The Illustrated Story of Copyright
© 2000 by Edward Samuels
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 Edison misjudges the market.
As he had with the phonograph, Edison misjudged how the market was to develop. He thought the money was in the kinetograph and the kinetoscope; he didn’t think people would want to sit in audiences to see an image on a screen.
The Edison profits came from the
sale of machines and prints, not from exhibition to the general public. . . .
From the Edison viewpoint, one machine for every viewer was more to be desired
than a hundred or more viewers for every machine.
 The patent wars.For the first ten years, the use of the new movie cameras and projectors was tied up in a protracted patent war between Edison and other inventors. In 1907, Edison formed the Edison Licensee Group. In 1908, this group joined with the Biograph Company to form the Motion Picture Patents Company, which was able to dictate royalties for the creation and showing of motion pictures.
In 1893, Thomas Edison patented the first efficient motion picture viewer, the kinetoscope. A customer could drop a penny into the kinetoscope, turn the crank, look through the viewfinder, and enjoy a short movie loop. In the 1890s and 1900s, kinetoscope parlors spread like crazy across the country. Although Edison didn’t immediately pursue his invention beyond this early version, in 1896 the American Mutoscope and Biograph Company produced the first projection of moving images onto a screen. Hollywood, here we come!
| The “peephole” machine, showing the continuous, circulating loop of film.|
In 1880, Harper Brothers published a book written by General Lewis Wallace, a colorful figure who had been a major general during the Civil War, and later governor of the New Mexico Territory. The book was Ben-Hur; A Tale of the Christ, and it was tremendously successful.
In 1907, the Kalem Company produced the first of several movie versions of Ben-Hur. It advertised the motion picture under the name “Ben-Hur”—“Positively the most superb moving-picture spectacle ever produced in America in sixteen magnificent scenes.”  There was one problem—Kalem had not bothered to get permission from Harper Brothers, the owners of the copyright in the book. Not surprisingly, Harper Brothers sued Kalem Company for copyright infringement. The case was ultimately appealed to the Supreme Court, which found that the movie version of Ben-Hur infringed upon the copyright in the book.
Kalem raised several interesting defenses. It argued (1) that the visual depiction of a story could not infringe the copyright in the book, which consisted only of words and not visual images; (2) that the pantomime action contained in the silent movie used only the unprotectable ideas, but not the protectable expression,* found in the book; and (3) that, even if the display of the motion picture might infringe on Harper’s exclusive right to perform the work dramatically, the distribution of the motion picture was not itself such a public performance.
* Ideas v. expression, see p. 188.
Justice Oliver Wendell Holmes, in the Supreme Court opinion, rejected all of these fine distinctions. As  early as 1856, Congress had amended the copyright act to grant copyright owners the exclusive right to “act, perform, or represent”* a dramatic work “on any stage or public place.” An earlier case, Daly v. Palmer, had held that a live pantomime within a play could be copyrighted, and would be infringed by the use of a similar scene in another play even if no words were used in either scene. As concluded by Holmes, “drama may be achieved by action as well as by speech,” and if a live pantomime infringed a copyright, then a motion picture pantomime would also infringe. (The Daly case  was important to the analysis, since motion pictures at the time were of course silent.) Kalem ultimately settled the case by paying $25,000, and withdrawing the film from circulation.
 The Kalem Company.
Kalem Company, founded in 1907 by George Kleine, Samuel Long, and Frank J.
Marion (K, L, and M), was headed by three men of broad experience in the movie
business. Kleine was the successful importer of European productions and owner
of Kleine Optical Company, Long was the inventor of much of the machinery used
to process and duplicate exposed film, and Marion was a former director and
studio chief for Biograph. In the first years of production, the Kalem Company
turned out a standard list of undistinguished comedies and melodramas . . .
. Most were predictable, and all were
less than one reel in length. By late 1909, the company had discovered the appeal
that audiences found in standard melodramas set in exotic locations. Early
excursions were among the palms in Florida, and later California, where the
climate facilitated winter production schedules that were impossible to carry
out in the New England states. -Wonderful Inventions
Early copyright protection.
was crucial to the continued investment in movies, and, for a period of time
when such protection looked dubious, Edison held back from movie production.
