rate were 2.5% or 3%.

Mr. Bélanger: After the introduction of tariffs and so on, would that amount to $8.8 million a year? What does this amount represent? A 22% exemption?

Mr. Pilon: The $8.8 million represent... I would have to check on the exact figure.

Mr. Bélanger: Is it about 22%?

Mr. Pilon: Yes, about 22%.

Mr. Bélanger: The exemption rate is 33%.

Mr. Pilon: That is quite a significant exemption.

Mr. Bélanger: This does not take inflation or increases in revenues into account.

Mr. Pilon: No.

Mr. Bélanger: I would not want to overburden you, but perhaps for the next five years, and maybe even the next ten years, because it must be acknowledge that you waited ten years -

I know that the impact on the initial period may be... The figures you have presented are quite glaring. If this bill is passed by Parliament, I hope neighbouring rights will apply forever, not just for five years. Neighbouring rights will be 100% only after five years.

I would like to see what the impact will be once the bill is in effect. I think that would help us in our proceedings.

Mr. Pilon: We would be pleased to do that, Mr. Bélanger. If the bill is not amended, with the $1,250,000 exemption for all stations, with revenues being constant, the figure is 53%. However, in the fifth year, another 53% of revenues would be exempt. I have done a quick calculation,Mr. Bélanger. If we use a growth rate of 2 or 3%, revenues would still account for something like 47% or 48%. I don't think that in all decency the Parliament of Canada can say that it will exempt almost half of the royalty payments forever.

Mr. Bélanger: Under your proposal, in the fifth and following years, not taking inflation into account, 1.5% of the revenue affected would amount to $3.2 million. Is that correct?

Mr. Pilon: Under the current bill?

Mr. Bélanger: Under the current bill. Under your proposal, the figure would be $8.8 million.

Mr. Pilon: No.

Ms Drouin: No, that is the average.

Mr. Pilon: Under the current bill, Mr. Bélanger, the figure in the fifth year would be$5.3 million. There is a progression: from $1.1 million to $2.1, 3.2 and then $4.3 million.

Mr. Bélanger: The average is $3.2 million. So the figure would be $5.3 million, as compared to $8.8 million? Are those exact figures?

Mr. Pilon: That is what we are talking about.

The Chairman: Thank you very much, Mr. Pilon and Ms Drouin. I must tell you that I found your work most impressive. You came to this meeting very well prepared. We thank you for your testimony.

Mr. Pilon: We thank you, members of the committee.

Mr. Bélanger: If we have any time left at the end, we might consider inviting this group back.

The Chairman: We will certainly talk about that this evening.

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.1252

[English]

The Chairman: Order, please.

[Translation]

We are resuming our meeting. It is 12:55 P.M. and we will continue until 1:40 P.M.

[English]

I would like to introduce, from the Canadian Recording Industry Association, Mr. Brian Robertson, the president; Mr. Ken Thompson, the vice-president and general counsel; andMs Margaret McGuffin.

The floor is yours. You know the set-up here.

Mr. Brian Robertson (President, Canadian Recording Industry Association): Thank you, Mr. Chairman.

The 28 members of the Canadian Recording Industry Association comprise all of Canada's major record companies, leading Canadian-owned independent labels and manufacturers of sound recordings. Initially, we would like to express our thanks to the government for its initiative in bringing forward these copyright changes and to other members of Parliament for their interest and support for the proposals. As you're well aware, the changes are long overdue and are an update of an act that is still buried in the 1920s. So congratulations to you.

Ladies and gentlemen, many of you will not be aware of the framework of the economics of the Canadian recording industry. CIRPA and ADISQ have provided you with an insight into the independent sector and to complement that I would like to give you a very brief snapshot of the investment levels and percentages of return in producing and marketing recordings by Canadian artists by the major record companies.

The average cost of producing a Canadian-content sound recording for the international marketplace is around $300,000. This would include the research and development necessary to discover and sign the artist, the costs of studio production, financial support and career development, costs of music and video production, and extensive marketing expenses to establish the recording both nationally and internationally.

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The major record companies generally recognize that an investment of three albums is necessary to adequately establish an artist. This can translate into anywhere up to $1 million. The reality of the success ratio in the recording industry, however, is somewhat sobering, as generally only one out of ten recordings generates significant profits. The sales of this recording therefore subsidize the production and development of the other nine.

