an enormous rental market out there that they have got to recoup their costs some way. Let's say if a "Star Wars" or "Raiders" were priced at $29.95 instead of $59.95—and I am not sure about those prices, I am picking them out of the dark and they may be too low or high-that, in fact, more people would buy, as opposed to rent, and they would be in a position to lower the price enough so the people would, in fact, start buying these things and they would library them.

They claim that the rental market is so large that there aren't any sales to speak of. I mean, there may be some sales, but the sales would be significantly enhanced and amplified if the rental market were a bit controlled.

Mr. GORRELL. I don't think the sales would be enhanced, sir, because, first of all, if that was really true, when the things first came out, there would never have been a need to find another way and that being the rental market. They would be selling the tapes; everybody would be happy; we probably would not be here today talking about the issue.

But that did not happen. The prices of the tapes were out of sight. The people did not buy them. The retailer was sitting back at home trying to figure out, "Well, I have lost half of my shirt. Am I going to lose my other half?" Then he came up with this creative idea to rent it.

Mr. GLICKMAN. Well, do you think-go ahead, I am sorry.

Mr. GORRELL. The rental business has enhanced Hollywood because without it, I think the thing would have failed. The rental business has enhanced it. Also because of the rental business, the freedoms that we have-and that is the marketplace-have caused the cost, the sale price of the movies to be bought for the library to come down.

I don't believe, sir, that without the rental business that this would have ever happened.

Mr. GLICKMAN. You think the prices would have stayed up?
Mr. GORRELL. Yes, sir.

Mr. GLICKMAN. OK, let me ask you this question about the flexibility. Is one of your arguments that you need this rental business because you would have to inventory a lot of crummy movies that might never be sold if you were in a straight sales business? But since you have the sales business, you might be able to rent some, sell some and have enough flexibility in your business to do both. and, therefore, protect the value of your inventory and your assets? Mr. GORRELL. I definitely need to protect the value of my inventory or my assets or my friendly local banker will come and see me real quick, but there is also the fact that we have an industry that wouldn't exist.

Mr. GLICKMAN. All right, let me ask you this. One of the things this bill may provide in possible amendments that Mr. Kastenmeier may include in a reissued bill is a requirement that a dual market exists to require a rental market as well as a sales market. You seem to imply you don't like that because it would require basically keeping two sets of inventories which means you would have to enhance the amount of your inventory in each, so to speak. Mr. GORRELL. That is right.

Mr. GLICKMAN. Now, after a period of months, wouldn't you be able to figure out that issue, though, so it wouldn't be a permanent problem?

Mr. GORRELL. It will be a permanent problem because you don't know what will take place in the marketplace. For example, even in my business, when I go purchase the number of VCR's or color televisions or whatever, I have many different models to choose from. I sit down and try to figure, "Gee, what is Mr. and Mrs. Average Consumer going to buy?" The same thing would apply to the

movies.

The dealer would have to sit back and try to figure what would be hot and what would be cold. Therefore, he would have more of the hot titles and less of the others.

Now, there have been, from talking to some of my dealer friends, there have been some movies that they couldn't hardly give away or rent right now, but thanks to a show called the "Academy Awards," all of a sudden the demand for seeing this movie has been enhanced.

or

Mr. GLICKMAN. You mean like "Tender Mercies," perhaps,

Mr. GORRELL. Titles like that.

Mr. GLICKMAN. Let me ask you this final question if I might. My concern is what will happen to the price of rentals. That is, if, in fact, the proponents argue that the price of rentals will not go up; you will just see more sales occur at more reasonable prices.

How would you feel about this legislation if we put a cap on the price of rentals or some statutory language to require that they could not be priced at anything other than at a just or reasonable price, or some other language to keep the price of rentals from being jacked up?

Mr. GORRELL. Well, first of all, you run into the problem of what is "just" and what is "fair," which would probably have to be determined by some court. Now, the Hollywood people-they have a few dollars. I mean, I wish I had something that I could sell that I would get a billion dollars' worth of revenue from, but unfortunately, I don't. Therefore, my resources are smaller.

