30 May 2002

Source: Hardcopy from the Electronic Frontier Foundation.

Compare to recent testimony by Jack Valenti and MPAA members.

[60 pages of testimony; duplicative prepared witness statements of 93 pages omitted.]





HOME RECORDING OF COPYRIGHTED WORKS

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HEARINGS

BEFORE THE

SUBCOMITTEE ON COURTS, CIVIL LIBERTIES,

AND THE ADMINSTRATION OF JUSTICE

OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

NINETY-SEVENTH CONGRESS

SECOND SESSION

ON

H.R. 4783, H.R. 4794 H.R. 4808, H.R. 5250,

H.R. 5488, and H.R. 5705

HOME RECORDING OF COPYRIGHTED WORKS

___________________

APRIL 12, 13, 14, JUNE 24, AUGUST 11, SEPTEMBER 22 AND 23, 1982

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Serial No. 97

PART I

*

Printed for the use of the Committee on the Judiciary

___________________

U.S. GOVERNMENT PRINTING OFFICE

15-168 O WASHINGTON : 1983

HOME RECORDING OF COPYRIGHTED WORKS

_______________

MONDAY, APRIL 12, 1982

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COURTS, CIVIL LIBERTIES AND THE ADMINISTRATION OF JUSTICE OF THE COMMITTEE ON THE JUDICIARY, LAW BUILDING, MOOT COURTROOM, UCLA SCHOOL OF LAW,

Los Angeles, Calif.

The subcommittee met, pursuant to notice, at 2 p.m,, at the UCLA Law School, Los Angeles, Calif., Hon. Robert W. Kastenmeier (chairman of the subcommittee) presiding.

Present: Representatives Kastenmeier and Schroeder.

Staff present: Bruce A. Lehman, chief counsel; Timothy Boggs, professional staff member; and Thomas E. Mooney, associate counsel.

Mr. KASTENMEIER. The hearing will come to order.

The Chair will announce that assisting the panel today is Congresswoman Pat Schroeder of Colorado on my right; Congressman Tom Railsback of Illinois will be here within a matter of minutes and later in the afternoon Congressman Don Edwards Of California. They will constitute the panel today.

On October 19 of last year the Court of Appeals for the Ninth Circuit issued an opinion reversing an earlier judgment f the district court in Los Angeles in the case of Universal City Studios v. Sony Corporation of America.

The issue in the case was whether recording off the of copyrighted television programing by private individuals without the permission of the copyright owner constituted an infringement under the Federal copyright law. The district court had held that there was no such copyright infringement in such a case.

The court of appeals found otherwise and remanded the matter to the lower court for purposes of developing appropriate remedies for the copyright owners. Meanwhile, the defendants have requested the Supreme Court to review the case. Further judicial proceedings at the trial court level have been suspended pending the high court's decision.

Within 24 hours of the appeals court's action, bills were introduced in both the House of Representatives and the Senate which would reverse the decision. The immediate and widespread interest in the Sony case is unprecedented in the history of copyright litigation.

Perhaps one reason this issue has generated so much interest lies in the fact that video cassette recorders constitute the most significant new development in the entertainment industry, possibly excepting cable, since the introduction of television itself, with over 3.2 million machines having been sold since 1975. And the ninth circuit decision has raised the spectre of making each and every use of these machines to date a copyright infringement.

Theoretically, at least, the court of appeals decision, if upheld could subject millions of private citizens to damages for copyright infringement and subject the manufacturers and retailers of the recorders to a financial liability, perhaps, even exceeding their entire net worth, theoretically.

Recognizing the serious implications of the case, for business and the public, the bills which have been introduced are of ypes essentially: Legislation offered by Congressmen Foley, Du and Parris which would specifically exempt all private, noncommercial video taping from liability for copyright infringement, while legislation introduced by Congressman Don Edwards and others would grant users of video cassette recorders a compulsory license with royalties to be paid to copyright owners from the sale of machines and blank tapes.

In addition, Congressman Edwards would provide similar treatment for audio recording equipment. Audio recording was not an issue in the Sony case, with both the district court and the court of appeals having concluded that control of off-air taping was not included among those rights granted copyright owners under the 1971 law, which first granted copyright protection to the sound recording industry.

This afternoon the subcommittee will begin 3 days of hearings on the issues raised in the case of Universal v. Sony and related legislation.

We have chosen Los Angeles as the site of the hearings because it is both the center of many of the industries involved and also because it is the site of the litigation which gave rise to the issue itself. We will announce at a later date further hearings in Washington for the purpose of receiving testimony from governmental witnesses.

This particular set of hearings will be divided into three segments of roughly 2 hours each. During each segment we will hear from witnesses representing a coalition of interests with roughly similar views on the issues.

This afternoon we will hear from those generally who approve of the ninth circuit decision, representatives of video program producers and allied groups. Tomorrow morning we will hear from those generally opposed to the decision. On Wednesday morning we will hear from witnesses who support legislation extending copyright protection in situations involving the taping of audio works.

[The statement follows:]

OPENING STATEMENT OF HON. ROBERT W. KASTENMEIER,

CHAIRMAN, SUBCOMMITTEE ON COURTS, CIVIL LIBERTIES

AND THE ADMINISTRATION OF JUSTICE On October 19 of last year the Court of Appeals for the Ninth Circuit issued an opinion reversing an earlier judgment of the District Court here in Los Angeles in the case of Universal City Studios v. Sony Corporation of America. The issue in the case was whether recording off the air of copyrighted television programming by private individuals without permission of the copyright owner constituted an infringement under the Federal Copyright Law. The District Court had held that there was no copyright infringement in such a case. The Court of Appeals found otherwise and remanded the matter to the lower court for the purpose of developing appropriate remedies for copyright owners. Meanwhile, the defendents have requested the Supreme Court to review the case and further judicial proceedings at the trial court level have been suspended pending the high court's decision. Within 24 hours of the Appeals Court's action bills were introduced in both the House of Representatives and the Senate which would reverse the decision. The immediate and widespread interest in the Sony case is unprecedented in the history of copyright litigation. Perhaps one reason this issue has generated so much interest lies in the fact that video cassette recorders constitute the most significant new development in the entertainment industry since the introduction of television itself, with over 3.2 million of the machines having been sold since 1975. And the Ninth Circuit decision has raised the spectre of making each and every use of these machines to date a copyright infringement. Theoretically, at least, the Court of Appeals decision, if upheld, could subject millions of private citizens to damages for copyright infringement and subject the manufacturers and retailers of the recorders to a financial liability exceeding their entire net worth. Recognizing the serious implications of the case for business and the public, the bills which have been introduced are of two types -- legislation offered by Congressmen Foley, Duncan and Parris, would specifically except all private, noncommercial video taping from liability for copyright infringement, while legislation introduced by Congressman Don Edwards and others would grant users of video cassette recorders a compulsory license with royalties to be paid to copyright owners from the sale of machines and blank tapes. In addition, Congressman Edwards would provide similar treatment for audio recording equipment. Audio recording was not an issue in the Sony case with the District Court and Court of Appeals having concluded that control over off air taping was not included among those rights granted copyright owners under the 1971 law which first granted copyright protection to the sound recording industry. This morning the subcommittee will begin three days of hearings on the issues raised in the case of Universal v. Sony and related legislation. We have chosen Los Angeles as the site of the hearings because it is both the center of many of the industries involved and also because it is the site of the litigation which gave rise to the issue. We will announce at a later date further hearings in Washington for the purpose of receiving testimony from governmental witnesses. This particular set of hearings will be divided into three segments of roughly two hours each. During each segment we will hear from witnesses representing a coalition of interests with roughly similar views on the issues. This afternoon, we will hear from those who generally approve of the Ninth Circuit decision -- representatives of video program producers and allied groups. Tomorrow morning we will hear from those generally opposed to the decision. On Wednesday morning we will hear from witnesses who support legislation extending copyright protection in situations involving the taping of audio works. Before calling on our first witness I would like to express, on behalf of the subcommittee, our gratitude to U.C.L.A. Law School and in particular Professor Charles Firestone and Mr. Ted Holbert, Ms. Doris Davis and Ms. Margaret Kiever of the Law School staff for their assistance in the arrangements for the hearing.

Mr. KASTENMEIER. Before calling on our first witness, I would like to express on behalf of the subcommittee our gratitude to UCLA, to the UCLA Law School, and particularly Prof. Charles Firestone, Ted Hobert, Ms. Doris Davis, and Ms. Margaret Kiever of the law school staff for their assistance in the arran ements for this hearing.

Mr. RAILSBACK. I don't have a statement, Mr. Chairman.

Mrs. SCHROEDER. I don't have a statement, Mr. Chairman.

Mr. KASTENMEIER. If not, then the Chair will be very pleased to call our first witness and he may handle his time or yield to other witnesses as he sees fit, Mr. Jack Valenti.

Mr. Valenti, do I understand that Mr. Eastwood will be the first witness?

Mr. VALENTI. No, I will speak first.

Mr. KASTENMEIER. Mr. Valenti.



TESTIMONY OF JACK VALENTI, PRESIDENT, MOTION PICTURE

ASSOCIATION OF AMERICA, INC.

Mr. VALENTI. Mr. Chairman and ladies and gentlemen of the committee, I shall testify first and then following me will be Mr Clint Eastwood, actor/producer/ director; Mr. Jay Eliasberg, former vice president and director of research at the Columbia Broadcasting System; Richard Orear, president of the National Association of Theatre Owners; Mr. Gene Allen, vice president of the International Alliance of Theatrical Stage Employees and Moving Picture Operators of the United States and Canada, commonly known in this town as the "IA"; Judy Taylor, president of the Directors Guild of America; Wayne Oliver, executive secretary of AFTRA, which is the American Federation of Television and Radio Artists and, finally, Mr. Jack Copeland, who is the chairman, Copyright Committee, Training Media Distributors Association.