The average annual investment in development production and marketing of Canadian artists and sound recordings by the six major record companies is in excess of $20 million.

We recognize that we have a limited amount of time with you, so we will focus primarily on two issues relating to Bill C-32, so that we can leave adequate time for questions.

We did provide you, of course, with a comprehensive submission on the bill at the end of August. The only documentation you will not have received in advance is a recently completed report on the topic of neighbouring rights, prepared by Coopers & Lybrand Consulting. We will leave a copy with you today, and summarize it as part of our presentation.

There are many important elements in Bill C-32 that influence the recording industry, and a number that are not in the bill, but should be. But that discussion is for another place and another time. Today we would like to discuss with you just two: neighbouring rights and private copying.

First, we would like to comment briefly on the private copying issue. I'll ask Ken Thompson to review it with you.

Mr. G. Ken Thompson (Vice-President and General Counsel, Canadian Recording Industry Association): Thank you, Brian.

CRIA is very pleased that in Bill C-32 this government has recognized that record companies, as well as performers and authors of music, are to be entitled to compensation for the unauthorized copies of their sound recordings that are made regularly by individuals for the individual's private use. The recording industry has been pursuing such a private copying amendment to the Copyright Act for decades.

In our written submissions we have emphasized that the future availability to consumers of electronic interactive digital delivery of sound recordings, otherwise referred to as the jukebox or record store in the sky.... The owners of those recordings and music could not be adequately compensated by a private copying regime.

For both consumers and producers of recordings to benefit from these future electronic forms of commercial distribution of sound recordings, private copying will have to be brought under market disciplines in the future. To achieve this aim will require an unequivocal exclusive legal right to authorize or prohibit all forms of reproduction, including private copying.

The same technology that in the future will allow consumers to easily access and copy the world's repertoire of sound recordings electronically will also make it easier for record companies to directly license and track each individual's use of the sound recordings, including the copies that individuals will make. These innovations are not pie-in-the-sky pipe dreams, but will be as achievable in the near future as bar codes and automated banking are today.

The new electronic forms of commercial distribution of sound recordings will undoubtedly benefit both users and creators, but these are considerations for another time and another discussion about the information highway - which we trust this government will speedily pass.

At this point you may be asking yourselves why we are telling you that private copying regimes will be outdated for the future use of technology to license individual copying directly. We do so because the recording industry is at present in a period of transition between traditional markets for analogue recordings on material carriers, such as cassette tapes, and the future market for interactive, electronically delivered, digital sound recordings, which individual Canadians will be able to order up into their own houses.

At no time could it be more crucial than the present to compensate performers, composers and producers of sound recordings for private copying.

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In the future, private copying regimes may be phased out and replaced by direct licensing. Until that time, however, a private copying regime that is founded on the simple concept that corporations that profit from the sale of blank audio recording media and individuals who benefit from private copying of sound recordings should contribute and remunerate producers of sound recordings, composers of music embodied on those sound recordings, and performances that are fixed on those sound recordings.

In our written submissions we recommended that the proposed private copying regimes should not create yet another exemption, but should be structured as a statutory licence. A private copying regime based on a statutory licence would not prejudice the establishment of one-to-one licensing in the future or private copies made in the course of interactive electronic delivery of sound recordings.

We hope the committee will consider the implications the proposed private copying regime would have for the future of the recording industry in Canada and for its related music industries.

I will now turn the issue of neighbouring rights back to Mr. Robertson.

Mr. Robertson: As I'm sure you're well aware, the issue of neighbouring rights conjures up images of conflicting views among the rights owners, the artists and the producers, and the users.

This is not just a Canadian scenario. In every single country that has enacted or contemplated enacting neighbouring rights - and there are 51 countries that have done so to date - there has been conflict between the rights owners and the users, specifically broadcasters.

From a Canadian perspective, if you were only to hear the views of the Canadian Association of Broadcasters, you would hear of a so-called longstanding arrangement between our two industries. The reality, ladies and gentlemen, is that there is no longstanding arrangement. The only thing that is longstanding is the CAB's ongoing objective of eliminating any form of performing right compensation for artists and record companies.

This crusade has been going on for almost 30 years. You may recall that a performing right was originally enshrined in the Copyright Act, and when the recording industry moved to exercise it in the late 1960s the broadcasters lobbied to eliminate it, and they succeeded.