Sigmund Lubin had been selling duplicates of Edison films . . . the inventor
sued the Philadelphia producer for copyright infringement. No sooner had Life of an American Fireman been
completed than the courts declared Edison’s method of film copyright invalid.
(The judge wanted each frame of film submitted separately, a hopelessly time
consuming and expensive task!) Without legal protection for his investment,
Edison halted serious film production for five months and dismissed the stage
director George Fleming. . . . Porter [working for Edison] did not resume
filmmaking until that summer, after a higher court reversed the earlier
decision and upheld Edison’s procedure for copyrighting films.
Even before the Kalem case found copyright infringement in the making of movie adaptations of copyrighted works, early film producers had registered their copyrights in movies as a series of individual photographs, by depositing either copies of the filmstrips or paper prints made from the filmstrips. Early cases upheld these copyrights under the category of photographs.
 Ben-Hur, the photo-play.
Back in 1899, General Wallace and Harper Brothers had realized the dramatic potential in Ben-Hur, and had arranged with Marc Klaw and Abraham Erlanger, part of Broadway’s notorious “theatrical syndicate” at the turn of the century, to have the book adapted into a theatrical production. The play ran for over a dozen years on Broadway. It featured an ocean scene in which the waves were recreated by stagehands waving large pieces of cloth, and a chariot race using live horses on stage, running on an elaborate treadmill in front of a moving panorama.
The contract provided that Harper Brothers would own the copyright in the play, but that Klaw and Erlanger would have the exclusive right of “producing” the work “upon the stage,” or “performing” the “dramatic version” so written. After the successful theatrical run, and after the successful suit against Kalem, Harper Brothers sued Klaw and Erlanger to prevent them from making a motion picture version of the play, since Harper Brothers wanted to make their own version free of their theatrical contract. In 1916, the district court that heard the case observed that, at the time of the contract, “the moving picture art was . . . in its infancy,” and hardly within the contemplation of the parties. So who owned the right to make movies of the play under the existing  contract? The court held that technically Harper Brothers had not conveyed the motion picture rights, since such rights were not contemplated at the time of the contract. But in a decision applying the wisdom of Solomon to the new technology of the twentieth century, the court read into the contract an implied contract by Harper not to undertake any activities that might interfere with Klaw and Erlanger’s theatrical rights. “Neither party . . . can produce a photo-play of Ben-Hur except by bargain with the other.”Bargain they did! The New York theater syndicate was able to get Goldwyn Pictures to pay a royalty of 50 percent of the gross receipts for the privilege of making its silent classic film. Although the movie was a smash success, grossing over $9 million, the hefty royalties actually left the movie company $850,000 short of recovering its costs. However, the legend established the reputation of the new Metro-Goldwyn-Mayer company for years to come.
 So, in contrast to the case of sound recordings, the existing copyright statute was broad enough to handle the legal issues raised by the invention of motion pictures. The major turning points, it seems, took place back in 1856, when copyright was expanded to cover dramatic rights, and in 1865, when copyright was expanded to cover photographs.* It took only a small further step—that is, a small step for an innovative judge—to find that copyright covered motion pictures, which embodied dramatic works in a photographic form. In 1912, without much discussion or controversy, Congress specifically added motion pictures to the growing list of works subject to federal copyright. The legislation was more a ratification than a change of the law.
 Ben-Hur, the Broadway play.
 Record of a Sneeze.
| How Scanning Works.|
No one person is responsible for the invention of television; it was developed by incremental improvements from the 1880s to the 1930s, when a workable television set was first made available to the public. A traditional video camera scans a picture and converts it to a beam of electrons that varies in darkness and lightness with the intensity of the image. In the United States, the  standard television image has historically consisted of 525 lines scanned 30 times per second. The television set then receives the electronic signal, and converts it back into an image by projecting the beam, 525 lines, 30 times per second, across the picture tube. For color television, the beam is broken down into three component parts, which make up the primary colors from which all the other colors may be reproduced.