I am going to stand, if you don't mind, Mr. Chairman, cause I have what is known as "visual aids." I know they are visual; whether they are aids or not is something you will have to determine later on.

Mr. KASTENMEIER. And whether they are copyrighted or not.

Mr. VALENTI. I am merely coming to start off by talking about the American film and television industry, not as an economic enterprise, but as a great national asset to this country, to the U.S. Treasury and the strength of the American dollar. And I am not just talking on behalf of people whose names are household words, like Clint Eastwood and some of his small band of peers. I am speaking on behalf, as he is, as he will no doubt tell you on behalf of hundreds of thousands of men and women who without public knowledge or recognition, who are not besieged by fans, but who are artisans, craftsmen, carpenters, bricklayers, all kinds of people, who work in this industry, not only in this State but in the 50 States where American films are shot on location. And they deserve no less, Mr. Chairman, than the concern of the Congress for the preservation of their industry.

But more than that, which I think is paramount to the national interest, the preservation of a huge trade asset. American films and television dominate the screens of the world and that just didn't happen. It happened because of the quality and caliber and the imagination and the way people construct fragile imaginings that we call the American film.

But now we are facing a very new and a very troubling assault on our fiscal security, on our very economic life and we are facing it from a thing called the video cassette recorder and its necessary companion called the blank tape. And it is like a great tidal wave just off the shore. This video cassette recorder and the blank tape threaten profoundly the life-sustaining protection, I guess you would call it, on which copyright owners depend, on which film people depend, on which television people depend and it is called copyright.

Now, my first card, Mr. Chairman, deals with what I consider to be one of the essential elements that you cannot ignore and, indeed, you must nourish. The U.S. film -- and I will read this -- "The U.S. film and television production industry is a huge and valuable American asset." In 1981, it returned to this country almost $1 billion in surplus balance of trade. And I might add, Mr. Chairman, it is the single one American-made product that the Japanese, skilled beyond all comparison in their conquest of world trade, are unable to duplicate or to displace or to compete with or to clone. And I might add that this important asset today is in jeopardy. Why?

Because unless the Congress recognizes the rights of creative property owners as owners of private property, that this property that we exhibit in theaters, once it leaves the post-theatrical markets, it is going to be so eroded in value by the use of these unlicensed machines, that the whole valuable asset is going to be blighted. In the opinion of many of the people in this room and outside of this room, blighted, beyond all recognition. It is a piece of sardonic irony that this asset, which unlike steel or silicon chips or motor cars or electronics of all kinds -- a piece of sardonic irony that while the Japanese are unable to duplicate the American films by a flank assault, they can destroy it by this video cassette recorder.

And that brings me, if I had to summarize what this is all about -- one lady from a network said would you want to summarize -- well, I will summarize it for you. The single centralizing principle on which this whole rostrum rests is this: If you cannot own, if what you own cannot be protected, you don't own anything and that goes for Clint Eastwood or the most obscure person in this industry or anybody in any industry. If what you own cannot be protected, you own nothing.

Now, that is the dominating theme of this debate an you are going to hear a lot of other stuff and we will have to bring it in, but it is like tracings on dry leaves in the wind. It is irrelevant to this essential dominating theme, which pervades this entire debate.

Now, I don't have to tell anybody in politics -- I have spent most of my adult life in politics and you learn one thing. Nothing of value is free. It is very easy, Mr. Chairman, to convince people that it is in their best interest to give away somebody else's property for nothing, but even the most guileless among us know that this is a cave of illusion where commonsense is lured and then quietly strangled. That is what it is all about.

Now, these machines are advertised for one purpose in life. Their only single mission, their primary mission is to copy coyrighted material that belongs to other people. I don't have to go into it. The ads are here. Here is Sony that tells you that you can record one channel while watching another. You can program to record a variety of shows on four different channels for up to 14 days in advance if you like.

Now, Mr. Chairman, how many people would want to buy these machines if you said you couldn't use any copyrighted material on it. The machine would be useless and this is what the Ninth Circuit said. They advertise their machine blatantly and deliberately saying the way to enjoy this machine is to copy somebody else's copyrighted programs.

Now, in my judgment the Ninth Circuit Court decision -- I am not a lawyer; I beg to ask the forgiveness of all of you in the UCLA Law School. If I was smart enough maybe I would have been a lawyer and then I would feel more comfortable about presenting this case. But, at least to my untutored eye, the Ninth Circuit Court decision was lucid, unambiguous, and consistent. The logic was clear and it said when you use copyrighted material on a video cassette recorder, it is an infringement of copyright.

Now, again, in politics when confronting difficult issues, we are often constrained to observe how few are the alternatives available to us and how meager the opportunities to enlarge them. However, we think that we have an answer that is founded in good sense: and more than that, coincides with the Constitution's command. This rational answer I will call it, H.R. 5705, the Edwards bill. It exempts home taping from copyright infringement. That is first off, so people in the privacy of their home can tape anything that they choose, but it links to that the indispensable buckling that must take place and that is, it establishes a copyright royalty fee, which would be paid by the manufacturers of the video cassette recorder and by the manufacturers of blank tapes.

Now, again, citing the fact that 100 percent of these machines are made in Japan and 85 percent of all of the blank tapes are made in Japan, and I say that, Mr. Chairman, because I. have to keep coming back to this trade asset because if the Congress doesn't act, then what we are going to be doing is exporting our jobs out of this country to another country, beyond the real of our own shore.

Now, I believe that -- I believe, I do believe it and I think I do have some confirmatory peer in this room -- they believe that the Home Recording Act, the Edwards bill is congenial to the spirit of fair play. It is a compromise, Mr. Chairman, as all of us in politics understand is the litmus paper from which everything must come, compromise, an intelligent compromise. But more than that, it is thoroughly hospitable to the Constitution itself and I simply cannot -- I cannot -- emphasize that fact too firmly. And I say that because the Edwards bill obeys the Constitution. Why? Because the fifth amendment forbids the taking of private property without just compensation.

Now, I have before me a memorandum of law prepared by Laurence Tribe, professor of constitutional law at the Harvard Law School, known as the UCLA Law School of the East, and this 49-page memorandum I must say, I think, is a devastatingly apt memorandum in which Professor Tribe summarizes -- and I am making this available to the committee as part of the record -- in which he says that if the Congress passed the Foley, Parris, or Duncan bills, which merely exempt home taping from copyright infringement without linking to it this copyright royalty fee, you would be insulting the Constitution. It would be unconstitutional.

The last sentence of the fifth amendment, and I urge all ofyou law students to read it again, because the fifth amendment is not merely that you can't testify to incriminate yourself. The last sentence says you cannot take anybody's private property, not even the Government, without giving them just compensation for it. It is that "takings" clause that is the heart and muscle of this memorandum by Professor Tribe.

Now, let me tell you something about how this business works. My God, Clint Eastwood and Terry Semple, who is the head of Warner Bros., who is in this room, can speak to this with for more accuracy and understanding than I, but I think it is important to a brief summary.

The permission of the copyright owner is required for the use of their programs in all markets. Now, I those markets include theaters, cable, pay cable, pay television, prerecorded cassettes, network television, syndicated television, video discs. Every one of those markets is going to be competing for Mr. Eastwood's new film "Firefox." They are going to license that film at a negotiated price.

Now, we cannot live in a marketplace, Mr. Chairman -- you simply cannot live in a marketplace, where there is one unleashed animal in that marketplace, unlicensed. It would no longer be a marketplace; it would be a kind of a jungle, where this one unlicensed instrument is capable of devouring all that people had invested in and labored over and brought forth as a film or a television program, and, in short, laying waste to the orderly distribution of this product.

Now, I don't have to tell you, Mr. Chairman -- God, we have sweated blood together on the Cable Copyright Act -- but this subcommittee back in 1976 recognized the inequity of a new technology being unlicensed, cable television. You didn't want cable television fouling the airwaves and like Pac Man, gulping do everything in sight, and denying the copyright owner -- I say that as a throwaway line to Warner Bros. and Atari -- not only de copyright owner his rights, but stripping his other markets of their profit potential.

Now what did you do, Mr. Chairman? You and your colleagues saw the need for licensing and unlicensed medium. So, you came firmly down on the side of the principle that what belonged to others could not be used by somebody else to make a profit without even negotiating with the Eastwoods of the world or the copyright owners or under a compulsory license, paying a copyright fee.

And I might add, to go back to those 1976 debates, you also paid tribute to the constitutional principle that it was the use, underscore use, of copyrighted material that was deeply relevant to what you were doing. Now, how did you express that? You said that even cable systems which did not carry distant signals, Mr. Chairman, would have to pay a copyright royalty fee, point 645, 1 believe, if I am correct.

A VOICE. It is point 675.

Mr. VALENTI. I have my man prompting me, point 675 of the gross revenues of a cable system for the use, for the privilege of using copyrighted material. So, what we are asking has nothing to do with shattering precedent. It doesn't collide with fair play at all. All we ask is this principle that you used in cable copyright be linked to the video cassette recorder and its control, the blank tape. I hope I am not moving too fast for this audience.

Now, let me tell you something about the high-risk business that we are in. This may be one of the most precarious business enterprises which a man or a woman can enter. Movie making is a high-risk business. Let me cite you some examples. The average film costs $20 million. That includes negative costs, advertising, promotion, prints, distribution costs -- $20 million.

Mr. Eastwood might want to talk about the cost of his current film. Eight out of ten films -- now, listen. These two statistics I am going to give you are really the nerve center of the statistical summary that you will have. Eight out of ten films do not retrieve their investment from theatrical exhibition.

Mr. RAILSBACK. Is there any water over there?

Mr. VALENTI. Six out of ten films -- Mr. Railsback, I am going to tell you, when people think about that, they don't ask for water, they ask for brandy.

Mr. RAILSBACK. That is what we really have in there.

