on charges was used by Paramount, and each one tried, on their own merit, to see what the impact happened to be.

Now, with 102 of our stores located in the California area and 56 located in Los Angeles, we are close to the studios all the time. We deal directly with the studios all the time in terms of their distribution. What they found out, working with us and with other retailers, is that what may have sounded good in theory simply didn't work, that the practical aspects of keeping track of it were just totally unworkable. The dual inventories couldn't be controlled even with the best of intentions and with-as Austin mentioned-we suffered significant competitive harm because we are not involved in duplicating product, but there are a lot of unscrupulous retailers out there, one-store operators, small operators, who may have no compunction about illegally duplicating a tape.

We saw it happen 3 years ago before, as Austin said, the industry really got cleaned up. So it is not that we are trying to take a look here into the future and see what would happen. Sir, we have already been there; we have already been with the studios, worked with them, tried every single one of the plans that they have proposed in the marketplace and found out that the best way to do it was to leave things relatively simple and focus in on the value of entertainment on the consumer. To maximize the market share on the consumer so that he is the one who is really voting.

We are for practical solutions here, not trying to stonewall anybody. We are trying to make the market as good for everybody as possible.

Mr. KASTENMEIER. Mr. Lara, what about the assertion made by some that in practice dealers already maintain a dual inventory insofar as they may have two or three cassettes which they rent and then they may have several fresh cassettes packaged for sale, and they do not normally interchange the two?

Mr. LARA. Well, I think that that is really the beauty of our free market system, that everybody is allowed to come up with business practices that they seem to feel most benefits them. Our position is that we think we can run our business most simply and most profitably if we offer everything for rent or sale. The consumer decides.

If somebody else decides that they want to have separate stock for rental and separate stock for sale and increase their inventory investment and they can justify that to their bank or their stockholders, terrific. At least they have got the choice. They can decide and if they are successful, they will be profitable. If they are not, they will go out of business.

But I think that that, Mr. Chairman, is precisely the beauty of our current system; is that there is a choice and that the smart people are going to succeed and those that aren't, aren't.

Mr. KASTENMEIER. I would like to yield at this point to my colleague from California, Mr. Berman.

Mr. BERMAN. Thank you, Mr. Chairman.

Mr. Lara, your last comment extolled the virtues of the free market system. Why isn't that argument the best argument for removing this restriction on what the people who produce these films can do on the theory that, in their desire to justify to their stockholders the maximization of profits, they will develop pricing struc

tures and a mix of markets which best allows them to increase sales and rentals?

Mr. LARA. Thank you, Mr. Berman, I think that is an excellent question and really speaks to chapter 2 of what I just talked about in terms of chapter 1. Chapter 2 is that every company can come up with the plans and forecasts for their stockholders, their marketing plans and so forth, and are free to try and put those plans into effect in the marketplace today.

To be legislated in-

Mr. BERMAN. Explain that one

Mr. LARA. Sure.

Mr. BERMAN [continuing]. Given the state of the first-sale doctrine.

Mr. LARA. Let's say that Studio A decides that they want to sell all of their prerecorded cassettes to the marketplace, to distributors and retailers, and let the chips fall where they may. If it is rented, terrific; if it is sold, terrific; if there is a combination, but the retailer and the consumer are the ones who are really in the final transaction and they think that is a profitable course of action for them.

Then we have Studio B

Mr. BERMAN. Just taking Studio A, nothing about the passage of this bill that is before us as amended

Mr. LARA. No, just as it is today.

Mr. BERMAN. All right.

Mr. LARA. Just as it is today. Now we have Studio B, who decides today, under today's rules of doing business, if I may, that they only want to lease to the retail community their films and that is clearly doable today. MGM had a program like that not too many months ago where they would only lease to the retail community titles that they could offer for rent and then 3 months down the line, that they could offer them for sale.

Those options exist today and every one of the studios can come to us with their particular plan, their particular offering. Then we take it to the marketplace. We have to set our pricing based upon what the studios come to us with.

