[Senate Hearing 106-1060]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1060
MUSIC ON THE INTERNET: IS THERE AN UPSIDE TO DOWNLOADING?
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JULY 11, 2000
__________
Serial No. J-106-96
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
74-728 WASHINGTON : 2001
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin,
prepared statement............................................. 60
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 4
Schumer, Hon. Charles E. a U.S. Senator from the State of New
York........................................................... 73
WITNESSES
Barry, Hank, Chief Executive Officer, Napster, Inc., San Mateo,
CA............................................................. 15
Ehrlich, Fred, President, New Technology and Business
Development, Sony Music Entertainment, Inc., New York, NY...... 27
Griffin, James Hazen, Founder and Chief Executive Officer, Cherry
Lane Digital, Los Angeles, CA.................................. 46
Hoffman, Gene, Jr., Founder, President and Chief Executive
Officer, EMusic.Com, Inc. Redwood City, VA..................... 34
Kan, Gene, Gnutella Developer, and Founder, Infrasearch, Inc.,
Belmont, CA.................................................... 38
McGuinn, Roger, Former Member and Co-Founder, The Byrds Musical
Group, Windemere, FL........................................... 13
Rosen, Hilary, President and Chief Executive Officer, Recording
Industry Association of America, Washington, DC................ 55
Robertson, Michael, Chairman and Chief, Executive Officer,
MP3.COM, Inc., San Diego, CA................................... 21
Ulrich, Lars, Member and Co-Founder, Metallica Musical Group, New
York........................................................... 9
QUESTIONS AND ANSWERS
Responses of Fred Ehrlich to Questions from:
Senator Kohl................................................. 80
Senator Thurmond............................................. 81
Responses of Gene Kan to Questions from:
Senator Kohl................................................. 83
Senator Thurmond............................................. 82
Responses of Robert H. Kohn to Questions from Senator Kohl....... 84
Responses of Lars Ulrich to Questions from Senator Thurmond...... 89
SUBMISSION FOR THE RECORD
Bergman, Marilyn, President and Chairman of the Board, on behalf
of the American Society of Composers, Authors and Publishers... 90
MUSIC ON THE INTERNET: IS THERE AN UPSIDE TO DOWNLOADING?
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TUESDAY, JULY 11, 2000
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 10:05 a.m., in
room SH-216, Hart Senate Office Building, Hon. Orrin G. Hatch
(chairman of the committee) presiding.
Also present: Senators Leahy, Kohl, Feinstein, and Schumer.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
The Chairman. We are happy to welcome you all out to the
hearing this morning. It is a very important hearing. It has a
lot to do with so many things that go even beyond the music
business.
This morning's hearing focuses on issues that have been
much in the press and are near and dear to many of us on the
dais and those of us listening in the audience.
In case you missed it, there has been an upheaval of sorts
concerning how music is copied over the Internet. What Newsweek
magazine dubbed ``The Noisy War Over Napster'' involves more
parties and has much broader implications than that moniker
implies. Fortune magazine has called the technology embodied in
Napster and Gnutella ``The Next Big Thing'' for the Internet.
At the outset, let me make it clear that it is not this
committee's purpose or intention to interfere with the
litigation and settlement discussions that are presently taking
place. Nor do I see our discussions entering into the wider
array of issues concerning technology standards for players or
related topics.
Our reasons for holding this hearing are to learn more
about what is taking place in the marketplace and, in doing so,
better equip us to advance the interests of consumers and
creators. Insofar as consumers are concerned, they desire
access to downloadable music which is not unnecessarily
restrictive or unduly burdensome. I want to ensure that the
marketplace provides them with the opportunity to access the
music they want to hear over the Internet and to do so legally.
Insofar as creators are concerned, I want to ensure that
artists and creators are protected through an approach to
copyright that empowers them to generate maximum revenue for
their creative works.
Recognizing the potential the Internet offered consumers
and creators, I led the efforts to pass, and Senator Leahy and
I did, the Digital Millennium Copyright Act which sought to
harmonize the copyright laws with the technological changes
taking place.
Now, this law sought to ensure that copyrighted content
would continue to be protected by copyright law in the digital
environment, but also sought the flexibility necessary to allow
the Internet technology and businesses to flourish while making
copyrighted content available.
For the most part, passage of the DMCA has proven to be a
prescient achievement, settling many complex liability issues
up front and allowing the online businesses to grow. It was our
hope that it would give creators incentive to make their
products available on the Internet. In short, it was believed
that a stable, predictable legal environment would encourage
the deployment of business models which would make properly
licensed content more widely available. Sadly, this has not yet
occurred to any great extent in the music industry, and the
DMCA is nearly 2 years old.
As chairman of the Judiciary Committee, I take it as a
basic premise that our copyright laws must play a role, a
strong role, in protecting creative works over the Internet.
These protections, however, must be secured in a manner which
is mindful of the impact regulation can have on the free flow
of ideas that a decentralized, open network like the Internet
creates. We must protect the rights of the creator, but we
cannot, in the name of copyright, unduly burden consumers and
the promising technology that Internet presents to all of us.
With this in mind, it is my hope that we can learn more
about the online music marketplace and why there is so much
disharmony. We have with us this morning a number of different
models of online music services.
MP3.com is a music service provider and offers a number of
different services to users. MP3.com shares revenues with
artists, often on a 50/50 basis. And we have Emusic, which
offers downloads of singles or whole albums, paid for either
per song or per album. Emusic has deals with many independent
record labels and offers deals to artists that are structured
similarly to recording contracts.
Both Emusic and MP3.com can track usage levels to
accurately account to the artists for use of their music and
pay them accordingly. And both Emusic and MP3.com are
structured with a central server Web site that makes music
licensing relatively easy for creators and consumers. Their
organization is similar to the chart on display which diagrams
a traditional Web-based search engine, where an individual's
computer deals with information sources through the
intermediary of a single server.
By way of contrast, consider the architecture of the
Napster and Gnutella communities, as represented in these
schematic charts over on the right here. As you can see,
Napster, which is a business, operates with a central server
site through which members submit requests. Requests proceed
from the central site out to other Napster users. And with
Gnutella, there is no central point, but we are linked directly
to other Gnutella users' PC's. We can download the music
directly from any Gnutella users' computer to which we are
linked.
This organization has implications for both music licensing
and for broader Internet technology. To quote Andy Grove, of
Intel, ``The whole Internet could be re-architected by Napster-
like technology.'' Using this peer-to-peer technology to search
for information on the Internet allows us to get the most up-
to-date information direct from the source, as opposed to
traditional Web search engines that are made through
intermediaries.
With regard to music licensing, however, as you might guess
from the charts, peer-to-peer file-sharing poses a much greater
challenge than single-source licensing. With each user being a
publisher to a greater or lesser degree, the relative lack of a
real distribution center makes licensing somewhat chaotic and
haphazard, which brings us to the nub of this hearing.
This technology presents a unique opportunity to those who
make a living by producing copyrighted works. They can be self-
publishers dealing directly with their fans. But it also
presents a unique threat, if misused, to rob them of their
livelihood, which could rob all of us of their continued work
by destroying the incentives to create and publish their works,
all of which will require much greater creativity in licensing
or distributing copyrighted creative works.
To illustrate the file-sharing technology that has proved
so controversial, we will demonstrate how a search and download
of music is done using Gnutella. If you will direct your
attention to the monitors, you will be able to see the process
from a live Internet connection.
First, we submit a request for particular music or a
particular artist. As I mentioned before, we do not submit the
request to a central site, but rather we link directly to other
Gnutella users and relay our requests through the individual
hard drives of members of the new telecommunity who are online.
If you look at the bottom left-hand corner of the screen,
you can see how many connections we have made with other users.
The search engine returns to us a list of the relevant music
files available to us from other Gnutella users, together with
information on the size of the file and the other users'
bandwidth, and hence probable download speed. We can choose
from among the many options returned which files to download,
and can watch the progress of downloading. Since the
downloading will take a few minutes, we will return to play the
music after the ranking member's remarks.
Once the file is downloaded, because the music is in a
digital format, I can copy it onto a number of different
listening devices to take the music with me. I think music fans
have expressed a strong interest in getting popular, legitimate
music in this format.
One continuing problem raised throughout the evolution of
online music, however, is the complaint that the major record
labels have not been willing to license online music
distributors to provide their music, or have offered licenses
on terms much different than online entities related to those
labels.
While I do not think that copyright owners have any general
duty to license their products to others, a complete lack of
licensing puts in question the labels' professed desire to be
ubiquitous. And a policy of merely cross-licensing among major
label-related entities might raise some competition concerns
that this committee would have a duty to consider.
In short, I believe there are opportunities for synergy
here between the creators of music and the technology companies
who can help make that music available to consumers in more
convenient and enjoyable forms. Some creative cooperation might
be to everyone's benefit, especially consumers and creators. I
look forward to hearing what each of our witnesses envisions
for the future of digital music.
We will turn at this time to the ranking member.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. I do feel this is
an important hearing. In fact, I came back around 2 a.m. or
2:30 a.m. this morning from Ireland, where somebody with my
name should probably be more often, to be here for the hearing.
I should mention, as I mentioned to Mr. Ulrich and others
earlier, I did become a hero in my daughter's eyes because I
took her to lunch with Bono and the other members of U2. She
got to go down to their studio and listen to them recording
their new album, and now she realizes that there is a reason
for her father to be in the U.S. Senate.
The Chairman. You should have taken me, too.
Senator Leahy. I would have. They asked about you
immediately.
The Chairman. I can imagine. [Laughter.]
Senator Leahy. And after they asked about you, I told them,
I want you to know.
The Chairman. Well, I want you to know we helped Bono on
his World Hunger Campaign.
Senator Leahy. I know.
The Chairman. He has been in the office. He is a great guy.
Senator Leahy. He is; Irish, too. A lot of the Irish are
nice. There is Manus, for example, and myself.
The Chairman. I happen to be Irish, too.
Senator Leahy. Are you reinventing yourself? I thought only
members of our party did that, Mr. Chairman.
The Chairman. I have so many mixtures that I can almost
claim everybody, let me tell you.
Go ahead.
Senator Leahy. This could go on forever.
You know, it is interesting, talking about downloading this
music, as the chairman said, it is going to take a while to do
it, and it also points out an interesting situation we have in
the Senate. The Senate is so far behind in technology on these
things, it is going to take us that long because we don't use
DSL lines. We don't use anything like that.
We will do oversight on companies that do those things, but
we have barely moved beyond the quill pens ourselves. And I
would hope--this is one more example--that maybe the leadership
in the Senate will let us move, if not into the 21st century,
at least into the latter part of the 20th century on
technology.
When I go out to spend time with my son in California--and
I will talk about this a little bit later on--we find in
downloading these kinds of things it is virtually
instantaneous, which is also both the good and the bad. As
Hilary Rosen and others will think about sitting here, it is
the good and bad of the news.
America's Founders recognized and valued citizen creativity
so much that they rooted intellectual property rights in the
Constitution. Article I, section 8, clause 8, of the
Constitution grants that, ``The Congress shall have power * * *
[t]o promote the progress of science and useful arts, by
securing for limited times to authors and inventors the
exclusive right to their respective writings and discoveries.''
It is in the Constitution right from the beginning. The
Continental Congress proclaimed, ``Nothing is more properly a
man's own than the fruit of his study.''
Protecting intellectual property rights is just as
important today as it was when America was a fledgling Nation,
at a time when none of us could have conceived what might
happen. In fact, the intellectual property generated in our
country is the envy of the rest of the world.
The challenge of protecting intellectual property, such as
computer programs, sound recordings, motion pictures, and other
copyrighted works in electronic formats has been the focus of
this committee's attention for the past few Congresses. In the
last Congress, we passed the No Electronic Theft Act to close
the loophole in the law that granted complete immunity from
criminal liability to willful copyright infringers. Closing
this loophole was something I had worked on since 1995, and
together with Senator Kyl, we were able to close that loophole
in 1997.
In 1998, the chairman and I worked closely together on the
DMCA, the Digital Millennium Copyright Act. We wanted to
advance the complementary goals of protecting intellectual
property rights in a digitally-networked world and promoting
the continued growth of electronic commerce. Bruce Cohen, Beryl
Howell, and others on my staff have spent a disproportionate
amount of their time on these kinds of issues.
As new online services are launched and new Web sites
created, the DMCA is helping order the online environment. In
fact, earlier this year a Federal court relied on the DMCA to
shut down Web sites that were used to post a computer program
permitting users to break the encryption used to protect
copyrighted motion pictures on DVD's and then to copy the
movies without permission. So it did work.
In other pending cases, involving some of the witnesses we
will hear from today, the applicability of provisions in the
DMCA which limit liability for Internet service providers when
they act as mere conduits for networked communications or
simply provide tools are also being explored.
Often, the discussion over how to protect intellectual
property rights has developed into a debate over whether such
protection will stop technological innovation. I don't want
that to be the case, and I would be the first person in the
Senate to oppose that. I want this technological innovation.
As we wrote some of these laws 2 or 3 years ago, none of us
could have even foreseen what was going on there. And I can
bet, among all of you here who probably know as much about this
as anybody in the country, you could not predict what we are
going to see 4 years from now or 5 years from now, maybe even a
year from now.
Protection of intellectual property provides incentives to
promote scientific and artistic advancement. But the interests
of intellectual property protection and technological
innovation sometimes appears to collide, as we have seen in
MP3, Napster, and so on.
Two years ago, a 19-year-old college freshman created a
software program called Napster that has grown exponentially in
popularity. I don't know a kid in Vermont at any of our
colleges who doesn't use it. It allows users to find music
files in other users' hard drives. Then you access the music
file, you download it, all in a matter of really minutes;
actually, seconds, if you don't have a Senate connection, or
within an hour or two if you are up here in the quill pen area.
Sharing files in this way among strangers has been likened
by some to sharing a CD among friends. The courts are in the
process of sorting out the legality of sharing files of
copyrighted music on the scale of Napster, and we should think
about that.
You know, there is a lot of publicity about Napster, but
that is not the recording industry's worst nightmare. Other
software programs are being developed that pose far more
difficult challenges for copyright protection. Gnutella and
Freenet are file-sharing programs; we are going to hear more
about those. They don't require a central server for users to
connect to each other. Instead, Gnutella uses the Internet
service providers of its users for connectivity.
In just going back and forth trying out these different
technologies, I realized how easy it is for anybody to do it.
The programs are not proprietary. They are not owned by a
specific company. It leaves copyright owners in search of a
responsible party to hold accountable.
Online music programs show strong consumer demand for new
artists and for good music delivered over the Internet. Let's
not forget about that. There are a lot of new artists who are
being discovered this way. It allows new artists to become
known. They are going to open new avenues for the copyright
industries to reach consumers. The music industry is
accelerating development of legitimate means for satisfying the
consumer demand for online access to music.
History has shown that when new technologies emerge, they
may seem to threaten to trump intellectual property protection.
In the end, things tend to get sorted out. Remember how the
movie industry was so afraid of videotape? They wanted us to
block that. There is not a movie made today that they don't
plan in it what is going to be the after-sale on video. In
fact, some movies that bomb at the box office make their money
back on video.
The concert tapes of Grateful Dead fans come to mind. I
used to go to a lot of Grateful Dead concerts. It used to be
kind of funny seeing the Volkswagen vans parked out back and
here is one car with Vermont license plate ``1'' looking a
little bit out of place. I remember how everybody used to be
able to tape those, and now those are traded and sold. Dick's
Picks does very well on it.
So I hope we are going to find how best to make this work,
how best to expand, the same way the movie industry did, but to
protect the legitimate rights. If you write a song, if you
record something, if you have gone to the work of putting your
expertise on it, you ought to be rewarded for it. If people are
going to enjoy it, you ought to be rewarded for that work, in
the same way if I came over and painted your house, I ought to
be paid for that. At the same time, let's not strangle the baby
in the crib; let's make it work.
Mr. Chairman, I notice there is a vote on. I don't know
what you want to do.
The Chairman. I think what we are going to do is the
Gnutella download is complete, I understand. We searched for
music from a popular rock group called Creed, and our search
turned up hundreds of Creed songs from their million-selling
albums. We downloaded just one of these songs.
Senator Leahy and I want to hear every one of you, so we
are going to go vote while you listen to one of these songs. Is
that all right? [Laughter.]
Senator Leahy. I am going to put my laptop up here so I can
download a couple of them, too.
The Chairman. I have to say that I was listening to
Metallica this morning in my office. [Laughter.]
Actually, you could use my lyricist ability.
Mr. Ulrich. Thank you very much.
The Chairman. Actually, they are pretty darn good--well,
not pretty darn good. Anybody that can sell 10 million CD's on
one thing, I am all for, let me tell you. I am really proud of
you. [Laughter.]
I don't want to say too much more, because of the 2,000
that we normally sell.
Let me just say this. I would like you all to listen to
Creed, and then we want to come back and we will start with Mr.
Lars Ulrich. I want to hear what he has to say, as well as
every one of these witnesses. We have one of the most diverse
groups of people we have ever had on any Internet hearing that
we have had in the U.S. Senate, and really very exciting people
as far as I am concerned. So we appreciate all of you coming.
We will go vote and we will be right back.
Senator Leahy. Mr. Chairman, are you sure you don't want to
come up and hear my music?
The Chairman. Listen, I like the Grateful Dead, too, but I
am not a slavish devotee. We will put it that way. [Laughter.]
We will listen to the music and we will be right back.
[The committee stood in recess from 10:26 a.m. to 10:41
a.m.]
The Chairman. If we can have your attention, we have eight
distinguished witnesses here with us today. Our first witness
is Mr. Lars Ulrich, a member of the musical group Metallica.
Mr. Ulrich co-founded Metallica in 1981 and has been the band's
spokesperson on a number of occasions, including most recently
in its dispute with Napster.
In 1999, Metallica became only one of three bands to
receive the Diamond Award from the Recording Industry of
America, signifying sales of over 10 million copies from a
single title. That is pretty impressive, very impressive,
stupendously impressive.
Mr. Ulrich. Thank you.
The Chairman. And you don't need a lyricist either; you are
doing a very good job yourself. We are very happy to have you
with us.
Mr. Ulrich. Thank you.
The Chairman. Next, we will hear from Mr. Roger McGuinn.
Mr. McGuinn is co-founder of the musical group The Byrds.
Today, Mr. McGuinn tours the world virtually non-stop, often
performing acoustic numbers as a solo musician. We are really
honored to have you here.
Mr. McGuinn. Thank you.
The Chairman. Moreover, Mr. McGuinn primarily makes his
music available to his listeners on the Internet through his
own Web site and the MP3.com site.
Mr. Hank Barry will address us. Mr. Barry is the Chief
Executive Officer of Napster, a software company that enables
users to share files, and mostly famous music files, through
their computers. Mr. Barry is also currently a partner at
Hummer Windblad Venture Partners. Mr. Barry has had over 15
years' experience working with media and technology companies,
and prior to joining Hummer Windblad, Mr. Barry was the
corporate and securities partner at Wilson, Suncini, Goodrich
and Rosatti.
We will then hear from Mr. Michael Robertson, Chairman and
CEO of MP3.com. MP3.com is a Web-based Internet site that sells
and distributes music of almost every genre to its users. Prior
to starting MP3.com, Mr. Robertson has worked as a consultant
to many high-tech companies. What you have accomplished is
nothing less than sensational yourself. In fact, all of you are
just top people in your fields.
Mr. Fred Ehrlich will then address us. Mr. Ehrlich is the
President of New Technology and Business Development for Sony
Music Entertainment. Mr. Ehrlich is responsible for online
promotion and marketing of the company's music. Prior to
joining Sony, Mr. Ehrlich served as Vice President and General
Manager of Columbia Records. We are looking forward to your
point of view as well, Mr. Ehrlich, and I have great respect
for you.
Next, Mr. Gene Hoffman, Jr., will speak to us. Mr. Hoffman
is the founder, President and CEO of Emusic.com. Emusic.com is
a leading site on the Internet for sampling and purchasing
music, and currently has licensing agreements with over 600
independent record labels.
I think I have that right, don't I?
Mr. Hoffman. Yes.
The Chairman. It is terrific to have you here.
After Mr. Hoffman, we will be pleased to hear from Mr. Gene
Kan. Mr. Kan is the developer of Gnutella. Now, I have to say
that is quite an accomplishment. Gnutella, of course, is a
real-time information search protocol. Prior to developing
Gnutella, Mr. Kan has worked as a computer engineer in software
development. Mr. Kan graduated from the University of
California at Berkeley in 1997 with a degree in electrical
engineering and computer science.
Our final witness will be Mr. Jim Griffin, the founder and
CEO of Cherry Lane Digital LLC and OneHouse LLC. Both companies
provide consulting services to entertainment companies working
to provide digital products and services. Prior to founding
Cherry Lane and OneHouse, Mr. Griffin was the Director of
Technology at Geffen Records from 1993 to 1998, where he
created and ran the label's technology department. And we are
all familiar with Geffen Records.
So I want to thank each of our distinguished witnesses for
being with us today. We know that you are all busy people and
we know that you have taken time out from not only busy but
very important schedules, and we are honored to have all of you
here.
Mr. Ulrich, I really look forward to hearing your
testimony, as well as all the others. So we will start with
you.
STATEMENT OF LARS ULRICH, MEMBER AND CO-FOUNDER, METALLICA
MUSICAL GROUP, NY
Mr. Ulrich. Mr. Chairman, my name is Lars Ulrich. I was
born in Denmark. In 1980, as a teenager, my parents and I came
to America. I started a band named Metallica in 1981 with my
best friend, James Hetfield. By 1983, we had released our first
record, and by 1985 we were no longer living below the poverty
line.
Since then, we have been very fortunate to achieve a great
level of success in the music business throughout the world. It
is the classic American dream come true. I am very honored to
be here in this country, and I am very honored to appear before
the Senate Judiciary Committee.
Earlier this year while completing work on a song for the
movie ``Mission Impossible 2,'' we were startled to hear
reports that five or six versions of our work in progress were
already being played on some U.S. radio stations. We traced the
source of this leak to a corporation called Napster.
Additionally, we learned that all our previously recorded
copyrighted songs were, via Napster, available for anyone
around the world to download from the Internet in a digital
format known as MP3. In fact, in a 48-hour period where we
monitored Napster, over 300,000 users made 1.4 million free
downloads of Metallica's music. Napster hijacked our music
without asking. They never sought our permission. Our catalog
of music simply became available for free downloads on the
Napster system.
I do not have a problem with any artist voluntarily
distributing his or her songs through any means that artist so
chooses. But just like a carpenter who crafts a table gets to
decide whether he wants to keep it, sell it, or give it away,
shouldn't we have the same options? We should decide what
happens to our music, not a company with no rights to our
recordings, which has never invested a penny in our music, or
had anything to do with its creation. A choice has been taken
away from us.
With Napster, every song by every artist is available for
download at no cost, and of course with no payment to the
artist, the songwriter, or the copyright holder. If you are not
fortunate enough to own a computer, there is only one way to
assemble a music collection the equivalent of a Napster user--
theft. Walk into a record store, grab what you want, and walk
out. The difference is that the familiar phrase ``files done''
is now replaced by another familiar phrase, ``you are under
arrest.''
Since what I do is make music, let's talk about the
recording artist for a moment. When Metallica makes an album,
we spend many months and many hundreds of thousands of our own
dollars writing and recording. We typically employ a record
producer, recording engineers, programmers, assistants, and
occasionally other musicians. We rent time for months at
recording studios which are owned by small businessmen who have
risked their own capital to buy, maintain, and constantly
upgrade very expensive equipment and facilities. Our record
releases are supported by hundreds of record companies and
employees, and provide programming for numerous radio and
television stations.
Add it all up and you have an industry with many jobs, a
few glamorous ones like ours, and lots more covering all levels
of the pay scale and providing wages which support families and
contribute to our economy. Remember, too, that my band,
Metallica, is fortunate enough to make a great living from what
we do. Most artists are barely earning a decent wage and need
every source of revenue available to scrape by.
Also keep in mind that the primary source of income for
most songwriters is from the sale of records. Every time a
Napster enthusiast downloads a song, it takes money from the
pockets of all these members of the creative community. It is
clear, then, that if music is free for downloading, the music
industry is not viable. All the jobs I just talked about will
be lost and the diverse voices of the artists will disappear.
The argument I hear a lot that music should be free must then
mean that musicians should work for free. Nobody else works for
free. Why should musicians?
In economic terms, music is referred to as intellectual
property, as are films, television programs, books, computer
software, video games, and the like. As a Nation, the United
States has excelled in the creation of intellectual property,
and collectively it is this country's most valuable export. The
backbone for the success of our intellectual property business
is the protection that Congress has provided with the copyright
statutes. No information-based industry can thrive without this
protection.
For instance, our current political dialogue with China is
focused on how we must get that country to respect and enforce
copyrights. How can we continue to take that position if we let
our own copyright laws wither in the face of technology?
Make no mistake about it, Metallica is not anti-technology.
When we made our first album, most records were on vinyl. By
the late 1980's, cassette sales accounted for over 50 percent
of the market. Now, the compact disc dominates. If the next
format is a form of downloading from the Internet, with
distribution and manufacturing savings passed on to the
American consumer, then, of course, we will embrace that
format.
But how can we embrace a new format and sell our music for
a fair price when somebody with a few lines of codes, no
investment costs, no creative input, and no marketing expenses
simply gives it away? How does this square with the level
playing field of the capitalist system?
In Napster's brave new world, what free-market economic
model supports our ability to compete? The touted new paradigm
that the Internet gurus tell us we must adopt sounds to me like
good old-fashioned trafficking in stolen goods. We have to find
a way to welcome the technological advances and cost savings of
the Internet. However, this must be done without destroying the
artistic diversity and the international success that has made
our intellectual property industries the greatest in the world.
Allowing our copyright protections to deteriorate is, in my
view, bad policy both economically and artistically.
In closing, I would like to underscore what I have spoken
about today. I would like to read from the Terms of Use section
of the Napster Internet Web site. When you use Napster, you are
basically agreeing to a contract that includes the following
terms, ``This Web site or any portion of this Web site may not
be reproduced, duplicated, copied, sold, resold, or otherwise
exploited for any commercial purpose that is not expressly
permitted by Napster. All Napster Web site design, text,
graphics, the selection and arrangement thereof, and all
Napster software are Copyright 1999-2000 Napster Inc.'' Napster
itself wants, and surely deserves, copyright and trademark
protection. Metallica and other creators of music and
intellectual property want, deserve, and have a right to that
same protection.
Finally, I would just like to read to you from a recent New
York Times column by Edward Rothstein, ``Information does not
want to be free. Only the transmission of information wants to
be free. Information, like culture, is the result of a labor
and devotion, investment, and risk. It has a value, and nothing
will lead to a more deafening cultural silence than ignoring
that value in celebrating * * * [companies like] Napster
running amok.''
Mr. Chairman, Senator Leahy, the title of today's hearing
asks the question: ``The Future of the Internet: Is There an
Upside to Downloading?'' My answer is yes. However, as I hope
my remarks have made clear, this can only occur when artists'
choices are respected and their creative efforts protected.
Thank you very much.
The Chairman. Thank you, Mr. Ulrich. We appreciate your
testimony.
[The prepared statement of Mr. Ulrich follows:]
Prepared Statement of Lars Ulrich
Mr. Chairman, Senator Leahy, Members of the Committee, my name is
Lars Ulrich. I was born in Denmark. In 1980, as a teenager, my parents
and I came to America. I started a band named Metallica in 1981 with my
best friend James Hetfield. By 1983 we had released our first record,
and by 1985 we were no longer living below the poverty line. Since
then, we've been very fortunate to achieve a great level of success in
the music business throughout the world. It's the classic American
dream come true. I'm very honored to be here in this country, and to
appear in front of the Senate Judiciary Committee today.
Earlier this year, while completing work on a song for the movie
Mission Impossible-2, we were startled to hear reports that a work-in-
progress version was already being played on some U.S. radio stations.
We traced the source of this leak to a corporation called Napster.
Additionally, we learned that all of our previously recorded
copyrighted songs were, via Napster, available for anyone around the
world to download from the Internet in a digital format known as MP3.
As you are probably aware, we became the first artists to sue Napster,
and have been quite vocal about it as well. That's undoubtedly why you
invited me to this hearing.
We have many issues with Napster. First and foremost: Napster
hijacked our music without asking. They never sought our permission--
our catalog of music simply became available as free downloads on the
Napster system.
I don't have a problem with any artist voluntarily distributing his
or her songs through any means the artist elects--at no cost to the
consumer, if that's what the artist wants. But just like a carpenter
who crafts a table gets to decide whether to keep it, sell it or give
it away, shouldn't we have the same options? My band authored the music
which is Napster's lifeblood. We should decide what happens to it, not
Napster--a company with no rights in our recordings, which never
invested a penny in Metallica's music or had anything to do with its
creation. The choice has been taken away from us.
What about the users of Napster, the music consumers? It's like
each of them won one of those contests where you get turned loose in a
store for five minutes and get to keep everything you can load into
your shopping cart. With Napster, though, there's no time limit and
everyone's a winner--except the artist. Every song by every artist is
available for download at no cost and, of course, with no payment to
the artist, the songwriter or the copyright holder.
If you're not fortunate enough to own a computer, there's only one
way to assemble a music collection the equivalent of a Napster user's:
theft. Walk into a record store, grab what you want and walk out. The
difference is that the familiar phrase a computer user hears, ``File's
done,'' is replaced by another familiar phrase--'' ``You're under
arrest.''
Since what I do is make music, let's talk about the recording
artist for a moment. When Metallica makes an album we spend many months
and many hundreds of thousands of our own dollars writing and
recording. We also contribute our inspiration and perspiration. It's
what we do for a living. Even though we're passionate about it, it's
our job.
We typically employ a record producer, recording engineers,
programmers, assistants and, occasionally, other musicians. We rent
time for months at recording studios which are owned by small
businessmen who have risked their own capital to buy, maintain and
constantly upgrade very expensive equipment and facilities. Our record
releases are supported by hundreds of record company employees and
provide programming for numerous radio and television stations. Add it
all up and you have an industry with many jobs--a very few glamorous
ones like ours--and a greater number of demanding ones covering all
levels of the pay scale for wages which support families and contribute
to our economy.
Remember too, that my band, Metallica, is fortunate enough to make
a great living from what it does. Most artists are barely earning a
decent wage and need every source of revenue available to scrape by.
Also keep in mind that the primary source of income for most
songwriters is from the sale of records. Every time a Napster
enthusiast downloads a song, it takes money from the pockets of all
these members of the creative community.
It's clear, then, that if music is free for downloading, the music
industry is not viable; all the jobs I just talked about will be lost
and the diverse voices of the artists will disappear. The argument I
hear a lot, that ``music should be free,'' must then mean that
musicians should work for free. Nobody else works for free. Why should
musicians?
In economic terms, music is referred to as intellectual property,
as are films, television programs, books, computer software, video
games, and the like. As a nation, the U.S. has excelled in the creation
of intellectual property, and collectively, it is this country's most
valuable export.
The backbone for the success of our intellectual property business
is the protection that Congress has provided with the copyright
statutes. No information-based industry can thrive without this
protection. Our current political dialog about trade with China is
focused on how we must get that country to respect and enforce
copyrights. How can we continue to take that position if we let our own
copyright laws wither in the face of technology?
Make no mistake, Metallica is not anti-technology. When we made our
first album, the majority of sales were in the vinyl record format. By
the late 1980's, cassette sales accounted for over 50% of the market.
Now, the compact disc dominates. If the next format is a form of
digital downloading from the Internet with distribution and
manufacturing savings passed on to the American consumer, then, of
course, we will embrace that format too.
But how can we embrace a new format and sell our music for a fair
price when someone, with a few lines of code, and no investment costs,
creative input or marketing expenses, simply gives it away? How does
this square with the level playing field of the capitalist system? In
Napster's brave new world, what free market economy models support our
ability to compete? The touted ``new paradigm'' that the Internet gurus
tell us we Luddites must adopt sounds to me like old-fashioned
trafficking in stolen goods.
We have to find a way to welcome the technological advances and
cost savings of the Internet while not destroying the artistic
diversity and the international success that has made our intellectual
property industries the greatest in the world. Allowing our copyright
protections to deteriorate is, in my view, bad policy, both
economically and artistically.
To underscore what I've spoken about today, I'd like to read from
the ``Terms of Use'' section of the Napster Internet web site. When you
use Napster you are basically agreeing to a contract that includes the
following terms:
``This web site or any portion of this web site may not be
reproduced, duplicated, copied, sold, resold, or otherwise exploited
for any commercial purpose that is not expressly permitted by
Napster.''
``All Napster web site design, text, graphics, the selection and
arrangement thereof, and all Napster software are Copyright
1999-00 Napster Inc. All rights reserved Napster Inc.''