Mr. VALENTI. And 6 out of 10 films do not retrieve their total investment period. Now, what are you going to do right on top of that? There is going to be a VCR avalanche. Exports of VCR's from Japan totaled 2.57 million units in 1981. No. 2, the United States is the biggest market. No. 3, February 1982, which is the latest data, shows the imports to the United States are up 57 percent over 1981. This is more than a tidal wave. It is more than an avalanche. It is here.

Now, that is where the problem is. You take the high risk, which means we must go by the aftermarkets to recoup our investments. If those aftermarkets are decimated, shrunken, collapsed because of what I am going to be explaining to you in a minute, because of the fact that the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace.

Now, is this all? Is it going to get any bigger? Well, I assure you it is. Here is the weekly Variety, Wednesday, March 10. Head1ine, "Sony Sees $400 Billion Global Electronics Business by the Decade's End," $400 billion by the decade's end. In 1981, Mr. Chairman, this United States had a $5.3 billion trade deficit with Japan on electronic equipment alone. We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages of this machine.

Now, the question comes, well, all right, what is wrong with the VCR. One of the Japanese lobbyists, Mr. Ferris, has said that the VCR -- well, if I am saying something wrong, forgive me. I don't know. He certainly is not MGM's lobbyist. That is for sure. He has said that the VCR is the greatest friend that the American film producer ever had.

I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.

The VCR avalanche, I told you about that. Now, what about the VCR owners. Now, from here on out, Mr. Chairman, I am going to be speaking about a survey done by the Media Statistics Inc., which is a prestigious firm out of Silver Spring, Md. We, meaning the MPAA, did not commission this survey. We bought it after it was done when we heard about it. So, this was not a case -- we have commissioned a lot of things, but this is not one of them.

Now, I want to tell you about it because I think it is absolutely fascinating. This survey was taken in October 1981. It is the newest and freshest data available. Here is what it says. Median income of a VCR owner is between $35,000 and $50,000 a year. Not a lot of what we call today the truly needy are buying these machines. One-third of all the owners have incomes of more than $50,000. Now, here is the next one: 87 percent, 86.8 percent of all these owners erase or skip commercials. I have here, Mr. Chairman, if you are not aware of how this works -- this is Panasonic. This is a little remote control device that you use on machines. It has on here channel, rewind, stop, fast forward, pause, fast advance, slow, up, down, and visual search, either going left or right.

Now, let me tell you what Sony says about this thing. These are not my words. They are right straight from McCann Erickson, whom you will hear from tomorrow, who is the advertising agency for Sony and here is what they say. They advertise a variable beta scan feature that lets you adjust the speed at which you can view the tape from 5 times up to 20 times the normal speed.

Now, what does that mean, Mr. Chairman? It means that when you are playing back a recording, which you made 2 days or whenever -- you are playing it back. You are sitting in your home in your easy chair and here comes the commercial and it is right in the middle of a Clint Eastwood film and you don't want to be interrupted. So, what do you do? You pop this beta scan and a 1-minute commercial disappears in 2 seconds.

Mr. RAILSBACK. Is that all bad?

Mr. VALENTI. If you are watching a Clint Eastwood film it is the most cheerful thing you can do. However, if you are an advertiser who has paid $280,000 a minute to advertise, he feels a very large pain in his stomach as well as in his checkbook because it destroys the reason for free television, the erasure, the blotting out, the fast forwarding, the visual searching, the variable beta scans. the technology is there and I am one who has a belief that before the next few years the Japanese will have built into their machines an automatic situation that kills the commercial.

Being advertised today in all the video magazines, and if any of you take video magazines, here is a marvelous little device called the Killer. It eliminates those black and white commercials. You put the Killer onto your Sony and it automatically takes out the commercial. You don't like the Killer, try the editor. The editor will do the same thing. It will wipe out commercials.

The technology is there in my judgment, in the next several years, where an integral part of the machine will be automatic Killer. But you don't need that now as long as you have this. Indeed, when my son is taping for his permanent collection, he sits there and pauses his machine and when he is finished with it, he has a marvelous Clint Eastwood movie and there is no sign of a commercial. It is a brand new movie and he can put three of those on one 6-hour tape.

Now, the average --

Mr. KASTENMEIER. May I interrupt, Jack, on that point?

Mr. VALENTI. Yes.

Mr. KASTENMEIER. And it is a point that just occurs to me. Actually, the advertiser doesn't pay for a taped replay of any program of that sort. He pays only for a live telecast, where his commercial appears and no matter how it is deferred, he doesn't pay for the deferral because that person wasn't there watching it the first time, presumably it is missed for commercial --

Mr. VALENTI. Mr. Chairman, I am going to defer that question because I have at this table Mr. Eliasberg, for 34 years a practitioner and a student of research in what Nielson and Arbitron present to networks and advisers, what they pay for and what they don't pay for. And rather than me, race over, take time, may I defer the question to Mr. Eliasberg.

Mr. KASTENMEIER. We will defer that question.

Mr. VALENTI. And he will be able to handle that for you even much better than I will.

But at any rate, that is a very relevant point that you make and it will bring it out, what the problem is and you will see that as you get into the future, this becomes a devastating problem for both advertisers and producers, who will get less for their programs on the air and that is what I am talking about. When less revenues are available to the networks and less revenues are available then to the producer -- Mr. Ferris and his people will tell you, oh, the marketplace will adjust, as if some tooth fairy hovers over the place and says whenever you lose here, we will be glad to pay for it. Nobody pays for value they don't receive and that is an axiom of the business marketplace.

The average number of cassettes per household -- this is fascinating -- Mrs. Schroeder, was 27.7, 28 cassettes. Now, if you are just time shifting, all you are doing is you are away from home and you are taping something and you come back and you watch the commercial, then you time shift, you don't need 28 cassettes. You need one cassette or at the most two. Why do you have 28? Why? Because of the next line. Seventy-five percent have a permanent collection. My own home, we do it in our on home. I know about that. Anybody that has a VCR, talk to them, and I ask you to use your own commonsense, Mr. Chairman, Mrs. Schroeder, Mr. Railsback, just think of you as human beings. If you had the power to sit on a playback of a recording and you could wipe out the commercials or not wipe out the commercials, what would you do? You would do exactly what you said, sir. That is terrific. Of course. We all do it.

But when you do it, you strip away the reason for free television. Now, let me --

Mr. KASTENMEIER. Jack, let me ask you. Do you consider yourself and your family infringers when you engage in that practice?

Mr. VALENTI. I consider myself and my family believing what the plaintiffs in this lawsuit said and they said publicly, they have said it to the press, they have said it to the lawyers, they have said it to the courts. They do not intend to file any actions against homeowners now or in the future. I mean, that is obvious and they have said that publicly, Mr. Chairman, so I believe them. As far as I am concerned, I am going to continue taping because the plaintiffs have said they aren't going to do anything to me. I am not committing any crime. They know that.

Mr. KASTENMEIER. That wasn't my question.

Mr. VALENTI. Do I consider myself an infringer?

Mr. KASTENMEIER. When you engage in such practice.

Mr. VALENTI. Yes, sir, I do. I am taking somebody else's copyrighted material without their consent and I know damn well I am infringing. But as far as court action or anything else, I am safe. First, it is not a criminal act. Again, the opposition would tell you video, police, and criminals. They show an astonishing lack of the copyright law. They know good and well that that is not a criminal infringement unless you do it for profit. But on the other hand the plaintiffs have said they are moving against anybody in the homes. There is no problem, but 1 know and everybody else knows they are infringing.

Mr. RAILSBACK. Could I ask a couple of questions? Your figures are very different from the district court in the Betamax case. I am wondering if the 27.7 is that acquired over a period of time. That is not a yearly acquisition?

Mr. VALENTI. What was the date of the court case? 1978. That is 4 years ago. They were using data that was gleaned in 1977.

In those days, first, there was only about an hour's recording time on a cassette. Nobody could really collect cassettes because you couldn't record long enough. Soon, they got up to 2 hours, 3 hours. Now, they are up to 6 hours. They are going to be up to 24 hours. Pretty soon, they will have a cassette that will record all year long, I suppose. But it is because of the time gap etween the court case and today.

Mr. RAILSBACK. I know, but I was really asking about the average cassettes for a household. Is that acquired over a period of time?

Mr. VALENTI. Yes, sir, it is. It is acquired over a period of time because you are making collections. You are making recordings that you are keeping. Otherwise, you wouldn't need but one or two cassettes. It is because of permanent collections or you are holding them.

Now, I do want to go over an interesting study -- and Mr. Eliasberg is going to talk a little about this -- because, example, Mediastat also found out the following: They did additional work in diaries and found out that of the total number of recordings in minutes 49.7 percent of all the minutes recorded wer not played back within 6 days. And all the movies recorded, 100 ercent, 59.3 percent of all the movies were not played back within days. That is a very vital point, Mr. Chairman. Mr. Eliasberg is going to touch on this because there is one thing you cannot measure. You cannot measure playback. This will also be part of the record that we will present.

But I want to tell you what Mediastat is saying here because, I think, it is relevant to what we are talking about. The Mediastat's analyst says that 67 percent of the VCR owners own no prerecorded cassettes and 72 percent plan to buy one in the coming year and 48 percent have never rented a prerecorded cassette. The major source of programing material is home recording, which thus preempts prerecorded tapes and their revenue. Consider that for a moment, which this survey is bringing out.

As one VCR owner wrote in his diary, why buy prerecorded movies? You can record the same thing from a premium pay channel, home box office movie channel show time, much cheaper. There is also less need for VCR pay TV people, Mr. Orear of the Theater Owners Association, to go out to the movies. Hence, in economic terms, people are deriving value, benefit, utility from the ownership of a home taped copy of a video film production while there is currently no equivalent benefit payment for the producers in the economic exchange.

Movies are the single most recorded program type accounting for approximately 30 percent of all the recorded minutes.

