ing and New York corporations have appeared in Arizona with legislation. So we're going through some of the same situations that I guess you are going through in Congress. We're very pleased to have him there.

Mr. SAWYER. I yield back.

Mr. KASTENMEIER. Thank you. I think the point you made about copying cassettes is interesting. We really don't have that much of a record on it. If it's impossible from a technological standpoint to copy the rented cassette or purchased cassette, you would still have a rental and a sale market. And I assume that the same economic problems would exist and we would still have a 1029 bill and the analysis would still be more or less the same, is that correct?

Mr. Rose. I would agree with that. Based on my personal experience, it's my judgment that, as to copying in the video area as opposed to the audio area, there isn't much evidence that it is widespread.

I have a VCR and I've never even recorded anything off the television. Of course, I don't watch much television, but we just play video tapes that, I might add, we rent for $1.24 in Arizona because we belong to a club. But I think that the likelihood of copying is quite much less, as I understand it, in the video industry than the audio. If I can just say one thing in conclusion, I think that there is another point that I disagree with Mr. Johnson on, and I think this will help focus the issues.

If you look at the literature, the scholarship, dealing with the movie industry, it is clear why that industry has had antritrust problems. And I want to make it clear on the record that I don't believe in the notion of antitrust recidivism in the sense that there are people in the industry who are more inclined to violate the law. That is what recidivism means. But the economic literature shows that violations occur in industries because of their structure. Why are there so many cases in the gypsum industry, in the cement industry, or in the steel industry? A major factor relates to their structure. It doesn't have to do with the people there being bad people as opposed to good people in other industries.

The writing on the movie industry shows that their antitrust violations come about in large part because of the structure of the industry and their desire to engage in price discrimination. And there are books and articles written about it. That's exactly what they're trying to do with this legislation. Instead of colluding together in the proverbial smoke-filled room, they have simply come to Congress for an alternative mechanism that does not present the same antitrust risks.

Mr. KASTENMEIER. The gentleman from Ohio, Mr. Kindness.
Mr. KINDNESS. Thank you, Mr. Chairman.

I would like to ask both of our witnesses to comment if they would with regard to the definition of the product with which we're dealing in terms of the video cassette matter. Looking at it from a copyright law standpoint, it appears to me that the product or property with which we are concerned is the image that is conveyed to some screen that can be interpreted by the human senses; that is, carried to a place where it can be viewed in the form of the video cassette. However, the human senses are not capable of inter

preting that piece of plastic and it requires another mechanism to do that.

I have been tending to look at the product as the video cassette in some of the interpretations of considerations in this matter in the legislation before us, but in fact, I feel I ought to be looking and all of us ought to be looking at the image that can be interpreted by the human senses as the product.

Now that product is conveyed in different ways, on screens in movie theaters, on VCRS in homes and so on. It can be copied, as has been mentioned, so as to be used again elsewhere. But would it make any difference in your respective interpretations of the market that's involved, if you looked at the product as being this image that can be interpreted by the human senses instead of this video cassette, this piece of plastic?

Mr. JOHNSON. I'm not an expert on the technical side of the industry, but I think you put your finger on what really is the heart of the problem here. You have this copyright doctrine that says no restrictions on rights of alienation once you physically sell your tape. But, as a practical matter, you're right, it's the projection of the tape on screen by the consumer that really is the first level here. I think that's exactly why you have to give the copyright owner the right to restrict and channel the distribution through to that first use transaction because, as a practical matter, the first sale is at the use level. The use is going to be the projection of that film over and over again; and you've got to have some way of measuring the value of that use, because it differs tremendously depending on who has the film and what use they make of it.

Mr. KINDNESS. And that's going to have an effect on the dimensions of what the market is, too.

Mr. JOHNSON. Right. It does. And I think that's part of the problem here. Really, we can't speculate on how the individual copyright owners might try to get optimum marketing with this amendment. There might be some advantage in metered use. It would be a little bit more like a movie theater where they might try to collect a royalty that's based upon the extent that the film actually is rented out. Ör, they may take an up front, lump sum royalty. They will have to experiment with whatever system gives them the best distribution.

