predicted a 300-percent increase in prerecorded cassette sales over the next 5 years.

So make no mistake, Mr. Chairman, Hollywood is making plenty of money from rentals. As Hollywood's own newspaper Variety just recognized, studios make money off of rentals because video stores have to buy movies in order to rent them.

But let's go back to the sales market. 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 something in volume, you cut the price. Paramount led the way a year ago with "Star Trek II" at $39.95. Paramount said it would be pleased with 70,000 in sales units. It sold twice that many in the window they desired. This past January Paramount released "An Officer and a Gentleman" at $39.95. It sold 150,000 copies.

Now I just mentioned "Flashdance," which came out at the same price point. They estimated only 2 months ago that, 150,000 units would be sold. They sold 300,000. Paramount will soon release "Raiders of the Lost Ark" at $39.95, and they have already announced they expect to sell one-half of a million copies. They will take in well over $10 million by Christmas.

Numerous other studios have jumped on the bandwagon. Well over 250,000 titles just this year are available at the new $39.95 price point. Even Disney is now advertising and will soon release its most precious property, "Mickey Mouse" and "Donald Duck" at $29.95.

Mr. Chairman, it won't take Congress to make money for Disney this Christmas. It takes some old-fashioned marketing commonsense to get Disney's prices to a level which they believe will create high-volume sales. And please make no mistake, the movie companies have not even begun to explore existing opportunities in the marketplace. Our manufacturers have to do it everyday.

There are many options they have not exploited under present law. Some of these could be giving rebates to consumers for sales. We do that all the time: We give incentives to dealers for sales and make better use of direct mail to consumers. And, of course, price experimentation, just like Paramount and Disney are doing.

Now, these are all lawful techniques. They are representative of competition in the free marketplace. But Hollywood seems to like legislation better than it likes competition. H.R. 1029 requires video retailers to get Hollywood's permission before they rent. This permission won't come cheap. If Hollywood wants to, it could deny permission at any price. It could wipe out the rental business by doing that. Or it can drive up rental prices to the point of crippling the business and putting many of these stores out of business.

For almost 2 years, the movie industry has been saying that the passage of this legislation will drive down the sales price of video cassettes. Well, the miracle of the marketplace has already done what that legislation promised. So much for that argument.

But we would like to ask you to ask Hollywood some hard questions, and some of them came out here this morning: how much money do you make from the sale of a prerecorded cassette? As VCR sales increase, won't you make more money from more cassettes?

Their dream is to take the $10 million that we represent in the marketplace to $20 million, to $30 million within 5 or 6 years with the VCR's, and then unleased will be virtually every product Hollywood has to offer.

And most important of all, where is your increased profit going to come from if this legislation is passed? We asked these questions last year when we testified before this subcommittee. We asked them again in the spring when we testified on the Senate side. And we are still asking them.

We asked this subcommittee to try to get these answers. You took an approach at it today. We also asked the subcommittee to recognize that traditionally Hollywood has feared new technologies, even those which eventually brought it great prosperity. In the fifties they feared television. In the sixties and seventies they feared cable. But time has proven that the marketplace works and that regulatory intervention does not.

So, in conclusion, we ask the subcommittee to recognize that the first sale doctrine as it now stands promotes competition and protects consumers. We ask you to recognize as you have in the past that the free marketplace works. Thank you, Mr. Chairman.

Mr. KASTENMEIER. Well, that was very quick. I compliment you, Mr. Wayman, for that summary of your statement.

And now I would like to call on Dr. Cornell.

[The complete statement follows:]

STATEMENT OF NINA W. CORNELL, PRESIDENT
CORNELL, PELCOVITS & BRENNER ECONOMISTS INC.

Before the Subcommittee on Courts, Civil Liberties, and the Administration of Justice of the House Judiciary Committee

on

Repeal of the First Sale Doctrine

October 27, 1983

ECONOMIC IMPACTS OF REPEALING THE FIRST SALE DOCTRINE
FOR AUDIOVISUAL WORKS

INTRODUCTION

Mr. Chairman and Members of the Committee.

Thank you for

asking me to come and present my views on the proposed legislation before you that would abolish the First Sale Doctrine

for videocassette rentals.

The movie companies advocate an amendment to the copyright laws that would require anyone wishing to lend, rent, or lease audiovisual works for commercial gain to obtain the prior permission of the copyright owner.1/

In short, the studios want

to eliminate the First Sale Doctrine for the rental of

1/ The bills the movie companies are supporting are known as the Consumer Video Sales/Rental Amendment of 1983," S. 33 and H.R.

movies.2/ The fundamental reason that movie companies give for wanting this change is that this will allow them to increase

their royalties from the retail rental of videocassettes without sacrificing any potential revenue from sales of videocassettes to ultimate consumers.3/

Whether such a change would be good public policy depends upon what society would gain from the change and how much it would have to pay for such gains. The movie producers argue that

2/ The First Sale Doctrine allows anyone who has purchased a Copy of a copyrighted work to dispose of that single copy in any manner without permission of the copyright holder. Despite the claims of the movie company spokesmen, the Doctrine applied to books during the period in American history when libraries were commercial, for-profit rental establishments more often than they were nonprofit institutions.

3/ The supporters of the change in the First Sale Doctrine have stated that, "Because of a provision in the U.S. copyright laws, a prerecorded videocassette today can be purchased and then rented for valuable consideration without compensating the copyright owner for the commercial exploitation of his intellectual property." ("Summary Paper: The Position of the Creative Community in Support of Legislation Amending the First Sale Doctrine to Permit Copyright Owners to Share in Revenues Derived from the Rental of their Property, Tab 1 of "The Consumer Video Sales/Rental Amendment of 1983 Briefing Material" Mimeo, February 22, 1983, hereafter cited as "Briefing Materials.")

That assertion is simply false. Movie producers today do receive royalties from the videocassette rental market. Those royalties are part of the cost to dealers of acquiring inventory, and represent a significant revenue source to producers. According to the March, 1983, issue of Leisure Time Electronics, annual sales to dealers are now approximately 6 million cassettes and movie companies received $344 million for them. Thus, the average wholesale price was $57.33 per videocassette. It costs approximately $15 to manufacture and promote a prerecorded videocassette; by this estimate total cost for the 6 million cassettes were about $90 million. (Variety, December 8, 1982.) Most of the balance of $254 million represents pure royalty income, over and above any costs of production and distribution.

While a fraction of that royalty revenue can be attributed to cassettes sold to final consumers, the vast bulk of that money represents royalties from the rental market.

the change is needed to compensate them "fairly" for their

creative endeavors.

Only if they are compensated fairly, they

claim, will they be willing to continue to offer new audiovisual

creations for the public to enjoy.

In order to extract higher prices and revenues from consumers, movie companies claim they need controls over the distribution of videocassettes they do not now have. The proposed change in the copyright law gives them such controls, but the increased powers could be used for much more than just raising prices to rental consumers.

New controls could be used to restore "price discipline" to the videocassette market. Today, price competition appears to be developing in the videocassette marketplace, a most unusual development in the movie industry. Consumers are the

beneficiaries. The alteration of the copyright law sought by the movie companies most likely would put an end to this competition to the detriment of consumers.

Movie companies also might use controls on the rental market to limit competition with other distribution channels. Movie companies might believe it would be more profitable to restrict videocassette rentals in order to try to increase revenues from other distribution modes such as theaters or pay television. Higher rental prices and any additional restrictions on rental availability would hurt consumers and force many videocassette rental dealers out of business.

This report cannot assess how much reward, in the form of increased monopoly power over a copyright, is necessary to