Now, what I am about to read you now boggles my mind and it is going to boggle the mind of everybody in the movie and television business in this city. If 56 of the 93 movies recordings made by the 250 households during the first 3 days of a diary week -- just 56 of those movies are saved for the shelf and for additional playback -- then the number of movies collected in a year by the Nation's 2.4 million VCR households, only 2.4 million, the number of movies collected would be 6,537,216. At a prerecorded purchase of $50, they would have a retail value of $3.2 billion.

Mr. Chairman, things like that could make a grown men cry.

Now, let me say a word about the portion of the Edwards amendment that does away with the first-sale doctrine. Just devote a little time to that.

What happens today, Mr. Chairman, is a very unstabilized marketplace because under the first-sale doctrine, if a producer sells a cassette for $30 to a video retail store, that store can either sell it or rent it. He can rent it 100, 200, 300 times and never pay the producer a dime. And the producer says, "Hey, we would like some of that money, too. That is our product." "No," he said, "under the first-sale doctrine I can do whatever I want to with it."

So, now, what do producers do? They have to be one of two things. They either withhold that prerecorded cassette from the sale market and say, OK all we are doing is renting alone. That means the customer is denied a choice of whether he wants to buy or rent. He has no choice. Or the producer can add a surcharge to the cassette. If you are going to sell it for $30, you add another $25 surcharge and you say that takes care of the rental income. So, now, you are charging the consumer more money for his product.

Also, if you don't do that and you are renting only, the inventory is lessened. The advantage is wholly with the public here. The public has two great advantages. One, it is able now to buy video cassettes at a much lower price and, two, he has an option. The customer now has an option of whether he wants to buy or rent, but it is his option.

Now, because of the distorted, unstabilized marketplace, that option doesn't exist. The fair marketing amendment will stabilize the marketplace, Mr. Chairman.

Now, that is what the public interest is all about. I know when I was in Government the first question that the President would ask any of his aides when we came up with some bright idea, he would say, well, what is the public interest? How does the public benefit from what it is you guys, want to do? And I think that the Edwards bill serves the public interest.

Now, look at these numbers because they are totally relevant. By 1990, the Japanese estimate that 30 to 35 million U.S. homes will be equipped with VCR's. VCR owners will buy about 225 million or 300 million blank tapes. But, and here is an explosive political fact, Mr. Chairman, two-thirds of U.S. households will not own VCR's, Mr. Chairman. One-third of VCR households will not be on cable or won't have access to cable. Now, if there is a scarcity of film and television entertainment, it won't be the well-groomed and the well-heeled that will suffer. It is going to be, as always it is, Mr. Chairman, the less-affluent, the disadvantaged people pressed against the wall, out of work, who can't afford these expensive machines, and free television to the sick and the old and the poor will remain the primary source of home entertainment.

Now, when a producer takes in less from these other markets, he is going to invest less. When your profit potential shrinks, you pull back. You produce less and you stay as long as you can in markets where you think you can make some money without having a VCR lay waste to your profit.

The loser will be your public because they don't have these expensive machines. And that is what I am saying, sir. The public is the loser when creative property is taken and here is the reason why. The investment of hundreds of millions of dollars each year to produce quality programs to theaters and television will surely decline.

Now, you are going to hear tomorrow from a number of eloquent, intelligent, well-paid gentlemen a lot of arguments. This congressional debate has ripened the imagination of this opposition and I must say as I -- in another forum I said that my dear friend Mr. Ferris is a fellow who plasters together the true and the false and therefrom manufactures the plausible. I want to deal with some of those plausible plasters right now.

Now, the first thing that you are going to hear is this is a tax. It isn't a fee. Well, Mr. Chairman, if this were a tax, I think we would be performing before Chairman Rostenkowski and not Chairman Kastenmeier. We would be before the Ways and Means Committee.

But they also say that it is going to be passed on -- this is a tax that is going to be passed on in its entirety to the consumer. What about this pass on? We contracted with the distinguished, consulting, economic firm of Robert Nathan. Robert Nathan Associates. I know you are familiar with them and all of the people in Congress are -- to do a study to tell us what will be the impact of a fee, say a $50 -- we picked this fee out mainly because I have been saying it "in public when trying to pick a number when people want to talk about numbers as being fairly reasonable, a $50 on the machine and a $1 fee on the blank tape. And we said what about this pass on?

Now, let me tell you what the Nathan -- I am going to read this because I think you ought to see it. Will royalty fees on VCR's and blank tapes be passed on to consumers? This is what Mr. Nathan said. "Conditions prevailing in the markets for VCR equipment and blank video cassettes will be such that very substantial portions of any fees will be borne by manufacturers and retailers rather than passed on to the consumer."

I have this entire report right here, Mr. Chairman. I will make it part of the record and I commend it to you because I think it will make for very interesting reading.

Mr. KASTENMEIER. Without objection, several reports, including that of Professor Tribe and your own statement will be received.

Mr. VALENTI. Yes, sir, the Mediastat survey, the Laurence Tribe memorandum and the Robert Nathan report will all be made part of your record.

The effect on the consumer price, says Mr. Nathan, will be negligible, between 1 and 2 percent. As the market matures progressive smaller portions of any fee will be passed on to consumers through higher prices. The effect on consumer prices from passing on the royalty fees is to increase them negligibly from 1 to 2 percent.

I want to just tell you that he did a study in New York and found out that the high and low prices of a Sony SL 5600. The suggested retail price was $1,350 in New York. In New York the high price was $999. The low price was $666 or a price differential, Mrs. Schroeder, of $333.

In Washington, D.C., the same 5600 Sony has a price differential of $571 and so forth and so on. That is in the report. It shows that the price is very competitive in the marketplace today.

Now, let me put it another way. If you had a 1 and 2 percent pass on, Mr. Nathan says it would be about $5.80 on an $800 to $900 machine and about 12 cents on a blank tape. If your machine has a 10-year life and it surely has more than that, then the consumer would be paying 50 cents per year for his copyright fee to use taping -- 50 cents a year. And if you had a tape, as I had, where you can tape as much as 200 times on a tape, each taping would cost you one-sixteenth of 1 cent per taping. I won't go into more detail on that. I think that you ought to read it.

Now, I have come to, another important fallacy that I want to nail to the wall right now. Mr. Ferris has said that the opposition is saying that the American producers are greedy and it is terrible that they want to extract more money and they are triple and double and quadruple dipping in all these markets and they are saying why in the devil should we go and make all this money. Why don't we stop? Haven't we got enough? Aren't we rich enough off of television and everybody?

Well, this charge is so riddled with absurdities that I hardly know where to begin, but, by jingoes, I will begin. Now, I think it is quite intemperate -- I hope they don't make this argument tomorrow because of the answer I am about to give you -- to charge the Americans with greed when the Japanese companies are swollen with profits. Now, let me just -- somewhere here I have an interesting little piece of paper. Here we are. Wall Street Journal, February 24, 1982. 1 am bringing this for the record, Mr. Chairman, because a charge has been made that the American producers are greedy.

Matsushita Electric Industrial Co., which by the way is the largest maker of VCR's in the entire world, aided by strong demand, said the Wall Street Journal, for its video tape recorders reported record results for its fiscal quarter ending November 20. In the fourth quarter, net income rose to the equivalent of almost $200 million. That is a quarter, net income at the rate of $800 million or more a year, net profit. Sales climbed to $4.12 billion. The strong results of fiscal 1981 were linked to healthy markets overseas -- for "overseas" read United States -- as sales within Japan were hurt by sluggish economy. Foreign volume rose 36 percent and VCR's posted the healthiest sales gain of all of Matsushita's consumer products, surging 80 percent. Overseas went up almost 90 percent.

Now, I have here the profits of Japanese companies, if you want to talk about greed. Here, Hitachi, Matsushita, Sanyo, Sony, TDK, Toshiba, Victor, all of whom make these VCR's. Do you know what their net profits were last year? $2.8 billion net profit. Indeed, Matsushita, one company alone, makes more net profits than the entire American film and television industry combined. He wants to talk about greed.

Now, let me just show you something else. Mr. Nathan has what the Japanese companies had on return on stockholder equity. Listen to this, and if you are a reader of Fortune, Forbes, or Business Week or you hear the economists on the air, you will know what I mean. Matsushita's return on stockholder equity, 32.7 percent; Victor's return on equity, 37.6; Sony, 25.1. In 1980, the Fortune 500 companies of America, their average return was 14.4 percent, enough of profits, I suppose.

And the second part of the charge is that the American companies are retrieving their investment, and I have already cited you the other markets, and why do they want something out of the VCR. I have already cited you the fact that 6 out of 10 movies don't make a profit. By that same tortured logic, should Sony, once it has recovered its investment from its VCR's, should they give away their machines'? Of course not.

Now, they also talk about how Nielsen rewards home taping and this is a bonus for advertisers. Mr. Eliasberg is going to handle that.

One final point, Mr. Chairman, and then I am through and I have taken more time than I should have, but I am so fascinated by what I am saying --

Now, the final charge, the electronics industry is saying that the VCR sales are going to be hurt and the prices are going to rise if you have this copyright fee and sales are going to go down and I will tell you it is going to be a black and bleak world. It is amusing and instructive for this subcommittee to read from the record, though, of 1962. Then the electronics industry wrung its collective hands in dismay over the All-Channel Receivers Act that Congress, you remember, was passing. It said you had to have UHF and VHF tuners. Some of the arguments made today by the opponents are lamentably and comically similar to those made in 1962.

I am going to quote L. M. Sandwick, staff director for the Consumer Products Division of the Electronic Industries Association and then I am done. I know this is in your file, Charlie, so you can correct me. This is what this gentleman representing electronics said. "The committee should consider what all-channel legislation will do to the consumer's pocketbook. The average selling price for TV sets will be increased by $30 and the public is going to be paying all this much more money, a 14-percent price could bring a 14-percent loss in business * * *" and on and on and on. The drop in sales could cost the Federal Government millions of dollars in excise tax.

