Hon. ROBERT KastenmeIER, CONGRESS OF the United STATES, Chairman, House Judiciary Subcommittee on Courts, Civil Liberties and Administration of Justice, 2137 Rayburn House Office Building, Washington, DC. DEAR BOB: The hearings we have had thus far on H.R. 1029, the so-called video first-sale bill, have been most enlightening. As a cosponsor of the bill, I have felt that it made theoretical sense; however, I must say that these hearings have raised a number of questions in my mind that could stand further discussion. I would hope that further hearings will be scheduled so we can better understand the practical implications of the proposed change in the law. I have had a number of individuals visit my office on this matter, including a number of persons who operate videotape rental outlets in my state, who have been particularly articulate. If time permits, I would encourage you to consider one of them as a potential witness. My Legislative Director, Scott Fleming, can provide the Subcommittee staff with names and means of contacting such individuals in Kansas. Thanks for your consideration. With best regards, DAN GLICKMAN, DEPARTMENT FOR PROFESSIONAL EMPLOYEES, AFL-CIO, Hon. ROBERT Kastenmeier, DEAR MR. CHAIRMAN: I write to thank you for the kind remarks you favored me with in the course of today's hearing on H.R. 1029 (the Consumer Video SalesRental Amendment of 1983). Also, to clearly set forth our position regarding the rental of pre-recorded video cassettes assuming that legislation is enacted. After the hearing was adjourned I heard some comments which made me realize that one of my responses to questions may have been misunderstood by some to favor eliminating the rental of pre-recorded video cassetts. It was not my intention to give such an impression, because it does not reflect my true position or the position of this Department as set forth in my prepared statement. My intention was to convey the point that the first-sale doctrine distorts the marketing of pre-recorded video cassettes causing their retail price to be artificially inflated. Repeal of the doctrine will lower retail prices of cassettes for consumers and make it possible for many of them to own rather than rent. Thus, the need to rent, for those consumers, would no longer exist. But, we also believe that a flourishing rental market in cassettes will continue to exist after repeal of the first-sale doctrine, as it should because it definitely serves many other consumers and union members. Indeed, with the elimination of the first-sale doctrine the copyright owner and motion picture production workers (through the collectively bargained agreements referred to by us during the hearing), will be able to receive more equitable compensation from the rental practice. For this reason alone we would want to see it continue and we believe it will. It would be greatly appreciated if this letter were inserted in the hearing record at the end of my comments. Sincerely, JACK GOLODNER, Director. CONGRESS OF THE UNITED STATES, To: Kansans concerned about H.R. 1029, Video First Sale Doctrine Repeal. Re: Decision to withdraw name as cosponsor. As I indicated to you in my earlier letter, some time ago I was listed as a cosponsor of H.R. 1029, to repeal the first sale doctrine of the copyright laws as it relates to video-recordings. As the hearing process continued and as I began hearing from a good many concerned Kansans raising very valid concerns about this legislation, I have been re-evluating my position. With the hearing record complete, I have come to the conclusion that H.R. 1029 does indeed present some serious problems. Therefore, shortly after the House reconvenes the week after next, I will be removing my name from the list of cosponsors. I appreciate the fact that you made sure I knew of your concerns on this. APPENDIX 3 THE VCR IS CHANGING THE WHOLE TV PICTURE (BY DAVID LACHENBRUCH 1) Unquestionably the most surprising media development of 1983-and the one that has received the least public attention and analysis-was the amazing growth in sales of home video-cassette recorders (VCRs). As 1984 began, 10 percent of American homes, or about 8.3 million, were equipped with VCRS-a number sufficient to make the market for recorded programs begin to look more profitable than pay cable is for movie producers. In 1982, VCR sales of two million units almost doubled the preceding year's sales, and manufacturers and marketers had forecast sales of perhaps 2.5 million units in 1983. As it turned out, the public snapped up more than four million of what must be the hottest electronic gadget on the market. For all the publicity given home computers, their unit sales last year probably were a good bit lower than those of the VCR, and various estimates put the population of home computers (as distinguished from personal business computers) at anywhere from three million to five million units-probably less than one-third the number of VCRs. Since the introduction of home VCRS in late 1975, their sales have almost exactly paralleled the takeoff years of color TV sales, 1959 through 1966. Annual color set sales grew from 90,000 