The plaintiffs, Universal and Walt Disney Productions on behalf of the Hollywood majors, charged that the ability of the Betamax to copy programming off air was an infringement of copyright and sought to halt the sale of the machines. The studios were ostensibly trying to protect film and television producers from the economic consequences of unauthorized mass duplication and distribution. However, Universal might have also wanted to prevent Betamax from capturing a significant segment of the fledgling home video market before Universal’s parent company, MCA, could introduce its DiscoVision laserdisc system, which was to scheduled for test marketing in the fall of 1977.

The Betamax case was filed in the U.S. Federal District Court of Los Angeles in November 1976 and went to trial on January 30, 1979. In its defense, Sony asserted that a consumer had the absolute right to record programs at home for private use. It drew an analogy to the audio cassette recorder, which was introduced in the 1960s and had made music tapers out of millions of American teenagers. Although the practice had not been tested in the courts, Sony believed a tradition had been established.

Handing down its decision in October 1979, the U.S. District Court ruled in favor of Sony, stating that taping off air for entertainment or time shifting constituted fair use; that copying an entire program also qualified as fair use; that set manufacturers could profit from the sale of VCRs; and that the plaintiffs did not prove that any of the above practices constituted economic harm to the motion picture industry.

These rulings pertained to the court’s interpretation of the fair use doctrine as it applied to consumers. Addressing the matter of retailing of videocassettes, the court let stand the First Sale Doctrine of the 1976 Copyright Act, which stated that the first purchaser of a copyrighted work (e.g., a motion picture on videocassette) could use it in any way the purchaser saw fit as long as copyright was not violated by illegal duplication, etc. This right extended to the rental of videocassettes purchased from Hollywood studios. Until the arrival of the VCR, film companies had received a portion of the box office or a fee each time one of their films was shown. As holders of copyright on their pictures, the studios were legally entitled to these forms of remuneration. Since the court’s interpretation of the First Sale Doctrine threatened to undermine Hollywood’s control over the use of its product, Universal appealed the decision.

Although the U.S. Court of Appeals reversed the lower court’s decision in October 1981, the decision, if it were to stand, would have been impossible to enforce. The home video market had expanded enormously since the start of the case; annual VCR sales had increased from 30,000 sets in 1976 to 1.4 million in 1981. Meanwhile, Sony lost the lead to its Japanese rival Matsushita, which introduced a competing format—VHS (for “video home system”)—recorder in 1977. Normally, Sony and Matsushita cross-licensed recording and playback equipment, but for the home video market, the two Japanese companies went their separate ways by marketing systems that were incompatible with one another. (The VHS cassette was larger than the Beta and had a longer recording capability.) VHS overtook Beta as the preferred format for home video, and by 1981 more than six Japanese manufacturers had entered the business both in their own names and as suppliers of VHS machines to U.S. firms. Starting out at around $1,300, the price of the machine had been dropping steadily, enabling it to become a standard appliance for most middle-class Americans.

The Betamax case went all the way to the U.S. Supreme Court, which reversed the appeals court decision on January 17, 1984. By 1986 VCRs had been installed in 50 percent of American homes, and annual videocassettes sales surpassed the theatrical box office. At first, the major studios believed that the only logical way to market videocassettes was direct sales, reasoning that consumers wanted to buy cassettes and create “libraries” in much the same way as they acquired record albums. However, people preferred renting to buying, and as the situation stood, retailers and not film producers initially wrung most of the profits from the market. After purchasing a cassette for around $40 wholesale, a retailer could rent it over and over at a nominal charge. In contrast, the film company’s profit would be small, less than a few dollars after materials, duplication, and distribution costs had been covered.

In their struggle with retailers to capture a dominant share of the home video market, the major Hollywood companies formulated a two-tiered pricing policy. For the first six months after a new movie went on sale, it would be priced relatively high on the assumption that the overwhelming majority of transactions would consist of sales to video stores for rental purposes. Then as demand began to ebb, the same movie would be reissued at a much lower price to stimulate home sales. The majors used similar strategies overseas and soon became the principal beneficiaries of the new distribution technology.