What really happened? Three years later the Federal Communications Commission did a study and they found the price of TV receivers didn't go up. They went down. The sales of TV receivers didn't go down. They went up. They went on to say that while some consumers may have paid for UHF tuners that they never used, the general public benefited because the all-channels law has been credited as a major stimulus to the creation of hundreds of UHF stations that have, been available to TV viewers.

Mr. Chairman, I am done. The public interest is at stake here. It is the public interest that you have by solemn oath sworn to serve because what I am talking about and what the rest of these witnesses are talking about is making it possible for a steady stream of quality entertainment to reach people through their television sets and to keep the incentive and reward mechanism in line so that people can risk great sums of money in this very dicey forum. That is what is at stake, and, finally, the preservation of a huge and valuable trade asset that can't be duplicated by any country in the world.

I thank you for indulging me. I went about 18 minutes longer than I wanted to. I apologize to you, but I am grateful for your attention.

[The statement follows:]

[85-page statement amplifies Valenti's testimony.]

Mr. KASTENMEIER. I compliment you on your presentation, Jack. Actually, even though you are not a lawyer, you didn't seem the least bit uncomfortable.

Mr. RAILSBACK. He really sounds like a lawyer.

Mr. KASTENMEIER. Now, I would like to call on the distinguished actor/producer/director Clint Eastwood.

Eastwood, you are in production, so you may proceed as you wish. I do have a question at the outset. Is Mr. Valenti right? You are producing Foxfire or Firefox, which is it?

Mr. EASTWOOD. Firefox, yes.

TESTIMONY OF CLINT EASTWOOD, ACTOR/PRODUCER/ DIRECTOR

Mr. EASTWOOD. You know, I got so wrapped up in Jack's speech that, I don't know, I was just kind of dazzled. I am used to speaking rather lengthy myself, but I decided I would cut it a little short today.

I think that when Mr. Valenti asked me to come and be a representative or a spokesman for the men and women who work in the motion picture industries, I was a little apprehensive at first, but I think that the one comment that he made, the thing that makes sense to me, is that the motion picture industry has never been subsidized by the Government like they are in some countries and they are not asking for that. They are not asking to be anything but in the free enterprise system.

But Mr. Valenti did bring up that there is a high risk factor in the fact that 8 out of 10 films might not make their money back and get out of the red in the first period of release, which is the theatrical division. And I think later on he brought up the point that if this continued at this rate and investors were turned off to not come into the film thing, there would be less films to produce, less films to be shown, less films to be taped on VCR systems ahd I think that is the main thing I would like to add here today.

I think it is going to be better for the home recording industry in the long run to have this copyright, potential copyright law, that Mr. Edwards is talking about. And I think that if a film is marginal, it needs those extra categories to get in. It needs that home box office. It needs that cassette sale to get out of the red or maybe even right up to network television sale. Maybe that is the thing that pushes it into the black. It is very simple. The more films that are in the black, the more films are made, the more men and women are employed by the film industry.

That is about the extent of -- I can read Jack's speech again.

Mr. KASTENMEIER. We appreciate your comments. They are, indeed, what it is all about. They are relevant. I think we might ask either Mr. Valenti or Mr. Eastwood some questions at this juncture so we get a little give and take between committee and the panel before yielding to Mr. Eliasberg and others among you who will comment on different questions.

One question I have of Mr. Valenti who brilliantly represents his industry and has in the past before this committee many times, is about the compulsory license. My question to you is this. You and I both having been through some very rocky times with respect to the compulsory license in the cable industry, and do you see that coming into your industry and, indeed, an interrelationship of a number of industries. It has been a rather painful experience, as you well know. Why, for heaven sakes, would you recommend now a new Compulsory license of all devices, I would ask you, Mr Valenti?

Mr. VALENTI. Mr. Chairman, as again, well we both know, when you and I and others on your committee were debating this issue, I wanted the free marketplace and that is no compulsory license and open negotiation between cable systems and program suppliers. Now, you are dealing, of course, with what? 20, 30, 40, 60 million homes, so, obviously, you can't deal with the homeowners, so you must deal with the manufacturer.

Now, it seems to me that the sensible thing to do with the manufacturers and program suppliers is to find some congenial way that satisfies both, that satisfies the copyright infringement, satisfies the need for these machines in the marketplace. We would like to have them out there. We like people to tape, but in a sense, Mr. Chairman, the compulsory license, while it is not everything that I want it to be, and you are the best judge of the accuracy of that statement, it is working.

The courts just came down yesterday with a decision that said the Copyright Royalty Tribunal are doing a good job. They are getting the job done and they made very few comments about the way the Copyright Royalty Tribunal was going. I know that Mr. Ferris has dubious comments about the CRT, but the appeals court -- I mean, the Federal court -- found it is working OK.

I am saying to you that that is the very minimum that should be done. I think that that is the attitude that the committee took. The committee said, well, we don't think we can go to compulsory license because that might upset the marketplace. I don't hink it would have, but the very least you did, Mr. Chairman, was you recognized the principle of ownership. You recognized that program producers can't have their programs off the air by cable systems. And, so, you, wisely, in a spirit of compromise, moved on the compulsory license.

This is an imperfect world, Mr. Chairman. Nothing is absolutely perfect and the cable copyright bill is not, but it is serving a useful purpose and it is the very least that should have been done.

Mr. KASTENMEIER. I have many questions. I will ask just one more and then yield to my colleagues.

What about past practices, past sales, past uses? Are they to be forgiven by the enactment of 5705 or how do you cope with all that?

Mr. VALENTI. Well, I cope with it Mr. Chairman, I cope with it with commonsense and that is if you have a machine, you don't have to pay anything. The manufacturer doesn't have to pay anything. The machine is there. We are talking about the future, just as the All-Channels Act said that in the future all TV sets must have two tuners. And blank tapes the same way, blank tapes and video cassette recorders have already been purchased. Obviously, they do not come within the ken of the canopy of this bill.

Mr. KASTENMEIER. Also, the bill itself indicates then that home users are not infringers. Is that correct?

Mr. VALENTI. Absolutely. Absolutely. The bill clearly states unambiguously that all home taping is exempt from copyright infringement. I am talking about 5705.

Mr. KASTENMEIER. Thank you. I am now going to yield to my friend from Illinois, Mr. Tom Railsback.

Mr. RAILSBACK. Thank you, Mr. Chairman.

Has there been any estimate of damages, actual damages, or predicted damages from an economic standpoint?

Mr. VALENTI. Mr. Railsback, there are less than 3 million of those machines -- we have 3 million plus machines out there. There are 80 million television homes. So, if you try to quantify damage, it is very difficult to do at this time, but you will be hearing from the audio people on Wednesday, Mr. Chairman, and there is a business that is collapsing before our very eyes; $2 billion a year in stolen property.

Mr. RAILSBACK. I recognize that audio may, by reason of the very large number of sets, have less of a problem as far as proving prospective damage. But I am aware, again, that the district court really made a point that your industry had not been able to show any damage at all at that time. I think there were something like 3 million at that time.

Mr. VALENTI.Oh, no, sir. There were less than 1 million.

Mr. RAILSBACK. Less than a million at that time.

Let me ask you this. Do you agree that the question of damages should be presumed in the event liability is shown and then that the burden would shift to the -- in the case that we are talking about -- manufacturers of the sets or the other defendants and that they then would have to show that damage has not occurred? What is your feeling about that?

Mr. VALENTI. Well, two things. First, the court of appeals suggested the copyright royalty fee as a suitable alternative as a solution of this problem. No. 2, the small number of VCR's in the marketplace now is a cloud no bigger than a man's fist on the horizon. To me, it is like the picture of Dorian Gray. You look at the picture and it is a very handsome fellow, but when you look behind the picture, behind the curtain, you see a face ravaged with ruin.

The audio business today is where the video business is going to be 4, 5, 6 years from now. By that time, Mr. Railsback, it is going to be too late. You can't salvage the business then. I am saying to you first there is use. There ought to be a fee for use. There ought to be a fee for the harm we know is coming. It has to come. All you have to do is use commonsense on this to know a little bit about this business.

I don't know of any issue in the 16 years that I have been in the movie business which has won the total unanimous support of everybody connected with this business because they live in this hazardous business every day and they know what the blight is all about and they see it right there.

Mr. RAILSBACK. What you are really saying is that it is there. It is very difficult to show. It is very difficult to prove, but you know it is there and I guess what I am asking is at this stage, which is later -- you know, now, we are in 1982 -- I wonder if it would be wise to have a study that would come up with a more predictable appraisal of what damage has actually occurred and what is likely to occur.

Mr. VALENTI. Mr. Railsback, I would be the last person in the world to try to deal with you on this. You and I both know that Congress rules exceedingly slow. If we don't do something this year, it may be years before we attend to this problem. You know, studies -- we don t need that, Mr. Railsback. It is here. We have 3 million cassette recorders out there. You are going to have 5, 6,7, 8, 9, 10 shortly. We are growing at the rate of 2 million a year. Mr. Eliasberg is going to tell you about some of the qualms that advertisers are having now.

I had one advertiser -- unfortunately, I don't have his written statement before me, but I do hope to have it for the hearings next week in the Senate -- in which he was saying that a lot of advertisers are looking at this. They are not going to pay for home taping recordings for just the reason I talked about, because you can't tell if they are ever played back and when they are played back, this little machine blocks out the commercial, which means that you are going to have a precipituous dropoff. If you are saying until the harm is there, shall we wait until the 355 magnum is in our belly or shall we do something about it now -- that is all I am saying. It is going to be there. It cannot escape it, Mr. Railsback.

Mr. RAIIZBACK. OK. That is all I have.

Mr. KASTENMEIER. Next, I would like to yield to my colleague from Colorado, who replaced George Danielson on this subcommittee. Mr. Danielson had been on the subcommittee many years and became a judge of the Court of Appeals of California. So, we are very pleased to greet our colleague on the full committee, Mrs. Pat Schroeder from Colorado and this is the first time she as appeared on the subcommittee and we welcome her.