 Pioneers of radio and television.
 Television at the 1939 World’s Fair.
Franklin Roosevelt (A) and a video camera (B) at the New York World’s Fair.
April 1935 the Radio Corporation of America announced a million-dollar
appropriation for television demonstrations. . . . RCA picked a target date and
site for the unveiling: the 1939 World’s Fair in New York. . . . On April 30,
the formal opening, Franklin D. Roosevelt became the first President in office
to appear on television. RCA sets with five- and nine-inch picture tubes went
on display at the fair, followed later by sets with twelve-inch tubes. Prices
ranged from $199.50 to $600. Crowds stared at the flickering scenes: plays,
snatches of opera, kitchen demonstrations; comedians, singers, jugglers,
puppets. But by now the world was on the brink of holocaust, and as the United
States geared for World War II, television gradually faded from the public eye.
Most of the 23 stations in operation during May 1940 went off the air. Sets
disappeared from the market. A few went into police stations to be used as
training aids for air-raid wardens.
By post-Depression standards, $600 was a lot of money; a new Ford four-door sedan could be bought for about the same price.
 Movies for television.
Theatrically released movies were not generally shown on commercial television until the 1960s. Prior to that time, the owners of motion pictures were reluctant to make their movies available “for free,” for fear of undermining their theatrical audience. As with the record manufacturers a generation earlier, their fears were probably warranted. As Samuel Goldwyn is said to have quipped, “Why should anyone pay to see a bad picture in a theater when he can see one for nothing at home?” In 1946, only ten thousand television sets had been sold; by 1951, there were twelve million sets in American homes. During that same period, total movie company profits plummeted from what was then an all-time high of $119.9 million (based upon box office receipts of $1.69 billion) in 1946, to only $31.4 million in 1951.
By the 1960s, however, the increasing profits to be made from commercial television release of their movies were too great to be ignored, and the movie studios essentially decided that if they couldn’t beat television, they would join it. Not only did they begin releasing their movies for television, at ever increasing prices, but most of the major studios began making movies specifically for television.
The miracle part of this process was not just in capturing or reproducing images, but in delivering images to locations far removed from the source. This was the technology of radio—wireless communication—first developed by Guglielmo Marconi in 1895. Because of the intervening depression and World War II, however, it was not until the 1950s that commercial television really caught on. This new technology allowed millions of viewers to see programs from just about anywhere in the country, using their own receivers in the comfort of their own living rooms. People didn’t have to go to the movies; the movies came to them.
As revolutionary as the technology was, it too posed no major problems for copyright. Although the medium was of course different, television programs were, for copyright purposes, just like movies. The basic principles of copyright* worked just fine. But a later television technology did require a legislative response—cable television.
Early cable television.
The revolution came in 1965, when Paragould Cablevision, Inc. built a community antenna, and charged customers a $10 hookup fee and $5 per month for the privilege of connecting to the antenna through cable. For the first time, pictures came in consistently. For the first time, we had meaningful access to all three national television networks, as well as the Memphis educational station. And for the first time, we could even view programming from such faraway places as Little Rock, Arkansas; Paducah, Kentucky; and Cape Girardeau, Missouri.
Curiously, the aspect of television programming that threw a monkey wrench into existing copyright was not broadcast television, but cable television. Originally, cable did not deliver the “premium” channels available today, but simply received and boosted existing television programming using a “community antenna.” The problem was that the cable operators didn’t pay anything for the programs that they retransmitted to their customers. In 1966, United Artists Television, the owner of copyrights  in several television programs, sued Fortnightly Corporation, a cable operator in the Pittsburgh viewing area. United Artists argued that Fortnightly infringed its copyrights when Fortnightly retransmitted these programs to their cable customers without obtaining a license. If an independent local television station had wanted to broadcast, for example, Goldfinger, a United Artists movie, they would have had to negotiate a licensing fee. Wasn’t it unfair that Fortnightly should be able to make a profit by charging its customers to see the movie, when it didn’t pay such a licensing fee?
