in the Sony "Betamax" case, a movie industry representative appeared before the Senate Judiciary Committee and asked Congress to change the copyright law to allow movie studios to control the rentals of video cassettes and discs.3

At that hearing, the movie industry representative the rental schemes result in the use

declared that,

"

of the copyrighted work without additional compensation to the manufacturer/distributor, the copyright owner, and the creative community."4 Since then, the movie industry has

repeatedly claimed that "under current law, the rental market returns nothing to the studios."5

The New Home Video Market

The claim that rentals return nothing to the

studios was never accurate, and it is becoming more false with each passing day. Simply put, the industry realizes tremendous profits from videocassette and disc rentals

3.

Interestingly, at that hearing, the movie industry asked that the copyright law be amended to make rental transactions public performances as defined by Section 101 of the Copyright Act. The movie industry has never explained its switch from its public performance approach to its current efforts to change first sale doctrine.

4. Oversight of the Copyright Act of 1976, Hearings before the Senate Committee on the Judiciary, (Statement of Stephen Roberts, President, Twentieth Century Fox Telecommunications Division.)

5. E.g., Jack Valenti, MPAA President, in Billboard, March 26, 1983.

because before a work is rented it must be purchased by a retailer. Nevertheless, despite such profits, the movie industry seeks, through H.R. 1029, to prohibit the rental of prerecorded video cassettes and discs without its permission. In so doing, it would abolish the historic first sale doctrine, the very law which and this is no exaggeration helped create those rental profits in the first place. The video cassette recorder has created a huge

market for movies, a market that provides revenues in addition to the amounts already received from box office, cable, airline and television sales in the U.S. and abroad. For example, Paramount expects over $20 million in gross revenue from fourth quarter prerecorded cassette sales to video retailers of just one movie "Raiders of the Lost Ark."

Not only has the VCR created undreamt of profits for prerecorded cassettes of hits, it has created new markets, and new profits, for older movies and box-office losers. After the advent of the VCR, movie studios revisited their dusty archives and found thousands of movies which they could put on cassette or disc and then sell to video software retailers, who would then rent or sell them to consumers. Until a few years ago, these older, fully-depreciated movies had little value, except for play on late-night television.

The VCR has even created a new market for box

office losers.

Even though these movies are not hits, thousands of video software retailers buy these movies to sell or rent to consumers.

Hollywood has little risk here as

the retailers provide a steady market. The retailer takes a risk by purchasing the movies, for consumers may refuse to view the movie at any price.

The VCR has also opened up a new market for

instructional and educational programming.

A popular example

is "Jane Fonda's Workout," which has sold over 200,000 copies and grossed over 12 million dollars, without ever appearing on television or at the box office. All 200,000 copies were sold to retailers who, in turn sold or rented the program to their customers.

Moreover, Hollywood's revenue from these markets for prerecorded movies is increasing at a tremendous rate. Last year, Hollywood made almost 350 million dollars in prerecorded cassette sales to dealers.

Next year, it is

expected to sell 1.3 billion dollars in home video products, an increase of 40% over 1983. Recently, movie industry

executives forecast a 300% increase in sales of prerecorded

cassettes over the next five years.

did not even exist a few years ago.

Remember, these markets

Let me stop right here, Mr. Chairman, to repeat a

very important point:

HOLLYWOOD PROFITS ENORMOUSLY

FROM RENTALS

We cannot emphasize this point enough. Hollywood

has reaped great profits from the prerecorded video cassette and disc market through sales of movies to retailers, who in turn rent or sell to customers. One recent study shows that more than two-thirds of the video software retailers maintain over 500 titles in stock, in addition to those they have sold.6

Each of these 500 titles is initially bought from a copyright owner, and each of these 500 titles yields a return to Hollywood. As Variety recognized, Hollywood makes substantial profits from rentals, because video stores have to buy them to rent them.7

No one anticipated that Hollywood would find such a lucrative market in the sale and rental of video cassettes and discs. Indeed, as Frank Barnako will discuss, if left to its own devices, Hollywood wouldn't have made much money at all from prerecorded video material. Why? Because the movie companies expected consumers to purchase the cassettes for

The Video Retailer, Readership Survey p. 46 (October 1983).

6.

$50 to $60. Consumers would not buy at those prices. Why pay $60 to buy a movie you only want to see once or twice? not Hollywood

It was video retailers

who recognized what the public wanted. It was video retailers who created the video rental market, over the

not Hollywood

strenuous objection of Hollywood. It was video retailers

not the movie studios

who turned what had been a slow

market composed entirely of sales into a fast moving and profitable one based on more rentals and sales.

The Present Law Works

Significantly, these enormously profitable markets

exist not in spite of but because of the first sale doctrine. Competition in a free marketplace, engendered by the first sale doctrine, has provided Hollywood with enormous revenues and consumers with the right to make a choice between

purchasing or renting a movie all under present law.

But let's go back to the sale market for a minute. Hollywood, which is remote from the consumer, originally set its prices quite high, and the retail prices inevitably followed suit. It took Hollywood several years to figure out what Macy's or Gimbel's would have figured out in about two minutes: if you want to sell more of something, cut the price.