Mrs. SCHROEDER. Thank you very much. All I want to now is does that little machine take off political commercials, too. mean, this could be serious.

I want to thank you and I want to say that I think the presentation was much more interesting than any moot court presentations I ever saw when I was in law school. You did an excellent job.

Mr. Eastwood, if 6 out of 10 movies never pay off, why do you invest in them? Why not go into money markets?

Mr. EASTWOOD. It has always been a high risk business, at least in the days since the advent of television. In the old days almost all movies made money. I don't know why people invest in them, but they do. You are asking me why do I. I have had a little bit better luck than 6 out of 10, but that happens to be the average and I think that average includes 8 out of 10 in the theatrical market and then this is on down through the other markets, because movies are a feast or famine kind of roll with the dice. There are movies out there making money and doing tremendously well. There are a lot of them out there that don't do zero.

Mrs. SCHROEDER. Do you have a lot of trouble raising money now? Do other producers have trouble raising money? Is there any difference in the market?

Mr. EASTWOOD. I think the movie industry as a whole is having -- I think the business is down about 50 percent compared to last year and I think it is down like the rest of the economy is. But at the same time, you need that extra amount of money out there to take those kinds of risks because it is a feast or famine -- it is more -- more than most industries, it has the feeling of red or black on roulette.

Mrs. SCHROEDER. The problem is that the public sees ihe feast.

Mr. EASTWOOD. Exactly. They all flock to the feast and they forget the famine jobs.

Mrs. SCHROEDER. But you personally don't have trouble getting investors, I am sure.

Mr. EASTWOOD. I personally don't, but I have had a little better average than that average there, but I am here at Mr. Valenti's request to represent the industry as a whole and the men and women this affects, the people that are unemployed now in the business and will continue to be unemployed if movies and television aren't turned out.

As I said before, I think this benefits the home recording devices in the long run.

Mrs. SCHROEDER. Do you have any worry about how these receipts are going to be divvied up?

Mr. EASTWOOD. Yes, I do. I don't know the exact way it is going to be done. I have read some information that Mr. Valenti sent me from Washington, but I think that there are experts enough here on this panel that can answer that question. I can't, but, yes, I would be concerned about that.

Mrs. SCHROEDER. Because the real question is whether or not -- and I guess is that camel under the tent notion -- are you going to come in and have to increase the amount of the royalty as you go forward and costs are rising and everything.

Mr. EASTWOOD. If I may, the bill says that the Copyright Royalty Tribunal after a year of evidentiary hearings would determine a fee and then they would hold hearings the following year to determine the allocation of that fee the previous year. Third, every 5 years they would revisit the fee that they had initially set.

Mrs. SCHROEDER. They are going to be real popular folks.

Mr. VALENTI. Well, they are getting a lot of practice now in cable copyright fees and mechanical royalties and juke boxes. But I might tell you, Mrs. Schroeder, that ASCAP has been doing this for 50 years. They have more than 40,000 artists and they have people who poll and spot check the logs of radio stations and they make allocations of hundreds and hundreds of thousands of musical recordings and they have done it with almost no dissention from the ranks because they have gotten expertise in it and everybody trusts their judgment and I am completely convinced that in the years ahead that the same sort of thing will come to the CRT gains more experience on how to do this.

Will it be easy? Of course not. It won't easy. Is it doable? Immensely doable. And I think fairly so. Mr. Eastwood and all other people will have the right to redress their grievances in the courtroom if they feel they have been harmed.

Mrs. SCHROEDER. Maybe that is why we are here. Maybe we are creating jobs for lawyers.

Mr. VALENTI. I think the UCLA Law School ought to be very much in favor of this. It is a life safety net for employment.

Mrs. SCHROEDER. But I think it is important to point out the industry record in other areas because I think the thing that bounces into the average voter's mind is something similar to their electric bill or what have you, you know, so you start here, but every year they are going to be wanting more and more and more and more and then you start seeing the consumer pushing and that is what I think is important to get very straight.

Mr. VALENTI. Well, two things, Mrs Schroeder. The Nathan study, I think, and if you read this, it is very easy reading, if you read this, you will find that this is not going to be passed through for one thing. No. 2, every 5 years, the Copyright Royalty Trinunal must go in and revisit this fee. It can't raise it or lower it in the 5 years. If it is too high, they lower it. If it is too low, they raise it.

Mrs. SCHROEDER. But as a politician when you are running for reelection no one is ever going to believe they are going to lower it and that if it gets high enough, they aren't going to pass it through.

Mr. VALENTI. Well, I might add that the Copyright Royalty Tribunal first doesn't cost the Government a dime. All the costs of actually maintaining this come out of the copyright royalty fees. You are talking about -- if you ask somebody and I have done this ith a lot of people, not scientific, of course, if you wanted to be able to tape all you could tape and you wanted to have a copyright royalty fee paid creative people so that you can get these programs, people don t mind paying 2 cents more a passthrough on a tape or $2 more on a machine that is going to last them 10 or 15 years. We don't mind when you go buy a record. You have a copyright fee on that. When you go buy a book, there is a copyright fee in that. People understand it and I don't think there is any problem to it at all.

Now, if you had the fee half again as high as the cost of the set, that is one thing, but, obviously, that is not going to happen.

Mrs. SCHROEDER. Thank you very, very much. Thank you, Mr. Chairman.

Mr. KASTENMEIER. I think is one point clearly on behalf of the bill is that the copyright owner here is merged in a single producing company. Unlike the possibilities in some cases, you do not have a situation where a script writer or a music composer shares in the copyright proceeds as such. The copyright in film production being unitary in terms of whatever the producing company is, the owner, does not have to proliferate it among so many sources. So, I think to that extent it would not be that complex.

I would like to yield to Mr. Railsback.

Mr. RAILSBACK. Could I ask, Jack, one last -- really, one last question. There was an article that appeared in the New York Times and I believe it was in November and it was by an Ernest Holzendoff and it said this:

Proposal being promoted in the motion picture industry would have the public paying an extra dollar or two for each recording tape, now selling at retail for about $20 each, and about $50 extra for each new tape machine, selling now for about $1,000 each, give or take $200.

I just wondered, do you know anything about that or who is circulating those figures?

Mr. VALENTI. Well, Mr. Railsback, I have used those figures in interviews and that sort of thing when people ask me, well, what kind of a fee are you talking about. I say, first, I don't know what kind of a fee. Now, if you ask me what I think would be a reasonable fee, I would say $50 and that is Jack Valenti. That has nothing to do with the Copyright Royalty Tribunal, which unhappily has oftentimes not taken my point of view.

Mr. RAILSBACK. So, it really would still be, of course, left to the Copyright Royalty Tribunal and actually their determination would be based on the evidence that they took.

Mr. VALENTI. But keep in mind, Mr. Railsback, that is not the pass through. I am saying to you that right now you can buy the same model machine in Washington for a price differential of $571 and in New York City $333. So, you are talking about what the Nathan people are talking about. What actually would the customer at the very worst have to pay? They are suggesting between 1 and 2 percent.

Mr. RAILSBACK. You are saying that because of the competition and the discount houses and everything else that that really would not necessarily be a pass off.

Mr. VALENTI. Absolutely not. You and I both know that you can walk in the Globe Book Store on G and Pennsylvania and buy a novel for $14.95. You walk right across the street to the Crown Book Store and buy the same book for $11.95. 1 mean, that sort of price competition is rampant in the electronics business and they are all indulging in it right now.

Mr. RAILSBACK. Thank you.

Mr. KASTENMEIER. Just to follow up very simply, the Copyright Royalty Tribunal, unlike all previous compulsory licenses, in this case makes the initial determination.

Mr. VALENTI. Yes, sir.

Mr. KASTENMEIER. In all other cases the initial determination was a statutory one.

Mr. VALENTI. Yes, sir. That is correct.

Mrs. SCHROEDER. Do you think that is fair?

Mr. KASTENMEIER. Yes, well, that is what they --

Mr. VALENTI. You asked me if I think it is fair, Mrs. Schroeder?

Mrs. SCHROEDER. Yes.

Mr. VALENTI. Yes, I think it is fair. Risky, but fair.

Mr. KASTENMEIER. I want to thank Mr. Valenti and Mr. Eastwood for their presentations thus far. Now, would you -- and I know Mr. Eastwood is in production --

Mr. VALENTI. Yes, would you excuse Mr. Eastwood? He is holding up a very expensive production.

Mr. KASTENMEIER. OK. Thank you very much for your appearance today.

Now, Mr. Eliasberg, who is former vice president of research of CBS Broadcast Group, we would be pleased to have your comments.

TESTIMONY OF JAY ELIASBERG, FORMER VICE PRESIDENT OF

RESEARCH, CBS BROADCAST GROUP

Mr. ELIASBERG. Thank you, Mr. Chairman. Mr. Chairman, ladies and gentlemen of the committee, my name is Jay Eliasberg. Until 2 weeks ago, I was the vice president for research of th CBS Broadcast Group, a position that I held for more than 7 years. Prior to that I held various research jobs with CBS over a period of 20 years. I have been involved with broadcast ratings, that is to say, the measurement of audience behavior, for more than 34 years.

I have been asked by the Motion Picture Association of America to come before this committee to comment on statements that the use of VCR's will not negatively affect the reported audiences to television programs. The opponents of H.R. 5705 have alleged that the producers of those programs will be adequately and properly compensated for the audiences their programs have created.

For reasons that I shall discuss, this not the case. On the contrary, VCR use, coupled with the television audience measurement techniques now being used or that will be used in the foreseeable future, will inevitably result in a decline in the amounts paid by television networks and stations to program suppliers.