``Napster, the logo and all other trademarks, service marks and
trade names of Napster appearing on this web site are owned by Napster.
Napster's trademarks, logos, service marks, and trade names may not be
used in connection with any product or service that is not Napster's.
Napster itself wants--and surely deserves--copyright and trademark
protection. Metallica and other creators of music and intellectual
property want, deserve and have a right to that same protection.
In closing, I'd like to read to you from the last paragraph of a
New York Times column by Edward Rothstein:
``Information doesn't want to be free; only the transmission of
information wants to be free. Information, like culture, is the result
of a labor and devotion, investment and risk; it has a value. And
nothing will lead to a more deafening cultural silence than ignoring
that value and celebrating . . . [companies like] Napster running
amok.''
Mr. Chairman, Senator Leahy and Members of the Committee, the title
of today's hearing asks the question, ``The Future of the Internet: Is
there an Upside to Downloading''? My answer is yes. However, as I hope
my remarks have made clear, this can only occur when artists' choices
are respected and their creative efforts protected.
Thank you.
The Chairman. Mr. McGuinn, we will take you at this time.
STATEMENT OF ROGER McGUINN, FORMER MEMBER AND CO-FOUNDER, THE
BYRDS MUSICAL GROUP, WINDEMERE, FL
Mr. McGuinn. Thank you, Senator. It is a pleasure to be
here. My name is Roger McGuinn and I have been in the recording
business for approximately 40 years. I started back in 1960
when I recorded with a group called the Limelighters, and
subsequently recorded with the Chad Mitchell Trio and Judy
Collins and Bobby Darin, and I was not a royalty artist at that
time.
I became a royalty artist when I signed a contract with
Columbia Records with a group called the Byrds, and we recorded
15 albums, or so, during that period. Aside from modest
advances for each of these albums, I never saw any royalties,
and so I am just saying that the protection for artists, the
issue of that--the artists don't always get the royalties they
are supposed to get from the record companies.
When you sign a contract that says you are going to get 15
percent, there are ways the record companies have of not paying
these royalties. And in my experience, even though we have had
number one hits with ``Mr. Tambourine Man'' and ``Turn, Turn,
Turn,'' I saw nothing but the advance, which is divided five
ways. It was only a few thousand dollars apiece, and with the
advent of MP3.com, I am getting 50 percent of the CD's that
come out now. I think it is a wonderful thing.
I have a Web site, mcguinn.com, and there I have a project
called The Folk Den, where I am preserving traditional songs.
Each month, I upload a traditional song for people to listen
to, and it is free. It is a public service and it is sponsored
by the University of North Carolina. And somebody from MP3.com
invited me to put my songs over on their site as well, and I
thought it was a good opportunity to get them to a more global
market. So I really appreciate the transmission of MP3's over
the Internet.
These songs are traditional, public domain songs, and I am
not worried about the copyright or publishing problem. I can
see how someone might be if they were not being paid their
publishing rights, and I think that MP3 servers should make
deals with the publishing companies. They should make deals
with BMI and ASCAP, and have proper royalties paid to artists.
But as far as my experience in the record business, the artist
doesn't always receive royalties from the record companies.
That has been my experience.
The Chairman. Well, thank you, Mr. McGuinn. That is a
complaint I have heard from a number of people.
[The prepared statement of Mr. McGuinn follows:]
Prepared statement of Roger McGuinn
Hello, my name is Roger McGuinn. My experience in the music
business began in 1960 with my recording of ``Tonight In Person'' on
RCA Records. I played guitar and banjo for the folk group the
``Limeliters.'' I subsequently recorded two albums with the folk group
the ``Chad Mitchell Trio.'' I toured and recorded with Bobby Darin and
was the musical director of Judy Collins' third album. In each of those
situations I was not a royalty artist, but a musician for hire.
My first position as a royalty artist came in 1964 when I signed a
recording contract with Columbia Records as the leader of the folk-rock
band the ``Byrds.'' During my tenure with the Byrds I recorded over
fifteen albums. In most cases a modest advance against royalties was
all the money I received for my participation in these recording
projects.
In 1973 my work with the Byrds ended. I embarked on a solo
recording career on Columbia Records, and recorded five albums. The
only money I've received for these albums was the modest advance paid
prior to each recording.
In 1977 I recorded three albums for Capitol Records in the group
``McGuinn Clark and Hillman.'' Even though the song ``Don't You Write
Her Off'' was a top 40 hit, the only money I received from Capitol
Records was in the form of a modest advance.
In 1989 I recorded a solo CD, ``Back from Rio'', for Arista
Records. This CD sold approximately 500,000 copies worldwide, and aside
from a modest advance, I have received no royalties from that project.
The same is true of my 1996 recording of ``Live From Mars'' for
Hollywood Records. In all cases the publicity generated by having
recordings available and promoted on radio created an audience for my
live performances. My performing work is how I make my living. Even
though I`ve recorded over twenty-five records, I cannot support my
family on record royalties alone.
In 1994 I began making recordings of traditional folk songs that
I'd learned as a young folk singer. I was concerned that these
wonderful songs would be lost. The commercial music business hasn't
promoted traditional music for many years. These recording were all
available for free download on my website http://www.mcguinn.com on the
Internet.
In 1998 an employee of MP3.com heard the folk recordings that I'd
made available at http://www.mcguinn.com and invited me to place them
on MP3.com http://www.mp3.com They offered an unheard of, non-exclusive
recording contract with a royalty rate of 50% of the gross sales. I was
delighted by this youthful and uncommonly fair approach to the
recording industry. MP3.com not only allowed me to place these songs on
their server, but also offered to make CDs of these songs for sale.
They absorbed all the packaging and distribution costs. Not only is
MP3.com an on-line record distributor, it is also becoming the new
radio of the 21st century!
So far I have made thousands of dollars from the sale of these folk
recordings on MP3.com, and I feel privileged to be able to use MP3s and
the Internet as a vehicle for my artistic expression. MP3.com has
offered me more artistic freedom than any of my previous relationships
with mainstream recording companies. I think this avenue of digital
music delivery is of great value to young artists, because it's so
difficult for bands to acquire a recording contract. When young bands
ask me how to get their music heard, I always recommend MP3.com http://
www.mp3.com.
The Chairman. Mr. Barry, we will take your testimony at
this time.
STATEMENT OF HANK BARRY, CHIEF EXECUTIVE OFFICER, NAPSTER,
INC., SAN MATEO, CA
Mr. Barry. Thank you, Senator. Good morning, and thanks for
inviting me to appear here today. I represent Napster, Inc.,
and the members of the Napster community. If you would for a
moment, I would like to recognize Shawn Fanning, who is 19
today. He is the inventor of Napster and he is sitting right
behind me, right there.
This committee is at the center of the great constitutional
debates of our country and the protection of the rights we
cherish as Americans. In the coming years, your committee will
continue its important oversight role of the legal issues in
the Internet world, and I am happy to be part of that endeavor.
Let me begin with a general point on which I think everyone
in this room can agree. Americans love music, and Americans are
listening to and making music like never before. Record sales
and music radio listening are up. Schools bands, choirs, and
drum and bugle corps are back, and Napster's success reflects
that love of music.
As of this morning, after less than a year, without any
advertising or promotion, Napster has attracted nearly 20
million users. Over half of them are over 30 years of age and
they are evenly split between men and women. In the evenings,
we consistently have about 500,000 people using the service
simultaneously. By comparison, that is about one-third the
number of people using America Online at the same time.
I would like to talk to you today about Napster's
technology, Napster's impact, and Napster's future. As you
noted, Andy Grove, the Chairman of Intel, recently said, that,
``The whole Internet could be re-architected by Napster-like
technology.'' Let me try to place his observation in some
historical context.
As you know, the Internet began as a redundant
communication network among scientists involved in defense
research. They needed to reliably share information that was
distributed all over the system, all over the DARPANet. The
commercial use of the Internet for media purposes abandoned
that structure. Instead, Internet companies adopted the
broadcast model, with large centralized computers that served
the information to the consumer's PC as if it were a television
receiver. Serving, and not sharing, became the dominant
approach.
Shawn Fanning began a revolution that is returning the
Internet to its roots. Napster is an application that allows
users to learn about other's tastes and share their MP3 files.
If users choose to share files, and they are not required to,
the application makes a list of those files and sends the list,
and only the list, to become part of the central Napster
directory. The Napster directory then is a temporary and ever-
changing list of all the files the members of the community are
willing to share.
Users can search that list, comment on the files on others'
computers, and see what other people like and chat about all
this. They do this all for no money, expecting nothing in
return, on a person-to-person basis. That is it. Napster does
not copy files. It does not provide the technology for copying
files. Napster does not make MP3 files. It does not transfer
any files. Napster simply facilitates communication among
people interested in music. It is a return to the original
information-sharing approach of the Internet, and it allows for
a depth and a scale of information that is truly revolutionary.
Napster is helping and not hurting the recording industry
and artists. A chorus of studies show that Napster users buy
more records as a result of using Napster, and that sampling
music before buying is the most important reason that people
use Napster. Users that transfer more than 20 files soon delete
over 95 percent of those files.
In the last 6 months, as you all know, record sales are up
more than 8 percent from the previous year, an increase of more
than $1 billion. Like other advances in technology, what
Napster shows is that more access to music leads to more
interest in music and more music sales.
Lawsuits against Napster contend that our 20 million users,
the recording industry's best customers, are guilty of
copyright infringement. We strongly disagree. Copyright is not
absolute. As Senator Leahy mentioned, it has limits; it is for
a limited time in the Constitution.
Companies that hold copyrights on behalf of creators and
which control distribution of creative works have a strong
inclination to change the copyright laws from a balanced
vehicle for public enrichment to an unbalanced engine of
control. Copyright holders traditionally are reluctant to allow
new technologies to emerge.
This committee's hearing records are replete with examples
of new technologies struggling to survive as copyright holders
argue that these new technologies will impede their ability to
be compensated for copyrighted works. You and the courts have
allowed, over their objections, technological advances like
radio, the cassette player, cable television, and the VCR,
advances which proved to be a financial boon to these same
concerned copyright holders.
Napster can work with the recording and the music
publishing industries. We remain enthusiastic about creating a
market-based solution that will benefit consumers, artists, and
the traditional recording and music publishing companies. Since
my first day on the job, I have been reaching out to the major
recording and music publishing companies.
In conclusion, I would say that we should not brand as
thieves the 20 million Americans who enjoy the Napster service.
Instead, we should let history be our guide. Americans love
music, and every time a new technology makes it easier for
listeners to discover, enjoy and share music, the recording and
music publishing industries benefit.
Thank you for your time today.
The Chairman. Thank you, Mr. Barry.
[The prepared statement of Mr. Barry follows:]
Prepared Statement of Hank Barry
INTRODUCTION
Good morning and thank you for the opportunity to appear before you
today to discuss music and the Internet. I am Hank Barry, Chief
Executive Officer of Napster, Inc., and I am here today on the
Company's behalf and on behalf of the members of the Napster community.
I am honored to be here today. Both through your jurisdiction and
your historical concerns, this Judiciary Committee has been at the
center of the great Constitutional debates of our country and the
protection of the rights we cherish as Americans. In the coming years,
your Committee will continue its important oversight of the laws that
govern how we handle delicate copyright issues in the Internet world,
and I sincerely value the opportunity to contribute to that endeavor.
Napster is a revolutionary technology based on person-to-person,
non-commercial file sharing. It was invented in 1999 by Shawn Fanning,
then a college freshman, who is seated behind me today. In less than a
year, without any advertising or promotion, Napster has attracted
millions of users of all ages and backgrounds, while gathering praise
from Internet experts for its technology and contributions to the on-
line community. As Andy Grove, former Chairman of Intel, recently
stated, ``The whole Internet could be rearchitected by Napster-like
technology.''
We at Napster respect and believe in the copyright laws and the
values--both public and private--that they are designed to promote. We
believe that copyright can successfully take into account new
technologies and innovations, and that Napster and its millions of
users throughout all fifty states are operating in compliance with the
law. The core issue is not copyright, although the recording and music
publishing industry, struggling to overcome its late entry into the
Internet economy, is attempting to paint it as such in court. The real
issue concerns business models.
My remarks today will address these technology, copyright and
business issues.
THE TECHNOLOGY
Two key elements of context are essential to understanding
Napster's technology. The first is the current architecture of most
Internet information. The second is the technology related to music
that is not part of Napster, but which is the enabling foundation that
allows Napster and similar architectures to exist.
Congressional support for DARPA was central to the beginning of the
Internet. Essentially, the Internet was set up as a redundant
communication network among scientists, many of whom were doing defense
related work. Using the Internet, they could share that information via
a system that would continue to allow communication even in the event a
great portion of the physical infrastructure were destroyed.
We have only begun to explore the potential of the Internet for
person-to-person communication. With notable exceptions like e-mail,
instant messaging and chat rooms, the Internet has largely been used to
create an experience for users that is similar to television. We have
taken the broadcast tower and replaced it with large computers that
``serve'' information to the consumer--and we have relegated the
personal computer, which is increasingly powerful, to little more than
a receiver of text, pictures and sound from the ``broadcasting tower''
web site. This ``client/server'' architecture tracks the broadcasting
model, but it does not in my opinion take advantage of the
fundamentally interactive nature of the Internet.
Concurrently with the adoption of this client/server architecture,
developments in computer technology have greatly affected the way
millions of people listen to music. Napster contains none of this
technology, but without it the Napster community could not exist.
In the early 1980s, Sony and Phillips promulgated the ``Red Book''
standard for making compact discs. As the recording and consumer
electronics companies (and some companies were both) adopted this
standard, we moved from a world where analog recordings were published
on analog media, such as vinyl records and cassettes, to a world where
music is represented by ones and zeros. Since their inception, both the
Microsoft Windows and Apple Macintosh operating systems have supported
the copying of any digital file, regardless of type. This effectively
allowed people to copy CDs onto the hard drives of their computers.
However, since the files for a song on a CD were on the order of 40 to
50 megabytes of data per song, this was not at all practical at that
time.
In 1987, the Morton Picture Experts Group, an industry standards
group that included representatives of the recording and music
publishing industry, promulgated the MP3 standard for taking these
large digital files and compressing them into smaller files
(approximately 3 to 4 megabytes per song). These smaller files could
more easily be stored on a computer, processed by a computer and
transferred between computers over the Internet. The file is
decompressed for listening by ``player'' software, but because of the
compression, the sound quality is not as good as that of a CD.
About four years ago, newly available software applications
combined the steps of copying the file from the CD and compressing the
file into the MP3 standard format. At the same time, the average speed
of an Internet connection increased. People found that if they had a
relatively fast Internet connection, the smaller MP3 file format
allowed them to effectively transfer digital versions of sound
recordings. They did this via e-mail, so-called FTP file transfer
software and many other means. This usage was promoted as an important
feature by all the leading Internet service providers.
In sum, the ability to listen to music digitally depends on the
ability to copy audio files into a computer, compress them into the MP3
format and transfer them over the Internet. Napster does none of these
things. So why all the fuss about Napster?
Napster is an application that allows users to learn about others'
musical tastes and share their MP3 files. If they choose to share
files--and they are not required to--the application makes a list of
the files designated by the user and sends the list to become part of
the central Napster directory. The Napster directory is a list of all
the files that members of the community are willing to share. Users can
search that list, comment on the files on others' computers, see what
other people like and chat about all this. If they want to and if the
other person is then online, they can share the files designated as
``shareable.'' This is accomplished by a file transfer from one
person's computer directly to another's. They do this for no money,
expecting nothing in return, on a person-to-person basis.
That's it. Napster is an Internet directory service. Napster does
not copy files. It does not provide the technology for copying files.
Napster does not compress files. It does not transfer files. Napster
simply facilitates communication.
Napster is a throwback to the original structure of the Internet I
described above. Rather than build large servers, Napster relies on
communication between the personal computers of the members of the
Napster community. The information is distributed all across the
Internet, allowing for a depth and a scale of information that is truly
revolutionary.
The Napster method of person-to-person, non-commercial file sharing
is a new tool, a new way of sharing information. All new tools change
the way we do things, and that often upsets the established order. In
the case of Napster, the established order is the recording and music
publishing industry. When presented with this new tool, the industry
reacted by attempting to crush Napster, as it has tried to do with
other technologies in the past. As it has before, the industry has
sought refuge in the copyright laws.
NAPSTER RESPECTS AND BELIEVES IN THE COPYRIGHT LAWS
Napster believes in copyright and its benefits to society. Napster
believes that copyright law can work well in the new Internet
environment, and foster innovation and technological advances like file
sharing, so long as we do not lose sight of what the copyright law is
truly meant to protect.
Copyright is a tool of public policy; it does not vindicate a
private right. The copyright laws are meant to find the balance between
the ``embarrassment of a monopoly''--to use Jefferson's term--that we
offer to authors in order to encourage their production of works, and
the public interest that otherwise would not allow such a monopoly to
occur. Copyright is therefore an incentive we as a society grant so
that we may have better access to more original expression. In the end,
the copyright laws are for the benefit of the public as a whole, not
the individual copyright owners. The balance requires that these rights
be limited so that we as a society can share, grow and build upon one
another's creativity. But that balance is always at risk in the
struggle between copyright absolutists and those who think more limited
protections are appropriate.
Companies that hold copyrights on behalf of creators, and which
control distribution of creative works, have a strong inclination to
extend copyright into a complete monopoly control over the creative
work--to change the copyright laws from a balanced vehicle for public
enrichment to an unbalanced engine of control. As a result, copyright
holders traditionally are reluctant to allow new technologies to
emerge. This Committee's hearing records are replete with examples of
new technologies struggling to survive as copyright holders argue that
these new technologies will impede their ability to be compensated for
copyrighted works.
Faced with these innovations and the copyright holders' protests
against them, Congress has repeatedly maintained the correct balance,
whether by only granting a limited term for copyright, by codifying the
fair use doctrine, or most recently, by recognizing the right of
individuals to make digital or analog copies of musical works for
noncommercial purposes.
As a result of decisions made by Congress and the courts,
technological advances like radio, the cassette recorder, cable
television and the VCR have survived copyright holders' attacks and, in
the end, proved to be a financial boon to these same concerned
copyright holders. The fact that this is true can be demonstrated by
the statement made by Jack Valenti, the President of the Motion Picture
Association of America, in the context of the Sony Betamax litigation.
At that time he testified before Congress that the VCR was to the movie
industry ``as the Boston Strangler is to a woman alone.'' Sixteen years
after Valenti's statement, the movie industry is thriving as never
before. U.S. box office receipts in 1999 reached $7.5 billion, their
highest level ever. All of this in spite of an 85.1 percent VCR
penetration rate in U.S. households. By all accounts, the VCR has
enormously helped the movie industry, and now accounts for more than
half of the industry's revenues.
It is my firm belief that the consumers who use Napster are not
committing copyright violations. Let me clarify that point. Nobody, not
even the recording and music publishing industry, is saying that
Napster is committing direct copyright infringement. Instead, they are
saying that the millions of people who use Napster, the hundreds of
thousands of citizens in every state, are copyright infringers. It is
the fundamental premise of their suit against Napster that, by engaging
in the very conduct--music sharing--that the recording and music
publishing industry has known about and encouraged for many years, your
employees, your colleagues, your friends, your family members and your
constituents are violating the law. We disagree, and believe that the
vast majority of Napster users appropriately operate in a non-
commercial manner within the bounds of the copyright laws. Napster's
view on this issue is based on a review of the copyright statutes,
court decisions and the expert opinions of copyright scholars. In that
regard, I would refer you to our brief on this subject in opposition to
the current preliminary injunction sought by the recording industry's
plaintiffs.
After years of uncertainty surrounding the copying of records for
non-commercial use, in Section 1008 of the Copyright Act, Congress
sought to clarify that consumers could make copies for noncommercial
use without fear of violating copyright laws. Today these same people
are flocking to Napster. The music industry should embrace these users
for who they are, the industry's most loyal consumers of music.
Further, even if one were to assume that some Napster users were
violating copyright law, Napster would still not be liable for any
copyright infringement pursuant to the landmark Sony Betamax decision.
The Betamax case recognized that Sony's offering of the Betamax VCR did
not constitute copyright infringement because the Betamax was capable
of non-infringing uses, such as copying for time-shifting purposes.
Napster allows similar uses. For example, Napster users often transfer
an MP3 file onto their hard drive as a complement to a CD they already
own. Further, studies show that Napster users share songs as a way to
sample music before purchasing it, including music that the user would
not normally consider buying. Finally, Napster provides a critical link
between new artists and the public. Too much creative talent fails to
get through the recording and music publishing industry filter. Lack of
recording contracts and radio play should not deny creators from
finding an audience. Napster is a great way for fans to find music of
artists they read about or hear play at a local club.
TECHNOLOGICAL CHANGE WILL IMPACT THE DISTRIBUTION OF MUSIC
The Internet revolution of which Napster is a part challenges many
companies. Often, existing methods of distributing goods and services
are at risk of being supplanted by new, more efficient and vibrant
Internet-based distribution systems. As a result, businesses try with
varying levels of success to adapt to the new environment the Internet
economy is still in the process of creating. These existing companies
take one of two approaches. Some embrace the new economy and mold
themselves into Internet-friendly companies. For example, UPS, FedEx
and WAL-MART are all examples of companies with significant pre-
Internet market share that are actively adapting to the new Internet
environment. Others, however, seek to exploit their position in the
existing market to dominate the development of this vibrant new market
space. In other words, these companies attempt to protect themselves by
keeping down innovative Internet technologies.
That is exactly what is happening here. The recording and music
publishing industry has known of the technology for creating and
distributing MP3 files for years. Yet they have chosen not to take any
actions to stop or even slow this widespread proliferation. Indeed, the
recording and music publishing industry actively encouraged this
proliferation by forming partnerships with and investing in companies
that direct consumers to MP3-encoding software that will enable them to
transfer music files over the Internet. They did this because they knew
that rather than hurting their sales, as they now claim, MP3s on the
Internet in fact help their sales. The recording and music publishing
industry's goal in attempting to crush Napster appears to be to retain
control over the flow of competing unsigned artists' music into the
marketplace, and the means of and business model of distributing music
over the Internet.
Despite all this, we at Napster remain enthusiastic about the
possibility of working with the recording and music publishing industry
to create a market-based solution that will benefit consumers, artists,
Napster and the traditional recording and music publishing companies
alike. Before my arrival, Napster's attempts to negotiate with the
industry were at first seemingly welcomed, but then, while talks were
still continuing and without notice, the recording companies sued.
Nevertheless, since my first day on the job, I have been reaching out
to the major recording labels. Ironically, all this is occurring in an
environment of steadily increasing record sales.
Recording industry statistics show that the music business is
booming. For example, according to the RIAA, U.S. CD sales increased 11
percent in 1999 to a dollar value of $12.8 billion, and are up 8
percent for the first quarter of 2000 compared to the same time period
last year. These figures discredit a study commissioned by the RIAA in
the litigation that attempted to show that sales of CDs near certain
colleges from 1997 to 2000 had gone down. That report focused on
declining sales at these selected stores over that time period, but
failed to take into account the fact that Napster did not even exist
until late 1999, and that big box and online retailers probably played
the most significant role in any declining sales that may have occurred
at these selected college stores.
In fact, numerous studies show that Napster users are more likely
to buy CDs after using the Napster directory service. For example, a
recent study showed that 28.3 percent of users who have transferred
files using Napster have increased their CD purchases, as opposed to
only 8.1 percent whose purchases have decreased. In addition, a Pew
Foundation report found that people are going out and purchasing music
they first sample online. Further, more than half of all users use
Napster to sample songs before purchasing them, and 42 percent of these
samplers actually purchase more CDs as a result. In fact, one study of
college-aged users showed that over 95 percent of all files that are
shared between those Napster users are soon erased, supporting the view
that Napster is a sampling and listening experience, and not a
permanent copying experience that could displace conventional CD sales.
The excitement that Napster creates for new and established artists is
helping to drive increased sales, reaping even greater profits for the
recording and music publishing industry.
Further, far from hurting the creative community, Napster is
offering thousands of artists a new and effective distribution system
for their work. Last year, the major recording labels released only
2,600 albums. In contrast, in the past four months Napster has signed
over 17,000 artists to participate in its new artist program, more than
7,500 of whom reside in the states represented by members of the
Judiciary Committee. Through this program and Napster-run chat rooms
that allow users to discuss new artists and songs, Napster provides
independent artist an inexpensive, alternative method of promotion. In
one case, a student at the University of Florida posted his songs on
Napster. The ensuing buzz resulted in increased sales of his CD on his
own web site, which allowed him to partially fund his college tuition.
In an industry where a few large companies operate as the
gatekeepers to the American listening public, artists clearly see
Napster as a revolutionary way to gain access to those who would not
otherwise have a chance to appreciate their work. Jim Guerinot, an
industry veteran who currently owns the Time Bomb recording label and
is personal manager for The Offspring, a multi-platinum-selling rock
band, has said: ``It is the band's and their manager's opinion that
allowing fans of The Offspring to hear their music on Napster will make
fans more, not less, likely to purchase the group's records, T-shirts
and other merchandise, and attend live performances by the band. * *
*. The Offspring view Napster as a vital and necessary means to promote
music and foster a better relationship with fans.''
In conclusion, we should let history be our guide. Every time a new
technology makes it easier for listeners to discover, enjoy and share
music, the recording and music publishing industry ends up benefiting.
In the end, artists, the industry and new technologists will create a
solution that benefits consumers, artists, Napster and the recording
and music publishing industry. Until that time, however, we believe it
would be rash to construe or change existing laws in such a manner as
to destroy Napster. To do so would brand as thieves the millions of
music lovers throughout the United States who have come together to
share and enjoy music on Napster and the Napster community will
disappear. I hope you in Congress will watch closely these developments
and I thank you for your time.
The Chairman. Mr. Robertson, we will turn to you.
STATEMENT OF MICHAEL ROBERTSON, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, MP3.COM, INC., SAN DIEGO, CA
Mr. Robertson. Thank you, Mr. Chairman, distinguished
members of the committee. Good morning. My name is Michael
Robertson. I am the Chairman and CEO of MP3.com.
You invited me here to discuss with you, the members of the
Senate Judiciary Committee, the future of digital music and how
that future will impact both consumers and artists. I would
like to address how music and technology together are making it
possible for consumers to access their music anytime, anywhere,
on any device, and how companies like MP3.com are taking
advantage of new technologies in a responsible way to bring
artists and consumers closer together.
I am going to provide a demonstration of our technology. I
will also discuss what happened after we introduced our
technology, the lawsuits that ensued, the confusion which
exists around current copyright law, and how consumers are
ultimately losing in the battle between technology and the
recording industry.
MP3.com has many parts. Roger talked about how we are the
host for 80,000 digital artists today, and we are proud to be
that. But what I want to talk about is one of our services,
called My.MP3.com. This revolves around our concept of an MSP.
I think I am going to be the only one to risk a live demo
here, and hopefully I won't regret it. I want to talk a bit
about our concept in MSP. The concept is a very simple one.
Because music can be digitized, we can store music digitally.
We can take an entire person's music collection, their entire
collection, the CD's that they have bought, the music that they
have purchased online, and store that. The beauty of that is
then those consumers can access that music from anywhere that
they are. Last night in my hotel room in Washington, DC, I had
with me my music collection, not because I lugged my CD's, but
because I had my computer and an Internet connection.
I want to show you this technology. We call it My.MP3.com.
So the first thing I am going to do is log in. Each account is
password-protected, so each person has their own account which
only they can access. The interesting part here is how we made
it possible to get the music into this online storage. Music is
generally very large, so we had to come up with technology that
would make it easy for a consumer to load their music in. We
rolled out two technologies to do that.
Perhaps the music that people care most about is the music
they have already bought, and so we came out with some software
called Beam-It, and I want to show you how that works. A
consumer takes an audio CD which they have purchased through
traditional means, loads this Beam-It software onto their
computer. Once the Beam-It is loaded, they simply enter in
their user name and password so that it knows what account is
being accessed. Then they take the audio CD, put it into their
computer, click a button, Beam-It, and literally 20 seconds
later all the tracks from those CD's are available in their
online account that they can access from anywhere. And so here
is an example where I just beamed a CD for Stevie Ray Vaughn. I
will click ``play'' and that music will load immediately and
start playing, we hope.
So, that is an example of a consumer loading their own CD
collection into the system. I want to show you another tool
that we rolled out which allows retailers to also be included
in the process. Today, when you buy a CD online at CDnow, it is
not really CD now; it is CDinfourdays.com, because you have to
wait for that CD to come in the mail. [Laughter.]
We rolled out technology that includes retailers in this
process, that encourages people to buy more music. I am going
to buy a CD from Steve Miller here at Djangos, who is one of
our retail partners. So I am going to purchase a CD as any
online customer would by putting in their credit card, their
shipping address. But as soon as this purchase is completed,
that Steve Miller CD that I just bought is immediately loaded
into my account. I can click ``play'' and all the songs from
that CD that I just purchased are mine to listen to in a
digital version while I wait for the physical CD to appear.
That is my favorite one, ``Fly Like an Eagle.'' But you
will notice here, Senators, I can click between these songs.
This is a virtual CD player. This allows me to access my music
not in a radio form, but as a virtual CD player online. That is
the core of the My.MP3.com technology.
What I want to do now is go back to what happened after we
rolled this technology out. The day we rolled this technology
out, we called the music industry and invited them to see this
technology firsthand. They sent their attorneys, they sent
their technologists to investigate this system, and we
encouraged them to do so.
After looking at this technology, they said they felt they
had concerns and wanted us to immediately cease the system. We
said that we were happy to discuss this, but we first wanted to
know a time line and what the issues were. They refused and
immediately leveled a lawsuit without so much as a demand
letter. From there, it went into the courts.
For us, this is really an issue of fair use. Does a
consumer who buys a physical CD have the right to load that
into an online service and listen to it? Does a company have
the right, like MP3.com, to assist them in doing this? To make
this easy, we built a database of CD's to make the upload
process quicker, but at the end of the day it is consumers
listening to their own CD's.
On to the lawsuit. We lost in the Second Circuit--I am
sorry--district court, my attorney tells me. That is why I
brought him. The judge did not agree with us that this was fair
use, so we immediately voluntarily disabled the system and
began licensing talks that were actually going on for some
time. We settled with two record labels of the five that are
suing us.
We haven't received complete licenses from any of the major
record labels. So although we have paid enormous amounts of
money, many times more than the largest copyright settlement
ever in history, for a system that was up for 4 months that
they can show had no damage to them, that, in fact, raised CD
sales to all the retailers that supported us, we are still not
able to offer that music to consumers.
We requested the license. We have the money to pay, but we
have not gotten licensed. There can only be two reasons. One,
money; two, barriers. We are willing to pay, but that isn't the
issue, in my opinion. The issue is more about barriers to
competition.
While we disagree with the judge's ruling, we are
respectful of it and we immediately went working on licenses.
But I want to explain to you how difficult this licensing
process is. Because the copyright law is vague, because it
deals with mechanical and analog realities, moving those to the
digital world is sometimes impossible.
To turn on our service, we need the following rights: one,
the right to copy the master recording onto a database suitable
for streaming over the Internet; two, the right to perform the
master recording via streaming over the Internet; three, the
right to copy the composition into a database suitable for
streaming over the Internet; four, the right to perform the
composition via streaming over the Internet; and, five, the
right to copy the composition each time it is streamed over the
Internet. That is for every song that we want to offer for
consumers who have already purchased this music. Clearly, this
makes a venue that is nearly impossible for any company to live
within.
I think today My.MP3.com presents the industry with a fork
in the road. Will licensing bodies work in a free-market
environment to license responsible technologies like My.MP3.com
or will they use this opportunity to squeeze competitors and
consumers?
I have heard this hearing referred to as the Napster
hearing. It is not the Napster hearing; it is the consumer
hearing. That is what this is about. I would contend that these
new technologies are being thwarted or reduced in their ability
to roll them out to consumers because of the ambiguities in
copyright law.
Completely new applications are impossible to know what
licenses are required. For example, we have a license with
ASCAP and BMI that pays publishers. Meanwhile, Harry Fox has
sued us for billions of dollars. They also collect money for
publishers. So you can see in this example there is double-
dipping, or even triple-dipping in some instances.
Additionally, the stiff copyright damages that surround
these gray areas can potentially wipe out any company for even
the slightest infraction over an issue that is very difficult
to ascertain. Technology for My.MP3.com is doable today. Yet,
there is no service available to the consumer, and that is a
shame.
Finally, consumers are paying more for music, not less, in
spite of the incredible efficiencies of digital delivery where
we should be seeing enormous price decreases. I can't deliver a
loaf of bread, I can't deliver a pair of shoes over the
Internet, but I can deliver music. We should be seeing great
price decreases, but we are not. Digital music is the only
industry that is moving to the Internet with higher costs for
the consumer.