The cable operators argued that to hold them liable for copyright infringement would effectively halt the development of cable television. They also argued that they didn’t technically violate any of the exclusive rights of copyright.* They didn’t actually create a “copy” of any programs, since the programs were transmitted in real time; they didn’t “distribute” any copies, since there were no “copies” to distribute; and they didn’t “perform”† the copyrighted work within the meaning of the copyright law.
† Exclusive right to perform, see p. 168.
The Supreme Court, in an incredible opinion, agreed with the cable operators that they did not infringe the United Artists copyrights. The Court divided the television world into broadcasters—who “performed” works, in the copyright sense—and viewers—who did not “perform.” The Court then concluded that cable operators were more like viewers than like broadcasters, since, at that time, cable systems didn’t control the content of programs, but passively received them and passed them on. In dissent, Justice Abe Fortas argued that, while the language of the act might not be entirely clear, it would be better policy to find in favor of the copyright owners until Congress could come up with a more balanced solution.
 The dexterity of Houdini.
This case calls not for the judgment of Solomon but for the dexterity of Houdini. We are here asked to consider whether and how a technical, complex, and specific Act of Congress, the Copyright Act, which was enacted in 1909, applies to one of the recent products of scientific and promotional genius, CATV. . . . Applying the normal jurisprudential tools—the words of the Act, legislative history, and precedent—to the facts of the case is like trying to repair a television set with a mallet. . . . Our major object, I suggest, should be to do as little damage as possible to traditional copyright principles and to business relationships, until the Congress legislates and relieves the embarrassment which we and the interested parties face. . . .
The opinion of the majority, in my
judgment, does not heed this admonition.
 Importing distant signals.
importing signals that could not normally be received with current technology
in the community it serves, a CATV system does not, for copyright purposes,
alter the function it performs for its subscribers. . . . The reception and rechanneling of these
signals for simultaneous viewing is essentially a viewer function, irrespective
of the distance between the broadcasting station and the ultimate viewer.
In the following years, it became obvious that cable television was not limited to the early “community antenna” model that had presented itself in the Fortnightly case. Instead, cable operators expanded into new territory, using satellite and microwave links to import signals from distant communities, particularly popular stations from major cities like New  York, Los Angeles, Chicago, and Boston. The cable operators relied on the Fortnightly case for the proposition that they were exempt from copyright liability. The movie studios, television networks, and stations whose programming was being taken argued that the Fortnightly case should not apply when a signal was imported from a distant community. This was not “enhancing” viewership within the normal service area, but making a profit by importing the television signal into a completely new television market.
The new argument was presented to the Supreme Court in 1974, in the case of Teleprompter Corporation v. CBS. The Supreme Court, however, stood by its analysis in Fortnightly, and found the cable industry still exempt from copyright liability. It also offered a more sophisticated defense of its position. Since most television programming in this country is financed not by direct payments from viewers, but by indirect profits from selling advertising, there is less economic harm to the copyright owner than might at first appear. After all, if a cable system delivers copyrighted programming to a wider audience, the original television station will be able to charge more for advertising. That’s true, at least, for national advertising, since national advertisers like Proctor & Gamble, or General Foods, will pay more to a television station or network when their advertising is delivered to a larger audience. But that isn’t true for local advertising. The owner of a car dealership or a local restaurant in Boston is not likely to pay extra to have the advertisements seen by viewers in New York or Los Angeles.
Meanwhile, Congress was already in the midst of a major revision of copyright, to deal with among other things the cable issue. When Congress finally responded, it was in the form of a compromise. The 1976 Act overturned Fortnightly and Teleprompter by specifically providing that cable systems would be  subject to copyright. But the Act also provided a compulsory licensing system to assure that cable operators would be able to get licenses at a modest fee. The cable compromise was very much like the phonorecord compromise of 1909,* providing for copyright liability, but subject to a compulsory licensing fee.