If Studio B's plan goes over very well, then everybody wins. The studio wins; we win; the consumer wins. If Studio B's plan is not as good as Studio A's, then we will stock Studio A's product. There is a limited amount of capital and a limited amount of shelf space that every retailer has and so the real beauty of what you have brought out was that every company today has the choice as to whatever plan they want to try. Every company can try a plan, and we can deal with that.

Mr. BERMAN. And were this bill to pass, why would that still not be so?

Mr. LARA. We really don't see the need to architect specific paths that will demonstrably increase the amount of money that consumers will have to pay for their entertainment.

Mr. BERMAN. Wait, wait, wait. If the beauty of today's world is that it allows a variety of different companies to offer a variety of different packages and allows retailers to choose different kinds of packages, but there is this one restriction imposed by this doctrine, and now by charging that doctrine, we create, in your terms, a

more beautiful day, when even without that restriction, different companies can do different things and different retailers can do different things, then you have an even better world than the ideal world that you defined.

Mr. LARA. Well, my response to that is that under today's set of operating rules, we are seeing an industry growing at really an unprecedented rate. We are absolutely sure that if the changes that are proposed, have been proposed by the studios, tried and failed, and now would be instituted under legislation would go into effect, that the market would, in fact, contract. The market would, in fact, contract, and that would hurt us. These would hurt the distributors and it would really hurt the studios.

Mr. BERMAN. These are pretty dumb people, aren't they, pushing a piece of legislation that is going to hurt them like this?

Mr. LARA. Well, clearly, we come out differently on the same issue.

Mr. BERMAN. They are not dumb?

Mr. LARA. No.

Mr. BERMAN. Oh.

Mr. LARA. We do have a different view of the impact of the legislation from the viewpoint of a retailer who has run their programs at retail. We have run them at retail. We know what the impact is. Mr. BERMAN. Well, I don't fully understand that comment, but-

Mr. LARA. We know that there is increased cost. We know that the cost of their programs must be passed on to the consumer. We know what the economic adverse impact on us and the consumers will be. It is already in our history book.

Mr. FURST. Mr. Berman, if you spoke directly to the home video operations of the various studios, you might well get a more divergent set of views on this subject than perhaps the current system with its various spokesmen groups would lead you to believe.

Mr. BERMAN. Expand on that; what would they be telling me? Mr. FURST. It is only conjecture, but I believe you would be hearing considerably more confusion at the very least and I believe that in some cases, you would be hearing views similar to those of Mr. Karl and myself.

You have got a wide open, rip-roaring market and the structures that are being used-the market structure that is evolving here is not so different than from some foreign markets. The consumer would rather rent than buy in a lot of cases within certain pricing parameters.

Mr. BERMAN. It just seems to me that here you have the state of the law and a doctrine developed at a different time, which now constitutes a specific kind of constraint on one type of marketing, and the argument is, "Let's get rid of that," and different people throw out different views of what will happen when that happens, but essentially the effect of this bill is to remove a constraint to one method of marketing.

Mr. FURST. Is it possible that rather than a constraint, that that doctrine is what has allowed the capital formation and strength of this industry to develop to date? And is it not also possible that what you are really talking about amounts to an antitrust exemption on pricing?

Mr. BERMAN. An antitrust exemption?

Mr. FURST. Well, I mean

Mr. BERMAN. Develop that one. I mean, first of all

Mr. FURST. If these people want to raise their prices, let them raise their prices. Let them be subject to market forces.

Mr. BERMAN. They say they want to lower their prices. Mr. FURST. What does the Goldman Sachs report say? Mr. BERMAN. Well, we haven't seen the Goldman Sachs report, but you are going to get it for us so we will find out.

Mr. KARL. Mr. Berman, one comment I have in relationship to pricing and product. When a movie, a theatrical film, is in the marketplace in theaters, if people won't come see it, it is dropped from the theaters. What I am concerned about is a retailer now makes an investment in a cassette, whether the cassette is good or bad, or able to be rented or not, he has his investment and he has to push that product. The studios have guaranteed themselves, contrary to how good the product is or not; the retailer is forced, then, in the position of pushing that product.