When a consumer buys a CD, they are now being asked, if it
is in digital form, to pay every time they hit the ``play''
button on their computer. They don't pay every time they hit
the ``play'' button on their home stereo, and they shouldn't
have to on the Internet.
So with that, I want to point out that the key to growing
the music business, the key to protecting artists, the key to
protecting the music industry is not by charging existing
customers more and giving them fewer options, but by growing
the entire business by offering more options to those that pay.
This is about making the pie bigger, not about charging more
for each slice.
What is needed is a business landscape which encourages
experimentation without a long list of companies simply seizing
an opportunity to garner a potential economic windfall on the
backs of entrepreneurial companies, or worse, block their
entrance into the market entirely.
What we ask from you, the committee, is clarity, clarity
for the consumer. What can the consumer do with the music that
they have bought and own outright? We encourage this committee,
as well as other Members of Congress, to continue this
dialogue. By encouraging innovative technology advances, by
encouraging all parties in the digital music space to work
together to embrace free-market enterprises which will drive
this to a new level, will help consumers in this battle.
Thank you for your time.
The Chairman. Thank you, Mr. Robertson.
[The prepared statement of Mr. Robertson follows:]
[Additional material is being retained in the Committee
files.]
Prepared Statement of Michael Robertson
INTRODUCTION
Mr. Chairman, distinguished members of the Committee, good morning.
My name is Michael Robertson, and I would like to thank you for your
invitation to testify before the Committee. You have invited me here
today to discuss with members of the Senate Judiciary Committee the
future of digital music and how that future will benefit both consumers
and artists. I would like to address how music and technology together
are making it possible for consumers to access their music anywhere and
at anytime. Also, how companies like MP3.com are taking advantage of
new technologies to bring artists and consumers closer together by
providing a demonstration of the My.MP3.com service. I will discuss
what happened following the introduction of My.MP3.com and the
confusion which exists with current copyright law. Lastly, I would be
pleased to engage in an open discussion of how the respective
constituencies can work together to the benefit of both consumers and
artists. Let me first begin by talking about my company, MP3.com
(http://www.mp3.com) and the My.MP3.com service.
MP3.COM--THE COMPANY
I am here representing MP3.com as its chairman and chief executive
officer. Since the founding of the company, MP3.com has been dedicated
to becoming the premier Music Service Provider, or MSP, which I will
describe in greater detail later in this testimony. While the company's
vision has evolved since its beginning in 1998, today it is to make
digital music accessible to consumers on any net-connected device. In
the near future, home and car stereos, cell phones, PDA's and other
devices not yet imagined, will access the world's largest fully
interactive database of music in an easy and seamless manner.
Currently, more than 74,000 artists and over 469,000 songs and
audio files are posted to our web site. These numbers continue to grow
with an average of over 100 artists and more than 1,000 songs and audio
files added daily.
BEING A MUSIC SERVICE PROVIDER
Music Service Provider (MSP) is a term MP3.com coined last year to
describe a significant new sector of the music business in which a
personal music library is delivered to users anywhere over any net-
connected device. Just as an ISP provides access to the Internet, an
MSP provides access to music. Imagine being able to listen to your
music collection from your desktop at work, any room of your house via
your home network, portable devices like your phone or Palm Pilot, and
even in your hotel room via an Internet connection. The proliferation
of bandwidth, PC penetration and portable devices is quickly giving way
to the demand for music anywhere. As an MSP, we are dedicated to
enhancing and improving our infrastructure which has been designed to
allow consumers to instantly discover, listen to, freely download, buy,
store and organize their favorite music online. We are partnering with
other technology companies to satisfy consumers' desire to enjoy their
music anywhere and at anytime. Our MSP model is great for music lovers,
a blessing for artists and a necessity for growing the music industry.
An MSP manages all of your personal music digitally and, because it is
stored on the net, allows it to be delivered to any net-connected
device--making music more versatile, portable and valuable than ever
before.
In January of this year, we rolled out some of the first MSP
services to all music fans on the net.
My.MP3.com represents a complete relaunch of our My.MP3.com service
that lets users store, manage and play back virtually their entire
music collection from any web browser. Sorting albums and artists,
creating playlists, and streaming music in Lo Fi or Hi Fi are just a
few of the features available via a personal account.
Instant Listening gives consumers the ability to buy a physical CD
online and instantly listen to that CD. This innovative service gives
instant gratification a whole new meaning. When purchasing CDs from
MP3.com's e-tailers, all tracks from the CD are made available in a
user's password-protected MY.MP3.com account. Consumers can instantly
enjoy the tunes they just purchased while waiting for the post office
to deliver the plastic disc.
Beam-it is a technology that makes it a snap to move CDs you have
already purchased into your My.MP3.com account. Once the Beam-it
technology is installed, any time users place a CD into their CD-ROM
drive, they will see a polite window offering to ``beam'' their CD to
their MY.MP3.com account. Ten to 60 seconds later, the tracks are
available. In addition, visitors to MP3.com can select any of the more
than 469,000 tunes, which have been authorized by the content owners,
from our web site and add them to their catalog with a just a click of
the mouse.
In offering these new features to consumers, we built-in extensive
security hurdles, creating a system that encourages positive behavior.
To gain access to the music, users must represent that they own the
physical CD. All of the accounts are password-protected, so the music
in one account is not available to another account. Also, if we detect
multiple users on the same account, we can terminate the users of that
account entirely.
EXISTING LAWS AND THE INTERNET
As you can see, the Internet and the technological applications
applied to this new medium are both exciting and dangerous. It's
exciting when consumers can access their paid-for music and all new
free music offerings effortlessly on any Internet-connected device such
as cell phones, Palm Pilots, home and car stereos (to mention just a
few) and enjoy their music in new ways. It's exciting when, for the
first time, a digital artist has access to a marketplace without an
intermediary. This is good for artists--it allows them to gain access
to a marketplace that was heretofore denied them. This is good for
consumers because this new medium allows for individual diverse and
vast choices of music that cannot be heard anywhere else. It is also
exciting because, with commercial music available on the Internet, new
complimentary sources of revenue can be had for all to benefit.
Now for the dangerous part--with the vast consumer demand for
popular music on the Internet, we face an immediate and critical time
that I believe requires immediate governmental intervention. Without
this intervention, the potential for ``lawful'' music on the Net may
very well die, and we will be left with demand continuing to seek and
find illicit supplies of music. What I mean by intervention is clarity
for the consumer and simplicity for the technology company. Today,
MP3.com is faced with a very frustrating and apparently futile
challenge--the challenge to make music (that people already own)
available for storage and retrieval on the Internet without running
afoul of multiple parties claiming rights and control over that music.
What is at issue are consumers' rights. The rights of consumers to
listen to, manage, and share their music--music they already own.
Because of current legal and regulatory roadblocks, as well as existing
and outdated copyright provisions, consumers are caught in a quagmire
of bureaucratic regulations and prevented from enjoying music in ways
never before imagined.
Let us again take a look at what MP3.com did that caused all of the
uproar. We created a system that required as the price of admission to
the My.Mp3.com service that the consumer had in their possession a
physical CD. If the consumer did not have a CD, there was no way to
access this system. Unrelated parties at Rice University intentionally
and formally tried to hack into our system for access without a CD. In
every case, this access was denied. Respectfully, I remind you that
these CDs were already bought and paid for by a consumer. Further, the
various rights holders have been compensated upon that purchase. If now
the law tells me as a technology company that MP3.com must ensure that
the various rights holders are to be paid yet again, we can live with
this. However, look at the landscape that Internet technology companies
now apparently find themselves in. From what the courts and other
interested parties are telling MP3.com, in order to allow consumers to
listen to their CDs at their discretion, the technology company has to
separately negotiate for: (1) the right to copy the master recording
onto a database suitable for streaming over the Internet; (2) the right
to perform the master recording via streaming over the Internet; (3)
the right to copy the composition into a database suitable for
streaming over the Internet; (4) the right to perform the composition
via streaming over the Internet; and (5) the right to ``copy'' the
composition each time it is streamed over the Internet--and that's with
respect to each separate song put on the Internet.
It seems only fair, prudent and utilitarian that we should be
required to only negotiate one royalty for the use of one song. Today,
we have (at great expense) procured a performing rights license for all
content, a master recording license for much of the content, and we are
still faced with the prospect of all of this for nothing if we cannot
get a publishing license. How can any company, or any consumer, for
that matter, have hope that their music will be lawfully available on
the Internet if the service provider must first negotiate with three
different parties and then have to negotiate with potentially thousands
more in order to become an infringement-free company. This, as you can
see, is futile and puts consumers in the position to fill their needs
only one way and that is via a systemless, licenseless, lawless
copyright-trampling outlet, many of which you are seeing today. And
they have just begun.
Now, as for clarity--consumers look to you to provide clear
understanding of the parameters under which personal property can be
used. Never before in history has there been such a fog surrounding
what a consumer can lawfully do with their music. I do not have the
answers, but I do know the questions: Can I play my music over the
Internet? Can I store my music using a music service provider without
fear of shutdown? Can I stream my music to my cellphone? How about to
my Palm Pilot? Where do my rights start, and where do they end? What do
companies that I need to help me access these rights have to do so I
know they are lawful companies to choose to help me?
Today, MP3.com respectfully requests that answers to these
questions for the consumer along with common sense and ease of the
content licensing process be addressed as soon as practical.
THE BUSINESS MODEL
The ability to listen to a personal music collection from anywhere
on the Internet is a monumental advancement for consumers. The benefits
for artists, while more subtle, are no less dramatic and something that
artists and rights-holders should welcome with open arms. Using the
My.MP3.com technology as springboard, we laid the foundation for new
revenue sources that will grow the business.
For example, much of the current digital music opportunity on the
Net centers around offering music wrapped in advertising, much like
network television (NBC, ABC, CBS). Today, MP3.com's ``Payback for
Playback'' model is attracting and rewarding artists for giving away
their music on the Internet, with some artists making up to $20,000 per
month based on the popularity of their music. The ``Payback for
Playback'' fund pool is generated through advertising revenues.
In addition, consumers currently pay a subscription fee for many
services, including TV (cable), film (premium channels), Internet
access, phone and cellular access, which creates a valuable, steady
stream of ongoing revenue. The obvious missing item is music.
My.MP3.com illustrates how music can be transformed into a digital
service whereby users can store their music on the Internet. Here they
can sort, create playlists and access their music not only from their
personal computer, but eventually from any digital device with Internet
access, including cell phones, Palm Pilots, etc. A subscription system
has the potential to double the music business, just as cable TV grew
the film business to more than double its previous revenues. It's
important to note that this revenue stream is in addition to CD sales
as the subscription system complements CD sales. In May, our first
subscription channel was introduced--the Classical Music Channel--and
offers classical masterworks for a monthly subscription fee of $9.99.
The Classical Music Channel provides unlimited streaming access to more
than 4,000 tracks and over 300 free downloads from the collection.
Other channels slated for release include alternative, jazz,
children's, urban, world and more.
CONCLUSION
As the leader in the digital music space, we have employed
technology to build new delivery methods for music fans and new revenue
streams for artists. Today, at MP3.com, we have two main objectives:
(1) Continue to build the infrastructure that creates an easy and
convenient way for consumers worldwide to discover, listen to,
download, interact with, manage and purchase music; and
(2) Grow the music business through new revenue models such as
advertising and subscriptions, which will benefit individual musicians,
record labels and other companies in the digital music business.
MP3.com will continue to be a force in shaping the future of
digital music delivery and distribution. At the heart of MP3.com has
always been a vast technology infrastructure that can accept,
structure, manage, move and report massive amounts of data. By
executing on our MSP strategy, we are building the infrastructure to
deliver music to any device, anywhere and at anytime. Along the way, we
are dedicated to making the music business a better place for consumers
and artists.
We encourage this Committee, as well as other members of Congress,
to continue their dialogue on this issue. By encouraging innovative
technological advances in the online digital music space and creating
clarity of both law and licensing procedures, consumers, rights-holders
and artists worldwide will win. Please help create clarity and
stability in this space.
Thank you for your time.
The Chairman. Mr. Ehrlich, we will turn to you.
STATEMENT OF FRED EHRLICH, PRESIDENT, NEW TECHNOLOGY AND
BUSINESS DEVELOPMENT, SONY MUSIC ENTERTAINMENT, INC., NEW YORK,
NY
Mr. Ehrlich. Thank you, Mr. Chairman. My name is Fred
Ehrlich and I am the President of New Technology and Business
Development for Sony Music Entertainment. This committee has
always been on the cutting edge of technology and intellectual
property issues, and I thank you for holding this hearing.
There is no longer any doubt that the digital revolution
will radically change the way that artists create and consumers
enjoy copyrighted works. We in the music industry think this is
a great thing. These new opportunities pose great challenges,
both to traditional copyright law and to certain longstanding
business models of how music is created and enjoyed. I am glad
to say, however, that the music industry is ready to meet these
challenges. Let me give you an example from my own company.
At Sony Music, we established a New Technology and Business
Development Department more than 6 years ago. Its charter is to
review, evaluate and, where appropriate, enter into
partnerships with digital technology companies. Sony Music is
committing hundreds of millions of dollars to develop these new
technologies, and we are at the same time licensing our content
to more and more legitimate distribution companies.
When you buy a CD today, you are, in fact, acquiring a
product that represents the creative contributions of a complex
chain of players, a value chain, if you will, that constitutes
the music industry. The price you pay for your CD flows back
through the chain to compensate each and every one of the
contributors involved in the production of that sound
recording.
Music companies were among the first to use the Internet to
market and promote our recordings online. Some of our earliest
efforts at Sony Music included artist chats and making
available samples of new music, tour dates, and up-to-the-
minute artist information on our promotional Web sites. The
goal was to allow consumers to communicate directly with the
artists they love.
Music companies and our recording artists were eager to use
the Internet to distribute music. As early as 1997, we began
what we call online music distribution, where a consumer orders
product online and the product is delivered via mail in
physical format. This was just a start, but we wanted to start
to take the next step; that is, to deliver the music digitally.
The music industry has now enthusiastically entered the
world of digital distribution and it is testing a wide variety
of new business models. One key feature in these new models is
greater consumer choice. Another is maintaining and even
exceeding the high level of quality that our music consumers
have come to expect.
We in the music industry firmly believe that at least some
of these new, innovative distribution methods will provide the
path to the future of the music business. Some of these new
models include streaming transmissions in which the sound
recording is transmitted to the consumers, but not in a
downloadable format--we have been providing live Internet
broadcasts of our artists' concerts since 1997--and
subscription models that allow record companies to offer tiered
services in both the streaming and downloadable format to more
closely match customer preferences. Cyber lockers offer
consumers the ability to store their music remotely and to
access their music wherever they are and whenever they want.
A number of major labels have licensed their repertoire for
use in creating customized CD's. Also, a number of major
labels, including Sony Music, hope to offer music via kiosk.
These kiosks will allow consumers to access a far greater
reserve of available product to purchase, especially our back
catalog. And every major label has announced plans to begin
digital downloads of music.
At Sony Music, we are making our music available in
downloadable format not only on our own Web site, but on some
40 other sites, and are continuously looking for more and more
places to take our music to consumers. We are constantly
exploring new options for downloading music to digital lockers,
personalized radio, and bundling tracks on hand-held devices,
to name but a few.
All of this is just the tip of the iceberg. It is my job at
Sony Music to explore new business models aimed at getting our
music to the e-marketplace. I assume other labels have a
similar agenda. We are doing all this in partnership with
technology companies of every size and shape, large and small,
in the new digital music space.
We view digital distribution as offering ways to expand the
value chain associated with music, while also offering ease and
quality and choice for the music fan. If in the future this
value chain is not honored and compensation declines, it will
be very difficult to sustain the level of investment involved
in developing music, and that would be a shame both for the
artistic world as well as for the consumer.
All we ask is the continued application of copyright law to
ensure a system that respects and protects music rights in
cyberspace. We believe that a legitimate system of the
protection of rights sets off a domino effect for true e-
commerce where creators of technology, creators of music, and
the consumer all benefit.
I have absolutely no doubt that a breakdown in that
protection of rights would result in the lack of any incentive
for anyone in this value chain to continue. It is our view that
the opportunities we see will outweigh and outlive the
challenges. The music industry is ready, willing, and able to
use digital technology to bring music to consumers in evermore
creative ways.
Thank you for the opportunity to appear before you today. I
would be happy to answer any questions you might have.
The Chairman. Well, thank you.
[The prepared statement and an attachment of Mr. Ehrlich
follow:]
Prepared Statement of Fred Ehrlich
Mr. Chairman, Senator Leahy, and Members of the Committee, my name
is Fred Ehrlich, and I am the President of New Technology and Business
Development for Sony Music Entertainment Inc. Sony Music is a leading
global producer, manufacturer, and marketer of recorded music, video,
and music publishing, headquartered in New York. Sony Music employs
over five thousand people in the United States in our many record
labels (which include Columbia and Epic), and at our four disc
manufacturing plants and our state-of-the-art recording facilities in
New York, and generates significant U.S. revenue from our record and
music publishing businesses worldwide. I am here before you today
representing The Recording Industry Association of America, the trade
association of America's record companies. The RIAA's member record
labels range from large companies with major distribution systems to
small independent companies who average just a few recordings a year,
and are responsible for producing and distributing over 90 percent of
the legitimate sound recordings sold in the United States.
This Committee has always been on the cutting edge of technology
and intellectual property issues, and I thank you, on behalf of Sony
Music and the recording industry, for holding this oversight hearing
today.
There is no longer any doubt that the digital revolution will
radically change the way that artists create, and consumers enjoy,
copyrighted works. We in the music industry think this is a great
thing. The digital world opens up an almost unlimited number of
opportunities for the public to experience music in ways that were
never imagined before. Of course, these new opportunities pose great
challenges both to traditional copyright law and to certain long-
standing business models of how music is created and enjoyed. I am glad
to say, however, that the music industry is ready to meet these
challenges. In fact, we have a long history of embracing and developing
the new digital technologies, including, for instance, our adoption of
the compact disc format in the mid 1980's.
Today, I hope to explain to the Committee some of the ways in which
the music industry has employed digital technologies to expand the ways
we bring music to consumers. I will also try to predict, to the extent
that anyone can, some of the ways we expect to even further
revolutionize the creation and enjoyment of music via the Internet,
broadband, and other digital technologies. First let me outline, in
broad strokes, what is involved in bringing a piece of music into the
marketplace from the date of inception to the moment the first consumer
has it in hand--to describe the ``value chain,'' as it were, involved
in delivering new music to the marketplace.
When you buy a CD today, you are in fact acquiring a product that
represents the creative contributions of a complex chain of players,
coordinated by the record label, that constitute the music industry.
There are obviously many different creative combinations starting with
a singer songwriter or a band that writes their own music like
Metallica, but the creative chain may also begin with a songwriter (or
team of a composer and lyricist) who puts together the words and music
for a new song. The record label and its recording artist work with
that songwriter's music publisher to fit the right song with the right
artist. The recording artist will then go into a studio to record the
song, joined by an array of background musicians and vocalists, and a
team consisting of a record producer, studio engineers, mixing
engineers, and others. Meanwhile, the record company creates the
graphics and album art for what will become a CD in a jewel box. The
record company finances the recording of the song and all of the other
songs on the album, secures all worldwide rights for the album, and
manufactures the CD.
Now the work of getting it into the consumer's hands begins--the
promotion and distribution. The record company promotes and markets the
album throughout the world, working closely with domestic and
international broadcasters, music video channels, retailers and other
distributors. With the advent of new digital distribution technologies,
we now have a whole new range of venues where we can bring our music to
music fans: these include our own websites; those traditional record
stores having an online presence; and a vast array of online
destination sites such as AOL and Launch.com.
New digital delivery channels open the door for new entrepreneurs
to help deliver our music in ever more innovative ways to consumers.
These new participants in the music value chain include companies that:
digitize and compress our music to maintain the
sound quality consumers have come to expect from Sony Music;
encrypt our music and maintain digital rights
management systems to protect the work from theft;
create identifiers such as watermarks to preserve
the integrity of the work and the identity of its author;
constitute an ever-expanding network of retailer/
affiliates to offer our music for sale;
serve as financial clearinghouses for transactions
such as credit card, micro-transaction, debit card, and
electronic wallet transactions;
support the development of secure software/hardware
players on which our recordings will be played; and
support customer service and tech support.
The price you pay for your CD flows back through the chain to
compensate each and every one of the contributors involved in the
production of that sound recording. It is primarily the responsibility
of the record label to effectuate that flow of monies. As you might
imagine, it is extraordinarily costly for a record label to acquire
talent, record, promote, market, manufacture, and sell recorded music.
Our experience over the past years of music-making is that only a
very small minority of recordings are profitable. For every artist
embraced by the marketplace (the artist whose tunes you recognize,
whose songs get played on the radio, whose records get sold in the
stores), there are many more for whom the investment will never be
recovered. It is the relatively few hits that fund all of the
investment in new music. I am not trying to say that one can't make
money in the music industry. In fact, we can, and do, and hope to
continue to be profitable. I am saying, however, that every record made
requires compensation to a large number of individuals, whether or not
the record is successful. And the reason that record companies have
been willing to pursue this business model--a model that has worked,
year after year, to bring America and the world a steady stream of new
talent and great music--is our certainty that we will enjoy the
benefits of success. A certainty that, when the marketplace likes what
we produce, we will get paid for our work and our goods. That
certainty, so critical to the model, is rooted in the Copyright Law.
When someone buys a CD, it is the Copyright Law which assures that
everyone in the value chain gets their share.
With this framework in mind, I would like to highlight for the
Committee some of the ways in which record companies have embraced the
digital technologies for many years.
As far back as 1994, music companies were among the first to use
the Internet to market and promote our recordings online. At Sony Music
at that time, part of our job was evangelizing to our artists. Not only
we were not afraid of the Internet, but we were actively encouraging
our artists to take advantage of some of the Net's earliest
opportunities. For instance, Sony Music's online website, which
included artist biographies and unique content as well as samples of
current music, was launched in 1995. Our artists found online promotion
to be an exciting tool which empowers music fans to communicate
directly with their favorite artists. A number of record labels,
including Sony Music, also began an to use online websites to find
unsigned new bands. At about this time, record labels also begin to
experiment with new formats on which to present our artists' music,
such as the ``enhanced CD'' format which allowed us to include, along
with a standard audio CD, photos and other materials selected by the
artist to enhance the consumer's experience of the music. Also at this
time Sony Music created customized CD's which were bundled with new
personal computers sold by IBM, Toshiba, Sony, Packard Bell and others.
Our goal in these early endeavors was to encourage artists and their
fans to embrace the emerging Internet and digital technologies to
enhance the music experience.
From the outset, music companies and our recording artists were
eager to use the Internet to distribute music. As early as 1997, we
began what we call ``online music distribution,'' where a consumer
orders products online and the product is delivered via mail in
physical format. This was a start, but we wanted to take the next step;
that is, to deliver the music digitally. We identified several hurdles,
including slow access to the net, which made it difficult for us to
quickly transmit even small sound files; an early lack of Internet
penetration among American consumers; inadequate compression
technologies for the truly high quality recordings our consumers have
come to expect from us; and the need for digital rights management and
security technologies.
While time and technology are addressing the first three challenges
[modem speed, Internet penetration and compression technology], the
music industry has taken and continues to take the lead in solving the
fourth: the need for a secure transmission method. We helped recruit
IBM and other record labels to launch a trial digital download program
called the Madison Project. The Madison Project enabled us to test a
rights clearinghouse system. In a more fundamental way, it helped open
the eyes of record labels and their technology partners to the
practical complexities of making digital download a reality, from
encoding our music, digitizing the album artwork, clearing rights,
securing the transmission, and working out such logistical puzzles as
how a consumer could print out our CD packaging and liner notes on a
standard home printer. Perhaps most importantly, the Madison Project
enabled us to learn from the feedback of the trial participants about
the ease of use of the system, and the quality of the music experience.
At about the same time, under the aegis of the Recording Industry
Association of America, the worldwide music industry launched a
collaborative effort with the global consumer electronic and
information technology industries to develop an open standard for
secure music distribution online, which came to be known as the Secure
Digital Music Initiative, or SDMI. Thanks to those efforts and a level
of extraordinary cooperation among more than 200 companies in the
music, consumer electronics, and information technology industries over
a relatively short period of time, specifications have already been
written for SDMI-compliant portable devices, and several compliant
portable playback devices have already been brought to market. The SDMI
group is now working to move beyond portable device standards to issue
written specifications for all aspects of digital music use.
In parallel discussions, similar intra-industry groups are
currently working towards the establishment of standards for a new
generation of CD device which is both compatible with current CD
players, but is secure (that is, that includes digital watermarking and
encryption to protect the integrity of the recordings).
Now that some of these initial hurdles are being resolved, the
music industry in the United States has enthusiastically entered the
world of digital distribution. Inspired by the potential of digital
delivery to allow music to be created and distributed without physical
package, and to reach music fans more directly with the music they love
best, we plan to test a wide variety of new business models. One key
feature in these new models is greater consumer choice. Another is
maintaining and even exceeding the high level of quality that our music
consumers have come to expect from our industry. We in the music
industry know that some of these new business models may prove
successful, and some will not. We firmly believe, however, that at
least some of these innovative new distribution methods will provide
the path to the future of the music business. Some of these new models
include:
Streaming Transmissions: A number of major labels, include
Sony Music have licensed their repertoire in the so-called ``streaming
media'' format in which the sound recording is transmitted to the
consumer but not in a downloadable format. These streams may be
promotional or for sale.
Webcasting: This already thriving business is one in which
consumers enjoy a new form of on-line radio with music more directly
targeted to their genre likes and preferences. These are operating
because of the encouragement of the DMCA.
Live Streams: We have been providing live Internet
broadcasts of our artists' concerts since 1997. Many other labels are
doing the same.
Subscription Models: Subscription models allow record
labels to offer tiered services, in both the streaming and downloadable
format, to more closely match consumer preferences. These services
might be delivered through a variety of playback media, including
digital TVs and wireless and other portable devices. For instance, a
monthly fee might allow you to enjoy all of the music and video from
your favorite artist, with access whenever you want it, and perhaps
access to special chat rooms. A number of major labels, including Sony
Music, have announced that we will soon be offering subscription
services.
Cyberlockers: Warner and BMG are licensing MP3.com, BMG is
licensing MusicBank, and Sony Music is in active discussions with
similar companies, to offer consumers the ability to store their music
in ``cyberlockers'' and to access their music wherever they are and
whenever they want.
Customized CDs: A number of major labels have licensed
their repertoire for use in creating customized CDs. For example, EMI
sold a Beastie Boys 2-CD package; the first was new material from the
band, and the second was a customized disc made specially for each
purchaser of that buyer's favorite Beastie Boys songs.
Kiosks: A number of major labels, including Sony Music
have entered into partnerships with companies to offer music via kiosks
in traditional and non-traditional outlets, from records stores to
train and bus stations and fast-food restaurants. These kiosks will
allow consumers to access a far greater reserve of available product to
purchase--especially artists' back catalogues--than would normally be
available in most stores.
Digital Downloads: Every major label has announced plans
to begin commercial digital downloads of music. At Sony Music we are
already online with this new program; EMI is scheduled to launch in
about a week; and all of the other major record companies are slated to
begin operations in the near future. In addition, over the years we
have offered numerous promotional digital downloads, designed to
enhance our marketing efforts and mindful of our obligations to artists
like Lars.
We are constantly exploring new options for downloading music to
digital lockers, personalized radio, and bundling tracks on hand-held
devices, to name a few. Many of us are out there on the edge,
literally, trying to find new and better ways to deliver our music. But
all of these final decisions must be guided by sound business
practices.
All of this is just the tip of the iceberg. I oversee these efforts
at Sony Music, where we have established an entirely new division
dedicated to exploring new business models aimed at getting our music
to the e-marketplace, and I've got to assume that our competitors are
doing the same. We're doing all of this in partnership with technology
companies of every size and shape, large and small, in the new digital
music space and our goal of a high quality music experience for our
consumers.
But let me state here and now that none of us at this table can
predict with any certainty what the digital music marketplace will look
like a year from now, let alone a decade from now. There are new
developments almost daily in transmission and distribution
technologies, and those developments influence our decisions. My
company made a conscious and early decision to work with a wide variety
of companies in these fields. In addition to our strategic partnerships
with technology companies, we also are funding some of these companies'
efforts to address some of these technological challenges.
As to the best way to deliver our music to the consumer: It must be
easily found by and easily delivered to the consumer. It must be
delivered in a secure fashion, protecting the consumer in the
transactional phase and the quality of the artist's performance in the
transfer process, living up to the obligation to all parties in the
value chain. And it must ensure that music consumers will continue to
enjoy the great music experience they have come to expect from the
music industry. We view the digital world as offering exciting new
opportunities to expand the music value chain while also offering ease
and quality and choice for the music fan. If, in the future this value
chain is not honored, and compensation declines, it will be very
difficult to sustain the level of investment involved in developing
music.
And that would be a shame both for the artistic world as well as
for the consumer. It's our view that the opportunities we see will
outweigh and outlive the challenges.
Let me be clear. The music industry is ready, willing and able to
use digital technology to bring music to consumers in ever more
creative ways. We have the best artists in the world, are witnessing
continued technological advancements, and we continue to seek out new
strategic partners who will help us do so. All we ask--and it seems
fairly basic--is the continued application of copyright laws to ensure
a system that respects and protects music rights in cyberspace. We
believe--in fact, this belief is at the core of our business--that a
legitimate system of the protection of rights sets off a domino effect
for true e-commerce, where creators of technology, creators of music,
and the consumer all benefit. It is that system which has made the
creative and intellectual output of the United States the economic
leader in the world. I have absolutely no doubt that a breakdown in
that protection of rights would result in the lack of any incentive for
anyone in this value chain to continue. That surely is not the intent
of the Copyright Law nor is it in the interest of public policy.
Thank you for the opportunity to appear before you today. I'd be
happy to answer any questions you might have.
Attached is a summary prepared by the RIAA of some of the pending
litigation on cases that may be of interest to the Committee.
Summary of Pending Litigation by Record Companies and Artists
MP3.COM
On January 21, 2000, record companies filed suit against MP3.com
for copying 45,000 copyrighted CDs onto computer servers as part of new
services called Instant Listening and Beam-It. These services are
designed to allow users to listen to their CDs anywhere they have an
Internet connection. With Instant Listening, when a user buys a CD from
an online retailer partnered with MP3.com, that user can choose to have
the album immediately put into his or her MP3.com ``locker'' for
immediate listening. With Beam-It, when a user puts a copy of a CD into
his or her ROM drive, MP3.com will put that album into that user's
MP3.com locker. But, users are not actually copying their CDs into
their MP3.com lockers. Instead, MP3.com is giving those users access to
a digital music library of over 45,000 albums that MP3.com had
previously created. On April 28, 2000, Judge Rakoff issued an order
granting ``summary judgment'' to the plaintiff record companies. This
means that MP3.com's reproduction of tens of thousands of CDs into a
database without authorization constitutes copyright infringement, and
is not a ``fair use.'' The judge issued a written opinion which is
available at www.riaa.com.
NAPSTER
On December 6, 1999, record companies brought suit against Napster
because it launched a service that enables and facilitates piracy of
music on an unprecedented scale. At any single point in time, hundreds
of thousands of users may be logged onto Napster offering millions of
pirated sound recordings. Napster has built a system that allows users
who log onto Napster's servers to obtain MP3 music files that are
stored on the computers of other users who are connected to the Napster
system at the same time. Napster provides advanced search capabilities,
as well as direct hyperlinks to the MP3 files housed on its users'
computers. Based on sampling by record companies, close to 90% of the
MP3 files offered on Napster are infringing--and we believe Napster
knows this and even encourages it. Napster is thus enabling and
encouraging the illegal copying and distribution of copyrighted music.
Napster has claimed that they are simply facilitating noncommercial
fair uses of works. That is not the case. There is a big difference
between a consumer making a copy for his or her own personal use, and
that same consumer making the file available on Napster where it can be
freely downloaded by thousands of people. Not even the staunchest
proponents of consumer rights have suggested that the latter is fair or
lawful. Napster's service is unfair to the artists and musicians who
have invested time and effort to create music. It is illegal, and
wrong. It is also a deterrent to record companies who are embracing new
technologies that enable faster, easier, and wider distribution of
music on the Internet. Record companies are actively involved in the
development of new Internet business models.
In June 2000, the court ruled that Napster did not qualify for an
exemption under the Digital Millennium Copyright Act from liability for
copyright infringement based on the fact that it claimed to be a ``mere
conduit.'' The court found that Napster is not merely a conduit under
the DMCA for copyrighted works. Judge Patel's decision on this issue
can be found at www.riaa.com. Therefore, Napster cannot shield itself
from liability if it is found to have contributed to piracy. The
hearing on the record companies' request to prevent Napster from
contributing to the infringement of our works will take place on July
26, 2000 in the U.S. District Court for the Northern District of
California.