The funds raised by the compulsory license are distributed among all of the owners of copyright whose works have been picked up by cable. The allocation has become fairly standard from year to year. About 55-60 percent of all the money collected goes to “program suppliers,” primarily motion picture companies (through the Motion Picture Association of America); about 20-25 percent to professional sports leagues; and the remainder to various other claimants. The total revenues available for distribution have increased substantially over the years, rising from $14 million in 1978 to about $200 million in 2000.
Whether one likes the compulsory license or not, it has served a useful function in allowing the sort of compromise that only a legislative body can provide. Indeed, the scheme has not only been retained but has been extended to cover satellite distribution, or “wireless,” systems that provide cable-like services. The total royalties from such satellite distribution services were about $55 million in 1998.
 A golden age of free premium television?
Here’s a little story of audacity not within the realm of copyright, but from related technological regulation. Back in the 1980s, cable systems, as well as broadcast networks, distributed their programming around the country by satellite transmissions. Under the existing law, it was perfectly legal for anyone with a compatible antenna to intercept these signals for free. With their backyard antennas, viewers could see not only hundreds of television channels, but even the channels, like Home Box Office, for which cable systems otherwise charged a premium, and even the network feeds to local stations prior to their formal broadcast, and prior to the addition of local commercials. Needless to say, many viewers had a field day. The number of people owning satellite dishes, primarily in rural areas, jumped from a few thousand in 1980 to over 3 million in the early 1990s.
Companies like Home Box Office and the television networks responded by scrambling their signals as they were transmitted by satellite. And here’s where the audacity comes in. Many of the satellite dish owners, having invested hundreds or thousands of dollars in their dishes, began pressuring Congress to pass a law that would make it illegal for the companies to scramble their signals. Never mind that the companies’ entire multimillion-dollar operations would be put in jeopardy; since the companies were using the “public airwaves,” they weren’t supposed to be able to protect their investment.
Congress was not persuaded, and allowed the companies to develop the technology that would protect their programming. The unauthorized descrambling of signals is now a violation of federal communications law as well as most state laws. But for the viewers who experienced it, the 1980s were a golden age of free premium television the likes of which may never be seen again. (Stay tuned, though. As of the year 2000, it looks like there’s another golden age of free entertainment, this time music on the Internet. Take a look at page 120.)
The Videocassette Market
The Test Case—Sony Against
Video recorders have been around since the 1950s. It was not until the 1970s, however, that the industry was able to shrink the equipment to an acceptable size, at an affordable price, and with the reliability and ease of use that made it suitable for the home market. The first  home video recorder, the Betamax, was introduced in 1975 by Sony Corporation. The Betamax lawsuit was introduced in 1976 by Universal Studios and Walt Disney Productions.
 The workings of a VCR.
A VCR must record much more
information than an audiotape recorder. The way to do this is to move the tape
by the recording head much more quickly. In a VCR, the record/playback head is
mounted at an angle to the tape and spins [more] rapidly [than the tape] at the
same time the tape moves. This records the signal in diagonal tracks across the
tape, one track for each frame of the picture. The sound information and the
synchronization signal that controls the pictures are recorded in two separate,
linear tracks at the top and bottom of the tape.
Universal and Disney argued that the use of the home recorder to tape their copyrighted television programs was copyright infringement. They realized that it would be pointless to sue individual Betamax users; instead, they aimed their arguments at Sony for supplying the equipment. The ultimate goal was to force Sony to agree to a licensing fee, much like the compulsory license compromises for music recording or cable television.
The first decision, however, in the district court of California in 1979, found that the home taping of television programs was a “fair use”* of copyrighted works. Even if not a fair use, the court decided that Sony should not be held liable for what its customers did with their Betamax machines. The public was free to buy and use video recorders, and Sony didn’t have to pay anything to the owners of the copyrights in the programs that were being taped.
Next, the Ninth Circuit Court of Appeals in 1981 reversed the decision of the court below. The appellate court found that the home use of  video recorders was not a fair use, and that Sony could be held liable for supplying a product whose primary and intended purpose was to tape commercial television programs, virtually all of which were copyrighted. As a result of this case, it looked as if the sale of video recorders might be legally barred, or at least delayed until some sort of licensing fee could be worked out.
