ROYALTY CHECKS AND REALITY CHECKS

The following is the text of an address given at MIDEM by John Hutchinson, CEO of MCPS/PRS (Mechanical Copyright Protection
Society/Performing Rights Society) in Great Britain. He is the British counterpart to Frances Preston of BMI, John LoFrumento of
ASCAP, Bill Velez of SESAC and Edward Murphy of the Harry Fox Agency, Inc.

We are pleased to reprint the speech in its entirety with the kind permission of the author.

Can Collecting Societies Survive Beyond The Digital Frontier?

By John Hutchinson Chief Executive,
The MCPS/PRS Music Alliance
MIDEM, Cannes, France

Only recently I heard the head of a major European collecting society say that collecting societies are guaranteed a future
because it is only through a collecting society that a composer can receive all the royalties due to him or her. On that basis the
question being asked today is patently nonsense.

Or is it? Even though they have survived and largely thrived in a span of time since before broadcasting and commercial sound
recordings began, can this creaking and groaning gang of old timers-- societies, that is-- really survive the onslaught of the digital
age? Well I am afraid that my answer to that question is a definite MAYBE!

If you compare our performance with that of the people already involved in doing business over the Internet or other large
networks, we are going to find it very difficult to keep up. Take our licensing activity. What is the acceptable time for a music user
to wait for a license? Well of course most of the people needing a Performing Right license would rather not hear from us at all
and certainly do not want to see us more than once a year. Provided we do not take the money until we issue the license, they
are prepared to wait for an extended period for the license document. A turnaround of one month from application is quite
acceptable.

Now, MCPS provides a seven day turnaround for record companies wanting a mechanical license. That sort of turnaround is just
not achieved outside the UK.

Library music users can get much more rapid turnaround but there are few examples where any collecting society has to or does
give a license inside one minute. Why should we? Well, have you ever noticed how fast most authorizations are when you use
your plastic card to buy something in a shop? Rarely does it take more than a minute and, if it does, it is usually the telephone
line which is busy.

My old employers, Visa, set a turnaround time of 20 seconds for their part in International transactions to get a response from the
bank which has issued the card. If the bank cannot meet the standard, Visa stands in, giving the answer itself and if the bank has
not delegated Visa to give a Yes the answer is No.

In the on-line digital environment we will need to meet those sorts of standards or someone will stand in for us. And unlike the
banks, we don't have a worldwide operation like Visa or MasterCard which we own and control. The person who stands in will take
our business.

But, of course, say many collecting societies "Our members will protect us because we protect them and they love us for it."
Really? I don't think so! As far as the performing right is concerned, distribution two years from performance for overseas
collections is not unusual and it often takes longer. That is totally unacceptable. One year for domestic performing right royalties
and even for mechanical royalties on the continent is quite normal. We have to do better than that!

Only in the UK do we see a situation where MCPS pays out mainstream mechanical royalties within 7 to 14 days of receipt from
record companies.

And the new Live Concert Service from PRS requires concert promoters to pay within two weeks and we pay to members at latest
two weeks after that. Most Continental societies have to pay us within 1 month of payment by the promoter and often pay quicker
so, at the outside, a major touring band gets its money in between 1 and 3 months of its concerts.

No other collecting society in the world, that I know of, is setting its management targets for turnaround of money to members.
MCPS already makes monthly distributions and within 2 to 3 years so will PRS. But let's face it, it is a lot easier to sit back and
earn interest on the float of money you are holding, than to pay it out quickly and accurately.

Well sorry, but in the digital era a turnaround time of 2 days is a proven concept. You can pay with a credit card at an electronic
terminal in Sydney, Australia on a Monday and it will still be taken from your account in the UK, France, Sweden,
USA-wherever-on that Wednesday. Why should our members wait longer when beyond the digital frontier all the information can
be logged and in theory transmitted at the time of the transaction?

"Ah," the traditionalists say, "but it is a much more complicated and expensive business to collect copyright royalties than to
process credit cards." Well, why should it be in the digital era? Yes, there are problems with numbering standards at present but
we had better sort that out soon or we will be on the scrap heap.

How much are members prepared to pay to have their money collected? Well, one of the top 16 societies, which between them
deal with 80% of the world's copyright royalties, deducted over 40% from its performing right royalties in its last recorded year and
as for other societies 30% or more, including social and cultural deductions, is not unusual. Most performing right society
deductions are over 20% and so are a surprising number of mechanical rights societies. Under 15% is the preserve of only two
performing right societies I know of-APRA in Australia and PRS in the UK-we beat 14% in 1997.

Where mechanical rights administration is concerned, the Cannes Agreement is designed to force a reduction in end-to-end
mechanical rights deductions from 8 to 10% or more down to 6% by 1st July 2000. But under 5% has to be the target and more
than that in the digital environment will be unacceptable. We are, of course, achieving that in MCPS when other societies are
not involved.

The MCPS/PRS Music Alliance has one prime objective "To maximize the flow of royalties from licensees and affiliated
societies and then get the money to members as fast as possible with the lowest possible level of cost deductions."