MP3BOARD
On June 23, 2000, the record companies brought suit against
MP3Board for contributing to the infringement of our copyrighted sound
recordings. MP3Board is an extensive and egregious link site that
facilitates widespread copyright infringement on the Internet. The
website has knowingly constructed a business from thousands (or more)
of links to illegal sound recordings on the Internet. Essentially, they
run an ever-expanding clearinghouse for illegal music in an effort to
create ``one-stop-shopping'' for anyone looking to steal music.
MP3Board not only posts these illegal links--which is bad enough--but
they take an active role in fostering the site's illegal offerings. For
instance, they encourage site visitors to post their own infringing
links and to download infringing files posted by others. They assist in
finding specific copyrighted sound recordings at the request of users.
They separate many of the links into various genres for easy searching.
Likewise, they provide a step-by-step online tutorial that teaches
visitors how to find and download infringing sound recordings.
The record companies do not oppose the concept of hyperlinking, any
more than we oppose the concept of MP3 compression technology. Both of
these represent useful technical tools that can offer great social
benefit when used properly. We are opposed, however, to the use of such
tools by MP3Board to knowingly create a business founded substantially
on our intellectual property. This case isn't about hyperlinking; it's
about a corporate defendant that is profiting from the deliberate
facilitation of copyright infringement.
The Chairman. Mr. Hoffman, we will take your testimony.
STATEMENT OF GENE HOFFMAN, JR., FOUNDER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, EMUSIC.COM, INC., REDWOOD CITY, CA
Mr. Hoffman. Mr. Chairman, members of the committee, thank
you very much for having me here. I want to enter my written
testimony into the record and go directly from my notes here.
The Chairman. Without objection, we will put it in the
record.
Mr. Hoffman. Thank you very much, sir.
First of all, let me tell you a little about Emusic. I am
Gene Hoffman, the President, CEO, and co-founder of Emusic.com.
We run a downloadable music service, and also the
Rollingstone.com Web site. But we are the leading seller of
downloadable music online. We sell songs for $.99 a song or
$8.99 an album. We have sold nearly 2 million MP3's since
inception, and it is music from people like Green Day and Bush,
Phish. Mel Torme might be a better person for this crowd.
Senator Leahy. Oh, come on. [Laughter.]
Senator Feinstein. Now, now.
Senator Leahy. Oh, come on.
Mr. Hoffman. Senator Leahy, we do have Phish, so we make
sure we take care of you.
Senator Leahy. OK.
Mr. Hoffman. It is kind of funny because I sit up here
wondering if I should get sued, being the only Internet company
on the panel who hasn't been sued. I am kind of proud of the
fact that we have, since inception, licensed all the music we
have offered for sale, paid royalties to songwriters, artists,
and labels throughout the entire period.
In fact, we were the first company to ever get what is
called a digital phono record delivery license, which is a
really fancy term from the Digital Millennium Copyright Act,
and the 1995 Act as well, that talks about what it is to sell a
downloadable file. The interesting thing is, in the face of all
this technological change and all of the supposed threats to
copyright, downloadable music sales continue to increase off of
our site. We currently offer 120,000 MP3 songs from
approximately 6 to 7,000 artists.
I want to make three main points and then I would look
forward to questions later. First of all, one of the important
things to consider as you look at the digital music debate is,
frankly, somewhat of a balkanization of a lot of the different
issues here. We are in an era of prohibition. Basically, what
consumers want really badly is the world music recording
catalog in a format they care for that is really easily
compatible with portable devices, like the Creative Nomad which
I have here. It is a little portable Walkman that has no moving
parts and holds an hour's worth of music.
This is interesting, this is really kind of fun. The really
compelling ones are ones that hold 150 albums' worth of music.
Literally, in my briefcase, I have most of my music collection
that I care about, and when I am over in Nevada later this
afternoon on the way back to California, I will be listening to
it. That is a compelling change in how music is used. I know
most of you probably have CD changers in the back of your car,
and while mine has the same six CD's in it from about 6 months
ago--it drives me nuts--having my entire collection with me is
why this matters.
Now, again, as I said, it is prohibition. You have got a
lot of consumers doing frankly behavior that is not exactly the
highest esteemed behavior we would hope from the American
constituency. But we actually trust customers. We think if you
give customers the opportunity to do the right thing, to pay a
reasonable price for exactly what they want, they will. And
customers have voted with their pocketbooks. Again, we have
sold nearly two million MP3 files so far.
The real issue about copyright piracy or illegal copying,
or whatever you want to call it, is scalability. Everyone has
always had the ability to make illegitimate copies of
copyrighted material. In fact, that is why copyright law
exists. Copyright law was a reaction to technology; it was a
reaction to the printing press. People somewhat forget about
the fact that copyright law is actually a law all about
technology, and the only reason it exists is because of new
advances.
But it is important to note that the services that are
frightening are the ones that have corporate backing because
they are able to scale. Frankly, I am not so sure that Napster
would be a very big thing if it wasn't for the fact that
someone can afford to run the central servers.
But it is important to note that the legality of Napster is
a much stickier question, and it is a question I happily leave
up to the Ninth Circuit Court. I am not sure what the right
answer is, but I can tell you one thing. I can tell you that
the people on Napster are often making copies of music
illegally. They are making music available that they do not
have the right to distribute.
Now, the real problem is--and this brings me to my third
point--market forces and the court system will solve this
situation. There is no real need for a major look at copyright
law. Copyright law as it exists today is actually pretty good.
It says quite clearly in the Net Act that even distribution or
copying of copyrighted material is illegal even if it is only
for possibly monetary gain, not actual monetary gain.
The question is it is sort of a problem of a death by a
thousand cuts. The issue is that the way the Net Act currently
works, it takes a very large trigger and then it starts very,
shall we say onerous enforcement proceedings, basically
felonious copyright triggers. People lose the right to vote.
Well, the problem is that copyright piracy online is simply
a lot like speeding. Basically, right now, a whole bunch of
people are going down the freeway at 110 miles an hour and
there isn't a single person out there to stop them. Setting up
a situation where people like Lars Ulrich have to actually go
after their own fans is not a system that we who are granting
government monopoly right there in the Constitution should be
continuing.
What we should look at is new ways to enforce what is
already illegal so that people realize that they actually do
have some risk in doing something that is not currently legal
in the United States. But, importantly, I think that has to
happen with the making available of the music that people
really want to have. It is very difficult from a moral position
to say to someone, you can't distribute that, when there is no
other option other than going to the store and paying $16 for
the CD and encoding it in the format you wish.
I frankly think that from an enforcement point of view, we
have a much better moral position, even though the legal
position is the same for all of us. We actually offer you the
opportunity to buy that song for $.99, and if you are willing
to rip off us and the artists and the songwriters over a measly
dollar, I am concerned about your moral fiber and your ability
to respect the laws of the United States.
So with that said, and the fact that these are people
running $2,000 computers with $40-a-month or $50-a-month
Internet access who just can't afford music, I am concerned
that we need to look at how we enforce copyright law on the
Net.
Thanks very much.
The Chairman. Thank you, Mr. Hoffman.
[The prepared statement of Mr. Hoffman follows:]
Prepared Statement of Gene Hoffman, Jr.
INTRODUCTION
It is a pleasure to take part in this hearing on the future of
digital music and the market for downloading music over the Internet. I
greatly appreciate the Judiciary Committee's leadership in creating
this opportunity for artists, consumers, government and industry to
focus together on how we can encourage our nation's continued
technological and economic leadership toward further advancement of
human expression of literary or scientific value.
My remarks today will focus on a top priority of the music and
Internet technology industries: the role of knowledge and intangible
assets in the New Economy. For the companies that make up the New
Economy, nothing is more crucial to success than striking a balance
between using technology and respecting the rights of others. Whether
it is the balance between marketing and protecting an individual's
privacy or freedom of speech and protecting children from harmful or
illegal content, those companies that balance breaking new ground in
the electronic frontier with enabling those with assets today to
continue to benefit from their work will succeed. My vision for the
future of the digital music industry is one that combines downloadable
music with subscription services, with new forms of promotion and
marketing that breaks the revenue ceiling from today's 40 billion to
the often touted 100 billion mark. Simply, physical promotion and
distribution has peaked in economic terms; there is so much music
already produced but unavailable to the consumer due to inherent
inefficiencies in the physical business model. These inefficiencies
either keep content from the market (e.g., back catalog) or drive
consumers to pirate music or to not buy at all.
BACKGROUND ON EMUSIC.COM, INC.
Let me take a few moments to tell you abut EMusic. Since it was
founded in January 1998, EMusic has established itself at the forefront
of how new music will be discovered, delivered and enjoyed in the next
decade. In addition to having the Internet's largest catalog of
downloadable MP3 music available for purchase, EMusic operates one of
the Web's most popular families of music-oriented Web sites--including
RollingStone.com, EMusic.com, DownBeatJazz.com, and IUMA. The company
is based in Redwood City, California, with regional offices in Chicago,
Los Angeles, New York and Nashville.
EMusic.com is the web's leading site for sampling and purchasing
music in the MP3 format, which has become the standard in the digital
distribution of music. Through direct relationships with leading
artists and exclusive licensing agreements with over 650 independent
record labels, EMusic.com offers music fans an expanding collection of
more than 100,000 tracks for purchase--individual tracks for 99 cents
each or entire downloadable albums for $8.99. EMusic.com features top
artists in all popular musical genres, such as Alternative (Bush, Kid
Rock, They Might Be Giants, Frank Black), Punk (Blink-182, The
Offspring, Pennywise), Jazz (Duke Ellington, Dizzy Gillespie, Louis
Armstrong, Concord Records), Blues (John Lee Hooker, B.B. King, Buddy
Guy), Hip Hop (Kool Keith, The Coup), Country (Willie Nelson, Merle
Haggard, Patsy Cline), Rock (Phish, Goo Goo Dolls, David Crosby), World
(Nusrat Fateh Ali Kahn, Lee ``Scratch'' Perry) and Vintage Pop (Liza
Minnelli, Eartha Kitt, Judy Garland).
To give you an idea of how fast the downloadable music industry is
growing, the company has now sold over 1 million songs in the popular
MP3 format since its launch. This total includes single-track sales as
well as tracks included as a part of albums and special collections. In
addition, EMusic.com's catalog has grown to offer more than 100,000
high-quality MP3s for sale from over 650 independent labels.
EMusic is part of the New Economy, both culturally and
technologically. At twenty-four years old, I am the youngest CEO in
NASDAQ. I am one of those freaks of nature in the high tech world--but
in a very good sense. I am very proud of the fact that I have taken
ideas and created companies with my friends and with many new people
that I have been fortunate to meet along my journey. EMusic is my third
company. My first, PrivNet, I created while in college. I sold it to
GP, Inc., and went to work for PGP. PGP was sold in 1997 to Network
Associates. While at EMusic I have bought four companies. Creating
companies, jobs, and economic wealth--all depend on sound accounting
principles supported by well thought-out public policy. EMusic is a
young company that has grown by acquisition. So far EMusic has done
purchase transactions because we are not poolable. This is one aspect
of the impact of accounting rules on the New Economy. I will come back
to that point shortly.
It is important to understand that EMusic represents significant
intangible assets. Many companies in the New Economy do not and will
not have any physical assets. Their value is either between the ears of
their employees or on the hard drives of their computers and networks.
THE FUTURE OF MUSIC
When pirated music is easy to find, so are the people who are
making it available. In other words, those who publish their digital
music collections through programs such as Napster and Gnutella are
unwittingly bringing attention to their less-than-legal behavior--kind
of like speeding down the highway at 110 miles per hour. Unfortunately,
some people will lose their license to drive.
Nobody responds well to threats such as these, but like traffic
laws and patrol cars, their existence is actually a very good thing. In
fact, I believe that a perceived risk associated with illicitly trading
music will end up benefiting not only artists and record companies, but
also digital music fans themselves, Let me tell you how this will all
work.
First off, let's be realistic: There is absolutely nothing illegal
about encoding your CDs into MP3 for your own personal use and
enjoyment. Even sending a selection of those same MP3s to some of your
friends is not going to get you into any real trouble. Additionally,
there are plenty of free, promotional MP3s being circulated by both
ametaur and well-known artists, and those tracks are perfectly OK to
share. And sites such as ours (EMusic) even sell MP3s licensed from
independent record labels. The controversy in today's digital music
industry stems from making MP3s available to potentially millions of
people through file-sharing programs such as Napster and Gnutella,
without the permission of (or compensation to) the copyright holder.
Besides the legal and moral issues involved, one of the main
problems with the recent Napster phenomenon is that most people who are
using these types of tools have the misperception that their actions
are electronically anonymous and, therefore, completely risk free. In
truth, these users can be easily identified and exposed, as Metallica
proved when it produced the names of 300,000 participants who the band
says have been illegally making its music available. Consumers and
music fans do not realize that they are actually exposing themselves to
a worldwide lens through which their music listening habits can be seen
by anyone on the Intenet. And with a few chicks and searches it is
likely that they can be personally identified. Napster and other file
sharing systems force people into the public eye of the Internet;
question is whether consumers fully understand this and appreciate the
downside to their privacy and security.
Firms are sprouting up to help artists and other copyright holder
find the pirated music. NetPD and Copyright Control Services are just
two examples of this new breed of business. Using technology very
similar to Napster's, their companies can easily identify as user's IP
address, ISP, and email address. When faced with the prospect of losing
their Internet access, how many people will risk making their music
collections available to a bunch of strangers? The pool of easily
accessible pirated music will begin to run dry.
So how could this possibly be a good thing for fans that want their
music in digital format? Because once we move beyond the current
``music should be free'' stage-rife with lawsuits, threats, and panic--
more musicians and record companies should be willing to make their
music available online in digital formats, and to do so legitimately.
The Internet is a wonderful way for artists and fans to get better
connected and to expand and experiment who how music in produced,
experienced, and enjoyed. The whole reason that Napster is so popular
is because fans have recognized that music in a downloadable format is
much more convenient to collect that compact discs. It also removes a
lot of the barriers that keep lesser known musicians and niche types of
music from being heard by more people.
CONCLUSION
When so much of the value of the American economy is tied up in
intangibles assets, how these assets are perceived is really the driver
of value. If the market is being driven more by perception than by the
principles and rules that artists, consumers, government, industry and
professionals have set out, then effective governance no longer works
and anarchy has taken over. This is not fair to individuals and is not
reflective of our nation's democratic values. Intellectual property is
an extremely important part of our nation's economy. I doubt that even
Napster's investors and employees and consumers want anarchy at the end
of the day. Their consumers want a reliable service and those with a
vested interest in Napster wish to see a return on their investment.
Whether it is Hollywood in southern California or Silicon Valley in
northern California, ideas and intellectual property are drivers of our
nation's economic growth and international economic influence. While I
an not in favor of any new governmental role here or in any new body
charged with setting rules or standards for digital music distribution,
we do need to work together in a new way to develop a better
understanding of where music and other forms of digital intellectual
property are going in this country and around the world. I look forward
to the day in the not-so-distant future when we can focus on these
positive effects and wonder what all the fuss was about.
The Chairman. Mr. Kan, we will turn to you.
STATEMENT OF GENE KAN, GNUTELLA DEVELOPER, AND FOUNDER,
INFRASEARCH, INC., BELMONT, CA
Mr. Kan. Thank you for having me here. My name is Gene Kan.
I am a Gnutella developer, one of many. I am not the inventor
of Gnutella, but I am simply one of the people who happily
talks about it. There are many people behind me on the Internet
who work to make Gnutella succeed.
Gnutella is an interesting technology, one which, in fact,
I have used as the foundation block for a company which I
recently founded called InfraSearch. We took investment from
people who founded Netscape and Excite, and they are all very
interested about the technology. In fact, Silicon Valley is
abuzz with the impact of fully distributed, decentralized
technologies such as Gnutella and its applications outside of
music download.
So let's get to the heart of the matter. This hearing is
about the future of profiteering on the mass distribution and
duplication of intellectual property. It is a do-or-die
situation, but the future is unclear, so let's hear the good
news first.
The good news is that the Internet is on our side in this;
it is on everyone's side. The Internet is a huge distribution
channel with infinite shelf space. Take, for example, the
examples which I cited in my written testimony, which I would
like entered into the record.
The Chairman. Without objection, we will put it in.
Mr. Kan. Thank you.
I have searched for 2 years for John Denver and Johnny Cash
albums at local record outlets in the Bay Area of California. I
have been unsuccessful. However, previous to this hearing, I
tried. On Napster and Gnutella, I found several hundred copies
of John Denver and Johnny Cash tracks--``Ghost Riders in the
Sky,'' ``Take Me Home Country Roads,'' both great songs, but I
have been unable to listen to them through conventional
outlets.
Really, the Internet is the Holy Grail of distribution
channels. It is a zero marginal cost distribution channel. That
means that it costs the same to transfer one copy of
intellectual property as it costs to transmit 10,000 copies or
1 million copies or 10 million copies. This is truly the Holy
Grail of distribution channels. There is no physical media,
there is no marginal cost. We don't have to print CD's, we
don't have to ship CD's. We don't have to mine the aluminum,
make the CDs, destroy our environment. The list goes on and on.
The benefits of digital downloadable media are infinite.
Twenty million Napster users can't be wrong. People like
this stuff. People love to download music from the Internet. It
is convenient. I can take my entire record collection with me
on the plane. It is just an incredible experience. The rollout
of broadband nationwide and worldwide makes this number swell;
20 million today, 100 million tomorrow. Everyone will want to
download music.
Our goal is to try to establish a method by which artists,
whom I call the intellectual property profiteers, can profit
side by side with these people exercising their rights to
listen to music in a convenient format. The question is how are
we going to harness the Internet, how are we going to make the
Internet work for us, us as consumers and us as intellectual
property producers and owners.
The answer is simple. I refer to my friend, Tracy Scott,
who developed this very simple model where we incentivize
pirates, we turn pirates into legitimate distributors. The fact
that we are here shows the efficacy of these pirates, and we
can only assume that if we were able to appeal to the profit
motive of pirates, they would be equally efficacious in
profiteering.
So what am I talking about? Let's assume that I can buy a
track for $1.50 from, say, Sony or BMG. I can resell that track
to you, Mr. Leahy, or Mr. Hatch, for $1.00. Let's split 50-50.
I make $.50, the record company makes $.50. Everybody is happy.
I am out there trying to profiteer. The profits are
staggering--20 million users today downloading what Lars Ulrich
claimed as an average of four songs per night. The profits are
simply staggering, and people will love to do this because we
are appealing to the profit motive.
So what about the bad news? The bad news is that old-world
tactics may no longer work on the Internet. This is the new
economy. That is a familiar term. Technological relief may be
impossible to stem the tide. Encryption, locks, whatever, they
are all useless. If we can hear it, we can pirate it. The only
way to manage this is through incentive. We must incentivize
people who are pirating and working against the system right
now. We have to use the carrot and not the stick.
In fact, legislative relief is a questionable possibility
here. People are infringing now and they might not change their
habits simply because of the law. People speed all the time. We
roll through stop signs, not a big deal. In fact, we just
infringed right now and everybody sort of chuckled about it. So
what does that say about the future?
And perhaps injunctive relief is questionable. With
distributive systems of today such as Gnutella and Freenet, it
is already nearly impossible to enjoin people who are acting in
an infringing manner. The technologies of tomorrow will be even
worse; they will be even more difficult to police.
Can we stem the tide of new technologies? Highly unlikely.
So what does the future hold? Great things if profiteers adapt,
if intellectual property profiteers adapt. There is room only
for the leaders. The Internet is inhospitable to middle men and
followers. Technology moves forward and leaves the stragglers
behind. The adapters always win and the stalwarts always lose.
Mechanized farming is a good example. You don't see anyone out
there with a horse and plow these days.
The future is in the creative exploitation of new
technologies. Maybe the express control over intellectual
property distribution is out. That doesn't mean that
intellectual property owners and profiteers are going to go
hungry. The Internet touches everyone and everything. Everyone
must adapt. Business and intellectual property owners are not
excluded.
Thank you. I hope that we can reach a reasonable conclusion
here and make everybody happy. Thank you for having me.
The Chairman. Thank you very much. That was a very
intelligent statement, except I don't think we infringed when
we downloaded because it was for educational and governmental
purposes, so it is fair use. And since we define what that is,
I will hold you in correction on that. [Laughter.]
[The prepared statement of Mr. Kan follows:]
Prepared Statement of Gene Kan
1. INTRODUCTION
The future of intellectual property in the face of broadband is
uncertain.
Intellectual property control on computer networks has long been a
problem for the software industry.\1\ Most recently, old-economy
enterprises such as the Recording Industry Association of America
(RIAA) have taken notice. Music is the topic of the day, so let's focus
there.
---------------------------------------------------------------------------
\1\ Software and Information Industry Association (http://
www.siia.net), 9 July 2000. The SIIA claims a loss of 59.2 billion USD
in the past five years with 12.2 billion USD lost in 1999 alone.
---------------------------------------------------------------------------
Technologies enabling the simple and fast exchange of music have
existed for decades. In the physical world, audio cassettes led the
charge. Remember recording songs off the radio? Minidisc and recordable
compact discs made it easy to swap and pirate music en masse with near-
original quality. In the virtual world, swapping MIDI, tracker, and
other formats of digitized audio were already commonplace when I began
BBSing in 1994.
Other media have had similar histories. Movies, images, and text
have had their equivalent of the audio cassette: that first easy-to-use
duplication instrument. Video cassettes, video compact discs,
photocopiers, scanner, email, optical character recognition. * * * The
list goes on for some time, and has been going for some time now.
So what is it about the Internet that has made the long-lived
problem of media duplication such a pressing issue? Recording industry
executives claim that one main factor is ease of use. Anyone,
particularly university students,\2\ can easily download whatever music
they want in minutes.
---------------------------------------------------------------------------
\2\ American universities are commonly blessed with extremely fast
Internet connections. They are also populated by young, technologically
savvy people with few financial means.
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For typical home Internet users (56 kbps modem) it takes
approximately eleven minutes to download a high-quality MP3-encoded
song.\3\ For a typical university student it takes about thirty
seconds. The recording industry would argue that the downloaded file,
when played back using an MP3 player,\4\ is similar in sound quality to
the original compact disc.
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\3\ Popularly encoded songs (128 kbps at 44 KHz) are approximately
one megabyte per minute.
\4\ MP3 players are numerous and varied. Software-based players
include the popular Winamp (http://www.winamp.com). Hardware players
include the Walkman-like Diamond Rio and the in-car empeg (http://
www.empeg.com).
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The cost to download? In the US, most Internet Service Providers
(ISPs) charge a flat rate, as does the telephone company for local
calls. That makes the incremental download cost approximately zero.
It's mainly a matter of patience and hard disk capacity.
With the impending globalization of inexpensive broadband access,
what is becoming a headache for the music industry will become a
headache for the movie industry.
2. CONSUMER DEMAND
Downloadable music attracts all manners of people. Recording
industry employees, doctors, lawyers, students, adolescents * * * the
list goes on. The people who use Napster are not criminals. They are
not the thugs you see on the evening news. The people who use Napster
are your family and friends.
There are numerous theories on why MP3 is so popular, and I'll
cover a few of them below. But the simple fact is that digital
downloadable music is hugely popular. So popular, in fact, that the
recording industry recently capitalized on Napster's success by using
it to ``leak'' new songs by Madonna and Dr. Dre, among others. No,
they'll probably never admit to it, but it did happen, and it's well
known throughout the music industry that these songs were leaked from
within the record companies to generate hype the same way movie
trailers do.
Convenience
The convenience of MP3 is undeniable. For less than 1000 USD one
can buy a 20 gigabyte hard disk, which stories approximately 5000 near-
CD-quality songs. The hard disk fits in your shirt pocket, or neatly
into your computer, where it will provide about 20000 minutes (fourteen
days) of continuous listening. Portable MP3 players are about the size
of audio cassettes. Compare that to compact discs which store about
seventy-four minutes of audio and don't fit into standard pockets.
Finding music is typically a very tough process. These are the
steps I take: Drive to the record store. Scour the shelves. Buy, if I'm
lucky enough to have found something worth trying. Drive home. Listen.
Remember the tracks that I like.
The steps for Internet music purchases are much more simple. Let's
take a brief look at the buyer experience at Amazon.com. Click over to
Amazon.com. Click ``popular music''. Type in ``John Denver''. Get a
screenful of results. Click. Buy. Moreover, when I clicked on ``John
Denver's Greatest Hits'', Amazon recommended several other albums I
might be interested in. Record stores don't do that, and if they did,
I'd have to scour the shelves again for the recommended disc.
Unfortunately, at this time, Amazon doesn't sell MP3s. Buyers must
wait for the physical CD to be delivered. And MP3.com, which does sell
MP3s, doesn't sell an MP3 version of ``John Denver's Greatest Hits''.
So while the Internet makes a step in the right direction, there is
currently no well-known non-infringing method of downloading ``John
Denver's Greatest Hits''.
The ultimate, really, is found in information-sharing communities
such as Napster and Gnutella.\5\ Users are able to search for exactly
the information they want, and download it instantly. As it relates to
music, that means users can search for exactly the artist and song
title they are interested in. Forget scouring the store shelves only to
find that what you wanted is not in stock.\6\
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\5\ Gnutella is a fully distributed network comprising individuals
and computers which actually build the strength of the network as they
join it. Without users, Gnutella is nothing but a definition of how
computers might communicate over a network to exchange information.
Gnutella is developed by hundreds of individuals around the world.
Numerous Gnutella-compatible softwares are released with complete
source code, increasing its appeal to technologists.
\6\ I have searched for two years for John Denver and Johnny Cash
at San Francisco Bay Area music outlets (Tower Records, Wherehouse,
Fry's etc.) and have been unsuccessful. I suppose my tastes are a bit
unusual, but I heard their songs as a child, and wanted to hear them
again. Strangely, even immediately after Denver's death, no record
stores carried his music. No stores even had a slot for John Denver! On
Gnutella, I found hundreds of Johnny Cash and John Denver tracks.
Similarly on Napster. If nothing else, this demonstrates the power of
the Internet to assist consumers.
---------------------------------------------------------------------------
It's my personal guess that if people could pay a reasonable price
for the music they download, they would. At this time the only well-
known pay-for-download services do not carry downloadable versions of
popular albums. People have no choice. If they want the convenience of
downloading, they unfortunately have no way to compensate the copyright
holder.
Cost
The marginal cost of an MP3 is zero. Even for consumers. When the
telephone company comes to your house to install your DSL, they might
charge 150 USD for installation and 50 USD per month. Using that line,
an infinite amount of music and be downloaded with little hassle.
Compare that to compact discs. Mine, transport raw materials,
acquire raw materials, manufacture, box, transport, unbox, stock,
inventory, sell, re-order, etc. All that costs a lot of money, and the
Internet eliminates the whole cycle. On the Internet, it's: record the
music, sell the music.
Flying
A popular argument for MP3 is that it makes music easily portable.
Flying on airplanes imposes interesting space constraints. When I fly,
I generally have a laptop computer with me so I can work while I'm in
the air. Before MP3, I carried a portable compact disc player and a
handful of the CDs I liked most. Now, I can carry MP3 versions of all
of my CDs on my laptop's hard disk. The best part: a full hard disk
weighs no more than an empty one, and I don't have to find a place to
stow my fragile CD player and CDs.
Environmental considerations
Compact discs, unfortunately, are made of matter. Matter which must
be mined, manufactured, and delivered. Each step in that process holds
numerous environmental disasters, and in the end the thing consumers
are really after is the music carried on the compact disc, not
necessarily the compact disc and its associated packaging.
The Internet makes near-zero-marginal-impact music ownership
possible. Downloading an MP3 does not require the manufacture and
delivery of a compact disc, box, liner notes, etc. To summarize its
sweetly: no environments were harmed in the download of this MP3.
Quality control
One thing consumers demand above all others is product quality.
Currently, Internet bootlegs of music vary greatly in quality. Some are
ripped \7\ from CDs which have scratches. Others are encoded at
horribly low bitrates, diminishing the audio quality to unbearable
levels. Yet others are encoded using low-quality encoding software,
leading to diminished quality.
---------------------------------------------------------------------------
\7\ Ripping is the process of extracting the data from a compact
disc into a manipulatable file. After a CD is ripped, it is typically
compressed an encoded into a space-saving format such as MP3.
---------------------------------------------------------------------------
The RIAA and its constituent record companies have an opportunity
to exploit their own brand name and quality control procedures to
produce digital downloadable music with consistent high quality. Surely
music downloaders would pay a small amount to ensure they aren't
wasting their valuable download resources.
When you buy toothpaste, do you buy Colgate, or do you buy Brand X
Tartar Control?
3. BENEFITS FOR THE RECORDING INDUSTRY
Artists and recording companies alike can benefit from digital
music. The reasons are numerous. For artists, it is a chance to reach
directly to their audience: a global audience. They have the
opportunity to capture nearly 100% of the gross sales of their product.
For recording companies, there is an opportunity to reduce the marginal
cost of distribution to nearly zero, and to expand the scope of
distribution to the entire Internet.
Artists
Whether or not it actually happens, artists have complained for a
long time that they don't get a fair deal in their record contracts.\8\
Even Metallica, a band rumoured to have struck an outstanding contract
with their recording company, sees the pot of gold:
---------------------------------------------------------------------------
\8\ Courtney Love has recently made statements to this effect at
the Digital Hollywood Conference. A summary can be found at http://
rollingstone.lyocs.com/news/newsarticle.asp?D=10847&Artist=23 (9 July
2000).
---------------------------------------------------------------------------
``Yes, of course, the scenario that the gentleman asked in the
question is very, very possible, and we've been looking at that for a
long time. An when we are done with our record contract, I would say
that something in that direction is somewhere (sic) between a real
possibility and a certainty.'' \9\
---------------------------------------------------------------------------
\9\ Metallica drummer Lars Ulrich on Slashdot.org (http://
slashdot.org/interviews/00/05/26/1251220.shtml), 26 May 2000.
---------------------------------------------------------------------------
The Internet allows artists to reach their listeners directly.
Listeners can provide feedback at the click of a mouse button. They can
use the same mouse button to purchase music directly from the artist.
In effect, the Internet combines the best of the patron and performance
systems. The entire audience can function collectively as the artist's
patron: each individual listener funding the particular aspects of the
artist that he likes, each listener encouraging the type of performance
he funds.
Finally, artists will return to a situation where they can net much
of the gross.
Recording companies
The benefit for recording companies is very simple: near-zero
marginal cost of distribution.
Typically, this would be a business's dream. Why it has apparently
become a nightmare is the subject of rampant speculation.
Perhaps it is because recording companies want to protect their
current model of operation. Lars Ulrich summarized the role of
recording companies very simply:
``Because what really, essentially, is a record company? A record
company is really essentially a bank, a bank that funds a bunch of
money to make records, and videos and promotion, publicity appearances
and so on, and they take that shot that one day the artist is going to
be successful that they're going to first of all get all their money
back, second of all make a profit.'' \10\
---------------------------------------------------------------------------
\10\ Metallica drummer Lars Ulrich on Slashdot.org (http://
slashdot.org/interviews/00/05/26/1251220.shtml). 26 May 2000.
---------------------------------------------------------------------------
Recording companies are in fact exactly like venture capitalists.
They fund, promote, and advise their portfolio artists. What they
mainly do is everything necessary to distribute music in the physical
world. They maintain relationships with radio stations, record stores,
and they arrange for manufacture and shipment of CDs.
Of course, the Internet changes that last bit. If communities such
as Napster and Gnutella are really successful, then perhaps the market
for music on physical media will shrink. But is that a bad thing?
Environmental considerations aside, a near-zero marginal cost
distribution system should be a boon to the companies which own the
copyrights to popular music. They would be able to sell the
intellectual property and net the gross.
4. RETOOLING MEDIA DISTRIBUTION
Exploiting new technologies often requires retooling. Automobile
manufacturers, computer chip manufacturers, the United States Postal
Service. * * * All have had to continuously change their methods of
doing business in order to remain competitive. In the efforts to retool
have proven themselves time and again to be worthwhile. Costs of
production and distribution decline, profits increase. The music
industry is not exceptional. Nor is the motion picture industry.\11\
---------------------------------------------------------------------------
\11\ Historically, both the music and motion picture industries
have faced challenges from recordable media. One example is the video
cassette recorder, which found motion picture companies suing Sony over
Betamax. Video cassettes have since proven to become a huge profit
centre for the motion picture industry by way of sales and home video
rentals. After all, what would moviemakers do with straight-to-video
productions if there were no video cassettes? Perhaps some day we will
have straight-to-Internet music.
---------------------------------------------------------------------------
The only thing missing is a method for the record companies to
financially exploit the Internet for what it is: the best intellectual
property distribution mechanism yet seen on Earth. So here is an idea;
turn pirates into paying distributors.
