tee a little by telling us about the Copyright Tribunal—that is, who are they, how are they selected, and what do they do-secondly, could you address the question of what criteria are used when the tribunal decides what the royalties should be and how they are allocated; and third, describe to us the tribunal's current experiences with cable TV and jukeboxes, and tell us based on those experiences what are the difficulties that might arise with tapes or with VCRs.

Senator MATHIAS. Would Senator Baucus yield, just to let me tack on one additional facet to the same question, really. Would the criteria be any different than if this committee undertook to do the job, and do you think the committee, using those criteria, could do it in less than the year that the amendment contemplates?

Mr. VALENTI. No; I do not think the committee can do it, Mr. Chairman, not because you are not capable of doing it, but because the many demands on your time, probably prevent you from looking at this issue in an analytical, methodical, and exhaustive way. The CRT, I believe, can do that. Its track record so far, though maligned by some; at times, I have disagreed with the CRT, not for its incapability of doing its assigned tasks, but for inserting itself in the free marketplace. I did not want a compulsory copyright license for cable. I thought we could deal with 4,000 cable systems. The reason why I am for compulsory license in this case is that we cannot deal with 40 million American homes, so administratively, we have to go the compulsory license route. But in every one of its decisions that the CRT has made since its inauguration as an agency, it has fulfilled its duty on time. Indeed-Senator BAUCUS. How much time?

Mr. VALENTI. Before the time had expired that Congress had mandated. The Congress required that within a year, the CRT must come down with a decision. The CRT has met that standard. There have been six court appeals by affected parties, and the three judicial decisons handed down to date have all affirmed the CRT. That is, the court of appeals has said the Copyright Royalty Tribunal was correct. Two appeals are pending right now because they were filed recently. The District of Columbia Circuit Court just recently upheld the CRT and it is typical of the court's finding with respect to the Tribunal. They said, "The Tribunal's decision has achieved an initial allocation of the fund that is well within the bounds prescribed by Congress." In other words, as far as the CRT is concerned, it has met its obligations; it has met the warrant given to it by the Congress.

There are five members of the Tribunal. Four of them were chosen by President Carter; one has been chosen by President Reagan. They serve standard terms of, I think, 5 years. I think they make $57,500 per year. They have the capacity to hire experts and to do the job right. The cost of distribution of funds comes from the copyright pool itself and not from the taxpayer.

Senator BAUCUS. Is there any limit, though, on the fees that they could assess?

Mr. VALENTI. Not in the Mathias amendment.

Senator BAUCUS. None whatsoever?

Mr. VALENTI. No, sir. The Mathias amendment says "fair and reasonable," and my judgment would be that if egregious fees were

set too low-and that could very well be the case, Senator Baucus-or too high, that somebody would appeal this to the court, saying, "This is a blunder, and we have been outraged by it, and we want our grievances addressed."

Senator DOLE. Could I ask, what happens during the appeal? Is the fee stayed, or is it imposed?

Mr. VALENTI. I think levy or distribution of the fees would be stayed until the courts have acted; that would be my judgment. Senator DOLE. That would take a while.

Senator BAUCUS. Have any litigants claimed that the Tribunal set excessively high fees with respect to jukeboxes or pay TV? Has that charge ever been litigated in the courts?

Mr. VALENTI. There has been one mechanical rate review that was affirmed in the courts in April of 1981. There was a jukebox review that the CRT won in April of 1982. I am not totally and specifically familiar with the contents of that; I could get it for you. But essentially, whatever the dispute was, the court of appeals said the CRT did not err and acted properly.

Senator BAUCUs. What criteria do you personally envision the Tribunal using in trying to properly assess tape and VCR fees?

Mr. VALENTI. My judgment would be that we would, in a year's evidentiary hearing, present our case. For example, we would show how a network's revenues are bound to go down. The Frito-Lays of the world will multiply, like a rabbit warren; no advertiser is going to pay money for an audience not reached. We would show how this would affect all other areas of the marketplaces which we must, of course, have access to in order to recoup our investment and make a sufficient profit to go back and reinvest. So I would assume that we would do what any normal inquiry in such a situation would compel us to do. Our economists, polling experts, and legal experts would present our case for some kind of incentive to replace these vanishing markets precipitated by the VCR.

Senator BAUCUS. Let us assume the DeConcini bill passes, but without the Mathias amendment. What percentage difference will that make in a movie actor's income?