My industry has been working tirelessly since the mid-1970s to reinstate the right. So it is not surprising that we look somewhat askance at statements in press releases about these so-called understandings between broadcasters and the record industry.

What has been lost in those 30 years is millions of dollars of not only domestic revenue for our artists and producers, but just as importantly, reciprocal revenue from the 51 enlightened countries that have enacted the legislation.

By opposing the introduction of these rights, Canadian broadcasters have deprived dozens of Canadian artists who have enjoyed ongoing or fleeting success in the international marketplace of performing rights revenue that in the latter group certainly would have sustained a career, or contributed to another recording and another opportunity.

In their presentation to you the CAB would lead you to believe that radio play is the sole reason recordings are sold. Let me quote them:

In 1996 the reality is that only a small percentage of airplay has any influence on the sales of sound recordings. How so? Let me explain.

First, let's look at the influences of AM radio. Twenty years ago AM radio was a dominant factor in the enjoyment of recorded music. Indeed, top 40 formats that featured new artists, new releases, and, more importantly, the hits, were a major factor in radio programming. Where are they now? AM radio is a dying format, in much the same way we lost vinyl recordings in the 1980s. AM is now utilized mostly for news and talk formats, and FM has supplanted it.

But there's a problem here. Commercial radio is advertiser-driven, and advertisers are chasing an older demographic. So new artists, new releases, and the hits are less of a factor, and gold formats are. Listeners are mostly fed a diet of old nostalgic hits, which is great for the Beach Boys, Carole King, Fleetwood Mac, and even our own Guess Who, but of course no one is rushing out to buy20- and 30-year-old recordings, and the programming window for introducing new recordings is extremely limited.

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Let me be clear that we are not complaining about the programming policies of radio stations. That is a perfectly understandable business decision. But we certainly object to the ploy of trying to artificially establish that the programming influences of 25 years ago are still viable today.

We are also perfectly ready to acknowledge that there are still a number of stations that are still interesting and exciting to listen to, but in general the Canadian recording industry has long ago recognized that radio is not the primary marketing vehicle for the industry any more, and by necessity millions of dollars are now invested by the record companies in other methods of communicating with the desired markets.

By way of example, my association last year invested in excess of $700,000 in a test market program in Calgary that was designed to more effectively communicate with prospective record-buyers. It is contemplated that this innovative program, which uses direct mail and 1-800 listening lines, will be extended to other centres in the near future.

Let me anticipate a question you may have on the surveys the CAB provided you with, which tells that radio was an influence in the purchase of sound recordings. In the context of the narrow window that still exists, we acknowledge that this is probably accurate, but it obviously cannot apply to the broader picture of AM radio or the dominating gold formats.

Let me share with you what is happening to retail sales in our industry. Like AM radio, we are dealing with a dying format, and that is the analogue cassette. You will see in the chart marked table I that the total unit sales of sound recordings in Canada peaked in 1979 and it has declined substantially since then. This trend reflects the loss of the vinyl format and the loss of popularity of pre-recorded cassettes. Broadcasters, particularly FM stations, utilize sound recordings for up to 70% or 80% of their programming, yet, as you are aware, for decades they have reaped the benefits of not having to pay artists and producers for that resource. Those broadcasters that also own television stations clearly understand the reality of actually having to pay for programming.

It is ironic that Canadian broadcasters oppose the rights of Canadian artists and producers, yet they are enthusiasticly pursuing the introduction of their own rights to protect their own signal. A little bit of a double standard, don't you think?

I will move now, if I may, to the content of the analysis by the Coopers & Lybrand consulting group of the proposed neighbouring rights legislation.

We have all been privy to the death-watch press releases from the Canadian Association of Broadcasters, which talk about a killer tax, or that small-market radio stations are going to go out of business, or about the so-called 15 years of losses, or that neighbouring rights will cost private radio up to $22 million, or $13 million, or $8 million, depending on which press release you read. It's been a numbing avalanche of inaccurate information.

The Coopers & Lybrand study, as you will see when you've had a chance to review it in detail, provides a clear-headed analysis of the levels of rights revenue that both the current proposals in Bill C-32 will generate, plus the alternate proposals you have already been made aware of. Additionally, there is a detailed economic analysis of the ability of the broadcasters to pay for neighbouring rights. Coopers & Lybrand said:

It concludes:

I would like, if I may, to take you quickly through the highlights of the study, and as part of your documents you will see the supporting material I will refer to.