Turning pirates into paying distributors
Napster and Gnutella are giant music distribution networks. Every
file-sharer is in fact a voluntary distributor. These communities are
like potlucks. Everyone brings what he or she wants to share, and
perhaps partakes in what others brought. Right now it all happens for
free, mainly because there is no infrastructure in place to do it for
profit.
Installing that infrastructure is a small matter, and its effects
are huge. Tracy Scott's method of turning pirates into paying
distributors is elegantly simple, and its success is predicated on only
two assumptions. First, Internet connections have finite capacity.
That's not just an assumption; it's a rule. Second, people have a
pecuniary motivation. Suppose I have a finite-capacity Internet
connection and lots of music to share. Lots of people like to download
the music I share. Now suppose I could charge each downloader in a way
that made it easy for them to compensate me for the music I am sharing
with them. I would, of course, also compensate the record company for
the resale of their intellectual property.
Now, because I have a finite-capacity Internet connection I would
seldom, if ever, allow someone to download from me for free when I
could charge for the privilege. If I charged 1.50 USD for each track,
and split the revenues evenly with the record companies, the record
companies would make 0.75 USD for each download! They would never have
to promote or distribute their products themselves again.
You and I would be doing our very best to promote and distribute
their product for them, as we would have a profit motive. Multiply this
over the thirteen million you and I's on Napster alone, and the profits
for distributors and copyright holders are staggering.
Do or die
Technology has interesting effects. Those who realize how to
integrate and exploit new technologies gain potentially huge advantages
over their competitors. Those who do not will acquire an equal
disadvantage with respect to their competitors.
Intellectual property profiteers are now at a crossroads. If they
adapt quickly, as they have in the past, they can leverage the Internet
to revolutionize their industries. If not, they may find grassroots
efforts invading their bailiwicks.
It's happened before: phonographs led to the demise of the player-
piano music industry. The forward movement of technology always leaves
behind the stragglers.
5. TECHNOLOGY IS JUST TECHNOLOGY
Technology is neither good nor evil. Individuals choose how to
employ technologies. Some choose for good, others for evil. Some use
automobiles as a conveyance. Others use automobiles to rob banks and
kill people. To boil it down into a popular refrain: guns don't kill
people, people kill people.
To adapt the saying for the discussion at hand: Napster doesn't
pirate music, people pirate music. In fact people have pirated music in
large scale for decades. What's happening on the Internet is nothing
new.
Napster and Gnutella are on the one hand user communities. These
users are the ones who are possibly pirating music. On the other hand,
Napster and particularly Gnutella are notable technologies which are
changing the way we look at the Internet.
Certainly these technologies are not running rampant on computer
networks seeking out the latest Eminem tracks and pirating them. Humans
are doing that.
People routinely use other means to distribute music over the
Internet as well. Email, FTP, Usenet, IRC, ICQ, etc. All are used to
distribute music on the Internet.
6. INEVITABILITY
Keeping in mind that music is only a current-day analog for all
types of intellectual property, we will spend a little time analysing
how duplication of intellectual property is inevitable, and why it
makes sense to use the carrot instead of the stick.
When my family got its first IBM PC/XT in the mid-1980's, the first
thing on my mind was games. In those days copy protections on games
were very creative. They involved placing magic bits of data at secret
parts of the floppy disks on which the games were distributed. For some
time it was impossible to pirate those games. That is, until more
advanced disk copying software was developed. After that, there were
secret codes and product registration keys. Even physical keys
(dongles). All have been defeated, generally on the day of the
software's release.
Copy protection doesn't work
Certain cable television channels are scrambled. You can either pay
fairly high recurring fees to watch those channels, or you can purchase
a relatively inexpensive descrambler to watch those channels. More
recently, DSS satellite television signals are encoded. So savvy
consumers reprogram the DSS card to circumvent the encoding.
Protection schemes seldom work. Encryption for Microsoft WMAa
format files was broken almost immediately after its release. The
process was incredibly simple. One would purchase the right to listen
to the encrypted audio file. Play it back through special software
which records the decrypted audio file, and mission accomplished.\12\
You now have on your hard disk a permanently decrypted audio file.
---------------------------------------------------------------------------
\12\ This piece of software was interestingly called UNFUCK.EXE and
has made its way around the Internet like a brushfire. Copies of it are
largely found outside US borders, where the road to stamping it out is
rife with jurisdictional hurdles.
---------------------------------------------------------------------------
SDMI
SDMI, or the Secure Digital Music Initiatives, is what many record
companies are betting on to preserve their control over music
distribution.
My suspicion is that people in significant numbers will choose to
re-encode SDMI music into MP3 (or some other freely distributable
format). In fact, if even a few people reencode and distribute a song,
the fluidity of information-sharing communities will ensure its rapid
and extensive duplication.
End-to-end encryption
One onerous tactic I have heard is postied end-to-end encryption.
The idea is that at no point is the media unencrypted. The file is
encrypted. The data travelling from your hard disk to your digital
speakers or your digital monitor is encrypted. Currently even encrypted
media formats are decrypted long before the data makes it out of your
computer. In end-to-end encryption the data is encrypted right up until
it is presented visually, audially, or otherwise.
It's an interesting idea that at first appears to put a stop to
piracy. But in my mind there are few if any panaceas that are
predicated on authoritarian control, and end-to-end encryption is not
among them.
End-to-end encryption is easily defeated. Currently, movies are
often copied using a method commonly termed ``telesynicing.'' \13\ If
end-to-end encryption became a reality, audio and video would surely be
telesynced. The encryption would be rendered meaningless.
---------------------------------------------------------------------------
\13\ Telesyncing is crude, at best. The process is simple: a person
enters a movie theatre with a video camera and tapes the movie. Later
he digitises his tape and releases the results on the Internet. A large
network of pirate movie FTP (File Transfer Protocol) sites propagate
the digital media worldwide.
---------------------------------------------------------------------------
The end-to-end part of the end-to-end encryption idea is
misleading. Since humans don't have decryption systems built into their
anatomy, information must be deciphered before we experience it. And
that is the failing. The only way to make music that cannot be copied
is to make music that cannot be heard. The only way to make movies that
cannot be copied is to make movies that cannot be viewed.
Napster and Gnutella are just the first wave
Napster and Gnutella are but the first of a succession of
technologies which will make it increasingly difficult to control the
distribution of intellectual property.
Napster was the first. It involved a central server, which has
demonstrated that it can be a point at which controls can be
applied.\14\ Gnutella was second. It involves no central server,
eliminating the possibility of easily controlling the habits of
Gnuetella users by strictly legal means.\15\ Gnutella is only pseudo-
anonymous. FreeNet corrects that. It, like Gnutella, is fully
distributed with no central server, and it is completely anonymous.
---------------------------------------------------------------------------
\14\ Both Metallica and Dr. Dre have exploited Napster's
centralization in their campaigns to thwart piracy on the service.
\15\ The idea that the RIAA or its designates may ``spam'', or
purposely overburden the network to cripple it, has crossed my email
inbox numerous times. Fortunately for the legitimate users of Gnutella,
spam and its relatives have been outlawed.
---------------------------------------------------------------------------
If laws are enacted against these technologies, the ensuing
replacements for these technologies would only be more difficult, if
not entirely unfeasible, to police.\16\ This is only the beginning.
---------------------------------------------------------------------------
\16\ Perhaps when Vice President Al Gore created the Internet he
never thought it would come to this, but then. Senator Trent Lott
probably didn't think of the myriad uses for paper clips either.
---------------------------------------------------------------------------
7. WHAT SHOULD WE DO?
A zero-marginal-cost means of distribution is a rare opportunity.
It should be seized and exploited. Tracy Scott's viral marketing method
is a clear and simple way to give incentive to Internet music shares to
promote the legitimate sale of music. The current crop of technologies
should be encouraged and adopted, not restricted or abolished, lest
lawmakers and industry leaders wish to bring forth truly intransigent
technologies.
We're on the precipice of slippery slope. The toothpaste is already
out of the tube. It can be exploited nicely, or be turned into a huge
mess.
The Chairman. Mr. Griffin, we will turn to you.
STATEMENT OF JAMES HAZEN GRIFFIN, FOUNDER AND CHIEF EXECUTIVE
OFFICER, CHERRY LANE DIGITAL, LOS ANGELES, CA
Mr. Griffin. Mr. Chairman and members of the committee, my
name is Jim Griffin. I am the CEO of Cherry Lane Digital, part
of the Cherry Lane Music Group, created by world-renowned
musicologist Milton Okun. I serve as co-chairman of a start-up,
along with Jeremiah Chechik, of a company called Evolab, an
evolutionary laboratory where we focus on the wireless delivery
of media.
I thank you and your staff, most especially Sean Bentley,
for the opportunity to appear today and address these issues. I
believe they are of paramount and universal importance, to name
just two of the companies that will be affected by them. Your
foresight in convening these hearings is to be commended. There
is and always will be enormous change in the delivery of
entertainment and all intellectual works, whether music,
movies, books, or other forms of art.
Essentially, my remarks are a brief presentation centered
around a half a dozen fundamental points, but they deal with
the basic instinct that was expressed best by Nicholas
Negroponte. Things that think like to link, and that will not
change.
My first point is that no one is here to defend free music.
But music can and should be made to feel free even when it is
not free. Few will honestly suggest long term that music should
be free, as this would be absurd from either a business or an
emotional point of view. Indeed, if it were truly free, there
wouldn't be much more of it, as any economist can tell you and
as any artist will readily verify, and as some here today have.
However, as certain as I am that it must not be free, I
suggest that it is our obligation and our opportunity to,
insofar as possible, make it feel free, at least at the moment
we decide to use it. The delivery of music is approaching zero
marginal cost, the cost of enabling each listen after the
first. And for some, this is a terrifying prospect, as their
income may have depended upon charging a price much higher than
marginal cost, say $18 for a disc that costs no more than $1.00
to reproduce.
For others, this is not at all terrifying. To Mel Karmizan,
who runs CBS Radio and its Infinity broadcast stations, it is
expected of him. He makes music played on CBS stations feel
free to its listeners, though they pay indirectly each time
they patronize an advertiser.
Today, it can be truly said that music behaves more like
Thomas Jefferson's candles. He pointed out that when he lights
one with another, it diminishes the flame of the first not at
all, and that information and knowledge does not act like an
object subject to the laws of supply and demand. Respectfully
to Mr. Ulrich, music is not his table. There is no fair use
applied to his table, nor does his right to own his table have
an expiration date. Neither can his table change from a product
to a service. Much like an attorney who writes a good will,
once the word is out others will adopt it and there will be
less compensation.
Another part of the disconnect is that music fans no longer
feel like consumers. We use the word ``consumer'' liberally
here, but there is no consumption today, as there is no less
music after playing it than there was beforehand. The supply of
boxes containing music is decremented not at all, and arguably
the demand is increased. So this explains some of the
disconnect.
My second major point, I think, addresses how we can deal
with the disconnect. It is that in the music world, like so
many others, service is replacing product. Quite simply, we are
moving from a world of music as a product to a world where
music is a service. Essentially, we are learning that the
answers like in new business models, not technology-based
solutions.
The video industry that once emphasized control now sees
greater value in growing the crowd. The best forms of copy
protection are new business models that destroy the motive to
copy, not its mechanism. A wireless, flat-fee, advertising-
supported jukebox of unlimited capacity would strip us of our
desire to make MP3 files. We are transitioning, as my friend
John Perry Barlow likes to say, from an economy of nouns to one
of verbs, an economy that emphasizes the wine and not the
bottle.
It is time to set a price for the interactive license and
administer it. The consumer wants option value without the
disc. In an increasing mobile and wireless world, this is not
an unreasonable request, certainly no more unreasonable than
wanting to watch a local network television station via my
DirecTV satellite dish, which you mercifully enabled over the
objections of local network television stations which had
copyrighted the content.
The third major point I will make is the digits will become
ubiquitous and will increasingly arrive just in time and in a
customized way. They will eventually cease to be distributed
digitally through downloads or transferred in analog boxes. The
arrival of wireless digital access will permit this just-in-
time access. The commonly held belief that we are moving from a
world of analog distribution to digital distribution, I think,
is wrong. I think that the just-in-time delivery of content
will obviate distribution entirely.
Fourth, I think history proves by analogy that these things
are true. The transition that entertainment went through in the
1920's is an example, and we saw it more recently with the
video cassette recorder. The sports industry, too, claimed that
those who would broadcast or electronically transmit their
events were attacking a product, the stadium seats. And yet
Ronald Reagan was one of the very first pirates, if we apply
this analogy, recreating games in a booth down the street,
allowing others to listen to a sporting event that they would
not otherwise be able to attend. And so in many ways, Ronald
Reagan was the Michael Robertson of his day.
The fifth major point I will make is that there will be a
renaissance of creative expression. Technology's deepest impact
will be from enabling the digital delivery of art, such as
music, movies, books, other intellectual property.
Respectfully, this is not about how we move the Metallicas or
the Alanis Morrisettes or the Guns and Roses. This is about how
we enable dead art to come back to life, new art to have a life
it wouldn't otherwise have, and unusual art to find an audience
that it would not have found.
And, finally, my sixth major point is that, in the
alternative, the unfortunate possibility is that we could
condemn billions of people to access to knowledge conditioned
only on their ability to pay. Friction was a very useful tool
in allocating access to art. Riding my bicycle to the library
overcame the friction that others would pay to defeat.
If the delivery of intellectual property is to truly become
friction-free, new models must evolve to restore and preserve
balance. Digital lending institutions must evolve and flourish.
The potential of every individual is at stake. Will their
parents' wallet determine the music they hear, the books they
read, the music and videos that they watch?
The digital delivery of intellectual property is our
generation's nuclear power. We can either liberate knowledge
through its friction-free delivery or we can develop these same
tools to condition access to art, dependent only on our ability
to pay. Knowing her love for libraries and hatred for
restrictions on sharing art, I know how Eleanor Roosevelt would
feel, and it is a sad fact that not many of us remember her
contributions.
Thank you.
[The prepared statement of Mr. Griffin follows:]
Prepared Statement of James Hazen Griffin
My name is James Hazen Griffin. I am the Chief Executive Officer of
Cherry Lane Digital, part of the Cherry Lane Music Group created by
world-renowned musicologist Milton Okun. At Cherry Lane Digital we hope
to absorb the uncertainty of our clients regarding the change inherent
in entertainment technology. I serve as co-chairman along with Jeremiah
Chechik of Evolab, the Evolutionary Laboratory, where we are focused on
the wireless delivery of media. Before my involvement with these
companies, I started in 1993 and ran for five years the technology
department at Geffen Records.
I am also a founder and leader of the Pho group, approximately a
thousand people connected electronically and through over a dozen meals
held weekly around the world. The Pho group takes no position on these
issues, but is instead a catalyst for discussion on issues such as
those we are addressing here today. In addition, I write a column in
every issue of the magazine Business 2.0.
Counsel accompanying me here today is Phil Corwin, a partner at the
Washington, D.C., firm of Butera & Andrews. This appearance would be
considerably less coherent without Mr. Corwin's guidance and that of
the Senate Judiciary Committee's staff, and I thank all these people
along with you for the opportunity to appear today and address these
issues, which I believe to be of Paramount and Universal importance, to
name just two of the studios that will be affected by them.
The Pho group and my advisors and associates have contributed
mightily to my comments today, but they are not to blame for its
presentation and my nervousness and perhaps resultant failure to fully
articulate them.
Your foresight in convening these hearings is to be commended, as
there is and always will be enormous change in the delivery of
entertainment and all intellectual works, whether music, movies, books
or other forms of art.
Essentially, my remarks are a brief presentation centered around a
half-dozen fundamental points:
1. No one is here to defend free music, but music can and should be
made to feel free, even when it is not free.
Few will suggest music should be free, as this would be absurd from
either a business or emotional point of view. Indeed, if it were truly
free, there wouldn't be much more of it, as any economist can tell you,
and any artist will readily verify. I am certain there are some here
today who will.
However, as certainly as it must not be free, I suggest that it is
our obligation and our opportunity to insofar as possible make it feel
free, at least at the moment we decide to use it.
The delivery of music is approaching zero marginal cost--the cost
of enabling each listen after the first. For some, this is a terrifying
prospect, as their income may have depended upon charging a price much
higher than marginal cost, say $18 for a disc that costs no more than a
dollar to reproduce.
For others, this is not at all terrifying. To Mel Karmizan, who
runs CBS radio and its Infinity broadcast stations, it is expected. He
makes music played on CBS stations feel free to its listeners, though
they pay indirectly each time they patronize an advertiser. Likewise,
Jerry Seinfeld feels free to his viewers, none of whom can remember
paying, though they all do. If we suggested to either of these
gentleman that they encrypt and protect from non-paying eyes and ears
their words and images, they would laugh, as this would reduce the
income they receive.
Indeed, for those who pay a subscription fee to watch MTV or listen
to an audio service, though they pay directly, each decision to listen
or watch returns more value for fees already paid, making the use of
music or movies a positive economic act.
Today, it can be truly said that music behaves more like Thomas
Jefferson's candle--which when lit with another candle diminishes the
flame of the first candle not at all--than it does like an object
subject to the laws of supply and demand.
To the music listener who shares music, there is no consumption, as
there is no less music after playing it than there was beforehand. The
supply of boxes containing music is decremented not at all, and
arguably the demand is increased.
These are the new clothes the music industry must wear if it is to
grow to the $100 billion business it wishes from the $40 billion
business it is.
2. This is because in the music world, like so many others, service
is replacing product.
The economy that affects the jobs of steelworkers and artists alike
is changing in fundamental ways, and like so many industries, the
artist's world is transitioning from product to service.
Essentially, we are learning that the answers lie in new business
models, not technology-based solutions. The video industry that once
emphasized control now sees greater value in growing the crowd.
The best forms of copy protection are new business models that
destroy the motive to copy, not its mechanism. A wireless flat-fee/
advertising-supported jukebox of unlimited capacity would strip us of
our desire to make MP3 files. We are transitioning, as my friend John
Perry Barlow likes to say, from an economy of nouns to one of verbs. An
economy that emphasizes the wine, not the bottle.
Digitization and data networks liberate content from control over
its quantity and destination, in much the same way that broadcast of
radio and television remove control over the number and location of
listeners or viewers. Control over quantity and destination are
customary requisites for establishing pricing schedules that leverage
maximum price over marginal cost.
If control is lost, price falls and hovers at or near marginal cost
of delivery. For example, if DeBeers lost control over the distribution
of diamonds, their price would drop dramatically. Absent DeBeers'
control, the price of diamonds would obey the standard laws of supply
and demand and command a lower price in the market.
Digital service relationships, on the other hand, can and do
flourish in an environment where there is no control and the audience
is left to grow virally. With the service provider serving as a
gatekeeper to the growing audience, profit can follow. Service
relationships, such as those established by radio or television
stations, emphasize repeat visits and informal or formal ``data
mining'' to extract full value from the business affiliation.
The Net of the future will continue to exhibit flat-fee/flat-free
pull, where we choose to monetize our presence by tolerating
advertisements or by paying a subscription fee to banish the ads and
the loss of privacy. We've already seen online services such as America
On-line adopt the flat-fee model, as have telephone companies such as
Sprint and AT&T. Where these companies once billed us for our
activities and their duration, we now enjoy a smorgasbord of
communication for one price.
At its most rational, consumer behavior suggests they believe media
should be priced at or near marginal cost of delivery, which is closer
to zero than 99 cents. This is the price to which they have grown
accustomed in radio, television, newspapers, magazines, and so on.
Where media can be controlled, such as concert seats or difficult-to-
replicate analog items, consumers are more likely to be compelled to
accept a wide disparity between price and marginal cost, but
uncontrolled media generally move at or near marginal cost.
Even if we can control the destiny of songs, we give up control
over quantity and commoditization, creating a singles business where
none has ever proved profitable. Even singles at a dollar apiece reduce
album-related income because debundled consumers will skim the cream
off a market built on bundled pricing. For years we've promoted singles
and sold albums.
At its most irrational, by the way, consumer behavior suggests the
obvious: We are often doing business with teenagers! This should be
little surprise because it is teenagers we target with the music. It's
as if we were complaining that they should like our dinosaur books more
than those silly Pokemon cards--value is in the eye of the beholder,
and the beholder is distracted and empowered in ways our experience
cannot appreciate.
Regardless, we must realize that our digits will flow like water
from their source to their destination. Whether disintermediated from
broadcast or networks or disk duplication or kids plugging into
listening posts or whatever, our reality is that our inability to
control has a dramatic effect on pricing and our business plans.
Great music was made long before music the product was even
conceived. Music the product is a relatively modern invention, and has
been part of music for only a blip in history.
Promoting ubiquitous music as a service creates the right business
model--with the permission of the appropriate rights holders (which may
or may not include the artist, and may or may not include the music
listener). When we move away from the package we liberate the content
to seek larger audiences, and serving as gatekeeper to that ever-
growing crowd is the key to viral success.
Even product-based business will thrive from entertainment the
service. By creating a flat-fee buffet instead of the current tax on
trying new things ($15 to see if you might like more than one song from
that new band), we'll likely see merchandise and concert tickets and
all manner of ancillary income increase. At the same time, we can grow
the bundled subscription revenues to support the financial licensing
needs of the industry.
It's time to set a price for the interactive license and administer
it. The consumer wants option value without the disk, and in an
increasingly mobile and wireless world this is not an unreasonable
request, certainly no more unreasonable than wanting to watch a local
network television station via my DirecTV satellite dish (which
Congress mercifully recently enabled over the objections of the local
network television station, which copyrights the content).
3. Digits will become ubiquitous and will increasingly arrive just-
in-time, and in a customized way. They will eventually cease to be
distributed digitally through downloads or transferred in analog boxes.
The arrival of wireless digital access will someday permit just-in-
time, customized access to music, movies, books and other media
content. These digits and the content they carry will be streams, not
downloads.
The capital markets enthusiastically support the growth of
connectivity by whatever means, including wireless, copper cable, and
fiber optic. Connectivity becomes an assumption, not a complicated
arrangement. Our American obsession with wires and set-top boxes
ignores belies the fact that China and Africa and others are not
wiring, they're skipping head, leap-frogging to wireless, ubiquitous
connectivity.
It's a commonly held assumption that digital distribution will
replace the analog distribution system that traditionally delivers
services and information-based products. In the music industry, for
example, there is much talk about the future of downloading music
singles for a dollar apiece--or free--in MP3 or some other digital
format.
More likely, however, the notion of offering music or other data,
such as Websites or movies or newspapers, to be downloaded and stored
will give way to business models that emphasize the widespread
availability of content. When we can access all the bits we want,
wherever we are, whenever we want them, we won't want to carry them
around. Delivery on a disk or fixed storage of any kind will atrophy,
as consumers tire of digital-asset management lessons and content
providers become annoyed at giving those lessons.
Products we once could only conceive of as tangible are now fully
functional services without form, ubiquitously delivered just-in-time
at marginal cost and customized for each use and user. Put more simply,
the ability to decide what I want and get it where and when I want it.
Economists call it option value. What it means to you is that this
content is available at your option. Conversely, the song you hear on
the radio or video you see on MTV isn't at your option, and is priced
accordingly. We pay a price for the ability to have option value over
something. A movie or song broadcast ephemerally has low economic cost
to the viewer, but on a prerecorded cassette it draws a premium for its
option value. The entertainment business refers to it as the difference
between a performance license (inexpensive, compulsory, generally
embodied in a radio or television broadcast) and a mechanical license
(relatively expensive, discretionary, and generally a box containing a
disc or tape).
Today, however, consumers have access to a multiplicity of
recording devices, some real products we plug into the wall (such as
the Replay or TiVO devices or standard audio or video recorders),
others are software services downloaded or accessed over the Web. They
are buffers, repositories of digits that hold them for your later use,
cached to enable you to summon them at will.
These products and services offer consumers option value over
streams, the ability to retain an ephemeral performance and use it when
and where they want to do so.
In other words, these buffers transform push into pull. They take
content pushed aimlessly by broadcasters and make it content you pull
when you want it, and if you don't want the commercials, you click a
button and they disappear. They buffer or cache the output of the
broadcast and allow consumers the ability to retain the content and use
it virtually at will.
Ultimately, the only purpose of the buffers and caches we rely upon
today, such as diskettes and compact discs and DVDs, is to overcome
real or perceived supply inefficiency.
Buffers and storage are determinative factors of our media
interaction today, but long-term they are obsolete, the equivalent of
today's floppy disk--or disk of any kind. Disks are like traveler's
checks in an era of automatic teller machines. Who amongst us didn't
rely upon traveler's checks when we absolutely, positively had to have
the money we needed to feed and shelter ourselves in a foreign land?
Today, with the just-in-time efficiency of customized cash available
with the swipe of a plastic card, I know few who bother.
In the final analysis, products, hard drives, and downloads
disconnect, depriving the audience--and the creator--of a relationship
bonded with continuous access. Every streamed use, however, is an
opportunity to grow a closer, better relationship between artist and
fan.
4. History proves this analysis by analogy.
A. 1920's
Radio was the first Napster, just as Gutenberg made simple the task
of printing previously difficult papal indulgences. Radio meant that we
could no longer control the quantity or destiny of the music, or
sporting event, or church service, once broadcast.
The New Economy is anything but new. Like a recently purchased
vehicle, it's new to us. But let there be no illusion: this economy has
been around the block a few times. Sadly, we put out to pasture decades
ago those who could teach us now. There are few old-timers remaining to
bear witness to the truth: The Roaring '20s make our 2,000 days in the
throes of dot-com fever look tame by comparison.
Acoustic became electric during the '20s with far more savage
impact on the economy of art than we see now with electric becoming
digital.
Radio was followed almost immediately by television. In 1925 the
image of a revolving windmill was broadcast, and by 1928 the first
patent was filed for color television.
Music and movies and books not only survived the 1920's, they
thrived because of them, not in spite of them. Where radio was once
viewed as a threat to the music business, it is now viewed as a
necessity to success, and television and then cable television and the
video cassette recorder have proven no different.
We recognized this and acted accordingly: There is a blanket,
compulsory license applicable where control is difficult or impossible
(i.e., broadcast, performance, satellite, etc.), and for the same
reasons I am suggesting here it should be applied to electric becoming
digital. These systems produce a known cost and easy licensing.
Blanket, compulsory licenses imposed by Congress were the outcome of
the recent DirecTV/DBS/DSS debate over rebroadcasting the copyrighted
material of network broadcast stations, and in my opinion they will and
should be applied to interactive use.
At some point, there will be so many digital licensees and so many
digital licenses and so many digital licensors that we will likely
agree to lower the overhead of negotiations and establishing a simple
rate and an easy way to pay. The Digital Millenium Copyright Act itself
offers a similar analogy in our world, because it promises (but has not
yet delivered) one simple rate with automatic licensing.
Ironically, today we live in a world of blanket, compulsory
enforcement (there is one organization per industry enforcing the laws
on behalf of every company in roughly the same way) instead of blanket,
compulsory licensing.
B. Video cassette recorder
The entertainment industry must learn from its mistakes. In the
1970's, Universal City Studios fought the introduction of the
videocassette recorder. Universal felt that losing control of the
quantity and destiny of content would lead to ruinous damages for
information purveyors, and took Sony to court as the primary
manufacturer. The case went all the way to the United States Supreme
Court, but fortunately Sony won. Today, Sony shares with Universal the
rich revenue stream provided by videocassette distribution, and most
television companies participated in the VCR+ system that makes
videotaping easier.
Print purveyors took a similar view in the early days of the Web.
Many that previously feared copying today offer a one-click button to
``send this story to a friend.''
C. Sports
Sports team owners were once certain that televising sporting
events would be the death of their sport--why go to the game if you can
watch it on television, our business is selling stadium seats--who now
could not and would not survive without it.
It is legend that Ronald Reagan was one of the very first sports
broadcast pirates, recreating games in a booth after reading them over
a wire service. Ultimately we've come to realize that not only was
there no threat to Reagan's game broadcasts, but they actually grew the
size of the crowd, and served an important purchase that we once
confused with theft. Little wonder we now encourage broadcasts from the
ballpark.
D. Biology
Whenever I wade deep into law and technology, I find an analogy
helps shed light on the otherwise incomprehensible. Biology fuses the
wondrous with the incalculable, and it is instructive where methodology
fails. Our rising level of digitization is like the Mississippi River
during a flood, with whole towns and small cities disintermediated by
water seeking the shortest path from source to destination.
Every day I find evidence of this flood, but technological or legal
sandbags will not stop the deluge. As they say, the water eventually
finds its way to the sewer and floods your home anyway. Technology has
no switch, no lever to throw, no way to reverse the course that history
and fate have chosen for intellectual property. Napster, Gnutella, and
their progeny are the first flood waves to crest the berm. These peer-
to-peer file-sharing systems were born to swap music, but are already
finding use for movies, photographs, and other rich media content.
Intelligent storage is also part of this flood. The video business
has its TiVo, Replay, and other devices that buffer push-based content
and make it feel interactive to the viewer, allowing pull at push
prices (flat-fee or flat-free), and without the commercials if you
prefer. Audio versions of TiVo and Replay will likely arrive soon,
permitting users to fill jukeboxes from digital and analog broadcast
stations.
Technology does not have a switch, there is not a way to decide to
go back. We can pass laws and we can hire lawyers to enforce them and
they can employ technologists to enable their legal vision, but
ultimately control of art is shifting from push (instigated by the
artists and their enabling companies) to pull (at the will and at the
instigation of art lovers).
5. There will be a renaissance of creative expression.
Technology's deepest impact will be from enabling the digital
delivery of art, such as music, movies, books, and other intellectual
property. The effects will go deeper than just changing the way we
listen to popular music. Currently, we kill art regularly due to our
need to balance the costs of distribution with its rewards. Once
delivery is digitized, art need never die, and new art can come to life
that might not otherwise find an audience.
The enabling effects of digitization will not be found in today's
or yesterday's stars or big names. After all, they achieved worldwide
delivery and distribution.
The primary effects of digitization are three:
A. Dead art will come back to life, and in the future art need never
die
Today, it is necessary that we kill most art to ensure that some
can live. Like a gardener who prunes a rose bush, we kill some art to
enable others.
Entertainment studios routinely discontinue music products. They
must determine where the cost of distribution exceeds the rewards, and
act to keep the rewards greater than the costs.
Once digitized with the costs of delivery commoditized to a
marginal cost near zero, no art will be said to have delivery costs in
excess of its rewards, and it is likely we will not only bring dead art
out of the vaults and back to life, but we will find that art will
never die in a digital future.
B. New art
Likewise, we abort new art even more often than we kill it.
Everytime we turn away a new artist, what we mean to say is that we've
decided that the costs of distributing their art will exceed the
rewards.
We are essentially a college admission committee, denying an
opportunity to dozens for the same of the few we admit.
Once commoditized with a minimal delivery cost, digital art can
find a life it might never have otherwise found. We can enable new
artists to find their audience where once distribution costs prohibited
many such bold and noble experiments.
C. Unusual art
The rock band Nirvana, for example, might like to release every
concert the band ever performed, but in an analog world of distribution
this is impractical.
Now these bands can make available their entire repertoire of
music, and so we will likely see in the future that we are able to
purchase any Rolling Stones concern ever performed, or watch any
baseball game played and kept in an archive.
6. In the alternative, this could condemn billions of people to
access to knowledge conditioned only on their ability to pay.
Friction was a very useful tool in allocating access to art. Riding
my bicycle to the library overcame the friction that others would pay
to defeat. If the delivery of intellectual property is to become truly
friction-free, new models must evolve to restore and preserve balance
in access to art.
Digital ``lending institutions'' must evolve and flourish,
spreading entertainment and information, replacing product with
service. We must promise our children that like us they deserve to hear
any song, read any book, watch any movie--regardless of their ability
to pay.
The potential of every individual is at stake. Will their parents'
wallet determine the music they hear, the books they read, the movies
and video they watch?
Ultimately, digital delivery may prove as problematic as it is
enabling. Once digitized, art can be liberated, but equally if not more
tempting is the idea of making access conditional through encryption.
If we choose the course of predicating access to intellectual property
on ability to pay, a class-based society of information haves and have-
nots will emerge.
Sadly, those with access will find the content pool diminished
unless we open access to all, through digital libraries and ad-based
services that make a mockery of content as product.
Once replicated, books--and by extension--movies, and music are
available to everyone. As a child, I became addicted to books and music
that librarians and others were happy to supply, regardless of my
ability to pay.
I was encouraged to borrow any book or record in existence with the
promise that if it was unavailable locally, other libraries would lend
it to my library. I was promised access to any intellectual property I
might seek.
Librarians schooled me in what could now be called the instruments
of piracy. The library was the first place I saw a photocopy machine
and a tape recorder. use of these copying tools was openly encouraged
and taught by those who also made change for the nickels needed to feed
the copy machine.