Mr. VALENTI. I will let Mr. Heston respond-I think that is a difficult question to answer. If it is passed-—

Senator BAUCUs. I mean, are we talking about a 1-percent, 10percent, or 30-percent difference?

Mr. VALENTI. Senator, I do not think, frankly, that you can quantify it at this time. I think we need to use common sense on it. We believe that there are going to be 20, 30, or perhaps 40 million VCR's in several years. We know that many users will be taping for a permanent collection. We know that 87 percent will be erasing commercials. We know this now. Advertisers know this. There is no question in the mind of anybody in this field who applies common sense that copyright owners' revenues and net worth will decrease. It is quite possible that, for example, the theaters will be hurt by VCR taping. Theaters are our major market. The same thing will happen to pay cable or other markets. As Mr. Eliasberg said, there is only a certain amount of leisure time that people have in a day. Instead of going out to the movie, people will watch something that was available on pay cable a few nights before. That is why the theaters are testifying. They see their own rev

enues eroding. And the same thing happens all the way down the line. You are inserting a new distribution system that is unlicensed in the marketplace.

Mr. HESTON. Senator, with respect, may I add to Mr. Valenti's response?

Senator MATHIAS. Certainly.

Mr. HESTON. I realize it is not easy to take very seriously the financial problems of movie actors when most people think of movie actors as me and Robert Redford. But the fact is, the 55,000 men and women who make up the membership of the Screen Actors' Guild constitute one of the most underemployed and underpaid group in organized labor. Last year, 76 percent-that is more than three-quarters-of the membership of the Screen Actors' Guild made less than $2,500. Now, I suggest even a 5-percent reduction in that income becomes serious. There is a very serious decline in motion picture production right now. Most of the membership cannot go outside the Guild jurisdiction and work in England, because they will not be hired there. Most of the membership makes what income they make from television commercials. I realize most of us regard television commercials as something of a nuisance and the capacity of the VCR to erase the commercials may be a welcome boon. I confess I feel that way myself. But network television, on which the bulk of the American public depends for almost all of their entertainment, is paid for by television commercials. And most of the money made by the members of my Guild is made from television commercials.

Senator BAUCUs. Well, I am glad you made that point, because I think the popular conception is that most actors are very well paid. Mr. HESTON. Yes. It is hard to take our financial problems seriously.

Senator BAUCUs. Turning back to the Tribunal, Mr. Valenti are there any specific criteria that you would recommend that we incorporate into this bill? What I am driving at is whether, in your judgment, you think that the present latitude given the Tribunal works well, or whether you think we should have specific criteria that the Tribunal should be required to apply.

Mr. VALENTI. Well, I think that there are some specifics you can look at. First, regardless of harm, there is the unlicensed use of the product. Somebody is using property that belongs to someone else. I think it is well settled in this society that nothing of value is free. Of that you can easily convince the public. You do not have to be an orator or a great persuasive talker to convince the public that it is in their interest to take somebody else's property free of charge. That is not the way it works. So use is a factor to be considered in establishing the level of the royalty fee.

A second factor would be the benefit to the manufacturers of tape and VCR machines. They are getting enormous benefit. For example, the three big Japanese manufacturers earn 33, 34, 35 percent return on stockholders' equity. The Fortune 500 median for our most productive enterprises is 14 percent in this country. So the manufacturers of recorders and tapes are receiving a very favorable return, vis-a-vis stockholder equity, at a rate of two or two and one-half times that of the Fortune 500. Thus, there is great

benefit to the VCR manufacturer. That is the second criterion that CRT could look at.

A third factor might be the harm to copyright owners-the demonstrable harm that comes from these little technological gadgets that expunge commercials, distasteful though some commercials may be. Commercials are the sinew, the blood, and the bone which fuels the whole television industry. Without them, everybody would be on pay television presumably, of course, they could afford it. I think it is an explosive political issue, Senator. By 1990, one-third of Americans will not be on cable, and two-thirds will not be on these machines. They are going to depend on free television for their home entertainment. So that is another criterion.