 The Conrad cartoon, syndicated in many newspapers, including the Philadelphia Inquirer.
The public response to the Ninth Circuit’s decision was immediate and generally hysterical. Could it be that individual purchasers and users of video recorders were now copyright infringers? Several senators announced the next day that they would give the American people a Christmas present—a simple amendment providing that home taping would be exempt from copyright infringement. The cartoons and commentary overwhelmingly conveyed a sense of fear and outrage. The most prevalent image was that of a police officer or FBI agent whisking away home videotapers in handcuffs.
As a young
copyright professor, I thought the opinion was absolutely correct. Of course, I
explained hurriedly, this doesn’t mean the end of the home video recorder. It
just means, I explained, that the companies that make money from such recording
will have to sit down and work out some arrangement to compensate the owners of
copyright whose works are being copied. If there were something to bargain
about, then I fully trusted that the parties would work out a deal to share the
revenues from what would inevitably be a lucrative market for home television
programs and movies. If they didn’t work out a deal, then I fully trusted that
Congress would work out a compromise, and come up with another of its
compulsory licenses. But if the opinion had gone the other way, holding that
home taping was not an infringement—if there were no leverage from a judicial
victory—then I felt certain that there would be no incentive for Congress to
pass a compulsory license, and some sort of disaster would befall the copyright
owners whose works would be duplicated without compensation.
 The Video Police.
Here’s the public response to the Ninth Circuit opinion holding against Sony:
so stupid it hardly bears comment,” declared an editorial in the Kinston (North Carolina) Free Press. “Big Brotherism,” said the Salt Lake City Deseret News. “Something
misfired in the judicial process,” concluded the Wall Street Journal. Enforcement would make “Prohibition look
easy,” opined a columnist 
for the Los Angeles Times. The Martinez
(California) News-Gazette contended
that the decision, “carried to its logical extreme . . . would forbid singing a
copyrighted song to one’s self in the shower.” A cartoon in the Philadelphia Inquirer showed a VCR and a
revolver side by side and asked the question, “On which item have the courts
ruled that manufacturers and retailers be held responsible for having supplied
the equipment?” Countless cartoonists and columnists—and Johnny Carson, in a
sketch for “The Tonight Show”—imagined frantic households being visited by
“Video Police” or detectives from the “Betamax Squad.” Tom Shales, the TV
critic for the Washington Post,
imagined himself as an underground videotaper in the dread year 1984. “It is
the third year of our persecution, oh my brothers, oh Betanauts and Betalogues
and fellow members of the Betanese Liberation Front,” he wrote. “Still, they
come, the gray men in the greatcoats, the storm troopers in their clodhoppers.
. . .” In the long history of its offenses that much-maligned branch of
government the judiciary had probably never issued a decision that attracted
more abuse and less sympathy.
 Shortly thereafter, the Supreme Court agreed to hear the case, and Congress decided not to act until the Supreme Court had its say. In January 1984, the Supreme Court issued its ruling: by a bare 5-4 majority, the Court reversed the Ninth Circuit and held for Sony. The American public got their Christmas present, a little late.
We’ll consider the ramifications of this case shortly. But first, let’s look at the other setting in which the movie producers got clobbered.
 “Completely Snookered.”
James Lardner wrote an account of the VCR wars for the New Yorker that was later expanded into a thorough and fascinating book, Fast Forward: Hollywood, The Japanese, and the VCR Wars (1987). Lardner colorfully documents the motion picture industry’s loss of the battle in the courts, in Congress, and in the hearts of the American citizenry. Some of the chapter headings suggest the dynamics: “Outgunned,” “Pigs Versus Pigs,” and “Completely Snookered.”
back on the collapse of the movie industry’s lobbying efforts, [Jack] Valenti
agreed with Dale Snape’s assessment. “You’ve got to be proconsumer, and we were
never able to show that we were proconsumer,” he said. He singled out the press
as another big headache. The New York
Times, the Wall Street Journal,
and the Washington Post, had come out
against the rental bill, as they had against the royalty. “We got completely
snookered—just absolutely destroyed—in the press!” Valenti exclaimed. . . .