No one called us pirates. None dared--though our actions violated
any corporate interpretation of copyright laws, we were considered the
opposite of scofflaws. We were scholars.
The fine balance between scholarship and piracy eludes us today in
our relentless struggle to monetize the digital delivery of art and
other intellectual property. Devoid of contextual motive, we now
declare illegal and immoral any use of digits outside their predefined,
technically based rule set.
Quite the opposite of the situation in my youth, it can now be said
that some digits (and the knowledge they embody) are off-limits, and
those limits are based purely on my ability to pay.
The digital delivery of intellectual property is our generation's
nuclear power. We can either liberate knowledge through its friction-
free delivery, or we can develop these same tools to condition access
to art on ability to pay.
The Chairman. Thank you very much. You do remind me a
little bit of Ronald Reagan. You are probably never going to
survive this hearing. [Laughter.]
Senator Leahy. Everybody reminds you of Ronald Reagan, Mr.
Chairman.
The Chairman. Oh, no, you don't, I will tell you.
[Laughter.]
Mr. Griffin. They both loved Ireland.
The Chairman. You are just fine.
I am going to ask Hilary Rosen, the head of the Recording
Industry Association of America, to maybe come up to the table,
as well, so she can answer questions if anybody has them.
If you could sit by Mr. Ehrlich, that would be a good
thing. We are glad to have you here. We are happy to have all
of you here. This has been a very stimulating hearing to me,
and each of you has a major role to play in these areas.
Mr. Ulrich, you have said that Metallica is not anti-
technology and will embrace new formats to make your music
available. Do you have plans to make your music available in a
downloadable fashion?
Mr. Ulrich. Well, you have to remember that we are the
artists, so I don't feel that it is my responsibility to spend
my time seeking out those new technological avenues to do that.
Our main concern is really when you have companies like Napster
selling it for free. You know, it is sort of the analogy of if
me and Mr. Barry were standing on a street corner together and
I am holding a Metallica CD and I am selling it for a price and
Mr. Barry is giving it away for free, which line are you going
to stand in? So we don't feel that it is our responsibility to
come up with the solutions. What we want to protect is the
artist's choice.
The Chairman. I don't either. I just wanted to know if you
were doing any downloadable----
Mr. Ulrich. Well, as soon as we stop spending all our time
trying to defend and deal with this whole issue where it is at
right now, we feel we look forward to moving on to the
solutions at some point in the future. But right now, most of
my energy is taken up just dealing with the situation at hand.
The Chairman. Let me ask you, Mr. Ulrich, again, and Mr.
Ehrlich, what is your response to those who argue that if you
put out of business companies like MP3.com and Napster through
litigation, or businesses like Emusic by failing to grant them
licenses for your music, you will greatly empower the Gnutellas
and Freenets that do not have a business office to call when an
unauthorized version of, say, ``I Disappear'' suddenly appears?
Do you want to start Mr. Ehrlich?
Mr. Ehrlich. We are in the business of making sure that our
music is available to as many places as possible, and so it is
not our intention at all to stop businesses from succeeding.
But we do want to make sure that businesses don't unjustly
enrich themselves without getting authorization.
The Chairman. But you do license to Mr. Hoffman's firm,
Emusic?
Mr. Ehrlich. To date, we have not. We are in active
conversations with a tremendous amount of companies and we have
licensed through others.
The Chairman. Do you license Mr. Robertson?
Mr. Ehrlich. We are in active conversation with MP3.com.
The Chairman. Mr. Ulrich, do you care to respond?
Mr. Ulrich. Well, I mean we are looking forward to dialogue
with all the gentlemen up here at the table at some point. Mr.
Barry has reached out to us a few weeks ago. There was a little
bit of dialogue, not much that was close to anything that we
felt comfortable with.
But we certainly understand, like I said in my statement,
that this is the future. We have no problem with the Internet.
It is just on whose conditions. We believe that, as the
artists, we have the right to control what happens to our
music, and that choice has clearly been taken away from us and
we are opposed to that.
The Chairman. Now, Mr. Robertson, you have drawn an analogy
between people making recordings of their own CD's for use in
other devices and your Beam-It virtual locker service. Now,
please explain the fair use purposes involved in a person
making a single non-commercial copy for personal use and a
business copying 45,000 CD's and selling access to them.
Mr. Robertson. I think to describe a little bit about our
Beam-It technology, the question really is when a person buys a
CD, what are they buying? I would contend that they are buying
a license to listen to that music on any format, on any device.
And perhaps there needs to be some clarity in copyright law so
that every time a new device comes out, like a cassette player,
like a CD, like a VCR, we don't go through the same issue of
does a consumer have a right to listen to the music which they
have legally purchased on a new device.
With our particular Beam-It technology, we had to overcome
some technology hurdles for the consumer. An average CD has
about 600 megabytes of data. That would take hours and hours,
if not days, on slow modem connections like the one we have
here for a customer to load it into their personal locker.
The Chairman. Rub it in. I will tell you, both Pat and I
were moaning and groaning about that as we went to the vote.
Mr. Robertson. And so, yes, we did buy 45,000 CD's or so.
We went out and purchased those through traditional retail
channels, and they sit there unused. The only time they are
ever activated is when a consumer verifies that they indeed do
have the physical CD. That is an important thing to note here,
is that we are rewarding paying customers. If they have a
physical CD, they are allowed to listen to that tune. That is
the real challenge here. If you reward customers that do pay
for the music, you by definition encourage them to pay for the
music instead of going to Napster and other resources.
The Chairman. Mr. Ehrlich, do you care to respond to that?
Mr. Ehrlich. Well, I am not a copyright attorney, and I
feel that the courts evaluated the particular occurrence and
they determined that illegal copying took place on MP3.com.
The Chairman. Go ahead.
STATEMENT OF HILARY ROSEN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON,
DC
Ms. Rosen. Thanks, Mr. Chairman. I think it should be
pretty clear, given the fact that these litigations have gotten
a lot of attention, that in the case of MP3.com, they never
sought licenses before they started this service. And in the
case of Napster, they never sought licenses before they started
this service.
The court did say that MP3.com is liable to seek licenses,
and they have been doing that. And there might be some edgy
disputes with Mr. Robertson and the companies about how those
negotiations are going, but you might expect a negotiation to
be a little difficult once there has been a court verdict such
as the one that we had.
So I think it is important to know that these are business
negotiations and that the artists and record companies didn't
have a choice at the outset of the businesses to grant licenses
because they weren't sought. In the case of MP3.com--and I
really distinguish that business from what Napster is doing--
MP3.com has a burgeoning new artist development section. They
ask artists' permission before they put music through their
site. This committee should not put these two companies'
current business models in the same category.
The Chairman. Did you care to comment, Mr. Robertson?
Mr. Robertson. If I could add one thing, yes, we are
respectful of the judge's decision that we do need a license.
The problem that we have is that we are faced with punitive
damages that go into tobacco-esque numbers for a service that
we were running for 4 months that they can show no damages,
that they didn't lose any CD sales. In fact, we presented
evidence that they sold more CD's through this process.
So for a service that was up for 4 months that allowed
consumers to listen to their own music, my company is
threatened with its very existence, not from one company, but
from five major record labels, as well as from institutions
representing multiple publisher entities. And that is the issue
here, is having monstrous punitive damages over these arguably
legal gray areas. I think everyone agrees they are gray areas.
The Chairman. Well, I want to be careful to stay away from
the litigation if I can. I know it is tough to do, but I want
to do that.
Now, Mr. Ehrlich or Ms. Rosen, either one of you, I would
like to ask you a few questions about fair use. Are you ready?
If I purchase a CD to play at home, it is fair use for me
to copy that CD onto a cassette to play in my car. Is that
right?
Ms. Rosen. Keep going.
The Chairman. The answer is yes.
Ms. Rosen. You know, the copyright law is a strict
liability statute. It was written, you know, by this committee.
I think the issue that we are running into now and the issue
that is unclear for these businesses is not what consumers have
the right to do.
The Chairman. Right.
Ms. Rosen. So we shouldn't be lost that that is the issue.
The Chairman. Well, I am going down the steps. Now, is it
fair use if I give a copy to my wife to listen to in her car? I
have made a cassette copy for my car and now I want to make one
for my wife.
Ms. Rosen. Mr. Chairman, you are leading me down the
Napster argument before the Ninth Circuit Court. I can't go
there.
The Chairman. Well, is it fair use for me to rip a CD onto
my hard drive to listen to in my office? Now, if so, if it is
fair use, then I assume it is similarly fair use for me to
store that file on a server rather than on my hard drive. Yes?
If the server host decides for efficiency reasons that one
copy of ``Enter Sandman'' is sufficient. [Laughter.]
You and I are going to get along well.
Mr. Ulrich. It is never sufficient. [Laughter.]
The Chairman [continuing]. Is sufficient to serve its
storage clients rather than 200 identical copies, is that fair
use?
Ms. Rosen. None of the things you are saying are fair use.
The issue, though, is one of enforceability, and what has
happened is now the argument before the court that Napster is
making about them taking the individual's fair use right is
proving that old adage that no good deed goes unpunished.
The fact that Metallica allows their fans a souvenir--or
the Grateful Dead did--allows their fans a souvenir from their
shows to make a copy and take it home, and maybe even share it
with a friend, does not justify the idea that a commercial
operation can enrich themselves with billions of dollars
exploiting that tolerance. And that has been what it is; it is
a tolerance for individual consumers to use their music as they
see fit. And those two things are very different.
The Chairman. My time is just about up, but let me ask Mr.
Barry and Mr. Kan a question. Can Napster or Gnutella peer-to-
peer architecture be made to work with either accounting
software that allows for accurate accounting for copyright
royalties or access control software to ensure payment for
using the music? And if it can, explain how. We will start with
you, Mr. Barry, and then we will go to Mr. Kan.
Mr. Barry. Mr. Chairman, I would just like to make sure
that we understand that Napster is not Gnutella, and I do not
share the views that Mr. Kan expressed in his testimony with
respect to the future. The world of music lovers that I have
experienced in the last 7 weeks as interim CEO is very
different from the vision that he painted. I have great faith
in the American people and the degree to which we take pride in
law abiding.
So technology does not mean the end of intellectual
property. I think that is your question. Can we work out
regimes where intellectual property is respected? The answer is
yes, and I think Napster is doing that. I think what 20 million
people are doing on Napster is sharing music. They are doing
that for previewing purposes, they are doing that for sampling
purposes, and then they are going out and buying CD's. CD sales
are up 8 percent, over $1 billion, Senator, and the reason they
are is that more people are interested in music. So we are
generating interest in music. Now, do we want to work out a
private arrangement whereby something could be done along the
lines you describe? The answer is yes.
The Chairman. Can you do it, though?
Mr. Barry. Technologically?
The Chairman. Technologically.
Mr. Barry. I think that it would be extraordinarily
difficult, but probably worth the effort.
The Chairman. Mr. Kan, we will let you finish and then I
will turn--well, before I go to you, Mr. Kan, let me just say
this.
Mr. Barry, some of your arguments against Napster's
copyright liability are predicated on the assertion that
Napster users are operating within the bounds of fair use, as
you have stated here today.
Mr. Barry. Yes, sir.
The Chairman. Now, let me understand what you understand as
the contours of fair use to be. If I buy a CD and I make a copy
for the car or one for Senator Leahy, my friend, that is
probably fair use. It may not be, in Ms. Rosen's eyes.
Mr. Barry. Well, indeed, Senator, Hilary Rosen has said,
``it's cool to make tapes, it's cool to trade them with your
friends, it's cool to share music.''
The Chairman. OK, but how about if I make a copy--she is so
outgoing, I will tell you, it is just wonderful.
How about if I make a copy----
Ms. Rosen. If that is the strongest argument you have, I am
not worried.
The Chairman. How about if I make a copy for anyone who
comes to my office? Is that fair use?
Mr. Barry. For anyone that comes to your office?
The Chairman. Yes.
Mr. Barry. For non-commercial purposes? I think the Audio
Home Recording Act says yes.
The Chairman. If I post a copy on my Web site and invite
people to download it, is that fair use?
Mr. Barry. If you post it on your Web site and you invite
people to download it for non-commercial purposes, I would say
yes.
Mr. Ulrich. Mr. Chairman.
The Chairman. I will be right with you.
How about if I generate revenue through ads or access fees
by attracting people to my site by offering a free download of
that CD?
Mr. Barry. Senator, just let me make one quick point and I
will answer your question. You need to understand that the
architecture which is described up here of Napster is sort of
semi-correct, and the reason it is a little bit incorrect is
that Napster does not host any files. There is no big Napster
server where there are files.
Napster is an index, and that index is generated by the
individuals who participate in the Napster community. So what
you have are about 20 million people who have decided to agree
to share some files among each other. It is all person-to-
person. They do it for no money on a one-to-one basis. We
believe that is----
The Chairman. You are saying that yours comes close to
being Gnutella.
Mr. Barry. No, sir. What I am saying is that we provide the
index, we provide the community.
The Chairman. They can all plug into that index, which
would be the server.
Mr. Barry. Well, it doesn't serve them, sir. The actual
transfer is done on a one-to-one basis from one computer to
another. We play no part in that. In fact, the court ruled that
we play no part in that. So to get to the answer to your
question, the point is that it is a community where that one-
to-one sharing goes on.
The Chairman. OK. Did you want to say something, Mr.
Ulrich?
Mr. Ulrich. I just have to comment. The use of the word
``sharing,'' I think, is wrong in this discussion. The word
``sharing'' has such a positive, community type of friendliness
attached to it. And I really think that you have to replace the
word ``sharing'' with ``duplicating.'' If I share a sandwich
with you, I am left with half a sandwich. If I share my car
with you, I lose the use of my car one day.
But what is really going on here is that we are
duplicating; they are using the word ``sharing'' instead of
``duplicating.'' My music is the currency in this situation,
and my music provides somebody else with getting access to
another song. So, really, you know, my music is the currency
here, and this sort of free-spirited thing, everybody sharing
it, and so on, we feel that that is really not just the right
terminology to use in this situation.
The Chairman. Mr. Kan.
Mr. Kan. Could you reiterate your question, please?
The Chairman. Yes. Basically, what I was saying is can
Napster and Gnutella really--in your peer-to-peer architecture,
can you make either or both of them work with accounting
technology or software that allows for accurate accounting for
copyright royalties, or access control software to ensure
payment for using the music? And if you can, then tell us how.
Mr. Kan. Well, I think that it would be extremely
difficult. Even if we were to force that upon software
developers in this country, we throw in a couple of national
boundaries, cross a few jurisdictions and that sort of control
evaporates. There are going to be open-source efforts, such as
Gnutella, wherein developers are not forced to conform to a
particular set of constraints.
And if we were to constrain developers of Napster to say
that they needed to do accounting, and so on, then there would
be massive leakage. Everyone would just run to Gnutella or the
successor technologies which would be even more onerous than
Gnutella.
I think that the solution really is to apply the carrot,
not the stick. We need to make people sort of want to allow
profiteering on the mass duplication and distribution of
intellectual property. In fact, today we haven't really talked
about the real sort of philosophical question of who should own
intellectual property or anything like that. We have talked
more about really the mechanics of profiteering on intellectual
property in the digital age.
So I would like to really just kind of close my answer with
a quotation from Mr. Lars Ulrich, dated May 26, on
Slashdot.org, which is a popular Internet geek site. Mr. Ulrich
says, ``yes, of course, the scenario that the gentleman asked
in the question is very, very possible, and we've been looking
at that for a long time. And when we are done with our record
contract, I would say that something in that direction is
somewhere between a real possibility and a certainty.'' He is
talking about using the Internet as a distribution mechanism
for his music, and he makes that commitment in spite of the
lack of accounting controls and access controls on digital
music.
The Chairman. But I guess what I am asking is do you
believe that the Gnutella technology could be used by
businesses which want to implement accounting or access
controls.
Mr. Kan. Yes, it could, but I think that really the term
``control'' is something which the Internet has sort of
despised for the 30 years of its existence. Really, the
Internet----
The Chairman. But you think you can?
Mr. Kan. Yes. I think that people can be incentivized into
putting that kind of thing into their software, yes. We must
appeal to their profit motive, though.
The Chairman. I have got to turn to Senator Leahy, but I
just wanted to ask you, Mr. McGuinn, how has the ability to
access music digitally increased interest in your music?
Mr. McGuinn. Well, I have a bigger consumer base. There are
more people who listen to the Byrds. I get e-mail from young
people under 20 all the time who have discovered the Byrds
basically from listening to Byrds tracks on the Internet. And
there is a renewed interest in folk music because I have been
putting traditional songs on the Internet, and the publicity
that I have generated from doing that has increased people
coming to my concerts. So it has been a good thing as far as
that is concerned as well.
The Chairman. That is great. I have a lot more questions,
but I will turn to Senator Leahy.
Senator Leahy. Did we determine whether we owe performing
royalties to Creed?
The Chairman. I decreed that we didn't.
Senator Leahy. And you know I always follow your decrees,
Mr. Chairman.
The Chairman. That is right. I have noticed that.
Senator Leahy. Mr. Kan, I was interested in listening to
you. We do have .com, .gov, .org. Are we going to do a .geek?
Is that what you were----
Mr. Kan. No, Slashdot.org.
Senator Leahy. I see. I think your suggestions on
incentives we should listen carefully to----
Mr. Kan. Thank you.
Senator Leahy [continuing]. But determining how we make
those incentives, though, and doing it fairly, because as has
been suggested here, there will be no more music if artists
cannot get the benefit of their music, if songwriters, artists,
and others cannot get the benefit of that.
Incidentally, Mr. Chairman, I am going to insert an opening
statement by Senator Kohl, who is the ranking Democrat on the
Antitrust Subcommittee.
The Chairman. We will keep the record open for opening
statements.
[The prepared statement of Senator Kohl follows:]
Prepared Statement of Hon. Herbert Kohl, A U.S. Senator From the State
of Wisconsin
The Internet has already dramatically changed the way we work, shop
and play. And now, with the rise of digital music files known as
``MP3s,'' the Internet is beginning to change the way we listen to
music as well. This new technology promises a world of digital music-
on-demand; where we can listen to whatever music we want, whenever we
want it--instantaneously via the Internet. So, clearly, there is an
``upside to downloading'' but there's a darker side as well. It we
don't meet the challenge that this new technology poses, the
intellectual property rights of those who work tirelessly to create and
produce music will become devalued.
The threat to our system of copyright posed by the new computer
technology known as Napster is easy to understand. Napster permits
anyone who is connected to the Internet to obtain, for free and without
the copyright owner's permission, a high quality copy of virtually any
musical performance. This copy can be downloaded on to a computer hard
drive, copied onto a CD, shared with any other user of Napster.
Napster argues that its users are engaging in a perfectly legal
activity--the one-on-one ``sharing'' of music files for non-commercial
uses--akin to someone copying a TV show with his VCR to watch later.
But it's one thing for a person to pay a subscription fee or a royalty,
download a song, and then make a personal copy of the song to listen to
while driving in his car. In contrast, it is entirely different for a
college student to be able to sit down at his computer and very quickly
find and download the collected works of Bob Dylan, the Rolling Stones,
or even Britney Spears to listen to and ``trade'' with his friends--
without paying a cent in royalties. And that is what Napster permits,
encourages, is almost entirely used for and plans to profit from.
I don't know about you, but while they say that this is music
``sharing,'' it certainly looks to me more like music stealing. Just
because my supermarkets were open for people to enter, didn't give them
the right to take things off the shelves without paying.
I sympathize with the many students who use Napster and complain
about the high price of CDs. It is rather curious that, over the years,
the price of CDs has remained more or less stuck at a stubbornly high
level. Indeed, the Federal Trade Commission seemed to agree when they
forced the five major record companies to stop their practice of
withholding advertising subsidies where retailers advertised discounted
prices. But the fact that CDs are expensive does not excuse the
wholesale theft of intellectual property on the Internet. We do not
allow art-lovers to break into the National Gallery and make off with
Renoirs simply because art is expensive.
At the same time however, one must eye the music industry's
doomsday predictions about Napster with a health dose of skepticism.
The entertainment industry has a long track record of opposing new
innovative technologies--fearing they would bankrupt their existing
products. For example, the music industry fought against the
introduction of cassette recorders, fearing they would harm vinyl album
sales. Before that, musicians even opposed LPs, fearing they would
destroy live concerts. And in each case, the new technology only made
the recording artists and the entire entertainment industry wealthier
overall. Indeed, in spite of MP3s and Napster, album sales are
increasing this year at a record-setting pace.
The music industry, in my view, must learn to adapt to the new
world of digital music rather than try to maintain an old music
delivery system that is rapidly becoming obsolete. It must alter its
business models and add value to its products to compete with new
distribution channels and to prevent unauthorized copying. And with new
and potentially more problematic file-sharing tools like Gnutella and
Freenet on the horizon, the music industry had best move quickly. But
while the industry must adapt to the changing reality of the Internet,
it also should not be forced to accept the wholesale theft of
intellectual property by Internet pirates.
The Chairman. We will also put all of your statements in
the record as though fully given.
Senator Leahy. I know Senator Feinstein of California and
Senator Schumer of New York have been here with us, and I
wanted to clarify one thing. The Senate has T3 inside of our
firewall. We don't take advantage of DSL or virtual private
networking for our remote use or telecommuting staff.
While we have been talking, in case some of you wonder what
I have been doing up here, I have gone onto Napster and
MP3.com, and others. I have been downloading some things,
trying to download a couple of versions of ``Touch of Gray.'' I
went from touch of gray to touch of white by the time it got
downloaded, it takes so long under the systems we have,
although I would mention I would take it any color I could get
it, I suppose. But we do move along slowly.
I couldn't help but think--and I am going to go into some
questions on this, but if there are 20 million voting-age
Napster users and if they suddenly get cut off, I suspect that
even those Senators who are not sure what that large screen is
in their office, called a computer, are going to start hearing
from these people. But also by saying that, if the parties
don't quickly move to some voluntary licensing arrangements,
then I suspect there is going to be pressure on Congress to
create statutory, compulsory licenses.
There will be pressure for Congress to create a single fee
for the writers, the performers, the record companies, and all
concerned. Think about that. Frankly, I am not sure everybody
is going to be happy with it if we did do that, and I would
hope that the parties might continue to work together.
If I could wave a magic wand today and tell you exactly how
to do it, and even if you all agreed, from the artists to the
providers to the record companies and everybody else--even if
you all agreed that you would take my solution, I am not sure
what would be the fairest solution. But when you can move so
quickly on some of these sites, and when I go on college
campuses, as many of us do, to talk and everybody is talking
about what they have downloaded, how they share, and so on, and
when my kids pick up a ``Black Muddy River,'' which happens to
be one of my favorites of the Dead, and send it to me--they
have heard a new version--and I log on in the morning while I
am having my breakfast and there it is, I mean this is a whole
different world, and I think we have to recognize that on where
we go.
Mr. Barry, one of the things I have pulled up here while we
have been talking is the new artist program of Napster. Tell me
a little bit about that, and tell me what your results have
been so far.
Mr. Barry. Let me describe it first and then I will tell
you how we are doing with it. We post on the Web site a special
place for new artists where they can voluntarily sign up to
have their music promoted on Napster, and essentially what that
means is they get a special area within the Web site. They are
able to characterize their music for other listeners,
essentially do some promotion on their own, and it is going
great.
We started in April. We have 17,000 artists who have signed
up already from all the 50 States. I would say in every State,
over 200 artists have signed up, and we think it is terrific.
In fact, it turns out that they are buying music. As you know,
records sales are up, and the people who are getting onto the
new artists program and looking artists there are also buying
things. In fact, they are buying them through MP3.com.
I have an e-mail from an artist who is a member of the new
artists program who then went over to MP3.com and did a
download over there. So we think Napster is primarily a
sampling and a previewing service, and that it is going to be
something that we will be able to work with the record
companies, both traditional and new.
Senator Leahy. Well, let me ask a little bit further on
that of both Mr. Ulrich and Mr. McGuinn. Again, using this
college campus thing, I hear people talk about it, but I also
hear from various administrators that they are having a little
trouble getting on sometimes their own computer systems because
it is, especially during certain hours, very busy.
Have either of you noticed any increase in fan interest
since the introduction of Napster, or even talking among--Mr.
Ulrich, you and I were talking about a mutual friend of ours
who is a recording artist earlier this morning, Sheryl Crowe.
In talking with others, do you see any increase in interest in
the music because of, say, Napster?
Mr. Ulrich. Not anything that we can feel. The numbers have
not gone particular up, down, or sideways. I mean, the numbers
that we monitor in terms of sales and concert tickets are sort
of pretty right in line with what they have been for us for the
couple of years.
Senator Leahy. You do monitor those, obviously.
Mr. Ulrich. Absolutely, and we have people that do that for
us.
I would like to just make one comment on what Mr. Barry
said a minute ago, which I think is really just what all this
boils down to. He used the word ``voluntarily''; have new
artists that are voluntarily on our Napster services. We did
not have that option, and what we believe really is that the
reason that new bands get the choice to be on a Napster-like
service is because they depend and they need the big bands like
us to get people into the system.
When we monitored Napster for those 48 hours, I think the
most interesting statistic, apart from the 1.4 million
Metallica downloads in those 48 hours, was that there was one
download, one single download of a file by an unsigned artist.
So it is clear that the big bands are the ones that generate
all the traffic and attract all the attention. And this whole
thing about the new artists, the up and coming artists--of
course, they should have those outlets if they so choose, but
the bigger bands have never been given that choice.
Senator Leahy. Sort of the same reason a bookstore puts the
bestsellers in the window?
Mr. Ulrich. I think that is a good equivalent, yes.
Senator Leahy. Mr. McGuinn.
Mr. McGuinn. I have seen a certain percentage of increase
in people coming to concerts as a result of my exposure on the
Internet through MP3's, and I would say it is a definite
benefit to me. I would be probably in a better position to
notice it than a major group that has lots of sales like that.
So, you know, I would say it is maybe a 15- to 20-percent
increase.
Senator Leahy. Well, I look at this software that Shawn
Fanning did, and we are talking about the kind of technological
innovation in this country, whether it is in this or anything
else, as the kind of thing we want to promote, not stifle.
Now, Napster may--I don't want to get involved in the court
case that is going on here, but let's assume it infringes on
copyrights. Well, then if that is the case, you can find out
some kind of a licensing scheme, whether it is done, as I said
before, negotiated among everybody. Can you negotiate a
licensing scheme on the Napster system? I mean, is that
possible?
Mr. Barry. A question for me, Senator?
Senator Leahy. Sure.
Mr. Barry. I think that it is possible, but I think you
would have to first accept your fundamental assumption that
what 20 million people are doing on a regular basis is
copyright infringement, that all 20 million users are guilty of
copyright infringement. Now, that is what the position has been
in the lawsuit. We just don't think that is right. We think
that those people are engaged in sampling and previewing, and
that both under fair use doctrines and under the Audio Home
Recording Act, what they are doing is absolutely correct.
Senator Leahy. But at some point, you know, you have to
figure out what you do. You don't really have a business model.
You have no profits, you have no revenues, but just picked up--
what is it--$15 million in venture capital fundraising?
Mr. Barry. Thereabouts.
Senator Leahy. So you have got venture capitalists whom I
find, anyway, in talking to them tend to be a little bit more
particular in the last few months, with their eyes on Nasdaq
and what not.
Mr. Barry. Yes, sir.
Senator Leahy. But they are willing to invest in a company
that makes no money and is currently mired in litigation being
done by hard-nosed business people. Then how do you make a
return on the investment? How do you make money? You have got
more people coming in than I think AOL did in 15 years or
something like that.
Mr. Barry. Well, the growth has been spectacular. I think
that the reality is that we have to remember it is a one-to-one
system, a person-to-person system. And reality of our economy,
I think, is that if what those people are doing is legal, then
we will have the right at some point in the future to work out
a business model where we can derive some economic benefit from
making that legal activity more convenient.
The index that we host and all the chat and community that
goes on there, we are facilitating that, and at some point in
the future I believe that we will be able to derive some
revenue from that. But I come from the premise that what is
going on on the system user to user, this one-on-one non-
commercial file-sharing where no one is making any money--and
certainly as you correctly point out, we have no revenues
today--is correct and legal. And therefore I have to believe
that we can make some money from making it convenient.
Senator Leahy. Let me go to Mr. Robertson. As I said, I was
downloading up here. You were doing it a little bit faster than
I was able to. You settled a lawsuit with two major record
companies, Warner and BMG. You have got EMI, Universal, and
Sony who still have legal action against you, and I realize
your settlement is confidential.
But I also notice that shortly after you launched the
service that led to the litigation, you invited the recording
industry to your offices to inspect the new system, and you had
mentioned that earlier in your testimony. Some people said that
if you had approached the record companies before your launch,
you would still be at the negotiating table right now. But you
are at the negotiating table because of the hammer of a
judgment hanging over your head.
Why can't you work out agreements with these others? If you
were able to work it out with two, why can't you work it out
with the others? And why didn't you, before you launched the
service, seek out a licensing agreement? And if you feel that
your answer may hurt you in your litigation, your lawyer is
going to reach and grab you and that is OK.
Mr. Robertson. Fair enough. It is important to note that
what MP3.com is doing, we believe, is building an
infrastructure. We don't own the content, we don't sign bands
in the traditional sense. We build the delivery system for that
music. So in that respect, we think that we are partners with
artists and labels alike.
However, as we learned last week, BMG has made investments
in companies that are doing exactly what we proposed. And we
heard earlier Mr. Ehrlich talk about a cyber jukebox, again
exactly what we have done with My.MP3.com. So there is very
much a competition there, and going to your competitor before
you, rolling something out and saying, hey, I would like to
talk to you about this new technology, is not a very prudent
thing to do.
So that is why we didn't go to the record labels, also
because we fundamentally believe that people have the right to
load their own CD's onto digital servers and have a company
help them do that, and play them back for their own personal
enjoyment, not to share with other people, but for their own
personal enjoyment.
As for our current settlement, it is true that we settled
the copyright lawsuit with two of the five plaintiffs in the
case. We have not settled with Sony, Universal, or EMI. We are
working hard to do that, but there are some challenges, and I
think maybe the question is better asked to Mr. Ehrlich of Sony
about why they haven't given us a license to date.
Senator Leahy. Mr. Ehrlich.
Mr. Ehrlich. As I mentioned before, we have been in
active----
Senator Leahy. We didn't rehearse this, I want you to know.
Mr. Ehrlich. We have been in active conversation. This is a
very complex issue and it is something that needs to be done
right. And so we are not opposed to the license and we have
been in active conversation.
Mr. Robertson. They have been in active discussions with
us, I will say.
Senator Leahy. Yes, and neither Senator Hatch nor I want to
go into those aspects because it would not be fair to you.
The Chairman. Well, I would like to, but I don't think we
will.
Senator Leahy. Yes, I know. We both would love to.
I was thinking last night when I got stuck in an airport
for several hours, Mr. Hoffman, I wish I had done as you have
and had some of my favorite music along. You are absolutely
right. The five CDs in the trunk are going to quickly become
such a thing of the past. People are either going to come with
their own disc or plug in to have whatever they want. You plan
an hour's drive and you may decide what you want and move it
around.
I had heard discussion of this earlier. Any encryption can
be broken and any kind of a security device can be placed and
somebody will find a way to copy it. I think, Mr. Kan, that was
probably you who said that. But is that true? Is that really
true? Is it possible to work out licensing agreements, whether
it is with Metallica, the Byrds, or anybody else, to do this?
The idea of the distribution I find exciting. I see the
same thing in movies. I mean, the day will come when I will sit
in my farmhouse on a dirt road in Vermont and I want to watch a
particular movie and 5 minutes later I will download a digital
copy of it. My credit card will be billed and I won't have to
drive down to the video store to watch it. And it is going to
make great business for the movie companies if you can do it,
and it is going to make great business for the artists. But is
there any way of doing that and protecting it?
Mr. Hoffman. Well, the interesting thing about copyright
law is that it basically assumes the reality of these
technologies. There is no real physical way--and I would use
the term ``physical'' as in physics--to keep someone who has
access to something from being able to duplicate it. It is kind
of a fundamental law. If I can see this, I can copy it. If I
get it on my computer, I can duplicate it.
You can have the appearance, but you can't actually really
keep it from happening. The reason is kind of fundamental to
cryptography. I actually used to be at PGP, or Pretty Good
Privacy, which is one of the leading encryption----
Senator Leahy. I know. I love it.
Mr. Hoffman. If you and I wanted to send e-mail to each
other, we could be decently sure that no one else in the room
could read it. But I would have to trust you because if I told
you company confidential information about Emusic, you could
call the New York Times with that same information. So the
disclosure problem is always a problem to cryptographic
systems.