And finally, the marketplace value of these copyrighted works. What is the value? All four of those criteria, I think, can be examined effectively and with careful scrutiny, and I believe that it is possible for a Government agency, experienced in the copyright field and in reviewing this type of evidence, to look at what experts bring to them and be able to make some decisions which are reasonable. The Mathias amendment specifies "appropriate and reasonable royalty fees." Those are well-known legal terms. "Such fees shall be calculated to afford the copyright owners of motion pictures and other audiovisual works a fair compensation for the use of their creative works." Now, each one of us looks at those words-fair compensation-through a different prism. But essentially, they mean equity, justice, reasonableness, and fair-minded men and women, I think, can make those judgments.

Senator BAUCUs. Well, I do not want to take anymore of the committee's time. I think that you have made your case well. There is no doubt in my mind that this equipment would not be manufactured, sold, and consumers would not purchase it but for the creative work of artists. And consumers and producers are not paying for that today, and I think they should.

Second, beyond that, I think we should do what we can in our country to encourage artistic creativity more than we are; it would not only be better for the country economically but good for the Nation's soul.

I will not take anymore time with more questions, but I do suggest that we examine the possibility of including criteria in the bill that would assure that we do not permit the Tribunal to charge fees that are excessive.

Thank you, Mr. Chairman.

Senator MATHIAS. The Senator from Kansas.

Senator DOLE. I have no other questions, but I think in line with Senator Baucus, I had my own question about how the proceeds may be distributed if in fact this legislation should pass in some form. To repeat, if in fact there is a possibility of avoiding any government participation, if it can be somehow negotiated with the makers of the machines-I note that there may be one or two representing the Japanese in the room-maybe one or two are not representing the Japanese in the room-but in any event, we would be pleased to discuss that with anyone.

Senator MATHIAS. I would say I think that is a serious suggestion, because we never would have gotten the enactment of the copyright revisions of 1976, if it had not been that there was, in

fact, an industry reconciliation which was finally brought back to the Congress and which, in essence, we adopted. So it is an extremely important element of the whole legislative process.

Mr. VALENTI. Senator Mathias, I subscribe to all that Chairman Dole has said and you and Senator Baucus have said. I just want to issue one modest cautionary note. I do believe time is of the essence. If we are laggard in addressing this problem, we are going to watch the American entertainment industry be devastated by technological developments.

Senator MATHIAS. Absolutely. And I do not think this committee can wait, because you are dealing with a problem of a relatively limited number of machines in proportion to the population of the United States.

Mr. VALENTI. That is right.

Senator MATHIAS. But when this gets to represent 20 or 30 percent of the population, then you begin to get a political and economic problem.

Senator DOLE. It becomes like social security, then.

Mr. VALENTI. And, Mr. Chairman, I also want to mention the audio industry. I do not want to leave audio out. They will represent themselves to demonstrate how they have been terribly and visibly wounded by the home recording phenomenon. They need help now. We and they cannot wait. We are linked together in the immediacy of this moment.

Senator MATHIAS. And that, Mr. Valenti, is why we are here. But the immediacy of this moment is such that we had better get on with the next panel.

Thank you very much, gentlemen.

Mr. HESTON. I thank the committee.

Senator MATHIAS. Our next panel will be led by the Honorable Charles D. Ferris; Nina Cornell, Richard Anderson, Carol Tucker Foreman, and Eugene H. Kummel.

Mr. Ferris, who in a former incarnation, ran the whole Senate, should be able to help us see the light on this subject.

STATEMENT OF A PANEL, INCLUDING: CHARLES D. FERRIS, COUNSEL, HOME RECORDING RIGHTS COALITION; RICHARD ANDERSON, PRESIDENT, SEA COAST APPLIANCE DISTRIBUTORS, INC.; NINA W. CORNELL, PRESIDENT, CORNELL, PELCOVITS & BRENNER ECONOMISTS, INC.; EUGENE H. KUMMEL, CHAIRMAN OF THE BOARD, McCANN-ERICKSON WORLDWIDE; CAROL TUCKER FOREMAN, CONSULTANT, HOME RECORDING RIGHTS COALITION

Mr. FERRIS. Thank you, Mr. Chairman. I certainly hope to be helpful. Each member of the panel will introduce themselves, give their affiliations and background; Mr. Chairman and members of the committee, in the interest of saving time. I ask that my prepared statement be inserted in full in the record.

I am Charles Ferris, and I represent the Home Recording Rights Coalition, a group of American and U.S.-based international companies and American trade associations involved in the manufacture, distribution and sale of video cassette recorders and blank