First of all, let's look at the potential revenue that will be generated from the existing proposals in Bill C-32. As you have already heard, out of a total of 495 private radio stations, 327, or 66%, will be exempt from rights payments. Only 168 stations with revenues exceeding $1.25 million will contribute. The actual royalty level will be determined by the Copyright Board at a later date, of course, but for the purposes of calculating these revenues Coopers & Lybrand has used a neighbouring rights fee of 1.5% for the following reasons. First, SOCAN currently has a 3.2% fee for authors and composers. Second, roughly only 50% of the repertoire will be eligible, given the current lack of neighbouring rights legislation in the United States. Third, neighbouring rights levels in other countries range from a low of 1.3% to a high of 9%.

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You will see from table two that, based on the existing proposals, a combination of the phase-in exemptions and U.S. deductions results in a revenue yield of only $5.3 million in the year 2002.

The cost estimates for establishing and operating a collective have been determined by looking at the experiences of other collectives, such as the Canadian Retransmission Collective and CANCOPY in Canada and the Australian and British collectives, PPCA and PPL.

As you can see from table three, the low revenue yield is not enough to cover the operating expenses of the collective until the fourth year, and that is covered in the fourth line.

Turning now to the analysis of the ability of broadcasters to pay neighbouring rights, let's take a look at table four. This chart provides an insight into the growth of advertising revenues for Canadian broadcasters. According to Coopers & Lybrand regression analysis, which is based on retail sales as the predictive variable, radio revenues will grow at a rate of 3.2% on average over the 1996-2003 period, in comparison with a 2.6% average over the historical period of 1986-95, outlined in the graph.

The next graph, which is table five, outlines air time revenues in the 1976-95 period. As you can see, the downturn during the 1991-93 period was something of an anomaly, as there has been continuous growth in the previous 16-year period, including the 1980-83 recession.

Coopers & Lybrand is determined that the profitability ratios of radio will rise significantly above the 6.7% level of profits before interest and depreciation and closer to the range of 10.3% to 22.3% levels of the larger stations, which typically belong to the large ownership groups. It is these larger stations that dominate the industry, not only in listenership, but also in revenues and profits.

In 1995 the large stations had combined profits of $77 million. The largest group of stations, those with revenues exceeding $4.5 million, had profits of $61 million, corresponding with a ratio of profits before interest and taxes of 22.3%. This is outlined in table six.

The $1.25 million across-the-board exemption feature in Bill C-32 would provide the same benefit indiscriminately to small independent owners who need the exemption as well as the large profitable ownership groups that have the ability to pay. The larger, most profitable stations are mostly located in the richer metropolitan markets and are generally owned by the major chains.

Radio is a very highly concentrated industry based on the number of stations controlled and listenership. Just 35 large ownership groups, which is 25% of all companies with radio assets, control 284 stations, or 55% of the total. These 284 stations in turn capture 84% of all listening hours. These stations enjoy proportionately larger listenership because they are located in the larger markets and as a result capture a larger percentage of advertising revenues.

As you've already heard, our industry has recommended a modification of the proposals contained in Bill C-32. Instead of a single amount-based exemption of $1.25 million, our industry proposes a variable basic exemption that distinguishes small, medium, and larger stations based on a recognition of their different rates and profitability. In addition, we propose to compress the introductory period into three years rather than five years, and increase the effective fee level earlier.

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Our proposal aims to focus the basic exemption where it is most needed; that is, with smaller stations with revenues of $750,000 a year or less. The overall impact of the revised proposal on the financial situation of the radio industry would be marginal. Our proposal involves a relatively greater financial effort from the larger stations, while leaving the smaller stations almost totally untouched.

The larger stations - that is, those with revenues of more than $2.5 million - would have 20% of their revenues exempted. Medium-sized stations with revenues between $750,000 and$2.5 million would have 55% of their revenues exempted. Small stations with revenues under $750,000 would continue to receive a 100% exemption, with the exception of the small token $100 payment.