In the simplest terms, the producers of television programs will in the long run be paid for their product in proportion to the effective size of the audiences that their programs reach. This is clearly true in the case of advertiser-supported television where the demand for television audiences at any particular time establishes a going cost-per-thousand-homes that an advertiser is willing to pay to a network or to a local station. This, in its turn, establishes the amount the network or station is willing to pay producers or syndicators for their programs.

The question before us then is simple enough. Will the use of tape machines increase or will such use decrease the size of the reported audience to the programs shown on television? The opponents of H.R. 5705 have suggested that the use of VCR's will have no negative effect on the audience size of movies shown on television. Indeed, it has been claimed and I quote the Home Recording Rights Coalition, that "The VCR is the best friend Hollywood ever had." With friends like that, who needs enemies.

I venture to differ and to differ strongly. The extensive use of VCR's will have major negative effects on the reported size of those audiences and on what I shall refer to as the effective size of those audiences, that is to say, the size of the audience tha advertisers are willing to pay for.

Careful examination of the claims of those who feel that the use of VCR's will increase the size of audiences to television programs shows that these claims all rely on the usually unmentioned assumption that the availability of VCR's will increase the overall use of television. While this may be true to a negligible degree, a simple examination of television use in the average home indicates that neither VCR's nor anything else in the foreseeable future will have any substantial positive effect on the use of television by the average television family.

We think of the day as having 24 hours and, indeed, it has. However, from the point of view of television set usage, the effective number of hours in a day is much less. Some time, after all, must be allowed for activities such as sleep, work, and so on. If we take as a reasonable figure that there are 8 hours a day when people are sleeping or engaged in sleep-related activities, such as showering or bathing in the morning or whatever, another 8 hours a day when there is no one at home to use the set, either because they are out at work or doing necessary shopping for food or on vacation or what have you. Now, that 8-hour figure is probably too large in a large family, where one person could be out and another person at home, but on the other hand it is probably much too small in a small family.

So, that, effectively, we are left with 8 hours a day during which the television set can be used during the average day. Now, in fact, according to A. C. Nielsen Co. figures for 1981, and these are year-around figures, the television set usage in the average television household is already in use for 6 hours and 43 minutes per day.

That uses up just about all of those available 8 hours and the hours, as I said, I think is an overstatement. I have left out a lot of other reasons why the set can't be used, such as family regulations and so on.

Now, giving all possible credit to the convenience, afforded by VCR's, it is clear that the use of such recorders is not, going to increase television set usage to any appreciable degree, Now, if we are faced with an essentially fixed amount of television use, the only effect that VCR's, or anything else for that matter, can possibly have is to redistribute the viewing and so it will. The problem is that in redistributing the viewing it will also reduce the reported amount of viewing and it will reduce the effective audience. I say this because of the measurement tools which are used to measure audience size. Let me explain.

On the network level, audience sizes are measured use of meters. These devices accurately report when VCR's are being used to record and what is being recorded. They, do not, however, indicate when VCR's are being used to play back programs, nor can they identify the programs that are being played back. In other words, there are two types of recordings. There are attended recordings when somebody records a program as he watches it. Now, in the case of attended recording, the audience is correctly reported at the time of recording because Nielsen reports a home view and, indeed, a home did view. Subsequent playbacks, however, are not reported as viewing.

At best then, a recorded program, which is recorded with someone in attendance, is correctly treated if the program is only viewed at the time of the original recording. As soon as the program is played back, however, its audience becomes understated because the future playbacks are simply not reported.

Now, unattended recording is also reported as viewing at the time of recording and this, in effect, is an overstatement. At the first playback, however this overstatement is, in effect, corrected since this playback is not reported as viewing. So, we have had one case where the program was not viewed, but was reported as being viewed and we have another case where the program viewed, but was not reported as being viewed and that is a wash.

However, on subsequent playbacks -- and you have all seen how many tapes these families have and how long they keep them. They have 27 tapes and they keep them for ages. This also results then in understatement. There is also some proportion of programs which were recorded but unviewed when the recording was made and that are never played back. And this is an overstatement. This overstatement, however, is much more than made up for by programs which are played back more than once and whose audiences are understated.

Thus, while audience measurement meters are marvelous mechanisms, they do not and they cannot accurately reflect VCR recording and playback activity without, on balance, understating the size of the audience on which broadcast advertising rate are based. With increased penetration of VCR-equipped households, the inaccuracies of the metered rating system, particularly where coupled with statistical proof of commercial deletion, which you ladies and gentlemen have seen and which the advertisers are coming to know about, must inevitably result in a serious erosion of advertiser confidence in network television as an advertiser medium.

Furthermore, because it is clear that playbacks of video recordings will not increase television use, each playback must replace original viewing to a program which would have been watched if there had not been a recording made and played back. And it is because of this fact that the apparent audiences to television programs will decline in VCR-equipped households. Programs which would have been viewed and would have had their audiences correctly reported will be replaced by playbacks of recorded programs.

And, as I have just explained, the vast majority of these recorded programs will have their audiences understated. And I shall not belabor, but it is worth repeating, that the effective audience will decline because advertisers will be unwilling to pay for audiences which may well have eliminated the commercial from playbacks by the use of a pause mechanism or skipping the commercials by use of the fast forward features, which are an integral part of all VCR's sold today.

It may be maintained that this situation could be corrected if the techniques used to measure audiences were improved. However, despite the optimism of the opponents of H.R. 5705, there is little prospect that this will be done or even can be done in the near future. And even if it is done, this is rather technical and I apologize for it, but there would still be a major decline in the size of reported audiences. This happens for the following reasons:

Nielsen -- and they are the people who measure network audiences -- Nielsen is in the business of reporting audiences. Those audiences have to be reported within a reasonable time after the program has appeared on the air if anybody is going to use those data-advertisers, networks, or anybody else. As a result, if the playback did not -- even if they could identify the playback to specific programs, if that playback did not occur before the Sunday following the original reporting, it just gets lost. There is no program to attach it to. Nielsen would know there was viewing and they might even know it was to -- Mr. Eastwood's movies seem to get all the examples -- they might even know it should be attached to Mr. Eastwood's, but there is no way to do it. Mr. Eastwood's program audience has already been reported and paid for and nobody is going to do anything about it after that.

Now, the third Mediastat study of VCR-homes, which Mr. Valenti referred to, which was conducted during September and October 1981, shows that less than half of the recordings made would meet these Nielsen requirements of being played back by the Sunday following the day they are recorded. In series programs, this could be partially corrected by attaching the playback viewing to the original program of the series that happened to be appearing in the week of the playback. However, this is not always possible, even for series programs, and it is completely impossible for onetime-only programs. And remember that, as I said earlier, there is no prospect of identifying or even measuring the volume of this. At least there is no possibility of that on the horizon this time. There has been reference to a Nielsen device called AMOL, which stands for automatic measurement of lineups. I think that this reference can only arise out of a complete misunderstanding of what this device is and what it does.

The reference seems to feel that these devices are in Nielsen homes and that they could be used to identify programs being watched, recorded, played back, or whatever in those homes. The devices are not in Nielsen homes. There is no prospect that they will be in Nielsen homes in the near future and, as I said, even if they were, there are reasons why it wouldn't work anyhow.

Now, if the situation is bad on the network level, and it is, it is even worse on the local level. Local measurements, except in a few markets where meters are used, are made with diaries. People are asked to keep detailed records of their television viewing. Now, in spite of the impression which may be left with you at some other time -- in spite of that impression -- neither the Nielsen nor the Arbitron diaries now in use have been designed in any way to encourage the entry of recordings made for timeshift or any other purpose. There are no special instructions given VCR owners in their keeping of diaries.

Any entries made by VCR owners regarding recording or playback are strictly voluntary and cannot be relied on. Neither the Arbitron nor Nielsen diaries are designed for VCR owners to note their recording or viewing, that is to say, playback activities. In other words, no rating service based on diaries now provides any measurements of the viewing of recordings in their audience raiings data.

The optimism of the opponents of the bill before you will probably lead them to suggest that Neilsen and Arbitron should change their instructions to diary-keeping families and request them to record VCR recording or playback or both. Their optimism would play them false. In my judgment and the judgment of most knowledgeable people in the industry, what is now already required of diary-keepers already strains their abilities. A set of additional requirements would, I am afraid, push many of them past the point of willingness to cooperate in the diary-keeping process.

In short, then, VCR use will not increase audience size, at least not reported audience size. Moreover, the limitations of the audience measurement techniques available to us or ever likely to be available to us will result in an apparent decline of reported television audiences. This decline in reported audience, coupled with a demonstrable inclination on the part of VCR owners to delete or fast forward commercials would lead to a decline in advertiser demand or to the price advertisers are willing to pay. Clearly, if the networks and stations take in less money from advertisers for their programs, there will be less available to pay program suppliers for their costly product.

Thank you.

[The information follows:]

[A two-page statement is almost identical to Eliasberg's testimony.]

Mr. KASTENMEIER. Thank you, Mr. Eliasberg.

Incidentally, there has been other reference to Mediastat. Mr. Valenti said that the Motion Picture Association had not commissioned it originally. Who did, do you know?

Mr. ELIASBERG. The Mediastat survey -- incidentally I didn't either -- but the Mediastat survey is a syndicated service done for the entire industry. Anybody could buy it that wanted it. Well, Mr. Valenti said they didn't commission it. They did not. They subscribed to it as hundreds of other people did.

Mr. KASTENMEIER. In other words, no one commissioned it. They did the survey themselves and. then sold the results to whoever --

Mr. ELIASBERG. It may have had its impetus from one or more companies in the industry that led them to feel that this could be wise.

Mr. KASTENMEJER. Your early analysis about the lengthy watching, the incurred time shift replay, is that all contingent on a single television set at home?

Mr. ELIASBERG. I am sorry. I don't understand your question.

Mr. KAsTENMEIER. Well, is that all contingent. on a single television set? That is to say, let me say, I would assume that any home that has a Sony or one of these thousand dollar VCR's is likely to have more than one television set. So, one person could be watching a certain program or sporting event while others of the family could be watching something else on another set.

