box-office hits recently-movies that include "Flashdance," "Footloose" and "Terms of Endearment"-industry observers believe that the strategy could be successful.

Although theater owners originally responded to video cassettes with anger, the ubiquitous cassette boxes of "War Games" and "Mr. Mom" are now showing up for sale in movie theaters. Larry Moyer, president of the 35-screen Moyer theater chain in Oregon and Washington, has been selling cassettes at four of his theaters for the last several months. "At $25 or $30, it's an impulse item for a movie addict," Mr. Moyer said. "I think it would be hard to sell cassettes for $70."

Mel Harris, president of Paramount Video, said that he did not expect the longrange effect of cassettes on movie theater attendance to be negative. "We've discovered that heavy moviegoers are also heavy cassette buyers," he said. "It's like getting hooked on chocolate. The more you get, the more you want."

DIFFERENT PRICES FOR CASSETTES

Within Hollywood, the pricing of video cassettes has turned into a philosophical battle. In order to create an environment where consumers will buy tapes rather than rent them, Paramount sells cassettes of most of its movies at $39.95, while other studios sell them at $79.95.

Almost all the $79.95 cassettes are sold to video stores to be rented to consumers. For example, 100,000 units of Columbia's blockbuster comedy "Tootsie" have been sold, while Paramount has sold 270,000 units of the less expensive "Flashdance" and more than 600,000 units of "Raiders of the Lost Ark." Rob Blattner, the president of RCA/Columbia Pictures Home Video, has said that because of the higher price, the profits of "Tootsie" make up for the lower volume.

"Regardless of whether we're ahead in dollars and even if we're behind by 10 percent, we're ahead by much more," said Barry Diller, Paramount's chairman. "Because every unit sold is a unit out there! The more people are used to the process of buying cassettes, the more the market will grow."

[From the Daily Variety, Hollywood, CA, May 10, 1984]

AMPTP WOULD CUT DGA RESIDS-PACT PROPOSALS INCLUDE SCRAPPING COIN FOR FILMS RELEASED TO HOMEVID MART

(BY DAVID ROBB)

Producers' contract proposals to the Directors Guild of America include a provision that would scrap the union's long-established claim on residuals from theatrical motion pictures sold or rented for home-use on videocassettes, Daily Variety has learned.

The proposal, easily the most volatile of the producers' package of 47 proposals for a new three-year pact, is especially sensitive in light of the fact that the DGA and the Writers Guild of America have both filed grievances recently claiming that management's Alliance of Motion Picture & Television Producers and many of its member companies-including all of the major studios-have been grossly underpaying them on the residuals from the sale of videocassettes and disks.

The new AMPTP contract proposal, however, would do away entirely with residuals from motion pictures sold on videocassettes and disks--and would constitute a major "take-back," as the DGA has been collecting these residuals since 1973.

According to the AMPTP's package of contract proposals, the sale or rental of these videocassettes and disks would no longer be considered a "supplemental" market for films.

Instead, the AMPTP proposal stipulates that "the salary paid to the director for his or her services in directing a theatrical motion picture shall constitute payment in full for the release of said motion picture on videodisks/videocassettes."

In effect, the producers' proposal is saying that videocassettes should be treated as part of a motion picture's "primary" market (for which directors are compensated in their base salaries) rather than as part of a film's "supplemental" market (for which directors receive residuals).

Recent reports indicate that the sale and rental of films on videocassettes may be eroding revenues producers derive from the exhibition of their films in the theatrical market. Revenues from the sale of these videocassettes is thus seen as a replacement for lost revenues from the theatrical market.

Whether the DGA will see it this way-especially in light of their grievances they have filed in regards to alleged videocassette residuals underpayments-is very un

likely, however, and could prove to be the most difficult area of the contract negotiations.

Those negotiations, which got underway April 19, are expected to go right down to the wire before the DGA's current contract expires June 30.

PAY-TV RESIDS

Residuals from pay-tv will be another bone of contention during the negotiations, with the producers proposing that a new exhibition "window" be established that would greatly expand the number of times a made-for-pay film could be shown on any given pay-tv service before the DGA's complicated made-for-pay residuals formula is triggered.

Currently, directors begin receiving residuals from made-for-pay film after the first day a made-for-pay film is shown on pay-tv. The AMPTP is seeking to expand this one-day "window" to 20 day—meaning that a made-for-pay film could be shown an unlimited number of times during its first 20 days of exhibition without the producer having to pay the director residuals.