The net financial impacts of the recording industry's proposal on the radio industry is modest over the initial five-year period, as shown in table seven. In the far right-hand column you can see where the high volume of the radio stations is located, which is in the small and medium-sized markets. Small stations therefore would continue to be completely exempt. Medium-sized stations would pay on average only between 0.2% and 1.1% of total revenues, while large stations would pay 1.2% of revenues.

The modest amounts of contribution from the medium-sized stations would not significantly change their financial situation, while the relatively higher rights payments demanded from the larger stations are supported by their much higher profitability levels. Even in the case of the larger stations, the amount of royalties is moderate.

Under the current Bill C-32, it is only in the fourth year that the collective would have any funds to pay out to artists, and this principally is due to the relatively high debt-financing costs. In comparison, in our revised proposal, in table eight, you will see that the royalties are paid out earlier and in a greater amount to artists and producers. You will see that the revenues have risen modestly, yet they clearly allow the collective to be efficiently established and create the opportunity for rights owners to receive revenue in year two, instead of year four in the Bill C-32 proposal.

In its submission to the House of Commons on Bill C-32, the CAB provided a background document on trends and outlook for the Canadian private radio industry, entitled ``Private Radio: An Industry in Economic Crisis''. In this document, the CAB indicates:

In contrast, the Coopers & Lybrand report states that the CAB analysis presented an unduly negative portrait of the financial health of the radio broadcast industry. They express the view that the CAB uses an uncommon measurement of profitability - profit after interest expenses. The CRTC, which regulates the radio industry, uses the more conventional measure of profitability as profits before interest and taxes, or PBIT. PBIT is used by the regulator in recognition of the fact that the financial portrait can be unfairly distorted if interest expenses are included.

In the late 1980s there were a significant number of buyouts in broadcasting, based on debt financing. This placed excessive interest expenses on the income statements and skewed the traditional debt-to-equity ratios of a number of broadcasting companies. In the 1989-93 period interest expenses ballooned following these buyouts. This increase in interest expenses was particularly evident on the AM side, which simultaneously recorded high operating losses.

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According to Statistics Canada data, which utilize profits before interest expense, the radio broadcasting industry has had only one year of negative profitability in the last ten years. You can see this in table nine.

The CAB study also emphasizes the impact of the recent recession, 1990 to 1993, in its evaluation of the revenue potential of the private radio industry. The business cycle is generally considered to be ten years. A more balanced view of the economic cycle and the potential of the radio industry would be obtained if a full ten-year period, i.e., 1985 to 1995, were examined, instead of the 1993 period the CAB used.

In conclusion, I would just say that not only has the CAB overstated the perceived losses of the private broadcast sector, but as you heard earlier, they have also recently received a major windfall of upwards of $5 million a year from the CRTC in the form of a reduction in their Canadian talent development payments.

To underscore the views of the returned profitability of the broadcasters, I would just like to quote from some recent comments that appeared in a broadcasting trade publication. It was referring to Newcap Broadcasting, which owns fifteen radio stations, from Edmonton to St. John's:

I submit to you, ladies and gentlemen, that the revised proposals strike a fair balance between adequate compensation for artists and producers and the ability of broadcasters to pay for the ongoing commercial exploitation of tens of thousands of our sound recordings.

In conclusion, we again would like to express our appreciation to the government for its initiative in introducing the bill and to the committee members for the investment of their time and ability.

The Chairman: Thank you very much, Mr. Robertson.

Mr. Abbott.

Mr. Abbott: I might suggest gently that if the CAB have overstated their case, perhaps you've understated yours, because if I compare table three with table eight, as you did, where you say revenues have risen modestly, I would suggest the difference between table three and table eight is that the revenues in fact have doubled. I don't really see that as a modest improvement.

I think you destroyed your argument about AM radio where you were talking about golden oldies, because what you're basically saying is that the new recording artists are not being played on the radio, the golden oldies are. If we take a look at neighbouring rights as getting compensation for the rights of artists, it seems to me what you're really asking for there under your argument - and I'm only using your argument here - is because in fact golden oldies are being used and you want the rights of artists to be recognized, they're not using the new artists. Therefore my question is why should they be liable to pay for the new artists if in fact they're not using them?

My argument there is based only on your argument. I want to define that.

Mr. Robertson: Mr. Abbott, if I could just go back to the first question, I don't see how they have doubled. In the fifth year under Bill C-32, in the year 2002, it's $5.3 million, and under the revised proposal it's $8.8 million.