Mr. ELIASBERG. Yes; they could be. They could be, but if you remember, my analys is related just to times when the television set could not be in use. The fact that two television sets might be in use at some particular time wouldn't change that very much. In fact, if it changed it at all, it might increase the number of homes watching the totality of two programs, but it wouldn't increase what we call the audience composition because it would just split the people watching between the two sets.

Mr. KASTENMEIER. Any questions?

Mr. RAILSBACK. Why don't you go to Pat first?

Mrs. SCHROEDER. Well, I just want to -- double dipping is such a loaded word and we have heard it a lot.

Mr. ELIASBERG. Did I use it?

Mrs. SCHROEDER. No, no. No, no, but I am hoping you are the one that responds to the issue and I just want to make it clear. Are you saying that the double-dipping argument, which is that the networks and the advertisers get that counted into the ratings whether you are recording or not and then you are saying, well, it doesn't matter because later on, they may replay it. Are you saying that the reason that that is different for the advertisers is because when they replay it, they may have taken the advertising out, so it is looking like they have a market for the advertising, but when people really see it, it is all taken out? It has been cleansed; it has been purged; it has been whatever?

Mr. ELIASBERG. I say it is different for two reasons and that is one of them and I won't repeat that because you just expressed it better than I could.

The other reason is that because of the technicalities of the measurement service -- because of the inelastic clock hat we live with, when a program is recorded and is later played back, it is going to replace another program. While the program which was recorded may appear to have a larger audience than it would have had if there were no such thing as video recorders. The program that would have been watched will have a smaller audience. And the problem is that those two things do not balance because the reported program will not get the full benefit of the larger audience because of the inadequacies of the research techniques that we have available to us. So that on balance between the two programs, the audience would appear to go down.

Then there is the point that you made that even if it looked as if it was the same size, the advertisers are not going to be willing to pay for it.

Mrs. SCHROEDER. Because as you see more and more video recorders come on, they will think that their message got lost. No one ever saw it.

Mr. ELIASBERG. You will hear testimony from people who say that they will and, of course, they are welcome to do that, as they want to, but the damage will be done if there is anybody who will not.

Mrs. SCHROEDER. Yes, because then it looks like a chocolate chip ice cream that had all of the chocolate chips strip mined out ot it, so why bother. Yes. OK.

Mr. ELIASBERG. Advertisers look at it as the chocolate chips being taken out, yes.

Mrs. SCHROEDER. Yes, and the technology is really there. Having black and white televisions I am amazed by all of this, but the first time you see it you can take it out.

Mr. ELIASBERG. Yes; there is a device called a pause and when you come to the commercial and you see it is a commercial, you just press this down and your machine stops and when the commercial is over, you just let the pause button back up and you have a continuous movie.

Mrs. SCHROEDER. But you have to be watching that.

Mr. ELIASBERG. The first time only. That is the use of the pause button. If you have recorded it with the commercials in it, but now don't want to watch it with the commercials, then as you watch the movie, when you come to the commercial, you just fast forward it and you are burdened for 3 seconds instead of 1 minut and then you are back to the movie.

Mrs. SCHROEDER. OK. Thank you very much.

Mr. RAILSBACK. May I ask one question?

Mr. KASTENMEIER. Yes.

Mr. RAILSBACK. May I ask is it possible to speculate as to where the greatest impact in the future would be; that is to theaters, to network sales or network programs, the sale of video cassettes by the motion picture business, to syndicated sales? I know you elieve it is going to impact on all of those, but I am curious. Is there any one or more areas where it is likely to impact if there is no copyright royalty?

Mr. ELIASBERG. Excuse me, Mr. Railsback. Whether I believe that it will have impact on all of those or not is immaterial, because I am not talking about all of those. I am really only here to speak about the effect on the network audiences and the syndicated audiences and I believe that effect will be substantial.

Mr. RAILSBACK. So, you believe that at least in those two areas that there certainly is going to be an impact.

Mr. ELIASBERG. Yes, sir, I do.

Mr. RAILSBACK. Maybe Mr. Valenti has somebody else who could talk about future impact on, say, theater owners.

Mr. VALENTI. We do, Mr. Railsback.

Mr. RAILSBACK. OK, good. Well, then, I will withhold those questions until we hear from them.

Mr. KASTENMEIER. I think the next witness is, in fact --

Mr. VALENTI. Mr. Chairman, may I -- because of some time constraints, I think Mr. Orear is going next and then Mr. Jud Taylor will follow him, instead of Mr. Allen, if that is all right with you.

Mr. KASTENMEIER. Yes, I would say to the witnesses I regret the time has passed so quickly. The Chair would appreciate your synopsizing your statements to the extent possible to get to the meat of it without refracting it, so that we are going to run well past the hour we planned to -- well, having said that, let me no all on Mr. Orear, who, as I recall, represents --

Mr. VALENTI. He is president of the --

Mr. KASTENMEIER. President of the National Association of Theatre Owners, speaking on behalf of H.R. 5705.

TESTIMONY OF RICHARD H. OREAR, PRESIDENT, NATIONAL

ASSOCIATION OF THEATRE OWNERS

Mr. OREAR. Thank you, Mr. Chairman. My name is Richard Orear and I would like to read my testimony here --

Mr. KASTENMEIER. Your testimony is short. It is only 4 1/2 pages.

Mr. OREAR. Yes. I am president of the National Association of Theatre Owners. Our association represents the owners and the operators of motion picture theaters in every State in this Nation. Many of these theaters are owned by small businessmen. There are over 18,000 motion picture screens in the United States. The 1981 attendance at these theaters reached over 1 billion moviegoers.

The motion picture industry had box office receipts for the year 1981 of almost $3 billion. The exhibition industry employed over 130,000 workers.

It is a great pleasure for me to be here this afternoon because I believe that the passage of the Home Recording Act of 1982, H.R. 5705, is very important for the continued viability of the motion picture industry on which our members depend.

Motion picture theaters have survived in this age of rapid technology by offering to the American public an entertainment experience that is unique, the ability to view great creative works in the setting of comfort, conviviality and has become a way of life ever since Edison first made a flickering image on the screen.

Americans have always had many alternatives from which to choose their entertainment. These alternatives are now even more varied and growing, as engineers produce equipment for home use. The expanded use of pay cable and pay TV, especially when coupled with the relatively new video tape recorders, will make it easier for the public to view full length motion pictures in their homes.

It is obvious that the new home delivery systems will become even keener competitors. We cannot say to what extent these competitors will fragment the audience and, thus, reduce the income of the theater. But movie theaters are willing to compete in this entertainment market, providing all those who compete use the same ground rules.

To date, the VCR gets its material free. Theater owners must pay a license fee to the owners of the creative property. It is only fair that the rights of the copyright owner be protected and that they receive fair compensation for the use of their creative efforts, whether it be in the theater or on video tape.

The theater and home viewing options available to the American public to date are dependent upon a unique product, movies. This product, in turn, is totally dependent upon a healthy and an active industry. No one could deny that motion picture theaters offer the opportunity to experience something that is bigger than life, a big screen, new sound reproduction technologies, improved production technologies, which are all focused on providing the viewer with a very special experience.

But the ability of our theaters to continue to do this depends upon the motion picture industry's creative ability and, frankly, financial capabilities, as well. Investments required to produce the thrilling scenes of "Star Wars" or the suspense of "Raiders of the Lost Ark" are immense. The public wants to see the grea works of the American movie industry, but to keep this process continually moving, the creators must be rewarded for their labors.

Let me explain a little bit about the business of movie theaters and the movie industry. First, everyone has heard about the pictures that become box office smashes; that rare film which is both a popular and a commercial success. Let me point out that no one knows at the time a film is being conceived, whether it will have the right combination of stars, story, and creative genius to become a hit.

All of the creative people involved hope that it will. We in the theater business are acutely aware that very few films find total acceptance by the public. In fact, investments in films are so risky that a recent film investment prospectus registered with the Securities and Exchange Commission stated in regard to public taste that it is both "unpredictable and susceptible to change without warning or explanation." And that is an understatement, as I am sure you in Congress know.

Motion picture theaters bid for motion pictures as they become available. The successful bidder hopes he has selected a picture which the public in his respective area will like in ever-increasing numbers. Our theaters must be open year round and our members need new releases and re-releases in order to offer a variety of entertainment to the public.

What the American public wants is to be able to continue to view creative and imaginative works. This continued flow of creative works can only be assured by casting the investment net wide. I believe that it is the creativity and the imagination that is at issue here and we insure that it continues to be supported.

Video cassette recorders now provide the technical means of taking the works of creative people from them without compensation. If we allow a new technology, the VCR, to take property without paying for it, I believe the Nation will be jeopardizing one of its greatest assets, our film industry.

I know that you will be told that no harm will come to the industry if video cassette recording in the home is exempted from copyright protection, but I cannot see how that assertion can be believed when confronted with the experience of the audio recording industry and simple commonsense. Other works of art ar protected from unauthorized reproduction because their value erodes as their numbers multiply. How can a film be any different?

And I expect that you will hear the argument, "If it ain't broke, don't fix it" in reference to the film industry today. To that, I would only say that in this case, an ounce of prevention is certainly worth a pound of cure.

The Constitution provides for the copyright and Congress is responsible for keeping it viable in the face of emerging technologies. The members of the National Association of Theatre Owners urge you to take action to protect the American film industry and the creative genius that it fosters. We as a nation will be poorer if you don't.

Thank you, sir.

[The statement follows:]

[One-page statment same as the Orear testimony.]

Mr. KASTENMEIER. Thank you, Mr. Orear, for that fine statement on behalf of the film industry, in support of -- but let me ask you from a self-interest standpoint as a representative of theater owners. H.R. 5705 does not produce copyright fees for theater owners. In fact, we have heard also Mr. Valenti say that the fees p