This proposal is also looking to lower the rate of these pay-tv residuals once they are triggered.

For example, once the DGA's current subscriber-based residual formula is triggered (after the 20-day "window" has elapsed), and after this formula earns the director 100% of scale, the AMPTP proposal specifies that the method for computing further residuals should revert to a much less lucrative formula "patterned on the rerun formula for syndicated programming."

Still another AMPTP pay-tv residuals proposal would permit producers to subtract residuals due directors in amounts equal to the salary of the director which is over double-scale, while at the same time allowing producers to "guarantee and prepay subscriber residuals."

In yet another proposal aimed at keeping down costs in pay-tv production, the producers are proposing that directors' initial minimums be based on "non-network or net-work nonprimetime rates" (even if the show is aired in primetime), and that the "existing discount formula will be applied against such rates."

In the area of basic cable, the producers are proposing that directors be paid residuals based on a percentage (1.2%) of the producer's gross receipts from product initially produced for free tv and subsequently shown on cable tv. Currently, directors are paid a fixed dollar residual for such "free" tv shows shown on basic cable.

WOMEN, MINORITIES

Perhaps the most intriguing of the producers' proposals, however, provides for increased employment for women and minority directors.

The proposal provides that producers "may assign more than one director to a television motion picture which is less than 90 minutes in length where such assignment will further the employer's good-faith efforts to increase the number of working ethnic minority and women directors. . .

This proposal would presumably provide a training ground for women and minority directors, though such a doubling-up of directors on such shows flies in the face of convention and could prove untenable to the DGA, which has been leading the battle for equality in Hollywood.

Yet another proposal would allow for "reallocation of contributions" between the DGA's Pension Plan and its Health & Welfare Fund. Purpose of this proposal is to shore up the union's sagging Health & Welfare Fund by increasing employer contributions, while at the same time reducing employer contributions (by the same amount) to the union's healthy Pension Plan.

In a series of cost-saving proposals, the AMPTP proposed that "travel by commercial jet airplane constitutes first class travel" where unit production managers, assistant directors and technical coordinators are concerned.

Current contract stipulates that these DGA-category members must be flown first class when traveling on assignment. Another proposal states that a first assistant director need not be sent overseas for U.S. based productions filmed abroad.

Currently, a first assistant director must be sent on such productions where there are no applicable foreign labor restrictions or quotas. This proposal would thus allow producers to more easily hire foreign first assistant directors on overseas shoots.

Another proposal would provide that layoffs "caused by strike" do not trigger payment of completion of assignment (severance) pay, but would defer such severance pay until after the poststrike production had been completed.

Another proposal would make it easier for the producer to replace a director with another person who had already been assigned to a particular motion picture provided that the director "is replaced by reason of incapacity or his own default.

BUDGET LEVELS

Yet another proposal would rise the antiquated budget levels which govern directors' minimum salaries on theatrical motion pictures. Currently, a high-budget motion picture (in which directors are paid a minimum of $5912 per week) is established at anything over $1,500,000.

APPENDIX 4

STATEMENT OF DAVID LANGE, PROFESSOR OF LAW, DUKE UNIVERSITY

Mr. Chairman, members of the Subcommittee, and staff: The legislation now pending before you would repeal the "first sale doctrine" in the case of commercial rentals of sound recordings. This is the first of a series of bills to come on for specific hearings as this Subcommittee begins to consider how the law of copyright ought to respond to issues raised by new technology. In testimony two months ago I suggested some preliminary procedural tests against which new legislative proposals, like this one, might be considered. You have asked me to comment on this legislation in light of my earlier suggestions, and I am happy to do so.

Federal copyright is a field of constitutional law and the conventional "right" of copy is in fact a limited privilege which Congress is to grant only in order "to promote the Progress of Science [i.e., knowledge]. . . ." (Article I, section 8.) The essence of this constitutional provision for copyright is that no new or extended interest may be recognized under the law unless its proponent succeeds in demonstrating that it ought to be recognized-succeeds in demonstrating, that is to say, how the progress of human knowledge will be advanced. In effect, then, the Constitution establishes a presumption against copyright which can-and, more important in the context of these hearings, which must-be overcome by a showing of something more than merely a natural desire for private gain.

Acknowledging the fact of this presumpiton against copyright, I sought in my earlier testimony to outline an approach to new legislation which clearly would pass constitutional muster and at the same time would provide a consistent framework for this Subcommittee's deliberations. Specifically I propose five challenges which the proponents of new rights (like the rights provided by the audio first sale bill) ought to be able to meet:

First, the new right ought to be clearly defined, in its statutory expression and in its conceptual implications alike.