And the other problem is just more fundamental to how
consumers use downloadable music. What customers really want is
real strong flexibility, and unlike Hilary's response to fair
use, I will draw some interesting lines. I think it is fair use
for you to space shift, as the Ninth Circuit Court of Appeals
has said, which is basically taking a CD, putting it on your
hard drive, putting it on a portable player.
I think it is fair use inside of your family basically to
copy because we are talking about personal performance,
personal private use for non-commercial means. I think it is
stepping over the line when you make music available to others.
But the interesting thing is when you make music available to
others, it is pretty obvious, especially if you are at all
effective, because if you are not effective, no one cares. If
you make music available on your little Geocities Web page and
no one ever comes, it clearly doesn't impact sales of recorded
music. But if 20 million people come, well, unfortunately we
all have to take note.
The interesting thing is, though--and this is coming back
to what I was saying about the Net Act and enforcement--it is
not exactly legal to make music or software or whatever is
copyrighted available without permission. And, you know, quite
a few people have literally plea-bargained out of jail terms on
Net Act violations. A college student in Oregon actually was
found guilty of pirating both MP3's and software.
So from that perspective, I don't think the fair use
argument is actually that clouded. I think fair use is pretty
simple. If you are doing something that doesn't replace a sale,
you pretty much have a right to do that as a consumer. If you
are a business trying to profit from that, you are going to
have to license.
One of the important things, I think, also in the kind of
debate here is, you know, a lot of people say, well, people
should license Napster because clearly you are going to have 20
million voters complaining to you. But it is interesting that
that generally penalizes the people like Myplay and others who
have done it right, who have basically said we would like you
to upload your songs and exercise your actual fair use rights.
We won't violate any laws. In fact, we will work directly with
and, in fact, have investment from, in the Myplay case, the
major labels and others who are interested in that business,
and we will play by the rules.
So it is an interesting situation in some senses because
what we are talking about around these systems is private
legislation, basically taking copyright usage and using the
DMCA's exemption to technical circumvention to be able to
really litigate a system without necessarily having the fine
ladies and gentlemen in front of us bless or not bless that
system.
Senator Leahy. My time is gone, and I see Senator Feinstein
here. As one of the authors of the DMCA, what I am going to do
is probably contact a number of you with some follow-up
questions on that.
Mr. Hoffman. May I make one last point?
Senator Leahy. Sure, of course.
Mr. Hoffman. Interestingly, DVD copy protection was broken
not for malice, but frankly what I think was probably a pretty
legitimate fair use reason. I believe a Finnish 16-year-old who
had a LINEX machine at home had gone with his parents to France
and really wanted to be able to view country-coded French
movies. I mean, the French are always very excited to have
French products exported instead of American products imported.
He reverse-engineered the DVD copy protection system so
that he could watch, basically perform his right to a private
performance, which by the way here in the United States we
specifically have the right to a private performance by any
means necessary to be able to watch DVD's. And, in fact, it is
interesting that very few DVD's are available downloadably.
But it is questionable whether he is ever going to be able
to exercise that fair use, and especially in a situation where
the copyright licenses of the operating system he was using,
LINEX, are actually somewhat diametrically opposed to the
ability to maintain control over a secret system like DVD copy
control. So I think it is important to note that the first
major challenge, if you will, to the anti-circumvention
technology was frankly probably legitimate fair use.
Senator Leahy. Well, I will just close with this, Mr.
Chairman. You and I authored the DMCA, and as one of the
authors of it I will go back and look at it more. But I just
want everybody to know I love the innovation that has come in
this digital world. I am a photographer. I don't get published
in music the way the chairman does; I get published in
photography. I look at some of the amazing changes in that area
in the last couple of years.
So I want to push innovation, but we are not going to have
photographers going out doing the work to get the fantastic
photographs we want, we are not going to have artists like some
of the wonderful artists represented here today, or others who
are going to continue to do it unless there is some gain to
them. So we have to figure out how to do that, whether it is
the incentives or however, and that is what is before us.
So, Mr. Chairman, I appreciate this hearing. I think it has
been well worthwhile, and I am delighted the Senator from
California, who is one who has spent an enormous amount of time
on these subjects, is here with us.
Mr. Griffin. Might I add a brief comment?
The Chairman. Sure.
Mr. Griffin. We regularly extend enormous amounts of public
funds to build and support libraries that have these very same
records in them. And they lend them out and they have tape
recorders in those libraries and that is where I learned to
tape record. And we also have copyrighted materials on the
shelves and we have copying machines in those very same
libraries. And it is our purpose and our hope that people will
share copyrighted materials and to use them, and that is a
public policy that our country has had for a long time, and
rightly so.
The Chairman. Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman. To my
way of thinking after listening to this, what I think has
happened is that Napster has found a methodology which entirely
defeats the purpose of copyright protection. If carried to its
logical conclusion, your very strength, which is your large
use, is also your Achilles heel. The one saving grace so far is
that you are not making money. It is hard for me to believe
that venture capitalists gave you money, not to receive
anything in return. So I would assume that somewhere down the
pike, you are going to make money.
About a week ago, the chairman gave me a CD of his. I
haven't had a chance to listen to it yet, but I assume it is
copyrighted. Now, essentially, I could put that through your
server, and let's say 10 million people wanted to hear it. It
would defeat his copyright.
Mr. Barry. How so?
Senator Feinstein. Because no one would pay anything for
it.
Mr. Barry. Well, sales are up, Senator, and most of the
people who sample and preview things on our site are, through
the Napster service, then going out----
Senator Feinstein. Yes, but you could then do the same
thing----
The Chairman. I am willing to try it. I will tell you that.
[Laughter.]
Senator Feinstein. Same thing with a book. And I don't
believe you can go to a library and copy a whole book without
violating copyright rights, maybe a part of it, but not the
entire book. You could do the same thing with a movie. You
could essentially defeat any intellectual property copyright
through your methodology, and it is all done under the cloak of
anonymity on either end of the server. Now, the question is
whether that anonymity is really a cloak to avoid copyright
protection or something else. And I don't pretend to know that,
but I am very curious.
You say Napster makes no money, is that correct? You are
incorporated as a corporation, a profit-making corporation?
Mr. Barry. Yes. As many Internet companies do, we are going
through a period where we have no revenues.
Senator Feinstein. And how do you plan on gaining revenues?
Mr. Barry. Well, as I said, Senator--you may have been out
of the room--what we are planning to do--now, I think, you
know, planning is probably an overstatement, but our position
is that copyright has always been about a balance. It is a
balance between the incentive that we give to the owners of
these works to produce the works and the public interest in
having access to those works. So the question is always what is
the balance.
And we think that the balance is struck in this particular
instance on the side of the activities that are going on in the
system. And so I don't want to get too much into our brief with
respect to the litigation, but our arguments are there and I
would just refer you to that. So we think that these 20 million
people are not infringing copyright, and since they are not
infringing copyright, there may be a time in the future when we
are able--because we are able to provide this community of
file-sharing which is a legal activity, we may be able to make
money by the fact that we make that convenient to people.
Now, having said that, I just wanted to make sure I respond
to Senator Leahy's question here. I want to reiterate that we
started talking to record companies the first day I got on the
job, and I am continuing that discussion because I think
Napster can make money for artists, labels, and for Napster,
while still serving the needs of the Napster community.
Senator, these people are sharing files one-to-one for no money
and no promise of anything in return.
Senator Feinstein. Well, let me ask you this question, and
maybe Ms. Rosen is the one to answer it. The record labels, I
understand, are claiming that 87 percent of the materials found
on Napster are copyrighted and exchanged without authorization.
Is that correct?
Ms. Rosen. Yes.
Senator Feinstein. How would you answer that, Mr. Barry?
Mr. Barry. Well, without getting too much into the
litigation, that is a factual question that is based on their
expert survey. Our experts say some other things.
Senator Feinstein. What percent do you say are copyrighted
materials that you make available?
Mr. Barry. I am not sure we know what percentage are
copyrighted materials. Remember that the way Napster works is
that the users decide what the file names are. When a user on
their own personal computer takes an MP3 file and puts it on
the computer, they decide what to name that file, and so
getting these percentages is pretty difficult.
But one thing we did do with a survey by our expert in the
litigation is we found that the type of space shifting that Mr.
Hoffman talks about as being exactly the kind of fair use,
Senator, where you are moving it over to your MP3 player
accounts for at least 36 percent of the use that goes on there.
And, traditionally, in Congress under the fair use doctrine
what we have said is we are not going to eliminate a whole
technology because we think that it may be capable of some sort
of infringement.
In fact, the Supreme Court said, look, if a technology is
capable of substantial non-infringing uses, not used for
substantial non-infringing uses, but capable of substantial
non-infringing uses, we are not going to eliminate that
technology simply because it might also do one thing or
another.
Now, the point here is we are not being sued for
infringement. It has never been a claim that Napster is a
direct infringer. What is claimed is that the 20 million people
who are using Napster are committing copyright infringement
everyday, and we just don't agree with that. If they are not
liable, then we are not liable.
Senator Feinstein. I beg your pardon. Why are you not
liable if you make it possible to convey a copyright
infringement? Instead of allowing anonymity, you could, in
fact, as others have done, have the individual's name and
address and they would pay a fee and a copyright fee would be
paid. But you have chosen not to do that.
Mr. Barry. Senator, I think these questions really go to
the heart of the litigation. It is difficult for me to comment
on them. I think that the question of how we preserve the
privacy of our users is one that I would be happy to spend some
time on. We do preserve the privacy of our users and we think
that is appropriate. What we are trying to do right now is to
fight this battle. We have been sued by the major labels.
Senator Feinstein. Mr. Barry, you are saying that any
publisher of a book could have the same thing done to them.
Their copyright would be null and void. Any producer of a movie
would have the same thing; the movie could be downloaded.
Essentially, you are setting up a technique which could be
applied broadly across any kind of written or spoken
intellectual property.
Mr. Barry. Senator, first of all, Napster does not support
any of those file types and has no plans to. So I think that we
are talking about some future that we don't really know what it
is going to be.
And I would suggest to you that these arguments have been
made previously with respect to almost every technological
advance over the last 100 years, from the piano rolls, through
radio and television, through cassettes, through the VCR. And
the terrible things that have been prophesied have just not
come true. In fact, every time, it has been a great financial
boon to the people who are the most concerned.
Senator Feinstein. Could I ask one other question?
Mr. Barry. Sure.
Senator Feinstein. How many pieces of music do you have
being--I am looking for the word--not sold----
Mr. Barry. Shared?
Senator Feinstein [continuing]. Shared every month?
Mr. Barry. Well, it varies tremendously because when
someone is offline, then the files that are associated with
their computer are not available to the other people who are
part of the community. So it just depends on how many people
are offline. You can actually look on our service and you can
see at any one time how many files are there, and I would say
it varies between 5 and 600,000 on a daily basis.
Senator Feinstein. Being shared?
Mr. Barry. Yes, ma'am.
Senator Feinstein. Ms. Rosen, did you have something you
wanted to say?
Ms. Rosen. Yes, Senator, thank you. I know it is not lost
on anyone in this room that Mr. Barry is saying they don't
actually know what is being copied, but they sure know that we
are selling more of it.
Mr. Barry. Record sales are up.
Ms. Rosen. I just wanted to address this general issue
because so many members of this committee have good histories
on balancing public policy and consumer access to new
technologies, and that is that this argument that the music
industry and entertainment industries before it, but
specifically now the music industry, is against technology and
that is the basis for a selected litigation is really silly.
If, in fact, people were trying to keep this technology off
the shelf, that might wash. But this is about establishment of
new markets. There are people at this table--Mr. Hoffman is one
company, Mr. Robertson is another company--that are investing
in new businesses using new technologies, paying artists,
paying songwriters, paying creative people down the food chain.
This is about can the development of new technologies and new
businesses using these technologies ever succeed if the rules
are not the same for everybody. So this is not an anti-
technology argument. This is sort of a selected commercial
target and we should not let anybody escape that difference.
Mr. Hoffman. Senator Feinstein, may I?
Senator Feinstein. Yes, please.
Mr. Hoffman. It may very well be true that record sales are
up for the major labels, but I can tell you as the sole
proprietor of any business selling MP3's or selling
downloadable music in any volume whatsoever $.99 is awful hard
to compete with free for exactly the same content.
And, respectfully, I submit that because our artists and
labels, people like Tom Waits, Merle Haggard, on and on and on,
choose to go with us and we pay them--we pay them advances, we
pay them royalties--and choose to make the content available to
consumers, we are allowing consumers to still rip them off,
even though they are doing the right thing.
And in the process, I can tell you that Wall Street and my
investors tell me that the reason my stock has declined 70
percent, not just because of the April pull-back, is because
they are afraid Napster will invalidate the concept of paying
for music, period. So I can tell you that my shareholders and I
have definitely had financial push-back, and that hurts my
artists and labels because it drops the amount of money I can
spend to market. It restricts my access to the capital markets
for me to go back and raise further funds to be able to fund my
business toward profitability, which again further encumbers my
ability to sell downloadable music.
Senator Feinstein. So what you are saying is anyone, then,
that respects copyright rights cannot survive in this kind of a
situation?
Mr. Hoffman. It is a really difficult climate out there.
Now, having said that, there are opportunities here. We have
spoken with people at different file-sharing services. We
understand how to do direct enforcement. Now, I don't want to
set up an adversarial relationship with my potential customers.
I would much prefer to have, frankly, in some ways the police
do the police's job and allow, be it the FBI, but it seems like
an odd organization to have to do it, enforce copyright laws
online because it is a Federal statute that says, gee, even if
there is no commercial gain, it is still illegal.
Mr. Barry. Senator, if I could just respond, I think the
point is that what people do on Napster is sampling and
previewing, and it helps all the people who are here at this
table.
Let me read you from an e-mail from Alex Smith, of the
Cynic Project. ``We are currently the band who holds the number
one electronic and techno song at MP3.com. I have gotten tons
of e-mails from people who have found my music on Napster, used
the ID3 tag to trace me back to MP3.com and download more of my
music. This makes me money. I just want to tell you that not
every artist who is out there is against you.'' So I think that
is a great illustration of the power that Napster has to
increase interest in music.
The Chairman. Well, let me ask a question. Senator
Feinstein mentioned that the Napster technology uses anonymity
to further its business. So maybe, Mr. Ehrlich and Mr. Barry,
you would care to answer this. I recently read an article about
a Utah songwriter who was giving away a technology application
designed to identify digital music pirates.
Now, this technology, called Media Enforcer, was apparently
designed to thwart illegal uses of Napster and works by
identifying the Napster users' names. I believe it can also
reveal the intellectual property addresses of Gnutella users.
By allowing copyright owners to identify those who are
infringing and possibly bring an action against them, couldn't
this type of technology address the illegal piracy concerns
that new and, when used legitimately, very promising
technologies such as Napster and Gnutella pose?
Mr. Kan. Sir, if I may address that, the IP addresses of
both Napster and Gnutella users, although they are possibly
revealed by Media Enforcer, are basically meaningless because
I, although I sit here today, can have hundreds of Internet
accounts offshore where I can infringe from afar, where I am
not subject to the laws of the United States, not subject to
copyright law as it is laid out in the United States. So,
really, IP addresses are particularly a transient thing. They
are not a fingerprint for individuals. I can log onto the
Internet with a hundred different IP addresses in 1 day.
Mr. Barry. Senator, that is a good technology. There are
lots of other ones. SDMI, the Secure Digital Music Initiative,
is something that the recording industry began a couple of
years ago. We have, since the early days, been members of SDMI.
We are following it and we intend to remain compliant with it
as the standard is promulgated.
The Chairman. Well, I can tell you right now I think I can
figure out a lot of ways you can make money with Napster, just
like Mr. Andy Grove said. So I have to say that I don't think
there is any worry about you making money in the future. The
question is how do we solve these problems.
Mr. Ehrlich, do you care to comment? Then we will turn to
Senator Schumer.
Mr. Ehrlich. Listening for the last 10 minutes, I have a
lot of thoughts, actually, on a lot of the conversations that
have happened. First of all, Senator, you mentioned there are
other files that potentially could be shared. It is currently
happening in the marketplace right now. It may not be happening
with Napster, but it is happening at other Internet sites. That
is one.
Two, the music industry has been very aggressive in trying
to figure out how to sell and how to allow music to be
digitally downloaded, and there is a complexity involved in
allowing music to be downloaded in a secure fashion. A lot of
the companies up here don't do it in a secure fashion. They
don't have any thoughts about paying the artists, anything
about intellectual property rights. And so we work with IT
companies, CE companies, and others to make sure that our
music, when it does get distributed, is distributed in a legal
fashion.
The Chairman. Thank you.
Senator Schumer, we will end with you.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. Thank you, Mr. Chairman. First, I want to
assure the young people in the audience that they can download
all my speeches free of charge. [Laughter.]
The Chairman. We all do it.
Senator Schumer. Yes, right.
Senator Leahy. There goes the Senate server now.
[Laughter.]
Senator Schumer. I don't sing them, though, for the benefit
of the listening public.
Anyway, I also want to thank you, Senator Hatch and Senator
Leahy, for your leadership on this issue and having this
important hearing. To me, at least, this hearing is part of our
ongoing series that particularly is involved in the Judiciary
Committee. The Internet has created instantaneous information,
the free flow of information. That is what has changed our
society. That is what has changed America. Yet, that free flow
of information bumps into other societal values.
Today it is intellectual property, tomorrow it is privacy,
and finally it is also respecting national boundaries. Mr. Kan
keeps mentioning, well, someone could go overseas and do this.
I wouldn't recommend that we throw out all drug prescriptions
in the FDA because someone can go overseas and not write a
prescription. We are going to have to grapple with that as
well, and that is not, in my judgment, the right type of answer
to just say, well, someone overseas can do it, therefore we
should just throw up our hands.
But there are going to be all of these types of balances,
and I think that is the number one issue that at least the
Federal Government will be dealing with over the next 5 to 10
years. There are some who say government should never be
involved. That is not going to be the case. The same people
said it when we had our last major revolution. This is the
information revolution. We had an industrial revolution, and
there were some at the beginning who said government should
never be involved. They were proved to be wrong. Child labor
laws were needed, minimum wage laws were needed.
I believe we will need some government involvement, but I
do want to throw a cautionary note here, which is that when you
are dealing with a changing world, and technology changes these
things everyday, we ought to be very cautious. We ought to be
quite sure that what we are doing is right and balanced, and
the burden of proof ought to be on any type of legislation we
propose.
To me, at least, it is probably better to have the private
sector--at least give them the benefit of the doubt and see if
they can come up with something, and that is what my questions
will focus on. I should say at the same time I have been a
supporter of intellectual property and copyright protection of
artistic works.
Mr. Ulrich, my daughter was delighted to know you would be
here. I said the Byrds are going to be here. She said, ``Who?''
She said Metallica is going to be here.
But if somebody like either Mr. Ulrich or Roger McGuinn
creates some property, they ought to have some kind of reward
for it. So I don't think anybody at this table disputes either
of those, that the free flow of information is important and
that we need to reward intellectual property.
But we have to be careful not to deal in false tradeoffs,
especially when new technologies are blossoming at sonic speed.
And we could pass some law this year that throws off the
marketplace and doesn't do the job next year because of new
technology. I guess we have to start facing up to the fact in
Congress, Mr. Chairman, that while our first reaction is let's
pass a law, what really regulates the Internet right now more
than law is code.
And as Professor Lessig puts it, the primary regulation of
the Net is, ``the code of cyberspace itself, the software and
hardware that together set the terms or rules or the law of how
behavior will be.'' Well, researchers are working hard and fast
to develop new systems through software that give copyright
holders better control of their works.
I read in the New York Times last week that there were
three Brown University professors, mathematicians actually, who
have patented an encryption code, and they say that it will
make it impractical or impossible to infringe on copyrighted
data like digital music. Now, if they are right, then we may be
faced in the future with whether the perfect control offered by
code goes too far or restricts appropriate uses like parody or
commentary or personal use.
I know Senator Leahy touched on this a little bit, but I
guess my question to the entire panel is just their view. Will
code like the encryption of digital music files, the use of
trusted systems, down the road, because there is going to be a
demand for it--just listen to Mr. Ehrlich and others--will that
create sufficient copyright protection, not enough, not too
much, but just right? Why or why not? Do you buy the argument
that the digital music issue may end up playing out more in
terms of code than in terms of law?
Mr. Griffin. I think it will be dealt with by business
models, and I say this because I think none of this is new. I
think that in the 1920's we learned that we could give up
control over quantity and destiny of content, but still make
more money. In other words, radio came along and said we will
take your music, we will take your sporting events, we will
broadcast them to, we do not know how many people, and we do
not know what they will do with it afterwards.
Likewise, television did the same thing, and when DirecTV
came before Congress, having been found guilty of violating
copyright laws, never having sought licenses in advance, our
response was to grant them a compulsory blanket license. So I
think each time we find that we cannot control quantity or
destiny of what we call intellectual property, we find it to
our advantage and we find a way to monetize it, and we do it by
creating pooled compensation funds and finding a fair way to
deal with it.
And that is and should be the province of private industry,
and if there is any necessary public oversight, such as through
the courts as occurs with ASCAP and BMI, that will happen. And
we are advantaged now by the notion that we know how large the
audience is. We can at least count through digital means.
And so I think it clear that this market will evolve not as
a new market, but as an extension of what happened in the
1920's. And the sad truth is that so many of those people who
created these great industries are not around to guide us now.
I think it is just the passage of time; 80, 90, 100 years
leaves us now grasping, but they could give us the best
guidance. How did they deal with it when it first became
possible through public address or radio or television to take
quantity and destiny away from artists? And I think we will
deal with it much the same way.
Senator Schumer. Go ahead, Mr. Kan.
Mr. Kan. When I was in high school, I was reasonably close
to the pirate community.
Senator Schumer. Was that a couple of years ago?
[Laughter.]
Mr. Kan. Yes. Yesterday, before I graduated, I was a
software pirate on BBS networks, like many of my friends, in
fact like millions of youth around this country. And in those
days, modems were slower and the pirate community was really a
closed community. Things were not very fluid at all. There was
not a lot of liquidity.
But now with the Internet, and combined with sort of pirate
groups who are willing to pay for--so I am really going to
respond entirely to the encryption idea.
Senator Schumer. Yes, OK, because Mr. Griffin had a
different methodology, but let's hear about all of them.
Mr. Kan. So I would like to respond to the encryption idea,
and that really is that, OK, so you can encrypt this file and
lock it down and make it so that only the people who pay for it
can view it or listen to it, or whatever. Well, pirate groups
always were releasing what they called zero day wares. They
would go to the store, buy a copy, release it for free, and
because of the infinite fluidity of the Internet, you don't
have to be a pirate anymore to have access to that stuff. You
can just be anyone on AOL using Napster or Gnutella or
whatever.
And pirate groups are going to be willing and happy to
contribute their small bit to buy a decryption key for a
particular piece of encrypted media, and they will be happy to
share it among their friends. And because of the fluidity of
the Internet, it will be worldwide in seconds.
Senator Schumer. All you need is one or two of these
pirates, I guess.
Mr. Kan. Exactly, one person to release it on Napster. I
know the title of the next Metallica song or whatever it is and
I am going to be on Napster searching for it--well, not me,
necessarily, but millions like me.
Senator Schumer. Does everyone agree with what Mr. Kan
said, that because a pirate can decide, for whatever reason, to
put the music out there that encryption is sort of useless?
Mr. Kan. Locks, I think, aren't the answer.
Mr. Hoffman. Let me step into this for just a second.
Senator Schumer. Go ahead.
Mr. Hoffman. We have been through this recently, and it is
interesting that there is no one else from the software
industry, except for Hank, basically sitting up here.
The software business started out and it was a really
expensive product and it was encrypted, and everybody hated it.
It was called Lotus 1, 2, 3. And Borland released Quattro Pro
and dropped the price by about a factor of 10, made it
unencrypted, and it sold like mad.
Well, what was interesting is that went on for a while, and
then basically pricing pressures due to piracy started to creep
back into the software business. And it got worse and worse,
and the Software Publishers Association, who has changed names
twice since then, I believe, was unwilling to take the radical
step of enforcing against end users.
So Microsoft and a few other companies started the Business
Software Alliance. And just last week I was listening to the
radio in my car and it said, call 1-800-PIRATE and turn your
company or individuals in for software piracy. It is amazing
how hard it is to find pirated software these days. If you are
in the specific elite fringe and you know how to use IRC or
other very difficult protocols, you can do it, but it is a very
tight-knit community.
The issue is scale. Your average user is not really willing
to risk the Net Act consequences, basically, of making software
available because software companies like Adobe and Microsoft
and others significantly disincentivize them. But I would say
the relationship between software publishers and users is
considerably different than artists and consumers.
Senator Schumer. Right.
Mr. Hoffman. In fact, that is why I continually speak about
the fact that I think there are concerns not with copyright
law, but with how we do enforcement because right now the only
option to really get redress is either to go after a
contributory copyright infringer, which opens up all sorts of
very difficult questions--I mean, sitting here with me, I would
like to have Hank as a business partner because I think it is
an actually very interesting network and there are interesting
ways I could use it to promote the 600 independent labels that
we have.
What I am concerned with is actually his end users who are
cheating, but I don't want to be the person seen to be the
bully, nor do I want my artists to be seen to be the bully.
That frankly is what the police are there for, and whatever
that function ends up being to enforce the law we already have
in the land, I think that is where we have to go.
Senator Schumer. Yes, Mr. Ehrlich.
Mr. Ehrlich. We fundamentally believe that honest people
want to continue to be honest, so the issue on whether or not
there will be people out there that have hacks to security--we
envision that is going to happen, but we also envision, with
time, technology will get better and better, and hopefully
there will be a situation where we are predominately
comfortable with the fact that security exists, and exists the
way that we need it to exist for our artists and our labels.
Senator Schumer. So you are optimistic about encryption
technology working, despite what Mr. Kan says?
Mr. Ehrlich. Well, I think, again, the various iterations
of encryption technology--and a lot of these conversations are
going forward. You know, we have a lot of music right now that
it is going to be very difficult to pull back, so a lot of it
is going forward. We do believe that there are going to be
better and better technologies that will allow it. Will I say
there will be a 100 percent certainty of security? I can't say
that. I don't think anyone can say that.
Senator Schumer. You don't have that now.
Mr. Ehrlich. Right, we don't have that now. Do I believe
there will be better iterations in the future? Yes.
The Chairman. Let me ask just one final question to all of
you, if I can.
Senator Schumer. Mr. Chairman, I think Mr. Barry wanted to
say something.
Mr. Barry. Just briefly, I would say I agree with Mr.
Ehrlich. I think that the point you made, Senator, about there
not being any encryption or other even identification with
respect to the files that are on CD's today is an issue. And
this point about sampling and previewing by sending things by
e-mail to your friends and by FTP file transfer, that was going
on long before Napster, and it was going on because there are
no ID's in any of these files.
I am sorry, Senator.
The Chairman. No. That is fine.
Mr. Robertson. If I could add one thing, and that is the
focus on encryption entirely misses the point. The focus is on
building revenues. How do you build an industry that grows the
revenue base and then fairly compensates those that are
producing the content?
In fact, securing music--we know this from even the
Internet's short lifespan--securing anything reduces the
revenue, not grows it. That happens with software. It is
interesting to look at newspapers. When the Net first came
along, they said, well, we have got to lock up our news stories
because people will get them online and no one will subscribe
to our newspapers.
Well, it is very interesting to go to a newspaper site
today and you will see a button there that says e-mail this
article to everyone you know. They have gone the exact opposite
way because they have realized that----
Senator Schumer. In all fairness, some have, some haven't.
Some newspapers still go for the limited ``we'll charge''
model, and some let it all out. I don't know which one will
prevail.
The Chairman. Well, let's ask just one last question on
behalf of Senator Leahy and myself, and we will start with you,
Mr. Griffin, and just go across. I would like short answers
because we are way overdue here. Let me just ask this one final
question that both Senator Leahy and I are concerned about, and
that is at what point should Congress consider whether
legislative action is warranted to ensure that Internet music
is made available to consumers and that artists are
compensated? And should we consider a compulsory license for
Internet music or a clarification of the fair use doctrine in
this area?
So let's start with you, Mr. Griffin. Have you got those
two questions?
Mr. Griffin. Sure.
The Chairman. And then we will go right across. If you
could give short answers, we would appreciate it.
Mr. Griffin. Sure. I think that the clear answer here is
that you need to engage in oversight like you are today,
precisely in the fashion that you have, to determine if
licensing is occurring. And if there is not an environment that
provides for fair, reasonable licensing, then perhaps you will
need to step in to ensure that this occurs, much for the same
reasons that you did in the DirecTV case.
The Chairman. So it comes down to reasonable and fair
licensing?
Mr. Griffin. Media or television, much the same way. We can
only have these industries created if we have reasonable, fair
licensing occur, and this kind of oversight leads to that. And
I would say, too, you should consider a commission, as the
National Academy of Sciences suggested, to continue to examine
and extend your own oversight of these areas so that it can
occur also in other rooms.
The Chairman. These are complex areas.
Mr. Griffin. Yes. Thank you.
The Chairman. Thank you.
Mr. Kan.
Mr. Kan. I agree largely with Mr. Griffin. I believe that
legislative oversight in this area is particularly good because
it affects not only the music industry, but already today I can
download a movie to my hard disc.
The Chairman. Yes. We didn't even get into all the other
applications.
Mr. Kan. Yes. I can download a reasonably good-quality
movie in about an hour. And broadband is only increasing around
the world, particularly in this country. A reasonable and fair
license is definitely needed. Clarification of fair use, I
think, is definitely needed. It seems to be really the subject
of so much discussion and things. Probably, you know, some
clarification would really eliminate that.
And the last thing I wanted to say is I think that really
the best thing that could come out of this is a general
framework that allows everyone to profit and allows everyone to
access their music conveniently, and tomorrow their movies and
who knows what next.
Thank you.
The Chairman. Thank you.
Mr. Hoffman.
Mr. Hoffman. To try to answer your questions quickly, as to
a statutory license in sound recording, I don't think it is
time yet. But I do think that the Senators shouldn't forget the
power of the pen to influence those people who have to work
together. I mean, you can force all of us to have real
important dialogues by simply saying that that is something you
expect us to do.
As far as legislative remedies and such, I don't think the
legislation is that bad right now. I think the copyright law as
it stands is either well-defined or will shortly be defined by
the various Federal courts out there with the more interesting
questions that are in front of them. I think that DVD-CCA and
the DVD anti-circumvention case are going to be very
enlightening as they go through the appeals process.
So I think right now legislation is not what we need to be
looking at, but I do think we need to start addressing how we
are going to enforce the Net Act because I think that is really
what we are talking about here, is the death by a thousand
cuts.
The Chairman. Thank you.
Mr. Ehrlich.
Mr. Ehrlich. I agree that legislation is not needed right
now. I believe in the private market, it will set itself right.
We are in constant conversations with companies on licensing
and selling our music, and we believe it will be worked out in
the private marketplace.
The Chairman. Hilary.
Ms. Rosen. I think that is right, Mr. Chairman. I might
feel differently in a year, but I think that the copyright law
is adequate now, and I don't think that anybody should be
fooled that the problem with some of these services like
Napster is that we won't give them licenses. They just haven't
asked. So I think the marketplace is working and I am glad that
you have held this hearing today.
Senator Leahy. If you feel differently in a year, I assume
we can feel comfortable in knowing that you will let us know.
The Chairman. I have the feeling you will let us know.
Ms. Rosen. I have your phone number.
The Chairman. Mr. Robertson.
Mr. Robertson. I think there is no doubt there needs to be
clarification of fair use. When the chairman asks Hilary, can
you copy a CD to a tape, and she cannot or will not answer, I
think that in itself indicates that there is need for
clarification about fair use for your own personal use,
especially property which you own.
As for compulsory licenses, I detest them because you are
guaranteed to be one of two things, too expensive or too cheap,
and that is the dilemma that we face. However, in this
environment that we have where we have companies at all ends of
the spectrum, it is important for them to get licenses.
We have license from two of the major record labels, but
the publishing side is an absolute disaster, and it is not
clear that we will be able to get the publishing licenses that
are required for us to turn on this service. I think in that
light, Congress has to look closely at some sort of input in
the future.
The Chairman. Thank you.
Mr. Barry.
Mr. Barry. I think you should continue your oversight. I
applaud you for the hearing today. I think that we should let
the market work and let history be our guide with respect to
not squashing these technologies too soon.
The Chairman. Thank you.
Mr. McGuinn.
Mr. McGuinn. I don't feel that legislation is necessary at
this point either. I think the market will work itself out, and
I think people should realize that the publicity aspect of
music being available on the Internet is really important, much
as it is with radio. Record companies give CD's to radio
stations and encourage them to play them, and people can tape
off the radio. So, you know, it is not new that people are
getting free music over the airwaves or however. I think there
is a lot of worry about nothing in some ways here.
The Chairman. Thank you.
