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eLabsUM'NIVERSAL UNIVERSAL MUSIC INTERNATIONAL UNIVERSAL MUSIC ENTERPRISES TESTIMONY OF UNIVERSAL MUSIC PUBLISHING GROUP UNIVERSAL MUSIC 8 VIDEO DISTRIBUTION ClKAJU ES CIjONGOI I

SENIORVICE PRESIDENT, FINANCE UNIVERSAL MUSIC GROUP Los Angeles, California

Before the Copyright Arbitration Royalty Panel Washington, D.C.

April 2001

UNIVERSAL MUSIC GROUP 2220 COLORADO AVE SANTA MONICA CA 90404 TEL 310 865 5000 PUBLIC

Table of Contents Page

Qualifications Summary. Discussion

A. Net A8zR Investment

B. Marketing Costs

C. Overhead

D. Manufacturing Costs Statement of Experience

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Quali6cations

I am Senior Vice President, Finance, for Universal Music Group, Inc.

("UMG"). I am responsible for the financial activities of UMG's North American operations, which include several record labels (such as MCA Records, Motown

Records, Interscope Records, Geffen Records, Mercury Records, Island Def Jam

Music Group, Polydor, Philips and Verve Music Group), as well as music publishing, distribution and manufacturing operations. UMG is the largest record company in the United States and has a market share of about 27%.

Universal Music Publishing Group ("Universal Publishing") is the third largest music publishing operation in the United States, with a market share of approximately 15%. Prior to assuming my current position, I served as Vice

President and Group Controller for both MCA Records and MCA Music

Publishing. A statement of my experience is attached.

Summary In this testimony I present comparative financial data on UMG's U.S. record label and music publishing operations. The most recent income statements for the UMG record labels ("UMG labels") and Universal Publishing are included in RIAA Exhibit No. oo8DR. These statements provide actual data

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for Fiscal Year 2ooo. The data help demonstrate the significant differences between the record business and the music publishing business. By way of summary, record labels engage in a very risky business that requires substantial expenditures for recording advances, overhead, marketing and manufacturing. In contrast, the publishing business has less risk and less cost. It also benefits from record company marketing and other efforts, which help generate both the mechanical royalties and performance royalties that publishers and songwriters receive. Discussion

A. Net A8zR Investment Record labels and music publishers use the same basic process to develop and compensate artists and songwriters. They both pay advances against possible future earnings, which are used to pay for certain costs. Earnings from the sale ofthe sound recording and use ofthe musical work are recouped to recover the advances. A primary difference between the record company business and. the publishing business lies in their different abilities to recoup these advances.

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The line item "Net A&R Investment" in our income statements refers to the amount ofunrecouped advances and recording costs to artists and songwriters paid or expensed in the relevant period. As shown in RIAA Exhibit

No. oo8DR and Figure l below, our record labels had a net A&R investment in FY

2000 Of of our labels'Y 2ooo total net revenue. The comparable data for our publishing operation are of net revenues for FY 2000.

Figure 1 FY 2000 Net A&R Investment UMG Record Labels and Music Publishina

[Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 20004 CARP DTRA 1&2.]

B. Marketina Costs Record labels must market and promote their new albums and artists to consumers in order to achieve sales. Publishers generally do not have to

Material Redacted Pursuant To Protective Order In Copyright Office Docket No. 2000-9 CARP DTRA 1&2 PUBLIC undertake this task because it has already been handled by the record label. As

RIAA Exhibit No. oo8DR and Figure 2 below demonstrate, in FY 2000 UMG labels spent a total of of their total net sales on marketing.

Universal Publishing, on the other hand, spent total publishing income on marketing in FY 2ooo. Figure 2 FY 2ooo Marketing Costs UMG Record Labels and Music Publishin

[Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 2000-9 CARP DTRA 182.]

C. Overhead Record labels generally have more significant overhead expenses than music publishers because the labels must undertake many more activities. As

RIAA Exhibit No. oo8 and Figure 3 below demonstrate, UMG labels had FY 2ooo overhead expenses of of total net sales in FY 2ooo. On the other

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[Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 2000-9 CARP DTRA 152.]

D. Manufacturin Costs Record companies also must pay significant manufacturing costs in order to produce the physical product that is sold to the customer. In FY 2ooo UMG labels had manufacturing costs of about oftotal net sales.

Universal Publishing incurs no manufacturing costs and thus has no budget line item for this cost category.

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Figure 4 FY2000 Manufacturing Costs UMG Record Labels and Music Publishina

[Material Redacted Pursuant to Protective Order in Copyright Office Docket No. 2000-9 CARP DTRA 152.]

I declare under penalty of perjury that the foregoing is true to the best of my knowledge and belief. gge/ Charles Ciongoli PUBLIC

Statement of Experience Charles Ciongoli is currently Senior Vice President, Finance, for Universal Music Group ("UMG"). He is responsible for the financial activities of UMG's North American operations, which include the nine United States record label groups in UMG Recordings, Inc., publishing, distribution and manufacturing, as well as Canadian operations.

Mr. Ciongoli has also been involved with a variety of special projects within UMG, including acting as an integral part of the group that handled the acquisition and integration ofthe Polygram Music Group in December 1998.

Mr. Ciongoli was previously Vice President, Finance, for MCA Records. He also served as Vice President and Group Controller for both MCA Records and MCA Music Publishing. He began his tenure with MCA in 1990 as the Group Controller for the MCA Music Entertainment Group. This group became UMG in 1996.

Prior to joining MCA in 1990, Mr. Ciongoli was a Senior Manager with the international accounting and consulting firm Price Waterhouse, where for ten years he provided a variety of audit, accounting and special services for Mergers and Acquisitions.

Mr. Ciongoli received his Bachelor's degree in Finance and Accounting from California State University at Northridge. He is a Certified Public Accountant (CPA) in the State of California, and he is a member of both the American Institute of Certified Public Accountants (AICPA) and the California State Society of CPAs.

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Exhibit Sponsored bv Charles Cionaoli

RIAA Exhibit No. oo8 DR — Consolidated UMG Record Label and Music Publishing Income Statements for FY 2ooo