That question came up with Congressman Mazzoli earlier today. Is the bookkeeping requirement impossible under this flexible royalty type of arrangement for rentals? It's not at all clear that you couldn't come up with bookkeeping arrangements that could meter the use of the product on an actual rental basis, using computerization. As I listened to the Consumers Union today, I could recall some similar consumer advocacy against computerized checkout in grocery stores back in the 1970's. It was doubtlessly well-intended, but with hindsight it appears to have been very wrong. I think we do have the technological ability to meter use of video cassettes if that's the way the industry members decide to go.

I'd just like to say one more thing with reference to Professor Rose's comments. I simply do not see this argument in which you characterize the film industry as so collusion-prone that they should be segregated out and denied the benefits of this amendment.

I have been in public antitrust enforcement and I stand by my statement. What Professor Rose describes is on the penumbra of antitrust law. Very few of those cases are brought. Many are surveyed, but few are found. You take the cement industry. The FTC was concerned about collusion in that industry. They had an old order that said you can't stabilize pricing by agreeing among yourselves to sell on only a delivered price basis. Then, the FTC came back 30 years later and brought some suits against even the tacit type of collusion that Professor Rose refers to and they did get orders that in effect said that the companies had to sell cement at the plant as well as on a delivered basis. In other words, the antitrust laws are quite capable of coping with those very rare situations where you get that type of phenomena.

If this bill were passed and you got what appeared to be a collusive pattern of marketing in the video cassette business, I'm sure the antitrust laws can deal with that. I think such a situation is very unlikely. Certainly that's no reason to presume that motion picture producers are not entitled to the benefit of the legislation. Mr. KINDNESS. Professor Rose.

Mr. Rose. Let me first answer your question and then Mr. Johnson's.

Of course, I'm not an expert in the technology either, but I think really they're both products in a different sense. The image you look at in some fundamental or technological sense is what the product is.

But in an economic sense, the different ways of embodying it are separate products.

Let me use another example. Butter is sold in pads. It's sold in pounds. It may be sold in five pound blocks. They are not all the same product. They're sold to different people for different reasons. They are economically separate products. Beer is sold in kegs. It's sold in bottles. It's sold in cans. Again, it's beer in there, but different people buy it for different reasons.

So in an economic sense, the way in which the product is embodied or packaged can be a different economic product in the economic antitrust sense of the word, even though what's inside it is the same product in the technological or chemical sense.

In response to Mr. Johnson's question, it seems to me it really focuses on what the key antitrust problem is. I have my hypothetical, which isn't very hypothetical, which is what happens if this bill passes. The major studios adopt this. I mean, that's what they told us they want to do and that's what they want the bill for. They are then sued because someone thinks it has horizontal effects of making a higher uniform rental price more likely. They are sued. Their defense is, "We didn't engage in any conduct except that which the Congress said we could do." The answer is, "Yes, but it had these effects." So the answer back to that is, "Well, that's inherent in what we did because of our industry." And then the question becomes, "What is the effect of this bill on the antitrust law?"

And it seems to me the answer is not a clear one. I am not saying that I stake my entire reputation on saying that a court would say your conduct is clearly illegal. What I'm saying is the answer to that question is unclear and you put a substantial

burden of litigating that risk on the retailer because they're going to be the ones bringing the lawsuits.

And it seems to me that the burden of my testimony is simply to show that that is an unclear legal question that would have to be resolved and the risk falls on the wrong person.

Mr. KINDNESs. Thank you, Mr. Chairman.

Mr. KASTENMEIER. I just have one last question. I suppose it should be addressed to Mr. Rose, but Mr. Johnson might want to comment.

Let us say, for purposes of argument, that we think H.R. 1029 should be passed but we are concerned about the antitrust implications. We would like to know if we can write language which, in your view, would be satisfactory, whether or not you share the fear that we may have horizontal collusion or, having eliminated that, we would permit certain practices which would be anticompetitive. Is there any way that we can, acting on the heart of H.R. 1029, save the implications of the bill from possible antitrust abuses?