to 4.7 million during that period. Aided by almost continual price reductions in 1983, the spread of VCRs reached the "contagion" stage that seems to occur when a product reaches a penetration of about 7 percent of American homes. In 1966, color television reached a similar point—at which almost everybody knows somebody who owns the new product. January's Supreme Court decision upholding the legality of taping copyrighted material off the air removes any cloud of uncertainty about whether consumers will be permitted to use VCRS as timeshift devices. Perhaps even more significantly, it virtually eliminates any short-term possibility of congressional passage of a tax or fee on VCRs and video cassettes to compensate copyright owners-which would have been almost certain had the decision gone the other way. Although VCR marketers expect a more modest sales increase, to about five million units, in 1984, the current sales momentum and a reasonably good economy could push the year's sales to six million or more. The prognosis for sales is particularly good because of the continued decline in prices. Virtually all VCRs come from Japan, and the units currently being shipped are averaging about $85 less than those imported just a year ago. The price drop could accelerate this year because of a pending flood of VCRs from Korea. The floodgates are due to open in January 1985, when Korean manufacturers will be granted licenses to export VCRS by the Japanese firms controlling the patents. Korea, which brought us 19-inch color TV sets at $198, is expected to accomplish a similar production miracle with VCRs. The Japanese have a year to bring their prices down to a level competitive with those anticipated for Korean exports, and they're now re-engineering their products, simplifying and integrating them. In 1983, VCRs were advertised at below $300, but only occasionally. Before this year ends that could be the established price for lowend machines. Thus 1984 could end with a VCR home population of at least 13 million-about the size of the subscribership that HBO has today. Already in 1983, movie producers were finding recorded cassettes an extremely profitable market. Block-buster movie title on cassette today are grossing in the multimillions of dollars. Paramount delivered nearly 550,000 cassettes of "Raiders of the Lost Ark" plus almost 100,000 video discs of the same title. RCA/Columbia Pictures Home Video was scheduled to ship 1 David Lachenbruch is editorial director of Television Digest. as many as 100,000 copies of "Tootsie" in early 1984. Even such modest titles as "Bad Boys" and "Dark Crystal" now are released in lots of 30,000 to 40,000 or more cassettes. Video Week newsletter estimates that CBS/Fox Video and Paramount Home Video each shipped more than 1.6 million recorded cassettes last year. Twenty percent of the wholesale price of a video cassette or disc goes to the copyright owner-a higher share than they get from pay-cable showings. Paramount is even considering skipping the HBO release of "Raiders" and going directly from cassette to network broadcast to give the cassette version a longer period of primacy. The horizon in home video is bright for producers, who have succeeded so far without revenue from cassette rentals, which outpace sales by about 10 to one. but in this session of Congress, Administration-backed legislation to give copyright owners a piece of the rental actions is likely to pass. Still unfathomed is the potential of the video disc in the consumer market. About 700,000 to 800,000 video-disc player owners supplement the cassette audience today. RCA this year is force-feeding its video-disc system to the public with player prices starting below $200 and, in cooperation with producers, top movie discs at less than $20. Any real takeoff in video discs could frost the profit cake for the movie companies. Major producers could bring in more money this year from see-what-you-wantwhen-you-want-it devices than from pay cable. With this little-charted growth, home video has become a formidable competitor of pay TV. Despite Hollywood's bitter words in the Betamax case about how the VCR is stealing the copyrighted bread from its mouth, the home tape machine could turn out to be the best thing to happen to the movie business since television. [From the Washington Post, Feb. 23, 1984] HOLLYWOOD AND THE FREE MARKET The motion picture industry, having failed to persuade the Supreme Court that it was entitled to compensation from manufacturers of home videotaping equipment, has turned to Congress for another type of help. Now it wants a change in longstanding copyright law to strengthen its hand in dealing with stores that rent movies on video cassettes. You will be relieved to know that the movie producers are not doing this solely in their own interests. No, their avowed concern is to help the consumer of video cassettes. If you are one of those consumers, however, you may find it hard to understand how the change sought by the industry is going to help you. After all, you can currently rent a movie for as little as $2 or $3 from any one of dozens of rental dealers that are