Mr. LARA. What happens if it doesn't sell?

Mr. KASTENMEIER. What happens if it doesn't sell?

Mr. LARA. We have it in our inventory and we can't sell it, what are our options? We can't-it doesn't sell and we can't rent it. What are our revenue options?

Mr. KASTENMEIER. I can't really tell you. I assume that you could reduce the price.

Mr. LARA. So that we would take the risk.

Mr. KASTENMEIER. Let me say this. The irony is, particularly for those who are film producers, you may be in a catch 22 situation in terms of this bill having some appeal because in the course of making it palatable and making a number of conditions suitable for consumers so it isn't as fearsome a product, the limitations in this bill may be wholly inappropriate for those producers engaged primarily in a sales market who want a wide-open, free-wheeling market.

You may lose something if there is interference with the markets that you presently have, but I don't know that. I just speculate that it may be even less attractive for some film producers or distributing companies after the committee is done with it. Apparently the type of material produced by the training. Media people will not benefit by this sort of coverage at all.

If something is contemplated, a bill would not be able to distinguish between these different forms of material to be released.

Let me ask you, and I do this not to make things any more controversial, but I wish to solicit a wider view on the spectrum of these matters. I know that essentially you are in the video field, but, briefly, do you have any view on the audio first-sale bill or the effect of the Supreme Court decision in Universal Studios v. Sony? These also are matters which are pending before us in one form or another and it may be that your priorities are different from those of the motion picture studios with respect to these issues. Not all studios are highly enthusiastic about first-sale changes.

The studios would perhaps, as with Universal, much rather have won their fight on home taping than first sale; but one reason I ask you is to see if there is some sort of distinguishing characteristic of these other issues.

Mr. FURST. I can speak to half of your question, the audio versus video. I think video is different than audio in two basic respects: One, the market formation process is incomplete and you need to treat softly in making too many conclusions about just what the market is and what it isn't because it is changing quickly, growing quickly. Maybe that speaks to giving a little time to develop before you make too many judgments about it.

Second, not only from what we see in this country, but from what we see on a worldwide basis, there are certainly some strong indications that at least at fairly high prices for sale and fairly low prices for rental, at least in that context, the consumer would overwhelmingly prefer to rent rather than to own, the repeat-viewing question.

Both of those issue, the early stage of the market and the rental predisposition, seem to be a variance with the audio market, which is fully formed and which is clearly repeat-oriented and where rental could arguably be characterized as taking away the interest

of the copyright owner because of quick copying and loss to the copyrighter, where here, you are dealing with more of a reverse situation, we think.

Also, in the movie business, you also have this whole overhang of sequential release, which has governed the entire industry from the beginning. The markets change and the sequencing changes, but the overall theory of sequential release has been present from the beginning.

This market is struggling to fit itself into all of that.

Mr. KASTENMEIER. That certainly isn't true of the audio recording industry.

Mr. LARA. Mr. Chairman, from the audio recording industry's point of view, our company's business is about half in audio. Our position, and the position of NARM, is that audio is a very eminently repeatable entertainment form.

Therefore, the rental issue of a disk is probably to copy it and put it onto a cassette, and, therefore, we support the legislation that you are considering now.

Mr. Furst's point about sequential release currently exists in the audio area right now. When you talk to the labels, the people who manufacture music, you will find that they typically come out with an album at 8.98 or 9.98 and then as the album's life goes on, they will stimulate demand by rereleasing that same album at 5.98 to get a whole new life for that album.

That is done under today's copyright law. A tremendous amount of business is being done by CBS and RCA and MCA. All of those companies are on sequential release right now in audio. So I hope that I have addressed both of those-and there is lots of flexibility under today's copyright law for sequential release and what our position is on audio.

We don't think that

Mr. KASTENMEIER. Mr. Karl, do you have any particular view on audio?

Mr. KARL. The only comment I have on audio is it mirrors what the other gentleman says. I think that the fact that the program is essentially the driving factor to protect the repeatability, I see the copyright law necessary. It is when a product does not have that repeatability that the issue becomes a factor.

