"promote the Progress of useful Arts...."4/ Clearly, if the ... proposed change in the copyright law is not enacted, movie producers will still make movies, and they will still release them on videocassettes. On the other hand, if the change is enacted, movie companies will acquire significantly increased monopoly power over consumers. Such monopoly power translates into increased prices to consumers, and presumably into increased revenues to the movie companies. The remainder of this report analyzes in more detail the impact on consumers, dealers, and the movie industry that could follow the proposed change in the copyright law. THE CURRENT VIDEOCASSETTE MARKETPLACE The Development of the Rental Market The videocassette market has evolved quite differently than the movie companies expected. When they began to distribute movies on prerecorded videocassettes, movie companies did not expect the development of a large rental market; they expected a sales market.5/ Yet, in retrospect it is not surprising that a rental market developed. In the right circumstances, rental markets develop in response to particular kinds of consumer demands. A durable good sometimes can be rented at a price 4/ Article I, Section 8 of the U.S. Constitution. 5/ "Briefing Materials," Tab 2, p. 5. substantially below its purchase price - in effect renters share the cost of purchase.6/ The renter buys the right to less use of the good than the consumer who purchases, but consumers will find renting attractive if they think the additional use and convenience that can be bought by purchasing is not worth paying the difference between the purchase price and the rental price. Thus, goods for which consumers have a large number of repeated uses are likely to be bought; goods that have only one use, or whose several uses will be spread out over fairly long periods of time, such as party supplies or wallpaper steamers, often are rented. Rental markets exist for a diverse range of consumer goods from wallpaper steamers and carpet cleaners to wine glasses and other party supplies to, in an era before public libraries, books. The common function of these rental markets is to make available to consumers more goods and services than they would buy if there were only a sales market. Thus, if consumers could not rent wallpaper steamers or carpet cleaners, they would likely find some other way to strip walls and clean carpets, but they would not buy those products. These rental transactions would be unlikely to change to sales transactions (unless prices fell so low the items became throw-aways). 6/ The difference between the rental price and the purchase price depends on supply conditions as well as on demand. The rental price a dealer must charge to stay in business depends not only on the purchase price he must pay for the good he rents, but also on the durability of the item (which will affect the number of times the item can be rented), the costs of maintainance, and on the costs of handling rental transactions. Some rentals do arise solely in response to price. These rentals are made by those who would buy the product if it were not available for rental at all, but who rent because the rental is less expensive and because they have little or no desire for additional uses. Thus, if the manufacturer of an item that is being rented believes that rentals are costing him too many sales, he can try to lower his price, thereby converting some former renters into purchasers. The inventory of the rental dealers represents sales that otherwise would not have taken place at the given price for the item but for the existence of sufficient demand for rentals of the products. Whether a lower price would result in a large or a small shift from rentals to purchases by final consumers depends upon how much value consumers place on subsequent uses of a product. The rental market for videocassettes serves the same functions as other rental markets. Most people rent most videocassette titles because it is not worth much to them to see the same movie many times, and, therefore, they will not pay a large premium to buy rather than rent.8/ Consequently, renting videocassettes of movies has proved much more popular than buying 7/ In all of these cases, moreover, the price the rental dealer pays for his inventory is the same as the price final consumers pay for the same item (unless some special deals are offered to rental agencies that buy in bulk, or buy less expensive versions of the item). 8/ While this is true for most movies and most people, each movie is a separate product. For some subset of movies, rentals do substitute for purchases that would be made if the price were lower. them. Prerecorded videocassettes, whether for sale or for rent, are a relatively new product. During the roughly five years that this market has existed, both retailers and movie companies have experimented with ways to market this product to consumers. At first the movie companies assumed prerecorded videocassettes would be sold. The movie industry agrees that small, independent video retailers first took the risks inherent in trying to develop a new market: videocassette rental.9/ Rental quickly became the dominant form of consumer use of prerecorded videocassettes. The rental market developed very rapidly: total rental transactions rose from seven million in 9/ "Issues Paper: The Need for the Consumer Video Sales/Rental Amendment of 1983," p. 5-6, Tab 2 of "Briefing Materials." In that paper, the proponents of repeal of the First Sale Doctrine have claimed that, "The smaller, under-capitalized retail outlet simply could not afford to carry enough titles to exist in a sales-only market. Consequently, they began to rent videocassettes..." (Ibid., p.6) This explanation of why retail outlets began to rent contains two basic fallacies. First, the inventory costs of renting are higher than for outright sales. When a cassette is sold, the dealer receives payment in full for that piece of inventory. If the cassette costs the dealer $90, at $3.00 a night, it takes about thirty rental transactions just to recover the original investment, and a number more to repay him the opportunity costs (interest) on the $90 and the costs of running his store. Second, given how the two markets work, rental dealers need to carry a larger number of titles than an outlet that is offering cassettes only for sale. Most rental dealers establish video clubs, and customers shop around to determine which club to join. Club memberships last for six months or longer, and two major features being sought, based on the advertising claims of dealers seeking new members, are price and inventory size. Thus, it is not logical to assume that the rental market developed because some category of dealers were undercapitalized. 1979 to 62 million in 1982.10/ By the end of 1979, a Fotomat study showed rentals outnumbering sales by a four to one ratio.11/ In this period, videocassette retail prices ranged $60, with some titles as high as $75.12/ As the strength of rental demand became clear, movie companies increased between $55 prices to dealers. By September 1982, rentals outnumbered sales by almost a twenty-two to one ratio, while prices of sales cassettes ranged mainly between $60 - $80, but with some over $100. By April 1983, a survey of dealers found that on average rentals outnumbered sales by a thirty-nine to one ratio. 13/ By every indication rental retailing is highly competitive. Rental rates have fallen (despite the rise in videocassette wholesale prices). location, but rentals as low as $2 per night are readily available in the Washington area. First, as The movie companies have responded in several ways to the strength of the rental market for videocassettes. noted, they have raised the price of videocassettes in order to increase their earnings from rentals. The drawback is that the resulting high prices have curtailed revenues from sales to final consumers. Second, several companies (Twentieth Century-Fox, 10/ Video Week, October 4, 1982, Vol. 3, No. 39. 11/ Video News, March 12, 1980, vol. 10, No.6, p. 4. 12/ Variety, June 11, 1980, p. 57. 13/ Video Week, Sept. 6, 1982, Vol. 3, No. 35; the rental ratio for 1982 was computed from the report of a Nielsen survey. The rental ratio for 1983 was computed from a Video Retailers Survey propared for A.C. Nielsen. |