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threat to the industry. Rented records, they believe, are almost invariably taped at home, thereby totally displacing record sales.
The record rental business began in Japan in the middle of 1980 and has now grown to more than 1,700 outlets in that country. Record sales by retail stores in the vicinity of rental outlets in Japan have dropped by 30 percent, and the Japanese record industry has suffered its first sales decline in 25 years.
A recent survey suggests that about 97 percent of those customers in Japan who rent records from commercial outlets in Japan tape those records at home. In response to this development, record rental control legislation has been passed by the Japanese Diet on November 28, 1983, and is expected to come into force in about 6 months. I understand that this legislation is considered to be a provisional measure until the contemplated revision of the Japanese copyright law.
The record rental industry in the United States began in the fall of 1981 and so far comprises only about 200 outlets. Concern has been expressed that the record rental business in this country will have the same growth and effect on retail sales as has been experienced in Japan.
Music industry spokesmen argue that record rentals will reduce the sales volume of retail stores and will also place such stores at a competitive disadvantage with rental outlets.
The record rental business has grown for several reasons. First, the technology for home taping has become quite good and moderately priced. It is the rare stereo these days that doesn't include a tape recorder and playback, as well as a turntable.
The development and imminent marketing of the digital compact disc may increase record rentals even more. This small and virtually indestructible record is a technological breakthrough. It can be rented innumerable times without degradation of quality and produces better sound particularly suited to high-quality reproduction. Second, the first-sale doctrine has allowed the purchaser who rents the record to recover the purchase price many times over by very low rental fees.
In passing S. 32, the Senate counterpart to H.R. 1027, the Senate added a new section 3 which applies the compulsory licensing provisions of section 115 of title 17 to the rental of such recordings. Currently, these provisions only apply to the sale of sound recordings of musical works. This amendment clarifies that the bill is fully applicable to both the copyright owner in the sound recording-typically the record company-and to the copyright owner in the underlying musical work-typically the songwriter and musical publisher.
Under this provision, if a record company authorizes commercial record rentals, it will pay a royalty to the songwriter and musical publisher on any rental revenues in the same proportion as it shares sale revenues under the existing section 115 of title 17.
Other, minor Senate amendments to section 2 of S. 32 clarify that it is fully applicable to the copyright owners of the recorded musical work, as well as those of the sound recording itself, and that the owner of a particular phonorecord may not circumvent the intent of the proposed legislation by authorizing another to engage in commercial rental activity.
The Record Rental Amendment of 1983, as contained in S. 32, would explicitly allow the copyright owners in sound recordings and underlying musical works to share in the revenues produced in the rental market. It would not forbid taping of records, nor would it change the first-sale doctrine with respect to resale, personal use or display, or nonprofit use or lending of copies. Further, it is wholly consistent with the principles that underlie the antitrust laws and it would not create an antitrust exemption.
Turning now to H.R. 1029, the Consumer Video Sales-Rental Amendment of 1983 would modify the first-sale doctrine as it applies to video recordings to permit the copyright owner to participate directly in the video rental business by receiving royalty income from the rental transaction.
Currently, a burgeoning video tape rental business exists from which the copyright holder derives no economic benefit. This situation has arisen from technological advances of the past decade, which have provided consumers with a number of new home video programming possibilities.
The first successful VCR's were introduced in 1975. Since then, competition and technical developments have helped improve VCR technology, and VCR's have an excellent potential for continued growth. VCR sales in 1978, for example, were just over 400,000 units. According to the most recent figures available to us, in 1982 VCR unit sales had grown to over 2 million, and the industry anticipates sales of about 3 million VCR's in 1983. At the beginning of 1983, there were an estimated 4.5 million home VCR's in use, and the industry projects that by 1990 there will be between 40 and 50 million VCR units in U.S. homes.
Surveys show that the majority of VCR purchasers buy them for home taping of television programs for later viewing, referred to as "recording off the air." However, the availability of prerecorded tapes of movies has increased the use of VCR's for movie viewing. In 1981, the estimated retail sales of prerecorded tapes were $270 million. Because of relatively high purchase prices for those tapes in the range of $30 to $100, an average being about $60 each-and the relatively small number of times one might wish to view a single movie, rentals of prerecorded tapes began several years ago at retail outlets. Retailers are able to rent tapes without permission of the copyright owners due to the first-sale doctrine, and the copyright holder has no share in the profits from this growing use of copyrighted material.