Mr. KASTENMEIER. On home taping, do you have any strong views on the decision in Universal Studios v. Sony?

[No response.]

Mr. KASTENMEIER. I gather not. OK.

Do you think it is possible to produce legislation in this field which would constitute a fair compromise? Do you see any elements where there could be some give and take and where the less favorable aspects of the bill as you see it could be amended so that you might not oppose such a bill?

In other words, do you see any sort of legislative product which could be produced which would be acceptable?

Mr. LARA. My comment from the retail perspective, and these gentlemen from the studios' perspective-first of all, I would like to more fully explore with the studios precisely what it is that they would like to accomplish that really and truly can't be accomplished under today's formula, business formula.

Once we have clearly defined what that is, and I think that in every instance, every single argument that we have heard, we have either pointed to recent history or we have talked through in a business way-and I am talking about speaking with the people from the home video divisions of the studios who have been before you-we haven't found one area of difficulty that they have that cannot be resolved, given today's set of rules.

So my first issue is, what do we need to accomplish with legislation that cannot be accomplished with what exists today?

Mr. KASTENMEIER. Sure.

Mr. LARA. I don't know what that is. Now, once I understand that, then I can speak to compromise.

Mr. FURST. The only response I would have is that the process of compromise appears inevitable from your statement. I would only suggest to you that some of the possible compromises may carry with them very significant problems that you have to be real careful with.

This piracy issue is a perfect case in point. I mean, you have a market now where it has been largely reduced to a controllable level and if you are not careful, even in the midst of compromise, you are going to have it loose again.

You know, the piracy issue, as much as we all would like to be a little bit altruistic in terms of viewing it versus legislation, it is only driven by economics. You make it economically viable for a small person to pirate product, they are likely to do it.

Mr. KASTENMEIER. In answer to my question, I would expect that Mr. Furst and Mr. Karl would say that their position is that legislation is unnecessary, just let us alone. But in the event that legislation does evolve, I was curious to know whether you saw anything which would be less offensive to you.

That is something that perhaps we can elicit a further response to after alternative versions are available, as they are not available to you today.

Does the gentleman from California have any further questions? Mr. BERMAN. I would like to hear one more time this distinction between the justification for changing the first-sale doctrine in audio and not doing so in video.

I think you indicated you support the effort to change the law in audio and oppose it in video.

Mr. LARA. Well, we see it as two different, completely different markets, Congressman. First of all, in the audio area, it is our belief that music is bought to be retained and listened to over and over and over and over again. It is our belief also that video, by and large, is rented to be viewed once, perhaps twice, and then the value of that entertainment ceases for that particular consumer.

So that when a consumer makes a value judgment as to what he is going to spend out of his pocket, if he is going to listen to an album 30 or 40 times, the cost per listen is quite low. If he is going to spend even $19.95 or $29.95 for a movie or a video product that he is going to watch perhaps once or twice, that is fairly high cost per viewing and our consumers have told us that they are simply not prepared in most cases to do that.

Now, there are certainly exceptions. Mr. Karl's company is clearly an exception to that. We have sold a tremendous amount of his

product and Mr. Furst's company, with "The Making of Michael Jackson's Thriller," we have sold a tremendous amount of that. Again, the beauty is that both sale and rental have been able to exist and grow and flourish in today's market, given the way the rules are written today.

Mr. BERMAN. I don't understand. Are people buying that because they only want to see it once or twice?

Mr. LARA. Which?

Mr. BERMAN. "Thriller" and "Jane Fonda's Workout"?

Mr. LARA. There are two issues here. You don't always like everything you buy so some people, perhaps, were buying it and putting it on the shelf. Other people, perhaps, before a youngster-Mr. BERMAN. You mean the customer should have that riskMr. LARA. Yes, a youngster-

Mr. BERMAN [Continuing]. But the retailer shouldn't.

Mr. LARA. A youngster, when he comes into our stores, and he perhaps would like a copy of "Michael Jackson's Thriller," before he will put down the full price, he may want to preview it and he has the ability now of taking it home, renting it, previewing it, bringing it back and buying it. That flexibility exists today. It is all there today.