Second, the new right ought to be clearly delineated against the public domain so that what is not to be appropriated also will be clearly understood.

Third, the competing costs and benefits of the new right ought to be carefully assessed by its proponents who should be prepared demonstrate persuasively that the benefits likely to result from passage will in fact outweigh the costs; self-serving generalities and endorsements by third parties with economic interests adjacent or comparable to those of the proponents should not suffice.

Fourth, proponents should show how as a practical matter the new right ultimately will "promote the progress" of the public domain, which is the province of science or human knowledge.

Fifth, proponents generally should be able to reconcile and harmonize the new right which comparable provisions of copyright law.

I originally proposed these five tests in general terms. In the remainder of this statement I will suggest more specifically how the audio first sale legislation can be evaluated within this framework.

(1) Statutory and Conceptual Clarity

The Statute: H.R. 1027 (which corresponds to S. 32 already passed by the Senate) certainly seems reasonably clear an aexercise in draftsmanship. That is not to say that all questions of meaning have been foreclosed. Identifying "the copyright owner" in any matter involving phonorecords is a potentially complex and puzzling undertaking, but that problem is not a particular consequence of the wording of this bill. The bill does introduce some new ambiguities: What is an "indirect commercial advantage", for example? What is a "practice in the nature of rental, lease, or lending"? I have no doubt that these (and perhaps other) questions arising from the language of the bill may one day lead to litigation, but still, in fairness it

must be said that no one otherwise familiar with the 1976 General Revision will be in doubt about the principal meaning or intention of the bill.

The Concept: Similarly, on its face, the basic concept of this legislation is easy enough to grasp. In effect, the proponents want copyright proprietors to be able to manipulate copyright law to control or tax-or to preclude altogether, insofar as this bill is concerned-other businesses which might otherwise presume to enter or establish a new corner of the rental marketplace for phonorecords of sound recordings.

(2) Delineation Against the Public Domain

What is not clear about this bill is where the concept it reflects would end. Is there any principled reason why the extended monopoly now proposed for the proprietors of copyright in sound recordings should not extend to the material embodiment of other works as well? To books, for example, or paintings or (to take an even more obvious example, given the introduction of H.R. 1029) to videocassettes of motion pictures or audiovisual works? Indeed, suppose (to consider a hypothetical raised in a note now being prepared for publication by the Duke Law Journal) that Lee Iacocca were to ask Congress for the right to control car rentals by Hertz and Avis on the ground that the automobile patents were held by Chrysler? Would that proposal also be thought to deserve serious consideration under the principle of the audio first sale bill?

If the audio first sale proposal can be distinguished meaningfully from these other examples of works fixed in tangible form, then the proponents of this bill should by all means do so. But if, in principle, the audio first sale bill poses the same basic issues as in these other examples-and if, in particular, it is in some sense a stalking horse for the video first sale bill-then its proponents ought to be expected to defend it on substantially broader grounds.

(3) Costs and Benefits

The music and recording industry are notoriously beset these days by problems which can be summarized in three points: first, revenues from sales of tapes and records (like paid attendance at concerts) are depressed; second, home taping, including off-air taping of broadcast music, is widespread and presumably contributes to the depressed revenues; and third, a relatively new rental industry has sprung up and is making further inroads into sales while contributing to the home taping problem. Even if we concede these three points, however, it does not follow that the audio first sale bill is an appropriate response.

I suspect the basic troubles of the industry have their origins in circumstances far removed from copyright. As Nick Schenck once said of the motion picture industry, there may be nothing wrong with this business that good product wouldn't cure. I certainly do not mean to lecture to this Subcommittee on recent American history, but the fact is that during the Sixties and on into the early Seventies some extraordinary groups were recording some extraordinary music for an extraordinary market in an extraordinary time. The industry expanded rapidly (perhaps too rapidly) on the strength of these successes. Now, times and the music have changed and so have the tastes of the marketplace. A new generation of consumers may simply be spending its money elsewhere.

Meanwhile, whether or not the market has declined in some absolute sense, production costs have risen while high quality recording technology has been making its way into every second home along Elm Street, U.S.A. In a pure economic sense, records and tapes today often cost more or are offered for sale at higher prices than they are worth. For many new releases the casual collector can be content with second, third and fourth generation duds from somebody's sister's boyfriend's tape.