So they have legislated around their product's inability to be accepted or not in the existing marketplace.

Mr. BERMAN. Say that one more time; I didn't quite pick it up. Mr. KARL. I am convinced that we are in a commodity-marketing business. What we sell is a product.

Mr. BERMAN. Right.

Mr. KARL. What we offer is a product that stands on its abilities. What concerns me is the studio's position to control that marketplace farther down the line and to put retailers in positions where they are making substantial investments in libraries that possibly may or may not be received by customers and the retailers end up taking the burden of this investment.

Mr. BERMAN. That is true today, isn't it? You buy something being marketed that is just coming out and you plan to sell some and you plan to rent others and you don't know how it is going to

go.

Mr. KARL. What concerns us is the fact that if you allow this legislation to go through, you begin to have situations—as I stated in my testimony, like packaging-you allow the studios to use market power to force retailers to take product that they might not otherwise take.

Mr. BERMAN. What would this bill allow that company to do that we shouldn't be allowing them to do?

Mr. KARL. I feel that the product itself should stand on its merit and if someone does not want to buy it, they should not have to buy it. They should be able to rent it. I think what has happened here if you drive the prices up, you eliminate that rental market and the retailers have nonrecoupable inventory which they cannot rent by law.

Mr. BERMAN. Are you talking about a consumer now? We are talking about a consumer?

Mr. KARL. Consumer.

Mr. BERMAN. And as I understand this legislation that we will be considering, it will guarantee that a consumer who prefers to rent, rather than buy, will have a market available to do that.

Mr. KARL. It is my contention that the rental market will be diminished by this bill due to higher rental prices.

Mr. BERMAN. Have the amendments that have been talked about surfaced? As I understand, one of the amendments is to guarantee that that rental market will be preserved. In reponse to criticisms that, in fact, this was all a plot of the industry to destroy the rental market, suggested changes are at least being talked about to eliminate that fear.

Mr. FURST. Why do it at all?

Mr. BERMAN. Well, the argument is to remove this constraint which, it is alleged, is forcing people who wish to purchase, rather than rent, to pay a higher price than they otherwise would have to pay. The industry wants it because if they can make more sales at lower prices, they can make more money. They can have the money they are getting from the sales to wholesalers who will be renting and they can get the money they will make from their sales.

Theoretically, there is a maximization interest here that should be shared, and the question, I guess, is really what is the best way to do it.

You are fearful that they are on the wrong road to getting what they want.

Mr. FURST. Not only that, but sequential release offers that flexibility right now. You can release the product at a high price early in its life cycle for those who choose to buy it at a high price and those who choose to rent it, and then offer it at a lower price a little bit later.

That flexibility exists right now and is being tested with and worked with right now with some pricing approaches that are already being followed. Why come in and fiddle with it? Why not let the free market sort it out?

Mr. BERMAN. Well, everybody can use the same arguments and take very different positions.

Thank you.

Mr. KASTENMEIER. It is contemplated that the bill will be altered somewhat. As you know, the film industry witnesses testified that they will only lower sales prices and they do not intend to interfere with the rental market. Presumably those films which would be sold for a rental market would be sold at prices equivalent to what they are being sold for today.

Mr. LARA. Mr. Chairman.

Mr. KASTENMEIER. Yes.

Mr. LARA. The impact of that statement on us, as a retailer, is that we don't have any more of a crystal ball than the gentleman from Kansas who spoke earlier. We are going to make buying mistakes, and if we buy product that is rental-only product, how do we dispose of that product? We can't sell it. Do we eat it? Do we take it into our bottom line? Does the studio buy it back at the price that they sold it to us for?

Mr. KASTENMEIER. I don't know that you cannot sell it. I think you can probably sell it. You cannot rent a cassette for sales only, but I think you can sell

Mr. LARA. And what happens if we

Mr. KASTENMEIER [continuing]. A rental cassette.