Mr. FURST. Maybe another-

Mr. BERMAN. Is there any fundamental underlying principle regarding the right of the copyright holder to be compensated for the use of his product? Otherwise, why change audio first-sale? Why not leave it the way it is?

Mr. LARA. The question is really, I think, if I understand it properly, one of use. We see that the rental aspect, the ability to rent prerecorded video, to give the consumer an option to see it once or twice, which is typically the case, by and large, lion's share casethat is the case; whereas in audio, it is a bought-and-repeat-inhome.

Mr. BERMAN. What if we put something in this bill that says we guarantee that for any film that is distributed, there will be a rental market available for those people who want to rent it? Now, why doesn't that deal with what you just said-that person who wants to see it once because he only wants to see it once, or to see it once to determine whether he wants it to buy it is protected?

Mr. LARA. Why should you want to force a studio to do something that they may not wish to do? Would you preclude the issuance of a title if a studio did not want to have it available for rent? Mr. BERMAN. Because you said this is a right worth protecting and that is why you oppose this bill.

Mr. LARA. My point is-

Mr. BERMAN. We are doing it because you asked us to.

Mr. LARA. My point is that the flexibility currently exists today. The flexibility to purchase or to rent.

Mr. BERMAN. I understand that, but this thing only makes sense if there is some fundamental underlying principle. We are talking about a lot of people. I have a funny feeling that these studios are doing very well and I have a funny feeling you are doing pretty well with your 162 outlets in California; and we are in a dispute here involving a lot of people who are doing quite well-some more well than others.

It only makes sense if there is some fundamental underlying principle; and that is that under this doctrine, the basic right of the holder of the copyright to be fairly compensated for what is being produced is diluted or compromised by virtue of the present state of the law.

Mr. LARA. We wouldn't argue for a second that the copyright holder should be penalized or not fairly compensated for the work that he has done. My problem is that we are attempting to legislate the method by which the compensation is done.

Let's go back just for 1 second, Congressman, to——

Mr. BERMAN. Explain that, though, what about——
Mr. LARA. Yes.

Mr. BERMAN [continuing]. This legislation is legislating the method, as opposed to removing a restriction on the holder's ability to determine the method?

Mr. FURST. The same issue can be posited, I think, better backwards, which is, under the current law, you have the flexibility right now to lease if you believe that through leasing, under the current law, your interests are maximized. You sell only if you believe by selling, your interests are maximized and you carry with it some burden of where those two market segments intersect, but you can do that right now.

Mr. BERMAN. We had pretty good testimony, if I recall, Mr. Chairman, that for a variety of enforcement reasons and thirdparty purchasers and all of this, that in effect, in the context of this first-sale doctrine, none of this worked.

As long as somebody can go out and buy something, the fact that the studios would prefer to lease to the retailers who are trying to develop a rental market is insignificant. That lease becomes meaningless because instead they just go buy it and use the first-sale doctrine to then develop a rental market where they are taking this product which-

Mr. FURST. If it is a lease-only plan, there would be no product available for the-

Mr. BERMAN [continuing]. For the entire industry.

Mr. FURST. Well▬▬

Mr. BERMAN. In other words, out of fear, which we can easily address, of protecting the rental market, should we prohibit the sales market?

Mr. FURST. No, you could have a title released on lease-only basis for 4 or 5 months and then available for sale. I mean, you could do anything you want to under the current law. What you are positing is a restriction——

Mr. BERMAN. You can't do anything you want to under the current law. That is the problem. I think that is what is motivating the change. You are really saying, "We want to keep you from developing both a sales and a rental market simultaneously, and we are going to use present law to try and restrict your ability to do that."

All right, well, we can argue this for a long time. I appreciate the time, Mr. Chairman, and yield back.

Mr. KASTENMEIER. On behalf of the committee, I would like to thank our three witnesses, Mr. Furst, Mr. Karl, and Mr. Lara, for