Our targets for 3 years hence are to reduce our cost to total royalties ratios to 4% for the mechanical right and 10% for the
performing right. And the mechanical rate for digital transactions will have to be well below 4% if we are to survive.

Let's face it, who is safe beyond the digital frontier? A lot more efficient people than collecting societies are threatened.
Broadcasters are threatened by Internet Service Providers and Telecoms; Telecoms are threatened by everyone with a network;
someone will need to be there to record tracks and market them but will we need record companies per se; publishers could
easily wind up being merged with record companies or vice versa and some composers do not think they will need publishers; but
that is like saying you do not need a marketing department or sales operation to sell consumer goods. However, the business units
operating in the music industry are going to have to change radically.

And so are we, or we will be cut out of the future development of the business. We'll gradually lose the business like broadcasting,
which requires a high-tech approach and will be left with the difficult stuff, like collecting license fees from hairdressers until
someone finally puts us out of our misery. And then composers really will be threatened because their only option will be to
accept a buyout for the works they create. And that really would damage creativity and the long term financial interests of
composers and their families. But, we will have brought this calamity upon ourselves and them.

"So," you may say, "how will this break-up occur when societies are firmly in control of the creators and publishers rights?" Well
the framework is already there for the Death of a Thousand Cuts and it started as long ago as 1971 with the First Cut when the EU
[European Union] commission delivered the GEMA decision which required that society to allow members to take back any one
of seven categories of right and even to exercise that withdrawal by territory.

And you will notice that one of those categories is new technology or to quote the decision "the exploitation rights resulting from
technical developments or future changes in the law." Yes, that's right, the 1971 decision made our demise inevitable if we don't
get our act together.

In 1972 the commission delivered the Upper Cut which broke down a number of the categories into smaller units making it easier
to break up the old rights into difficult to collect and easy to collect. And, of course, as you would expect all the future rights are
still grouped together ready for plucking.

And then, we cross the Atlantic for the 1993 Buffalo decision which forced per program licensing for broadcasting on the US
societies-a sort of Cut and Come Again approach where every single radio or TV program's music has to be licensed and
processed separately; and of course it can easily happen here.

Back in the UK, in 1995 the Monopolies and Mergers Commission made the report on PRS. This forced us to incorporate the
GEMA decisions in our rules and in addition made us give back the right to license Live Concerts if our members wanted to
collect those royalties themselves. In view of the involvement of one of our most famous touring group members, I have called
that U2 can cut.

One of the reasons that a number of the continental societies believe they can keep their members' loyalty is the use of social
and cultural deductions from Anglo-American royalties to line the pockets of their own members. Notable among the societies to
do this is GEMA of course. The German society does not just put 10% of all royalties into the pot but also all interest income and
a few other odds and ends. And it claims that German law forces it to do this. Now, PRS made a lot of public fuss about this for a
long time and did not really get that far. So, last year I suggested to GEMA a discreet approach to the German Cartel Office to
see who was right and who was wrong. In the Unkindest Cut of all, GEMA denounced this initiative in its member yearbook and on
the Internet. Does it deflect us? No!

The time has come, please, for our members to get all the money due to them subject only to reasonable cost deductions and
modest cultural contributions. Even PRS undertakes sponsorship and makes donations-but at a level of less than 1% of royalties.

If overseas societies wish to provide pension schemes for their members, let them do so from their own royalties not from ours. If
any society wishes to subsidize its classical composers and not those of other societies then let them do so from their own
domestic royalties.

For too long, UK and USA composers have provided a latter day Marshall Plan for Continental composers and publishers, and it
has to stop. As I say, if a Continental society can demonstrate benefits from cultural support, we can talk about it. And I am
delighted to say that we have already reached an agreement with STIM, the Swedish society, on that basis.
There is little doubt that if we do not stop this interference with royalty flows then someone will blow the whistle at the European
Commission and that will be the Final Cut.

Then, with that level playing field and no golden handcuffs, how are societies going to survive? Well here are my tips. First, we
all have to collaborate with the service providers to ensure that proper Electronic Copyright Management systems are in place.
That means devising a common systems architecture that will allow royalty information and royalties to flow easily into societies,
in a readily digestible form.

Next, we all have to speed up our back office processing and get the money to our members as fast as we possibly can. Otherwise
our members will turn direct to the service providers or other agents to do the work for them. You may say, "how could they?" But
the monopolies most societies have are not legal monopolies. And any society in the European Union that claims that it does
have a legal monopoly should look at European law and think again. Competition is always possible if the competitor can offer
our members something they want and we cannot provide.

Then, we have to cut overhead drastically and eliminate unauthorized deductions. Our members are adults; they should be able
to decide what they do with their money, not have it stripped out at source as part of a society's policy or rules.

And, having done all that, even though most of us are monopolies, we have to behave as though there is competition out there.
We must compete for our members' business because sloppy complacency breeds unwelcome competition.

And, I have to go back to my "Maybe," in answer to the question posed by this seminar, because I am not certain we do have time
for all the current players to survive.