A retail dealer's resources could even be smaller than mine and he would have even a harder time to go, to fight about what is fair and just. There have been-I have read in the trades-several plans that have come down that Hollywood has tried to do some of these things and they have all failed miserably.

Now they are trying to get you to make a law that their ideas that have failed at the marketplace must succeed.

Mr. GLICKMAN. Thank you very much.

Thank you, Mr. Chairman.

Mr. KASTENMEIER. Now I would like to yield to my colleague from Illinois, fresh from his triumphs in the Foreign Affairs Committee, Mr. Hyde.

Mr. HYDE. Some triumph.

I have no questions.

Mr. KASTENMEIER. The gentleman from Connecticut, Mr. Morri

son.

Mr. MORRISON. I would first like to thank you for your testimony, which I find useful to try to inform me on this legislation. I share

many of the concerns that have been expressed by Mr. Glickman in this area, but it doesn't seem to me that we are incapable of addressing the problem as you describe it in this legislation.

Let's leave aside the question of whether we could write legislation which will control the wholesale price which a dealer could then use for rentals.

I think it is important for those who oppose the legislation to address the question, if we can fashion a control on that price, then if the price of tapes for rent to the dealer would not rise over the current situation, how then would a dealer be hurt by this legislation? Mr. GORRELL. As I mentioned earlier, sir, the dealer would have increased cost, not from buying the tape, but because of the inventory, tying up his hard-earned capital dollars into it. He would have increased costs, interest expense. As we all know—

Mr. MORRISON. Excuse me, I heard you say that before but I don't quite understand it. Nothing would force the dealer to go into the sales area, at least in my hypothetical. If the cost to him of the rental tapes is exactly what he is paying today, then how does a change that allows the sales market to develop going to hurt the dealer?

Mr. GORRELL. Because-if I may relate to my business-if I had a TV or VCR, I could put it out on rent because it was a slow mover, or maybe it has a scratch on it; or maybe it has a little too much dust on it. It comes to a point-and I think you can relate the same thing to the movie, that maybe it starts to get worn out or maybe it has been abused a little. At least, then, somebody comes to me and says, "You know, I have rented this from you so many times, I would like to go ahead and buy it."

I would have the opportunity to go ahead and sell that to him, which then would save the consumer▬▬

Mr. MORRISON. Which a dealer can currently do under-

Mr. GORRELL. Which the dealer can currently do now. He could not do that under the legislation that is pending, sir.

Mr. MORRISON. Well, I think one of the problems of this discussion is that we keep coming back to the legislation as filed as if that is the only alternative and I find us not getting very helpful answers on what the alternatives might be if there is any middle ground. I mean, it seems to me if the proponents and the opponents are saying there is only one way to address this problem, then somebody is going to win and somebody is going to lose, but I think it would be more helpful if both sides would contribute to the discussion of how to try to accomplish both purposes.

If the producers are correct, that there is a sales market that is not being addressed because of the current law, it certainly is of interest to everyone to find a way in which that market can be addressed.

I have no further questions, Mr. Chairman.

Mr. KASTENMEIER. The gentleman from Ohio, Mr. DeWine.

Mr. DEWINE. I have no questions.

Mr. KASTENMEIER. Mr. Gorrell, we are very appreciative of your testimony here this morning. You have been very helpful. Mr. GORRELL. Thank you, Mr. Chairman.

Mr. KASTENMEIER. Next, we have a panel of three witnesses. Stuart Karl, president of Karl Video, an independent producer of

video cassettes; Austin O. Furst, Jr., chairman of Vestron Video, the largest distributor of video cassettes in the country, we are told; and James Lara, senior vice president of Wherehouse Entertainment, Inc., representing the National Association of Recording Merchandisers.

TESTIMONY OF AUSTIN O. FURST, JR., CHAIRMAN, VESTRON VIDEO, STAMFORD, CT; STUART KARL, PRESIDENT, KARL VIDEO, NEWPORT BEACH, CA; AND JAMES LARA, SENIOR VICE PRESIDENT, WHEREHOUSE ENTERTAINMENT, INC., ON BEHALF OF NATIONAL ASSOCIATION OF RECORDING MERCHANDISERS Mr. KASTENMEIER. Gentlemen, if you will come forward. You have each very thoughtfully prepared lengthy statements. I would hope that you could summarize, but in any event, your full statement will be received for the record. Who would like to proceed first? Mr. Karl.