Several years of experience with tape rentals have shown that consumers choose rental over the more expensive tape purchases. Retailers say that rentals outnumber purchases by 6 to 1, but estimates go as high as 45 to 1. The average price of a prerecorded tape used to be about $50, but with the advent of rentals, that price has risen to about $75. Rentals, on the other hand, range from $2 to $10 for a 24-hour period.
Movie studios, which are the prime copyright holders for video recordings, have sought to derive some profit from tape rentals. Since they had no legal power to prohibit rentals, the major studios tried a number of different plans to overcome this effect of the first-sale doctrine. Among those were surcharges tacked on the sale price, rental-only plans whereby the studio would only rent the cas
settes, and maintenance of separate inventories of rental and sales tapes with differing purchase prices for each group. Each of these measures served to increase the sale price of tapes and shifted the market further into rentals.
A sample survey of 10,000 VCR owners in February 1982 showed that VCR cassette renters comprise almost 40 percent of the sample, up from 16 percent in the comparable 1981 survey. Cassette purchasers, conversely, went down from almost 20 percent in the 1981 survey to 10.5 percent. That survey demonstrated that demand for tapes is elastic and that consumers will be willing to purchase more tapes if the price drops significantly-to under $40.
H.R. 1029 also confers no immunity from antitrust laws, nor does it affect the first-sale doctrine as applied to resale, personal use or display, or other nonprofit use or lending of audiovisual works. It merely gives film copyright owners an opportunity to profit from commercial rental of their copyrighted works in the same proportion as from sales. Since the rental market is clearly established, failure to provide for a way for authors to profit through rentals will give the audiovisual rental market an unfair advantage over retailers, who must pay royalties.
More importantly, as this market distortion continues, it will have an adverse effect on film creators, who will find it increasingly difficult to derive sufficient income from sales to justify their investment in major works. Conversely, passage of the Consumer Video Sales-Rental Amendment of 1983 will ensure that the technological advances which have made rentals of audiovisual works economically feasible do not choke the creative industry on which they rely.
As you know, the Cabinet Council on Commerce and Trade has established a working group on intellectual property to consider the increasing number of important issues in this field. This working group, which I chair, considered these bills at its first two meetings. The working group recommended to the Cabinet Council that it endorse both measures.
Subject to a suggestion with respect to the effective date of these bills, the Cabinet Council, on the recommendation of Secretary Baldrige, endorsed the Record Rental Amendment of 1983, as passed by the Senate. It also endorsed H.R. 1029, as introduced.
The first-sale doctrine, as applied to copyrighted phonorecords and audiovisual works, seriously undermines the incentive to create which is fostered by the copyright system. The Cabinet Council is convinced that enactment of these measures would enhance the incentive to create.
Accordingly, the administration believes that the strengthened protection for intellectual property embodied in H.R. 1027-amended in the same fashion as S. 32-and H.R. 1029 will restore the incentives which new audio and video technologies have taken from the creators of these works. Such protection clearly will be beneficial to the public and should be provided.
As I have mentioned, the technical suggestion relates to the effective date of this legislation. Currently, these measures would become effective upon enactment. It is my understanding that the amendments to title 17 would not apply to any work purchased by someone prior to the enactment of these bills. Accordingly, anyone
who had acquired ownership of a copyrighted audio or video work before the date of enactment could continue to rent without the obligation to share the rental income with the copyright owners.
While this approach is certainly logical and equitable in that it would not apply retroactively, the administration believes that the committee may want to consider an alternative. Specifically, the legislation should apply only to works copyrighted after the date of enactment. This legislation is intended to stimulate creativity, and it seems unnecessary to provide the added protection for existing works which were copyrighted prior to the date of enactment. While the administration believes that this approach would be preferable to the one presently contained in the bills, on balance, we would support this legislation also with the present provision regarding its effective date.
Mr. Chairman, that concludes my prepared statement. I would be pleased to attempt to respond to any questions you or your colleagues may have.
Mr. KASTENMEIER. Thank you, Mr. Mossinghoff.