Mr. ROSE. That's an excellent question, Mr. Chairman. As soon as I got on the airplane in Arizona I said I know one question that's going to be asked me, how do we amend the bill to eliminate this problem?

So I've spent a lot of time thinking about it. My answer is, after playing around with several possibilities, that I don't really think you can amend the bill. This conclusion is for this reason: I think what you're saying is that certain conduct can have certain effects that are caused by a combination of the conduct and the nature of the industry. Therefore, without really taking away everything the legislation gives, it seems to me it becomes impossible to write an amendment that deals with that problem.

I mean, we've considered language stating that nothing in here alters the antitrust laws in any way. In my view, that doesn't work and I have explained that several times. So my answer is that I think that an amendment cannot be written that doesn't have Congress giving with one hand and taking away with the other. Mr. KASTENMEIER. Mr. Johnson?

Mr. JOHNSON. I get to the same conclusion for obviously different reasons, Mr. Chairman. I don't think any change in the proposed statute is needed for the reason we've touched on before. There is no antitrust exemption in this statute; and, to his credit, Professor Rose has not said here today that the antitrust laws as they exist don't cover some of the horrors that have been raised in previous testimony. There's no reason at all to think that vertical price fixing, horizontal price fixing, and all of those things can't be reached.

So, we're down to a very smoky situation here, and I see no reason whatsoever to think that the existing antitrust laws can't cover it.

Mr. SAWYER. Mr. Chairman, similar to the question that Mr. Kindness asked on the definition of what's covered, we recently had occasion to visit an IBM software production facility and they have the same first sale problem with their software program. They have kind of gerrymandered an approach that's never been tested in court and I have serious questions about its efficacy anyway. They have a big recital on the outside package of their

program that says by opening this box you agree to all of these conditions, one of which is you can't copy it or you can't lend it to somebody or whatever. And they admitted it had never been tested.

I know Professor Rose does not agree with the statute, but I think we ought to certainly include a broader definition of the kind of things that are having the same problem, and apparently computer software has substantially the same problem.

What would you feel about that?

Mr. JOHNSON. I think there may be a bill pending on that. I will defer to my legislative assistants here, but I think there is a bill on the software side. At least it was in the last session. I don't know whether it's been reintroduced this time.

I think they do have the same problems. It's a contractual problem. There's no way that you can enforce contracts against third parties in 50 States and have an effective way of monitoring it.

Mr. SAWYER. Now I wonder why we should have all those separate amendments? If we think this is a good idea, and I don't have any reading on what the view of the subcommittee or the full committee is but assuming we did, wouldn't it seem advisable to include the various items that have the same problem in the definition rather than have a bunch of different bills floating around? Mr. Rose. Is that directed at me now?

Mr. SAWYER. Either one.

Mr. Rose. I don't really know the answer to that. I obviously am not prepared to take a position on other industries. I am sure other people are going to see themselves as kindred souls if the movie industry has success.

I am at what you might call virtually at the idiot stage in the new technology, although——

Mr. SAWYER. I think most of us are.

Mr. ROSE. Well, I have to learn more because our law school is getting very big in the law and technology business and I'm going to have to learn. My understanding is that the software industries are trying to experiment with devices-I can't remember what one is called-Locksmith or something like that to try to reduce this problem, although it may be that people are finding ways around those kind of problems as well.

I think the new technology presents a lot of dramatic legal problems. That's why our law school has decided to try to pioneer in this area.

As a lot of people correctly pointed out though, it's not really a new area of law. It's a new area of fact to which the old laws have to apply or be adapted. And I really think it requires careful thinking through of what the implications of all these things are and whether the problems of the software industry present the same problems, particularly this price discrimination, market segregation problem of the movie industry. I simply don't know.

Mr. SAWYER. Well, I agree with you except I've found the whole subject very difficult myself in that we are basically struggling to apply the basic law of copyright that was really designed for printed material to a whole new area. It's kind of a square peg in a round hole to some degree.