Mr. FURST. My name is Austin Furst.

Mr. KASTENMEIER. Mr. Furst.

Mr. FURST. I was elected to go first.

Mr. KASTENMEIER. Mr. Furst will go first.

Mr. FURST. I am the chairman of Vestron Video, which is the largest independent distributor of home video programming in the United States. I am here on behalf of Vestron to testify against H.R. 1029.

I would ask that this statement be made a part of the record. Vestron is 21⁄2 years old and is the fourth largest manufacturer and distributor of prerecorded video products in the United States. We have about a 10-percent market share of video cassettes sales. We distribute worldwide and we actively acquire and distribute programming in the same way that the major studios do. We also acquire, produce, and distribute children's instructional comedy and music programming.

Home video is an extraordinary new medium. Its potential is enormous. It is the first time the consumer has had a medium in which he can acquire and access what he wants, when he wants it, at a reasonable price. For that reason, the medium, as a medium, is growing like crazy, and it is something that is increasingly competing with some of the larger, more established media.

This medium today is a patient before you. Surgery is being proposed and we are here to give you a second opinion that no surgery is needed. This marketplace is wide open; it is a completely democratic marketplace. It is a distribution structure that relies on merchandising and marketing as well as products, and not on the restrictive longstanding distribution relationships and licensing relationships that some of the MPAA companies may be more accustomed to.

The first-sale doctrine is not an anachronism in my opinion. It is something that worked very well for the book industry in how they came to grips with essentially the same problem from the time that the copyright law was originally written.

Ultimately, they dealt with it in the same way that the video business is dealing with it through the establishment of rental libraries. If you will think back to the towns and cities you came

from, you will remember there were rental libraries all over the place, essentially renting books to people for a low price, allowing them access to the best sellers, and it is a procedure that started to build that business. Ultimately, the paperback book and the sequenial release of books solved the problem.

Right now, the marketplace can generate what the proponents of this bill claim they want, which is a separation of sale and rental, without any intervention at all.

In addition to the existing flexibility on separation and sequential release, releasing a high-priced cassette early on and a lowerpriced cassette later; in addition to that flexibility, you have the flexibility of leasing, which is available to any and all who may endeavor to try it—several have; it hasn't worked, but that flexibility is there.

Second, the flexibility exists to charge whatever price you want under the law. You don't need legislative protection for that. That flexibility exists right now and the reason the studios don't take advantage of it is they are afraid of losing competitively by charging a higher price.

We feel this legislation is unnecessary and it is going to hurt some people. It is going to hurt distributors, as well as independent producers who stand behind the independent distributors.

The continued health of independent distributors is important because they offer distribution to independent producers. They offer the independent an access to the market which he would otherwise not have.

Independent distributors also provide innovative financing for producers and for creative talent. For example, independent producers increasingly make prebuying arrangements where separate rights for separate market segments are sold off in advance and thereby, the distributor shares the risk with the producer and effectively puts up some of the money to help some of the movies get financed, all of this in competition with the existing studio structure.

The legislation threatens these relationships in a couple of ways: First, the retailer's economic survival is going to be damaged by an increase in rental prices which seems to be an issue of contention. The stated aim is to raise those prices as far as we can see.

Second, the cost of dual inventory, which is an operating cost for a retail establishment that often has a gross of only $200,000. These are not big businesses, these rental libraries.

The loss of flexibility that will exist in resource allocation for those small outlets, the product that they will no longer be able to afford to buy. We have right now a market structure that requires a lot of product to keep it going and a lot of diversity for the consumer to get the machines bought and to keep the whole thing flowing. That is all compromised under this bill.

We are concerned that there will be a curtailment of competition by the enactment of this bill. Whether by agreement or by joint marketing practices, product from independent distributors will be less likely to reach the shelves if all of the companies are able to operate under what amounts to an exemption on pricing.