As you stated, the first-sale doctrine, as it currently applies, serves as a disincentive to creators. Is there any evidence that copywriters or script writers, are in fact creating fireworks?
Mr. MOSSINGHOFF. There is no evidence that I know of in this country at this time, and I think as Professor Lange pointed out, we are, in this case, a year or two behind the Japanese in our experience in this area. This may be a chance for Congress to act at a time when it is very opportune to do so.
Clearly in Japan, as I point out in my prepared statement, the availability of these rental phonorecord stores had a drastic effect on the number of records sold and it seems to me that it is axiomatic in that it has to reflect back to the entire industry.
Mr. KASTENMEIER. With respect to phonorecords, I take it it is your evidence that presently there is not a problem in this country; that there are about 200 such outlets, which is really a drop in the bucket. It could conceivably be 2,000 or 3,000 or many thousands. And, of course that would be a substantial problem, but today, there is nothing that is urgently taking place, is there?
Mr. MOSSINGHOFF. No. I think that is exactly right. I think that analysis is fair. I think the handwriting is on the wall that if this becomes even more technologically desirable and feasible-and I think the compact disc is going to make that a reality-that there is nothing to suggest that the experience in Japan, which they have now dealt with legislatively, would not be felt by us.
Again, as we discussed in a hearing last week, this, I think, gives both the administration and the Congress a chance to address the issue without having very strong vested interests built up on its side.
Mr. KASTENMEIER. Well, would you not agree with the preceding witness that the real problem here is home taping, referred to in your own testimony.
Mr. MOSSINGHOFF. Clearly; and particularly in the phonorecord area, I cannot imagine why anybody would want to rent a record to hear it once or twice at home. It seems to me by its very nature that music is the kind of thing people want to tape once they get home. I think some advertisements indicate that if you rent the
record, you get a free blank cassette to go along with it. The obvious implication is you would take the cassette home and copy the record. So I think the answer is yes.
Mr. KASTENMEIER. Would you also agree with the preceding witness this is a piecemeal approach, that we are approaching only a part of it? Certainly with respect to home taping audio, currently there is only the tip of the iceberg. Therefore, for a generation people are home taping audio cassettes and are video taping by means other than renting video cassettes. Therefore, we have a much larger problem, and we ought to think about the larger problem.
Would you not agree?
Mr. MOSSINGHOFF. I don't want to sound at all presumptious. I sure don't want to be telling Congress how it should legislate. But my experience in the legislative area, both here and in my former position as NASA's deputy counsel, was that if you have a situation where the principles are well founded, well accepted by the Congress-such as the principle of copyright-and you see a problem where something has been distorted because of new technology, and if it can be fixed in a limited way, in an inductive kind of way, I would recommend doing that as opposed to waiting for a global or deductive kind of solution to it.
I think that some of the best legislation was written in the area to solve a particular problem, narrowly drawn, as these bills are narrowly drawn, to solve this problem, and you don't end up 2 or 3 years from now with a global problem, with two or three different interests tugging in different directions.
Mr. KASTENMEIER. What we will have is two small outlets closed, but you still will have massive home taping, Mr. Mossinghoff, will you not? And home taping apparently is the root of the problem.
Mr. MOSSINGHOFF. Obviously in the Universal Studios v. Sony case that you mentioned, everyone, I think, on both sides, is waiting for the Supreme Court to decide that case.
Mr. KASTENMEIER. Should we not wait?
Mr. MOSSINGHOFF. In that area the answer is clearly yes, but that involves, I think, different issues than this. In each of these cases, we know there are commercial establishments. Whether it is phono rentals or video, there are commercial operations. They are not renting it or in any way doing something in their home. They are doing it on 42d Street or they are doing it on 6th Street downtown-renting records, taking commercial advantage of the fact that new technology has come along and somewhat distorting the underlying principles of the Copyright Act, which says that creators of new things, new works of art, should profit from those creations.
I would say I disagree with this idea of setting up a thing called the public domain and trading off rights between the creators and the public domain. Nothing gets in the public domain unless the creator is stimulated to invest his or her talent, money, or risks. That is how things get into the public domain. They are the feeders of the public domain.
Mr. KASTENMEIER. Your advice is, then, not to wait for the Universal Studios versus Sony decision before legislating in this area?