Mr. Abbott: I went by your average, where you went from $2.67 million to $5.53 million.I took that number and I noted it kicked in fairly early on.

The other thing is that you speak of there being 35 companies, or 35 owners or ownership groups, which comprise 55% of the radio stations. Maybe I'm wrong, and you can correct me, but I understand your seven largest members are foreign multinational companies that account for over 95% of Canadian sound-recording sales.

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Mr. Robertson: It's six companies, Mr. Abbott, and I think it's about 80%, realistically.

Mr. Abbott: Okay. When we're talking about sustaining careers of artists, there are some details I looked at in your presentation. You state that your CRIA members invested $21 million in the development of Canadian artists last year. That's in your appendix A, page 2. This gets you a fairly high return since, according to Statistics Canada, foreign-controlled sound-recording companies made a profit of $124 million before tax in 1993-94.

In fact, Statistics Canada shows that foreign controlled companies had revenues of$51.4 million in that same year on recordings with Canadian content. In other words, your members invested $21 million in the development of Canadian artists and generated $51.4 million in revenue. That sounds like a pretty fair business deal to me.

Mr. Robertson: It is. I'm not denying it, but the level of investment, too.... If you'd like to see it, I have a list here of Canadian artists signed to the majors. It lists almost 160 artists. There's a significant investment.

They also have substantial investments in manufacturing plants and distribution systems. They also distribute all of the significant Canadian-owned independent labels in the country. They provide numerous opportunities not only for domestic sales, but for international revenue that returns substantial moneys back to this country in the form of export revenue.

Mr. Abbott: How does this relate to the poor artists making $13,000 a year? Would they be included in these artists we're talking about now?

Mr. Robertson: Yes, they would.

Mr. Abbott: So people earning $13,000 a year collectively are investing $21 million?

Mr. Robertson: I don't quite follow the argument.

Mr. Abbott: Okay. I'm just working from this $13,000 a year the minister talked about. The foreign-controlled sound-recording companies in Canada earned $124 million in profit, and I'm trying to relate $13,000 a year in income to $124 million in profit for your recording industry.

Mr. Robertson: First of all, we didn't quote the $13,000. I'm not quite certain if that comes solely from the music industry or from -

Mr. Abbott: It comes from Statistics Canada.

Mr. Robertson: It also refers to artists who do not have recording contracts. And the majority don't, as you well know. It's an incredible numbers game to actually get signed as an artist. As you know from the numbers I quoted you on being successful, it's a big numbers game. So the majority of the artists included in that estimate are not signed to recording contracts. They would be artists who are performing in small clubs and basically eking out a living as performing artists.

Mr. Abbott: Would it then be fair to say that CRIA actually represents these large multinational foreign companies and very successful artists who are not earning $13,000 a year?

Mr. Robertson: No. If you recall my presentation, Mr. Abbott, I told you that the average investment on a recording career is up to $1 million. Those major multinationals are investing up to $1 million on these younger, unproved artists, which I think is a fairly substantial high-risk investment when you consider that only one out of ten recordings recovers its investment.

Mr. Abbott: Do those artists have to pay back the companies by way of extra money being taken from them because of the investment in their records?

Mr. Robertson: I'm not familiar with the details of the contracts between the artist and the record companies, but certainly in terms of the risk factor it's the record company, be it domestic or multinational, who is making that investment. Without that investment, there'd be no recording industry, would there?

Mr. Abbott: To change the topic, on page 15 of your presentation you suggest the remuneration right be extended to Canadians who have recorded outside of Canada. In your letter on appendix G, I note you've suggested that by limiting the right of remuneration of those who have recorded in a Rome convention country, very few of these major Canadian stars will come back to record in Canada. But Minister Copps told us on the first day of these hearings that artists like Céline Dion and others will return to Canada, and she said there would be major industrial benefits. Does this indicate a difference of opinion between you and the minister?

Mr. Robertson: No. I think we're talking about internationally successful Canadian artists, aren't we?

Mr. Thompson: Yes. I'm not really quite clear on what the question is.

Mr. Abbott: The minister is saying that Bill C-32 will bring these artists back to Canada and you're saying no, they won't come back. So I'm asking if there a difference of opinion here between you and the minister.