At this point, of course, we do have a potential copyright problem. That problem is with home taping, however, and not with rentals as such. Yet the audio first sale bill does not deal with home taping directly at all. The bill may have some marginal impact on the current availability of studio produced records and tapes for home taping. But that impact is likely to be transient, lasting only as long as it takes for the home taping market to accommodate itself to what will be at most a trivial nuisance. The bill will have no long term impact on private non-commercial circulation of tapes and records after sale or rental; nor will it address the question of off-air taping of broadcast music.

Perhaps this bill can be seen as a way of controlling rental entrepreneurs whose clear expectations—indeed, advertised intentions are that their customers will copy the tapes and records they rent. Now (and particularly so if those activities violate the reproduction right) the bill begins to make more direct sense, but there are still at least two objections to be raised. First, home taping may be a problem, but it is not clear that it is illegal; that may be the most important single question now

facing the courts and this subcommittee, but it ought to be addressed directly--not indirectly, through a bill like audio first sale. Second, whether or not home taping is illegal (or simply ought to be made the subject of additional revenues for the copyright proprietor), the audio first sale bill seems over broad: it covers not only the person who rents expressly for the purpose of taping; it also covers the rental contracted for the purpose merely of listening. In the latter case, I suppose, what might be envisioned is a new right akin to a performance right; but performance rights in sound recordings also present serious questions of copyright policy which, once again, ought to be addressed directly, rather than indirectly through manipulation of the distribution right.

It seems to me, then, that the collateral benefits this bill promises are either unrealistic, unwarranted or better addressed directly in other more suitably-tailored legislation. I may be wrong; the proponents of the bill presumably see more in it than I do, and their estimation of it obviously will deserve serious attention. In any event, the one undeniable benefit of the bill is that it will produce revenues for the copyright proprietor that are presently unavailable under the law. That is a perfectly acceptable consequence if the benefit to the proprietor is not outweighed by costs to others, and if that net benefit can be translated ultimately into a public benefit.

Two potential costs stand out in the case of this legislation. One is that the fledgling audio tape and record rental industry may be jeopardized. It is not easy to see why a business founded in reliance on a public domain concept as well-embedded as the first sale doctrine ought to be imperiled. If the rental market is consequential in and of itself, then certainly the music and recording industry should be encouraged to jump in an compete; but legislation is not needed to make that competition possible and the established industry's new competitors should not be expected to carry it on their backs.

The second cost of the audio first sale legislation is that it may tend to perpetuate inefficiencies and bad judgments in the established segments of the industry while discouraging desirable competitors and alternative marketing practices. I do not mean to debate this issue myself. I do mean to suggest that the proponents of this legislation ought to offer answers to some questions rooted in basic economic theory. These questions can and probably should take many forms, but they all lead toward one issue: How can we justify encouraging the inefficiencies that may result if this legislation is passed? In short, the question is whether this legislation can be defended as something more than adventitious opportunism by an entrenched segment of the entertainment industry.

(4) "Promoting the Progress of Science.

As I have pointed out earlier in this statement, the "Progress of science" is the ultimate constitutional standard against which this legislation must be measured. It will not be enough for the proponents to show that financial benefits will accrue to them as a result of this legislation; they must demonstrate that those benefits will translate into public advancement. If they succeed in justifying the legislation in the several respects I have already discussed, then surely they can be conceded this issue as well; but it is still not wrong to make a separate point of it or to ask that the connection between private and public benefit be drawn in explicit terms.

Meanwhile, there is some potential for a serious constitutional question on another ground. The Copyright Clause authorizes protection "for limited times", and it is generally agreed that copyrighted (or copyrightable) material that has passed into the public domain by deliberate Congressional design cannot later be taken out of the public domain and placed under copyright again. Applied to this legislation, this constitutional principle may well mean that no phonorecords of sound recordings which have already been subjected to the first sale doctrine as it is presently reflected in Section 109 of the Act can be subjected now to the restraints contemplated by this legislation. The prospects for confusion on this issue in the practical administration of this legislation, as well as for litigation itself, seem substantial-and all the more so, given the history of phonorecords in copyright law. At the least, the proponents of this legislation can be expected to anticipate this problem and explain how it ought to be minimized or avoided.

(5) Reconciliation With Other Provisions

The main question to be raised here, again is why other material embodiments of copyright (books, paintings, and so on) are not also subject to repeal of the first saledoctrine. That no such general proposal has been introduced suggests, I think, the essentially adventitious nature of this legislation.