“But I suppose we lost this battle when those cartoons appeared about video
police coming into your homes. The cartoonists killed us. We became objects of
ridicule. Molière once wrote that most men don’t object to being called wicked,
but all men mightily object to being made ridiculous, and the Molière line is
quite relevant today.”
 The economics of the video market.
The video market was definitely affected by the lack of a video rental royalty. Producers of video works had to decide whether a work was intended primarily for the “sales” market or the “rental” market. If for the former, then the producers would have to charge a low enough price—in the $10 to $20 range—to encourage hundreds of thousands or millions of sales. If they believed that the video would do better in the rental market, then the producers would charge a higher fee, as much as $50 or $60 per video, knowing that the primary buyers were video rental stores and that they had to charge enough on the “first sale” to compensate for all the rentals of the particular copies sold. If the producers could “differentiate” these markets—charge a high fee for videos in the “rental” market, and a low fee for those in the “sales” market—the result would be that more video works would be available for sale to consumers at a cheaper price.
Under the first sale doctrine,* once someone buys a particular copy of a copyrighted work, they may dispose of that copy however they want, including by sale or by rental. It’s because of this doctrine that video rental stores can buy a copy of a movie, and then make money by renting it out over and over again, without paying any royalty above the price of the one copy. In 1984, the very year of the Betamax decision in the Supreme Court, the music recording industry managed to get Congress to pass an exception to the doctrine so that audio works may not be rented out without the authority of the copyright owner.† The movie industry originally had expected to be included in the amendment. But by now millions of people owned VCRs, and were used to the idea of renting movies cheaply. Congress was unwilling to pass a bill that threatened to end or “tax” a practice that people had gotten used to. In the end, the video amendment was severed from the audio amendment: the audio amendment passed, but the video amendment did not. In 1990, the computer software industry was also successful in getting an exemption to the first sale doctrine, barring rentals of computer programs;‡ but still video rentals were not included.
Why the disparate treatment? There are at least two possible answers. One, a sort of “conspiracy theory,” is that the video dealers  simply outflanked the movie industry in lobbying efforts. And as with most conspiracy theories, there’s also a possible rational explanation. Everyone understands that many people who rent audio works are going to make copies of them, so that they can listen to them over and over. It is assumed, however, that most people don’t make copies of videotapes, because they don’t generally watch video works repeatedly, or because it takes two video recorders to make a copy of a videotape, and most people either don’t have two video recorders or wouldn’t normally go to the trouble of hooking them up to record from one to the other. It’s debatable whether these assumptions are still true today. Children, for example, are very likely to watch favorite programs repeatedly, and many households now have more than one video recorder. (It’s still a good bet, though, that most consumers haven’t figured out how to, or don’t care to got to the trouble to, hook up the two VCRs. But that’s probably only because it’s so cheap to rent the tapes anyway.)
In any event, the copyright owners of movies and television programs got neither the license for home video recording, nor the rental amendment that they said was necessary for their continued survival. Those of us who were sympathetic braced for the disaster that we predicted would occur.
Guess what? The disaster never came. Instead, the VCR turned out to be one of the most lucrative inventions—for movie producers as well as hardware manufacturers—since movie projectors. Video rental stores had to buy lots of copies of hit movies, and so the movie companies still made a bundle. As the economy was strong in the 1980s and 1990s, more people bought movies than appeared likely to do so in 1984. Indeed, movie companies soon made more from video release of their movies than they did from theatrical release. Of course they didn’t make as much as they would if they could charge for every single copy, or for every single rental. But the market was big enough that everybody in the chain could make money.
 The economics of the new video market.