springing up in almost every neighborhood. As things now stand, those dealers buy each copy of a movie tape for a relatively hefty sum from the studios and then hope they can rent it often enough to cover their costs. If Congress changes the copyright law as Hollywood wants, movie makers can sell tapes at higher prices to rental dealers than to other customers or collect part of the rental fees. In either case, rental costs are likely to go up. The movie studios argue that raising costs to dealers is not their intention. They say they want to continue charging rental dealers the current price for a tape but also to be able to sell tapes at lower prices to noncommercial customers. While few people want to see the same movie over and over again, if the price were low enough-say about $20-more people might find it convenient to buy rather than rent, and Hollywood's profits would go up. Of course, unless Congress added many safeguards to the law, Hollywood could also use its new powers to squeeze the small dealers out of business. That would not be fair to the dealers, who had the foresight to recognize, as Hollywood did not, that rentals, not sales, were the main market, and who ran considerable risk in stocking their extensive tape inventories. It might not even be good for Hollywood, which has, almost in spite of itself, reaped hefty profits from sales to dealers. And, of course, like most other legislated interferences in the marketplace, it wouldn't be good for you, the consumer. Movie producers are entitled to a fair return on their creativity. But it is by no means clear that Hollywood has taken full advantage of alternative pricing mechanisms such as long-term, low-rate rentals to dealers with provisions for sharing in rental fees, or higher sale prices for early releases of new hits-that current law allows. The studios need to build a better case that they can't prosper in the current market before Congress decides that Hollywood needs a helping hand. [From the Hollywood Reporter, Apr. 6, 1984] VIDEO RESIDUAL SCAM CHARGED-DGA, WGAW ALLEGE PAYMENT SHORTAGE BY AS MUCH AS 80 PERCENT (BY HENRY SCHIPPER) A potential war appears to be brewing in Hollywood over the payment of videocassette residuals to writers, directors and actors, with union officials alleging the studios and other major production companies have engaged in a "massive scam" by bilking their members out of untold millions of dollars.' Both the Writers Guild of America West, and the Directors Guild of America have filed grievances against some 17 member companies of the Alliance of Motion Picture and Television producers, The Hollywood Reporter has learned, charging them with systematic and long-term underpayments on residuals for feature films sold as videocassettes. The Screen Actors Guild, while taking no action as of yet, is investigating what it believes to be similar underpayments on the videocassette earnings of its members, officials say. According to the WGAW and DGA, the 17 companies, including all major and minimajor motion picture producers, are shortchanging writers and directors on videocassettes residuals by as much as 80%, and may have been doing so since the inception of contract provisions covering cassettes in 1973. Both the WGA grievance, filed in mid-February, and the DGA grievance, filed at the beginning of March, are first-step procedures towards arbitration, through which the guilds hope ultimately to win backpayments, plus interest, on the affected residuals. Such a sum could be immense, given speculation that the underpayments may have affected the entire industrywide catalog of feature film videocas settes. "A massive scam has been going on, a massive amount of cheating," asserts Naomi Gurian, executive director of the WGAW. "The size of the scam beggars description." Indeed, the arbitration is believed to be the biggest in the WGAW's history in terms of dollars and cents. AMPTP president Nicholas Counter III, speaking on behalf of the cited companies, categorically denies that any "cheating" has taken place with regard to cassette residuals, and asserts producers have in fact adhered to the terms of the WGAW and DGA contracts. "According to out interpretation of those contracts, we are contributing correctly," he says. Interpretation is, of course, the key word in this dispute. Both the WGAW and DGA contracts, unchanged with regard to videocassetts since 1973, call for 1.2% of the production company's "accountable receipts" to accrue to guild members. In both contracts, those "accountable receipts" are defined as "world-wide total gross receipts derived by the distributor of such a motion picture" from selling the videotape cassette licensing rights. According to the WGAW and DGA, however, the AMPTP companies are not paying the required 1.2% on that gross, but rather on the licensing fees received by the production companies, minus the distributors' cut. With distributors generally getting 80% of the videocassette rights money, the directors and writers shares have correspondingly dropped to one fifth of what they ought to be, guild officials say. According to the WGAW's Gurian, the