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Mr. Chater: Our view - correct me if I'm wrong, Ken - is that the way the bill is worded, if a Canadian artist is an internationally successful artist not signed directly to a Canadian company - and that could be someone like Brian Adams, for example, but I'm not certain if that's actually true - they would not qualify for neighbouring rights payments. I think that was the issue we were addressing.

We've made recommendations to the minister to make some changes so that artists who maybe are not signed directly to Canadian companies would not be penalized for that right. They still are Canadian, they are resident here, they pay taxes here, and the revenue flows back here.

Mr. Abbott: Should Canadians like Alanis Morissette, who neither lives, records nor pays taxes in Canada, be given the benefit of the worldwide neighbouring rights if she won't even record with a Canadian company?

Mr. Chater: If you recall, Alanis Morissette is from Ottawa. Her home is here, and she spent a great many years developing her career here. At the moment she is touring around the world and recording in other centres. That doesn't necessarily qualify that she's not a Canadian, Mr. Abbott.

Mr. Abbott: I'm not suggesting she's not a Canadian. I'm asking, if she doesn't record in Canada and she doesn't sign with a Canadian company, as a Canadian should she still receive neighbouring rights?

Mr. Chater: Of course she should.

Mr. Abbott: Thank you.

The Chairman: Mr. Peric.

Mr. Peric (Cambridge): Thank you, Mr. Chairman.

Mr. Robertson, thank you for a very good briefing on radio broadcasters. Could you describe to us the revenue of the 28 members in your association - and Mr. Abbott mentioned there are six multinational companies - for the last year, say?

Mr. Robertson: I would say it was about $750 million.

Mr. Peric: Could you describe to us the whole operation after you sign the contract with the artist - how you promote them, how much time and money is spent on their promotion, how much you have to pay to radio stations for promotion and so on? Where do you spend money and how much do you share with the artist and so on?

Mr. Robertson: I'll certainly try. I don't think we have the time, but certainly -

Mr. Peric: You had enough time to describe all about radio stations and so on.

Mr. Robertson: Each record company, be it multinational or independent, has what is called an ``A and R'' department, which stands for ``artist and repertoire''. It's their sole job to find and discover new artists and new talent and new music and to put those together to try to determine whether there is a career opportunity there. I stress ``career '' because nobody is interested in one recording. They're interested in developing a career for the artist.

This A and R department would search out artists. There's a lot of competition between not only the multinational companies but also the independent companies, plus companies that are not based in Canada, such as U.S. companies. Everybody is looking for tomorrow's hit.

Mr. Peric: The next superstar, eventually.

Mr. Robertson: Ideally. They're always looking for the next Céline Dion.

Mr. Peric: And profit.

Mr. Robertson: I call all that research and development. Once that artist has been found and signed, then there's a whole process of determining whether they have the ability to perform publicly in concert or in clubs. Music has to be found, depending on whether the artist can write their own material. That's always a consideration, because some do and some don't. The best example of those who don't is Céline Dion. When they do, this gives an advantage to both the artist and the record company. Eventually they will go into a studio. It may take anywhere from three months to a year and half to get through the studio process.

Once you have the recording the record company usually will be giving advances to the artists in terms of assisting them in the day-to-day process of buying instruments, touring support and basically sustaining them until the recording is released and there is some revenue flow. Once the recording is released there is a whole marketing process to support that, which can be extremely expensive.

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As I explained, radio used to be a much greater factor than it is now. It's still a factor in some instances, but the record companies have to be a lot more entrepreneurial in finding other ways to market sound recordings.

The test market we did was utilizing direct mail and 1-800 music lines where you dial in and you can listen to the recording. One of the biggest complaints now is that the outlets for listening to music have declined, for various reasons. So that's the sort of flow of the process.

Mr. Peric: How does this marketing department sell the records? Do they just deliver them directly to the stores? Do they approach radio stations to send a...?

Mr. Robertson: Sure, they will approach radio stations.

Mr. Peric: Do the radio stations charge you for playing that music?

Mr. Robertson: No.

Mr. Peric: They don't?

Mr. Robertson: No.

Mr. Peric: Okay. Since you know the whole operation of radio broadcasters, could you explain to us how much time to they spend on promotion - according to you, free of charge?

Mr. Robertson: Who, the radio broadcasters?

Mr. Peric: Yes.