In recent years, the video market has actually been moving in the direction of allowing movie companies to get a percentage of the revenues directly from video rentals. The problem with running a successful video store is to have enough of the “hit” movies immediately, when they are in demand. Blockbuster Video has arranged for this by negotiating with the movie companies to allow for the making and stocking of lots of new release videos at a relatively cheap cost per video, in exchange for granting the movie companies a percentage of the rental revenues. The resulting market looks very similar to what would exist if the movie companies had an exclusive rental right that survived the “first sale”—except that the video stores probably get a better deal, because of the leverage of the first sale doctrine. The arrangement also has the effect of giving Blockbuster a tremendous advantage over video stores that are not in a position to make similar deals with the movie companies. Blockbuster can “guarantee” that major new releases will be available immediately, while stores without profit-sharing arrangements can’t afford to buy too many new releases, because of the high cost of the inventory and the relatively short shelflife of most movies today.
Don’t yet write the obituary for the movie industry. In December 1996, the United States and most other countries signed a new international treaty sponsored by the World Intellectual Property Organization (WIPO). Among other things, it provided that all countries were supposed to protect exclusive rental rights in audio, computer software, and video works. There was an exception, if it could be demonstrated that the market for rentals was sufficient to protect the interests of the copyright owners. The signing of the treaty did not obligate the United States to amend its copyright law (instead, the United States hoped that it would get other countries to upgrade their laws), but it did focus the inquiry upon the market effect on copyright owners of movies. If it were determined that the first sale doctrine undermined the ability of the movie producers to make a fair return on their investment, there might yet be legislative changes in the statute.
Some legislative changes have already occurred. The Digital Millennium Copyright Act of 1998* has a new provision governing the analog video recorder market: after the middle of 2000, manufacturers are required to include in all analog video recorders a chip that recognizes the “macrovision” copy protection system used by many movie companies in their videos. It’s now illegal to circumvent such protection systems or to sell equipment that can circumvent such systems, and the penalties for violating the statute are severe. The act thus allows movie producers to physically protect movies released on VHS video (the successor to the Beta format), to prevent copying. Movie producers can be expected to increase their use of such copy protection schemes. Although broadcast television stations and basic-tier cable television services are prohibited from encoding their programming, pay-per-view and subscription services will be allowed to add the electronic protection to their programming. No one yet knows  whether such encoding will become the norm, or whether consumers will simply boycott subscription services that don’t allow for videotaping of their programs. Stay tuned for future developments.
And, as explained in the sidebar, “The economics of the new video market,” movie producers have already worked out ways of getting a bigger “piece” of the video rental action. With such arrangements, the movie producers are effective partners with the video stores. We’ve come a long way since the Betamax case.
In the 1990s the television industry developed, and the Federal Communications Commission approved, a new HDTV (high definition television) standard that will completely replace the old NTSC (National Television System Committee) standard. It’s based upon the digital encoding of programming information. The new HDTV standard scans the equivalent of 1125 lines per frame, exceeding the resolution of 35-millimeter movies, and far surpassing the quality of the NTSC standard.
This digital technology makes it easier to copy, reproduce, and alter television programs, and, as with other digital works, each copy retains the same quality as the original. The technology thus raises some of the same seemingly intractable copyright concerns as it did in the case of music.
As we’ll study in more detail in chapter 5 (after analyzing computer programs and the Internet), the fix for this problem is already in place. In 1998, Congress passed the Digital Millennium Copyright Act, which makes it illegal, except in certain circumstances, to gain access to digital copyrighted works that are protected by electronic protection systems. So, as movies follow music and computer programs into the digital age, and as the movie industry develops hardware and software systems to block access to and block copying of their works, the law supports their efforts.
 High-definition television, (right) compared to the previous standard television (left). The high definition version uses twice the number of scan lines, making it comparable in resolution to film.
While movies and television may have appeared to be technologies that would test the limits of copyright, it turns out that, for the most part, the fit between copyright and the video technologies has been fairly smooth. In the case of movies and television, the basic principles of copyright seem to have accommodated the technologies. In the case of cable, when the fit didn’t seem to work, Congress responded with a special compromise to balance the interests of copyright owners and the cable industry. And even in the case of the new video market, both analog and digital, it looks like Congress has been able to fix the problem. Miracle of miracles, the market has managed to adapt quite nicely, or well enough. The technology in this field has turned out not to be copyright’s enemy, but its friend.
Go to Chapter 4: The Computer
Permission, Limitations, and Format