WGAW-AMPTP basic agreement unequivocally includes the distributor's share in the gross from which the writer's 1.2% is to be tallied. "There is no ambiguity or room for doubt in the contract," she says. "This was a definition established a long time ago when the videocassette field was young, in the hope that our members would one day get a payoff. Now the time has come and the industry is disputing the definition." The AMPTP's "interpretation" of the contract is nothing more than an attempt to renege on its deal now that the videotape cassette market is booming and the dollars at stake are great, Gurian says. DGA national executive secretary Michael Franklin, in a letter sent to Counter April 4, expresses similar sentiments. Describing the producers' conduct regarding videocassette residuals as "inexplicable," Franklin asks Counter whether "the fact that U.S. homes with videocassette recorders have risen from 500,000 in 1979 to almost nine million in 1983, and are predicted to reach 50 million in 1990," could have anything to do with it. According to Counter, the AMPTP companies have not been influenced by the suddenly burgeoning videocassette market, and have calculated residuals in the same way "since the first dollar was earned by any producer" from videotape cassettes. Counter further says the distributors' gross, which the WGA and DGA insist must be included in their residual's formula, "doesn't fit the videocassette marketplace." He feels the language in the guild contracts, originally drawn up in 1973 before the videocassette fields matured, is deliberately vague to accommodate developing practices. The key factor in defining a picture's videocassette gross for the purpose of determining guild residuals is license fees from manufacturers for the right to produce cassettes, not distributor earnings, Counter says. The videocassette dispute developed only recently, as the cassette market picked up and WGAW officials detected an apparent discrepancy between widely reported million dollar cassette deals and disproportionately low payments to guild members, Gurion says. The guild alerted its residuals policing department, which concluded that "something was dreadfully wrong" with payments to WGAW members, she adds. When the guild confronted the production companies about the apparent payments gap, the producers justified the residuals on the basis of their reading of the videotape terms. In addition to the WGAW's and DGA's 1.2% cuts, the AMPTP has contracts with virtually identical movies-to-video cassette language that provide SAG with a 3.6% share of the "worldwide total gross receipts," the American Federation of Musicians with 1%, and the International Alliance of Theatrical and Stage Employees with 5%. Add it all up and the AMPTP companies could be liable for 12%, plus monthly interest of 1.5%, on the combined worldwide gross of most if not all of the feature film videocassettes ever made. Although Counter would not speculate on the potentially dizzying stakes or the dollar difference between the conflicting interpretations of the contracts, he does believe the AMPTP companies will quit the videocassette business if they lose the arbitrations. Should the AMPTP prevail, on the other hand, that victory could haunt Hollywood labor-management relations for some time to come, with the guilds attempting to win back the provisions they thought they already had in upcoming contract talks. Negotiations with the DGA, set to begin later this month, have already been rendered a bit chilly by the videocassette fight. Indeed, the DGA's Franklin concludes his letter to Counter by asking: "Is the Producers' current tactic [with regard to cassettes] a sign of the kind of 'good faith bargaining' we can expect from the Producers in the 1984 negotiations?" [From the Wall Street Journal, May 1, 1984] MOVIE STUDIOS PUT MORE EMPHASIS ON HOME-VIDEO, PAY-TV MARKETS (By Laura Landro) In the old days at Paramount Pictures Corp., "90% of our meetings used to dwell on what our movies were going to be about," says Michael Eisner, the studio's president. That was five years ago. Today, Mr. Eisner says, Paramount's executives more often than not are mulling over strategies for pay television, home-video pricing, software, "windows" (release schedules for home video and pay television) and new delivery technologies like direct broadcasting. Indeed, from barely rating an asterisk on movie companies' annual statements five years ago, the home-video and pay-television markets have become powerful and important contributors to the major studios' revenues-at a time when costs of making movies are soaring and ticket prices aren't keeping pace. Alan Hirschfield, chairman of Twentieth Century-Fox Film Co., says that to break even on the average film today requires $38 million at the box office, of which the rentals, or studio share, are about $20 million. Since 1980, he says, only 47 of 513 films made have achieved more than $20 million in rentals. And consider this: While box-office revenue have grown at about 7% over the past five years, revenues from pay television have grown at a 55% clip, figures Richard |