Mr. Robertson: The stations that do play new recordings and new releases are very helpful to the process. Our issue is not with what they do; it's with the narrow window that exists now because of programming formats.

Mr. Peric: How much would it cost you to pay that air time?

Mr. Robertson: How much would it cost us?

Mr. Peric: Yes.

Mr. Robertson: It's difficult to put a price on it.

Mr. Peric: It's difficult to say.

Mr. Robertson: My understanding of Bill C-32 was that the question has been addressed. It's not one we necessarily agree with. The Copyright Board has to take that into consideration when we go before them.

Mr. Peric: I have one last question, Mr. Chairman.

The Chairman: Yes, very briefly.

Mr. Peric: What's the portion of your revenue that you share with the artist?

Mr. Robertson: It's a contractual arrangement. The royalties vary.

Mr. Peric: Anywhere from minimum to maximum, I'd say, a percentage.

Mr. Robertson: I can't tell you.

Mr. Peric: Could you provide us with that information, please?

Mr. Robertson: I'll endeavour to, of course.

Mr. Peric: Thank you.

The Chairman: We'll have two last questions, from Mr. Bélanger and Mr. Abbott, and then we'll close.

Mr. Bélanger: Thank you, Mr. Chairman.

I would like to know, sir, if in calculating the profits or their profitability your members take their interest costs into account.

Mr. Robertson: In their profitability?

Mr. Bélanger: Yes.

Mr. Robertson: I can't answer today, Mr. Bélanger. I'm sorry.

Mr. Bélanger: It would be interesting to know, because if you're going to be asking the radio stations not to include their interest costs when they're determining their profitability, I'd like to know what your members do.

Mr. Robertson: Sure.

Mr. Bélanger: Secondly, would you consider that Bill C-32, as it stands, would result in artists who are not currently recording in Canada, who are not Canadians, coming to the country to do their recordings in order to be part of the Club of Rome countries? You don't think so?

Mr. Robertson: No, not at all.

Mr. Bélanger: Thank you.

Finally, when you sign a deal with an artist, do you...? I haven't seen a standard contract. Is there a standard contract?

Mr. Robertson: I don't think so.

Mr. Bélanger: Are the artists asked to sign over their copyrights so that the income from those rights goes to your companies in order that they can cover their costs first?

Mr. Robertson: No, Mr. Bélanger. The agreement, certainly on neighbouring rights, as you know, is a 50-50 split between the artists and the record companies. The artists' revenue goes directly to them. It does not go in any way -

Mr. Bélanger: I'm not talking about neighbouring rights here; I'm talking about rights that are...SOCAN rights, and so forth, other rights now where the artist may get some royalties. Do they sign those over right now?

Mr. Robertson: In general, I can't answer your question because each individual negotiating deal is done separately.

Mr. Bélanger: Thank you, Mr. Chairman.

The Chairman: Mr. Abbott, briefly.

Mr. Abbott: I have one last quick question, back to where we were before, where we were talking about a Canadian citizen who achieves international fame.

We all seem to work by the conventional wisdom that the larger market and to become worldwide and well-known is the U.S.

Mr. Robertson: Right.

Mr. Abbott: Under the proposal that, as I understand it, you are in favour of, that person, whether they recorded with a Canadian company or whatever, by the fact that they had Canadian citizenship, their royalty cheques, their neighbouring rights cheques, all of their cheques, would go to them at their U.S. address if that's where they chose to live. What is the benefit to the Canadian industry and what is the benefit to Canada of that?

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Mr. Robertson: I think you're talking about a handful of artists who are actually living outside the country. So with respect, I think it's a bit of a narrow example you're giving me, Mr. Abbott. Most of the artists are actually resident here, as you know, and their homes are here. So I think the vast majority of the revenue is going to come back into this country.

Mr. Abbott: Then why would we have this exception for this narrow band of people?

Mr. Robertson: Because I think it's fair and reasonable that an artist who is Canadian and has invested the early part of their career here and for whatever reason chooses to -

I'll give you one example. Joni Mitchell, you may feel, is in those circumstances. She has a home in Los Angeles. But she also has a home in British Columbia. So she divides her time. Now, would you penalize her because...?

Mr. Abbott: It would depend on where she recorded and whether she worked for and did it for a Canadian company.

The Chairman: Thank you very much, Mr. Robertson and colleagues. We appreciate your time.

The meeting is adjourned.

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