Mr. Ulrich.
Mr. Ulrich. I feel that the legislation should definitely
be part of this soon. I think that we all are dreaming if we
think that we can work this out between us. I think the issue
is too deep on many, many levels, and I think that ultimately I
think it comes down to a sort of fundamental look at the whole
situation.
We have sat here and you have heard many different points
of view on this, and obviously when companies like Napster sit
down and talk about sharing and trading and swapping of music,
and talk about what a good thing it does, what it does for the
record industry and all this type of stuff, when artists like
myself have a completely opposite view--we have tried to have a
little bit of dialogue with some of these people and I don't
feel that there is going to be a situation where we can work
this out without your involvement. So we look forward to that.
The Chairman. Well, thank you. What I think we are hearing
is that fair and reasonable licensing needs to take place. Now,
that is not happening currently, apparently, except there is an
offer to do it. At least that is what I am hearing.
So we will be watching this very closely, and we would
appreciate continual education from you. Feel free to write to
us and to send us information because we want to do what is
right here. We don't want to interfere with these great
industries, but we sure as heck want to make sure things work
right and that the law works right. We want to thank each and
every one of you for being here today. This has been a really
interesting hearing, and I think one that will have a dramatic
impact over the next number of years. So you haven't wasted
your time.
I would like to come down and shake hands with each of you.
So with that, we will recess until further notice.
[Whereupon, at 1 p.m., the committee was adjourned.]
Question and Answers
Responses of Fred Ehrlich to Questions of Senator Herb Kohl
Question 1: Please respond to the following hypotheticals. For each
hypothetical, answer whether or not you believe the practice would
violate copyright laws. Explain why or why not, and, as a policy
matter, whether you think it should violate copyright laws.
(A) An individual goes on a music website, clicks on a song track
and listens to the song on his computer--without downloading it to his
hard drive.
Assuming that the music site is legitimate (such as webcaster
licensed to render interactive public performances), neither the music
site nor the individual who requested the transmission from the site
would be liable for infringement.
(B) An individual goes onto the music website, clicks on a song
track and downloads it to his hard drive for later use.
Assuming that the music site is legitimate (such as a retail site
authorized to make promotional downloads), neither the music site nor
the individual who requested the transmission from the site would be
liable for infringement. Of course, the situation would be different in
the case of a pirate site of the kind that courts have enjoined on a
number of occasions.
(C) An individual takes a downloaded track and e-mails it to a
friend.
The individual's unauthorized reproduction and distribution of a
new copy would seem to be an infringement unless authorized by the
copyright owner, although it is hard to imagine a copyright owner
interested in taking action against such occasional limited
distribution among friends. Indeed, record companies are taking
advantage of new technologies to enable and legitimize just this kind
of distribution.
(D) An individual or company creates a searchable file-transfer
program to make it easier for all of his friends to find and transfer
each other's music files among themselves.
Use of such a program to reproduce or distribute copyrighted works
without the authorization of the copyright owner would seem to be an
infringement. However, as above, it is hard to imagine a copyright
owner interested in taking action against such use if it really was
limited to distribution among a few friends (as opposed to a circle of
millions of anonymous online ``friends'' worldwide). The maker of the
program would also be liable for infringement if its conduct meets the
tests of contributory infringement or vicarious liability. If, for
example, the program was designed primarily to reproduce or distribute
copyrighted music without permission, then it would give rise to
liability for infringement.
(E) An individual or company creates a searchable file-transfer
program and allows the general public to use it to download and
transfer music files to others, intending to derive profits from the
program.
As above, the maker of the program would be liable for infringement
if its conduct meets the tests of contributory infringement or
vicarious liability. If the maker of the program not only distributed
the program but also operated it knowingly to provide an online ``flea
market'' for the distribution of copyrighted recordings like Napster,
those tests clearly would be satisfied.
(F) An individual or company creates a searchable file-transfer
program, intending to derive profits from the program, and allows the
general public to use it to find and listen to one another's music
files--without the users' actually downloading the music files onto
their individual hard drives.
Use of this program to render unauthorized interactive public
performances would violate the Digital Performance Right in Sound
Recordings Act. The maker of the program would also be liable for
infringement if its conduct meets the tests of contributory
infringement or vicarious liability.
Responses of Fred Ehrlich to Questions of Senator Strom Thurmond
Question 1: Mr. Ehrlich, when the recording industry started
backing the compact disc as a new medium to replace vinyl, record store
owners were very slow to adopt the new technology. For years, CDs were
shipped in throw-away cardboard ``long boxes'' because the record
stores would not modify their vinyl racks to accommodate compact discs.
Do you expect any resistance by traditional music retailers to the
recording industry's attempts to exploit the internet?
Answer: Traditional music retailers are in far better position than
me to discuss their reaction to the new business models made possible
by the Internet. However, I expect that many traditional retailers will
embrace new forms of music distribution. Already many retailers have
formed partnerships with record companies in offering digital
downloads, kiosk services in their stores, and other innovative
offerings. I'm confident that together we can draw on our years of
serving music fans to create new services that create a better music
experience for those fans than ever before possible.
Question 2: Mr. Ehrlich, as the recording industry explores methods
of using the internet to develop artists and create demand for music,
do you see any implication for traditional broadcasters?
Answer: The recording industry and traditional AM/FM broadcasters
have historically enjoyed a mutually beneficial relationship. I see no
reason why the creation of additional opportunities for consumers to
use the Internet to access the music they love should affect the way
people enjoy music from local, over-the-air broadcasts. Moreover,
broadcasters are beginning to offer their programming on the Internet,
too, so even ``traditional broadcasters are becoming Internet music
services.
Question 3: Mr. Ehrlich, if the recording industry does not keep
pace with technology, it risks forfeiting any ability to profit and
exploit new technology. For example, it appears that MP3 format has
obtained a sizeable head start on the music industry's SMDI format. How
do you respond to the argument that the recording industry is not
moving as fast as it should in adopting to new technologies?
Answer: As my testimony and the continuous stream of press reports
show, record companies and others in the music industry are working
hard to harness the power of new technologies to offer consumers new
opportunities to access music. They have done this both by launching
their own Internet music services and by licensing others to use their
music on the Internet. I have attached a list of some specific
initiatives in this regard.
These efforts have taken time due to the enormous complexity
involved in making sure that these new services respect the rights of
recording artists, songwriters and record companies. However, it is
unfair to compare these efforts to the relative speed of those who have
launched infringing services. They can move quickly because they make
music available without worrying about obtaining licenses, honoring
artist contracts, paying royalties to songwriters or creating a secure
system. When viewed in the context of other types of content being made
available by companies ``playing by the rules,'' legitimate music
services are being developed as fast or faster than many other forms of
Internet distribution.
Finally, a clarification regarding SDMI. SDMI is not intended to
create a format to compete with MP3. In fact, it is not intended to
create any specific format. Rather, it is intended to specify a minimum
level of security that will provide consumers a better music experience
using whatever specific technologies work best (including MP3 or other
compression technologies) while also respecting copyrights.
Question 4: Mr. Ehrlich, compact discs are arguably much cheaper to
produce than are records and tapes. Consumers were willing to pay a
premium for compact discs in order to obtain the better sound quality
and features associated with that medium. But now, it appears that
consumers expect to pay far less for digital music downloaded over the
internet. Will the recording industry be willing to pass on the
distribution and manufacturing savings of internet music to consumers
in the form of lower prices?
Answer: The recording industry is intent on doing much more than
simply replicating the consumer's experience with CDs through an
Internet service. There are--and increasingly will be--a wide variety
of music services with different features, including services offering
webcasting, on-demand streaming and downloads. Some of these services
will be provided without charge, others will have promotional features
like ``try before you buy,'' and others yet will have usage-based
charges or be provided on a subscription basis. Like everyone else in
business, the companies that offer those services will determine
appropriate pricing based on many factors, including their cost
structure and competitive considerations.
Responses of Gene Kan to Questions From Senator Thurmond
Question: Mr. Kan, you have proposed a system where individuals
and/or businesses would charge a fee for offering music to the public,
via Gnutella or something that functions like Gnutella, and then share
the proceeds of the fee with recording artists. Under your proposal,
would there not still be a need to shut down pirates who offer music
downloads for free? How would such a system deal with artists, such as
Metallcia, who wish to opt out of this method of distribution?
Answer: Artists should be compensated for their works in some way.
The exact way is under question right now, and is hotly debated on the
various industry discussion groups, some of which I participate in.
The idea that there would be localized piracy in spite of a
widespread payment system for downloaded music is definitely a concern.
Evaluation of the importance of the piracy comes down to its scale.
This is the primary reason I proposed a business model in which
incentives are employed to promote pay-for-download. Most other
proposals for pay-for-download are mainly about enforcement, not
encouragement. Enforcement on the fast and wild Internet is even more
difficult than in the physical world, where there is rampant piracy
despite the best efforts of industry and law enforcement.
In an incentive model, the people who are providing the
downloadable content are financially motivated (not financially
threatened) to profit from downloaders. If we sort of extrapolate the
desire to profit, we can see that file-sharers would only allow paying
customers to download from them.
The reason is simple: Internet connections have finite capacity. If
I can squeeze ten downloaders onto my Internet connection, I would want
ten paying customers, not ten freeloaders.
In this scheme the content provider acts as a merchant, and he will
see to it that customers pay, as all merchants do.
Any piracy will be minimal, since even pirates want to make money.
Sure there will be as mattering of piracy, but those pirates are going
to turn right around and resell the music they pirated. And when there
is only one payment network. Those pirates won't actually be pirates:
they'll be legitimate merchants.
Let me try to answer the second part of your question about artists
who want to opt out of this system.
It will be very difficult to opt out. Music is fundamentally easy
to duplicate and distribute, especially on the Internet. No physical
exchange needs to take place. The zeroes and ones just float easily
around the ether.
In such an environment, it would be very difficult for a group to
police the distribution of its work. That does not mean it's difficult
to profit (in fact it's easier), as I said in my answer to the first
part of your question.
Policing the distribution of content which is easy to replicate on
what is a progressively larger and faster Internet will be nearly
impossible. As Madonna and Dr. Dre saw, once one copy gets out there,
it is rabidly consumed.
If the infrastructure to ensure profitability exists then the only
artists who would want to opt out of this are those who are
philosophically opposed, for whatever reason. Unfortunately we may not
be able to help those artists.
Just as Luddites find it difficult to entirely avoid modern
conveniences, it will be difficult for groups to completely divorce
themselves from the Internet.
Responses of Gene Kan to Questions From Senator Kohl
Senator Kohl: I'll keep these answers short since I'm no legal
expert. My answers are purely based upon my opinion of what ``should''
be reasonable to do.
(a) An individual purchases a CD and makes a tape recording
of it to listen to in his car.
This sounds reasonable. My understanding is that this is even okay
under the Fair Use constraints of the various recording acts. It was
found to be okay by the Diamond Rio suit a while back. But I see that
suit has been refiled, so this point is in litigation again, I think.
To borrow from what I know of software law: it's okay to make a
backup copy.
(b) An individual purchases a CD and makes a tape recording
of it for his wife to listen to in her car.
I'm not so sure this is acceptable. If the two people can listen to
the recording simultaneously, then it's hard to justify that this is an
acceptable practice in the current copyright regime.
But if this is getting into the husband's true intentions for the
duplicated tape that seems pretty messy.
So, to summarize: seems reasonable, but dubitably acceptable.
(c) His son goes onto a music website, clicks on a song track
and listens to the track on his computer without downloading it
to his hard drive.
Apparently this is widely acceptable behavior as long as the guy on
the giving end doesn't try to capitalize on the child's listening of
the recording.
This is sort of like hobby radio stations. They may or may not be
absolutely legal, but they are largely ignored by copyright holders.
(d) His son goes onto a music website, clicks on a song track
and downloads the song onto his hard drive to listen to later.
If he owns the physical media for this, I don't see how anyone
could argue that this practice is unreasonable. This goes back to
question A.
If it's okay to make a backup copy, or a copy in a different
format, then this should be okay too.
If the child doesn't own the physical media then this is really
what is at question in the Napster case. I believe that if the child is
previewing the music, he should be allowed to do so.
Many record stores encourage the previewing in the store. Why not
extend that to the convenience of the Internet?
(e) His son takes the downloaded track and burns it onto a CD
to listen to in his car.
If the child already owns the physical media for the song, then
this should be acceptable. He'd be creating a copy with degraded
quality.
But this is actually quite interesting, because many DVD players
and recent car stereos are able to play MP3 CDs. This is where the CD
stores MP3 files. On one CD it is possible to store 150 full-length
songs. That's pretty compelling.
So yes, this should be entirely acceptable as long as somewhere
along the line the child paid for the music.
(f) His son takes the downloaded track and e-mails it to his
friend.
If you believe that emailing tracks is sort of a word-of-mouth
marketing device, then this should be more than just acceptable: this
should be landed by the by the copyright holder.
People have been giving each other mixed tapes forever. Email is
just an extension of that.
Responses of Robert H. Kohn, Chairman, EMusic.com to Questions From
Senator Kohl
Emusic.com. Inc.,
Redwood City, CA,
September 22, 2000.
Hon. Orrin G. Hatch,
Chairman, Senate Judicial Committee, Washington, DC.
Dear Senator Hatch: This is in reply to Senator Kohl's request of
my colleague, Gene Hoffman, for our response to several follow-up
questions about the legality of certain activities relating to the
digital transmission of musical recordings. Gene and I are co-founders
of Emusic.Com, Inc., and because I have previously written extensively
on the subject (See, Kohn On Music Licensing, Aspen Law & Business
1992-2000), Gene asked that I submit the following response on behalf
of the company.
Specifically, you've asked whether or not we believe the practices
set forth in scenarios A through F below would violate the copyright
laws, and whether as a policy matter, that should violate the copyright
laws. For the purpose of our answer, I start with the assumption that
(a) all of the tracks in question contain both a sound recording and an
underlying musical work, (b) a valid copyright subsists in both the
sound recording and the musical work, and (c) no permission to effect
the transmission (i.e., stream or download) in question has been
granted by the owners of either copyrighted work.
A. An individual goes onto a musical website, clicks on a song
track and listens to the song on his computer--without downloading it
to his hard drive.
Answer: Yes, the foregoing activity would violate the copyright
law, and, as a matter of policy, it should violate the copyright law.
Discussion: A more precise answer demands that we made a
distinction between a sound recording and a musical work, and the
various exclusive rights for each under the Copyright Act (17 U.S.C.
101, et. seq.).
Sound recording
The person permitting the ``stream'' would clearly be violating the
exclusive right to make digital audio transmission (under 17 U.S.C.
Section 106(6) of owner of the copyright in the sound recording, unless
there were an exemption under Section 114. Since the transmission is
clearly interactive, no such exemption should apply.
Musical work
A. The person permitting the ``stream'' would clearly be violating
the exclusive right of public performance under 17 U.S.C. Section
106(4)) of owner of the copyright in the musical work.
Such person could avoid liability for infringement by obtaining
permission from the copyright owner. Such person may be obtained on a
``blanket'' basis from the applicable performance rights society (e.g.,
ASCAP, BMI, or SESAC) representing copyright owner with respect to the
work, or by obtaining a license directly from the owner of the
copyright, usually a music publisher.
B. Would the stream also constitute a violation of the musical work
copyright owner's exclusive right of reproduction under Section 106(l)?
Herein lies a controversy that should be resolved by Congress, a
Copyright Arbitration Royalty Panel, or the Courts.
The music publishers have taken the position that songs digitally
streamed from interactive services constitute digital phonorecord
deliveries, even if no digital copy is, or can be, made by or for the
intended recipient of the transmission. However, the interactive
transmissions of purely streamed copyrighted musical work would be
subject to the compulsory licensed set forth in 17 U.S.C. 115,
requiring payment of the statutory compulsory license fee of 7.55 cents
per stream.
Opponents, which include an unusual alliance among the Internet
community (i.e., those who don't want to pay anything, if they can
avoid it) and the traditional record companies (i.e., those who don't
want to pay music publishers, if they can avoid it), suggest that this
would amount to ``double-dipping'' on the part of the music publishers.
If a performance royalty is required to be paid to ASCAP and BMI for
the stream, why, they say, should a reproduction royalty also need to
be paid?
The music publishers argument may be stated as follows:
Technology developed for use to facilitate the listening
of these streams have made it trivial for the listener to convert the
stream into a download;
The stream in question is not like a stream of a
traditional raid broadcast, consisting of a series of tracks in some
random or programmed order which listeners are not likely to copy, but
an interactive transmission where the listener may know in advance
exactly what will be streamed to his or her computer and can prepare
for it (i.e., prepare to download or save it to his or her hard drive;
Accordingly, interactive streams of musical works will
tend to displace sales of CDs and digital phonorecord deliveries,
transactions which typically earn them a compulsory mechanical
reproduction fee.
Moreover, the saving of the transmission to your disk as a
downloaded file eliminate the need for further public performances of
the work, because when a listener listens to the rendering of a file
that has been downloaded to his or her computer, as opposed to
listening to a stream from a website, the rendering is a private
performance;
Since music publisher's have no exclusive right of private
performance under the copyright law, only public performances, no
further public performances royalties will be collected on performances
rendered after the file has been downloaded (i.e., you only have to
stream the file once and save the stream to get an infinite amount of
performances from it);
To the extent public performance royalties are reduced,
they should be replaced by a mechanical reproduction fee, similar to
that which music publishers typically collect upon the sale of a CD or
the sale of a digital download;
This argument, in my view, is compelling, even though it may mean
the collection of both a public performance fee and a reproduction fee
for the same transmission (but I'll deal with that below). Moreover,
legally, under the current copyright law, the music publishers may be
right. They take solace from a very specific provision that was in the
Digital Rights in Sound Recording Act of 1995 which is now part of the
compulsory license provision at Section 115(c)(3)(L): ``The provisions
of this section concerning digital phonorecord deliveries shall not
apply to any exempt transmissions or retransmissions under section
114(d)(1).''
In the view of the music publishers, the above language implies
that the provisions concerning digital phonorecord deliveries, while
not applying to any exempt transmissions under Section 114(d)(1) does
in fact apply to those transmissions that are not exempt under Section
114, which would include all transmissions made as part of interactive
services. Thus, according to the argument, the transmitter must pay a
mechanical reproduction fee, subject to Section 115's compulsory
license, or about 7.55 cents per interactive digital audio
transmission, whether or not a copy results in the recipient.
Nevertheless, music publishers have not appeared to have taken an
unreasonable position on the issue. First, they recognize that an
interactive transmission of a song that is of a short duration and
which is not intended to result in a copy being made for the intended
recipient, is not likely to have an effect on the sale of a CD or a
full digital phonorecord delivery of the song. Accordingly, the music
publishers have informally let the record and Internet industry know
that they will allow such interactive transmissions without requiring
payment of the statutory fee if (a) no more than 30-seconds of the song
is transmitted and (2) the transmission is effected by or with the
permission of the owner of the sound recording embodying the song.
(Note, this does not allow anyone to make such 30-second transmissions,
only the record company who owns the recording, or its licensees).
Second, Section 115 refers to something called an ``incidental''
reproduction or distribution.
``* * * Such terms and rates shall distinguish between (1) digital
phonorecord deliveries where the reproduction or distribution of a
phonorecord is incidental to the transmission which constitutes the
digital phonorecord delivery, and (ii) digital phonorecord deliveries
in general.'' 17 U.S.C. 115 (3)(C).
The music publishers are willing to admit, at least privately, that
they would be willing to consider interactive streams intended as mere
performances, where copying to hard drivers is merely incidental to the
transmission, are these very same ``incidental'' reproductions. The
quoted portion of Section 115 above appears to contemplate that
incidental reproductions may have a lower compulsory, statutory rate
than full digital phonorecord deliveries.
It is our view that this is where this controversy can and should
be resolved. Allow the collection of both a performance fee and a
mechanical reproduction on these interactive transmissions, but
recognize a lower mechanical reproduction rate for incidental
reproductions. Of course, no mechanical reproduction fee should be
charged for non-interactive transmissions. However, where the
transmission constitutes an incidental digital phonorecord delivery, it
would appear that once the statutory royalty is paid, no further
royalties would be due, including performance royalties (to ASCAP or
BMI).
C. Would the stream also constitute a violation of the musical work
copyright owner's exclusive right of distribution under Section 106(3)?
No, because the distribution right only applies to the distribution
of copies or phonorecords, each of which are defined as material
objects. Thus, the ``stream'' in question, which odes not involve the
transfer of possession of material objects, does not constitute a
distribution. The word ``delivery'' is better terminology than
distribution in connection with digital transmissions that result in
reproductions (i.e., downloads).
B. An individual goes onto a music website, clicks on a song track
and downloads it to his hard drive to listen to later.
Answer: Yes, the practice would violate the copyright law, and, as
a matter of policy, it should violate the copyright law.
Discussion: Again, we make a distinction between sound recordings
and musical works, and the various exclusive rights under copyright.
Sound recording
There should be no controversy about the answer to this question:
persons desiring to make digital phonorecord deliveries of sound
recordings must obtain a license from the person who owns the
recording, which is typically a record company. Further, unlike for the
use of the underlying song, there is no compulsory license for these
kinds of digital audio transmissions. In other words, you must obtain
permission from the record company and the record company can charge
whatever it likes or even refuse to grant you permission to make the
transmission.
The reason for this is straightforward: digital phonorecord
deliveries directly replace sales of phonorecords. Without such sales,
the purpose of the copyright law will be defeated: Record companies
would be unable to finance, promote and distribute new recordings, and
artists would be unable to earn royalties to support professional
recording careers. As a result, there would be an economically
insufficient supply of quality musical recordings for the buying
public. It is the very purpose of the copyright law to ensure that
artists and their record companies receive economic remuneration for
their undertakings, so that an efficient supply of quality musical
works and sound recordings will be produced and distributed to the
listening public.
Musical Work
Similarly, and for the same reasons, persons desiring to make
digital phonorecord deliveries of a musical work must obtain a license
from the person who owns the song, which is typically a music
publisher.
A. Reproduction Right. Recall that a copyright owner of a musical
work has an exclusive right to reproduce the song in copies and
phonorecords. This right is subject to the compulsory license provision
set forth in Section 115 of the Copyright Act. Briefly, as long as
records of a song were previously distributed in the United States, the
compulsory license provision allows anyone else to compel the copyright
owner of a song (e.g., a music publisher) to license the song at a
license fee that is established by law--this fee is called, the
``statutory rate.'' The license which authorizes these transmissions is
called a ``mechanical license,'' and the organization in the United
States that issues most of them on behalf of music publishers is the
Harry Fox Agency.
B. Performance Right. But there is a little controversy brewing
here. The performance rights societies (e.g., ASCAP, BMI, SESAC) appear
to be taking the position that a performance license is required to
effect a digital phonorecord delivery, even though a statutory
mechanical reproduction license has already been obtained for the same
delivery. In their view, all transmissions of songs constitute
performances of songs, whether or not they result in a specifically
identifiable phonorecord made by or for the transmission recipient, and
therefore, they say, you must also pay a public performance fee for
these transmissions.
The performance rights societies have not yet disclosed how much
they intend to charge for these transmissions. They are likely to seek
something less than what they charge for transmissions that do not
constitute digital phonorecord deliveries, such as ``streaming'' audio
transmissions.
One may legitimately ask: If I am paying 7.55 cents for the digital
phonorecord delivery, why must I also pay for its performance,
particularly if the phonorecord is not truly performed or in any way
rendered during the transmission? Isn't this a form of ``double-
dipping'' by the music publishing industry?
The performance rights societies could point to the definition of
``digital phonorecord delivery'' to support its position. The complete
definition of that term, which was added to the Copyright Act by the
DPRA, is as follows:
A ``digital phonorecord delivery'' is each individual delivery of a
phonorecord by digital transmission of a sound recording which results
in a specifically identifiable reproduction by or for any transmission
recipient of a phonorecord of that sound recording, regardless of
whether the digital transmission is also a public performance of the
sound recording or any nondramatic musical work embodied therein.
(emphasis added).
One could certainly infer from the italicized language that a
digital phonorecord delivery may involve the public performance of the
musical work embodied in the sound recording. But only that it may do
so is the best you can say about it. If Congress intended to
definitively answer the question, it certainly could have done so in
unambiguous terms, such as, ``A digital transmission containing a sound
recording that results in a digital phonorecord delivery constitutes a
performance of any musical work embodied in that sound recording.'' But
it didn't.
Quite possibly, Congress recognized that some digital phonorecord
deliveries may be performed or ``streamed'' for listening by the user
while it is being downloaded; hence, the italicized language may have
been needed to make certain that a digital phonorecord delivery will
still be deemed such, even if the digital transmission happens also to
constitute a public performance.
The performance rights societies could point to the definition of
public performance:
``To perform * * * a work publicly means--
``(1) to perform or display it at a place open to the public or at
any place where a substantial number of persons outside of a normal
circle of a family and its social acquaintances is gathered; or
``(2) to transmit or otherwise communicate a performance or display
of the work to a place specified by clause (1) or to the public, by
means of any device or process, whether the members of the public
capable of receiving, the performance or display receive it in the same
place or in separate places and at the same time or at different
times.'' (emphasis added).
It appears, from the italicized language, that it does not matter
whether you hear the performance at the same time as you download the
file. Certainly, when a recording is being streamed to you, it is first
buffered in your computer's temporary memory, before the recording is
actually played so that you can heart it. What is the difference
between storing the recording in temporary memory and storing it on
your hard disk (which is typically the case with a digital phonorecord
delivery) prior to your hearing the records?
The problem with these arguments is that the above definition
concerns not what a performance is, but what it means to perform a
working publicly (as opposed to privately). Nevertheless, even if the
transmission of a work is considered a public one, it may still not
constitute a performance. According to the Copright Act.
``To perform a work means to recite, render, pay, dance, or act it,
either directly or by means of any device or process * * *''
It may well be asked, where, for purposes of the definition of
``perform,'' is the ``rendering'' or the ``playing'' of the work in the
transmission of a downloaded music file? The performance rights
societies could take the position that a sound recording of a work is
itself a ``rendering'' (i.e. a performance, albeit a recorded one) of
the work. This is as opposed to sheet music where the musical notations
only are listed. When one digitally transmits the sound file, one is
engaged in a transmission of the recorded performance, as hence, it may
be said, the requisite ``rendering'' is taking place.
This argument would be plausible but not for the definition of
``sound recordings,'' which is defined in the Copyright Act as ``works
that result from the fixation of a series of sounds.'' Thus, by
definition, a sound recording is a fixation of sounds, not a rendering
of sounds. Arguably, then, by transmitting a sound recording, you are
transmitting a fixation of sounds, not a performance or rendering of
them.
A better argument, from the performance rights societies
perspective, would be to say that the downloading of a digital file is
part of a process that results in a rendering or playing of the work at
the recipient's end. Recall that to perform a work means to render or
play the work, ``either directly or by means of a device or process.''
Thus, arguably, the process of transmitting the bits constituting a
digital sound recording file, the recipient's buffering those bits or
saving them to his hard disk or other storage media, and his playing of
the bits, either as the bits are being downloaded or later, even after
the entire file has been saved to disk, constitutes a playing or
rendering of the sound recording, ``either directly or by means of a
device or process.''
Because technology now permits the playing of the bits either as
the bits are being downloaded or after all the bits in the file have
been received, the distinction between a digital phonorecord delivery
(DPD) and a non-DPD (i.e., a purely ``streaming'' digital audio
transmission) is being blurred. The performance rights societies may
argue that all of these transmissions should be considered
performances, merely because it is too impractical, on a case-by-case
basis, to make a distinction between them.
In addition, the performance rights societies have argued that a
digital phonorecord delivery provides an added value to the consumer--
that is, with the advent of digital deliveries, the consumer no longer
has to schlep down to a record store to buy a CD; he or she can just
order it online and receive it in minutes. Consequently, that added
value should be paid for. This argument, however, was first made before
the success of companies like Amazon.com, from whom you can now order a
CD and have it sent to you by overnight courier. What practical
difference does it make whether the tracks constituting a record album
come to you overnight or several minutes or hours after you have
requested them to be downloaded?
Moreover, it may be reasonable to assume that if Congress made
digital phonorecord deliveries subject to a compulsory license under
Section 115, and set the fee for such licenses at the statutory rate,
then, arguably, it should be unnecessary for anyone to pay more than
the statutory rate to effect the delivery, ``regardless of whether the
digital transmission is also a public performance of * * * any musical
work embodied therein.''
Again, the quoted language is from the Act's definition of digital
phonorecord delivery, and one could infer from it that Congress wanted
to make certain that a digital download of a sound recording will be
deemed a digital phonorecord delivery, subject to the compulsory
license, with no one having to pay more than the statutory rate, even
if the digital transmission happens also to constitute a public
performance. Thus, once the statutory royalty is paid for a compulsory
license, whether for digital phonorecord deliveries in general or
incidental digital phonorecord deliveries, the payment of a performance
royalty would not be necessary.
C. An individual takes a downloaded track and e-mails it to a
friend.
Answer: When an individual takes a downloaded track and e-mails it
to a friend, the copyrights in both the sound recording and the
underlying musical work are being infringed, and, as a matter of
policy, such activity should violate the copyright law.
Discussion: The reproduction of a copyrighted work by means of an
individual's e-mail is no different from any other form of
reproduction, whether in the form of making tapes or posting files on a
website, and the violation of the copyright owner's exclusive right of
reproduction would constitute copyright infringement, unless some
exemption applies.
By using the term ``friend,'' the question raises the issue of how
far should the currently recognized exemption for private non-
commercial home copying apply. In the legislative history of the Sound
Recording Act of 1971, Congress recognized what is loosely called, the
``home recording exemption'' which permits a consumer to make ``home''
recordings for their non-commercial use. The House Report stated,
It is not the intention of the Committee to restrain the home
recording, from broadcasts or from tapes or records, of
recorded performances, where the home recording is for private
use and with no purpose of reproducing or otherwise
capitalizing commercially on it.
An example of a home recording would be your making a cassette tape
recording of a CD for use in your car tape player. The question arises:
would this exemption permit your wife to use the tape in her car? The
answer, in our view, is be yes, as ``home recording'' would include
recording for use by members of your family. Since one is not likely to
purchase a separate copy of a record for a spouse, child, sibling or
other family member, record sales are not likely to be displaced
significantly by such recording.
Making a copy for a friend or neighbor, however, is a different
matter. In these instances, making recordings for friends and neighbors
would likely displacing sales that the copyright owner might otherwise
have made. Since virtually everyone has friends to whom they can email
a copyrighted work, extending the exemption to beyond the family could
easily defeat the purposes of the copyright law.
Moreover, by extending the permissible home-copying to ``friends''
would put the Federal Courts in the unenviable position of determining,
``What is a friend?'' Does it include acquaintances or just close
acquaintances? Because this is not practical by any means, a line
should be drawn at the outskirts of family members. Incidentally, for
political reasons, I think we would all be wise to include, for this
purpose, mothers-in-law.
D. An individual or company creates a searchable file-transfer
program to make it easier for all of his friends to find and transfer
each other's musical films among themselves.
Answer: When an individual or company engages in activity, such as
developing and maintaining a software program, that facilitates the
activity in Question E above, such individual or company should be
liable for contributory copyright infringement, and, as a matter of
policy, such activity should violate the copyright law.
Discussion: It will be recalled that we started with the assumption
that a valid copyright subsists in both the sound recording and the
musical works contained in the files being transferred and no
permission to effect the transmissions have been granted by the owners
of the copyrighted works. The problem in that many of the files
transferred among friends may constitute files that are either not
subject to copyright protection, or permission was otherwise granted by
the copyright owners to effect the transfers. How do you stop the
transfer of copyrighted files while permitting the transfer of other
files?
We believe that Congress reached an adequate compromise in Section
512(d) of the Copyright Act.
(d) Information Location Tools.--A service provider shall not be
liable for monetary relief, or, except as provided in subsection (j),
for injunctive or other equitable relief, for infringement of copyright
by reason of the provider referring or linking users to an online
location containing infringing material or infringing activity, by
using information location tools, including a directory, index,
reference, pointer, or hypertext link, if the service provider--
(1)(A) does not have actual knowledge that the material or activity
is infringing;
(B) in the absence of such actual knowledge, is not aware of facts
or circumstances from which infringing activity is apparent; or
(c) upon obtaining such knowledge or awareness, acts expeditiously
to remove, or disable access to, the material;
(2) does not receive a financial benefit directly attributable to
the infringing activity, in a case in which the service provider has
the right and ability to control such activity; and
(3) upon notification of claimed infringement as described in
subsection (c)(3), responds expeditiously to remove, or disable access
to, the material that is claimed to be infringing or to be the subject
of infringing activity, except that, for purposes of this paragraph,
the information described in subsection (c)(3)(A)(iii) shall be
identification of the reference or link, to material or activity
claimed to be infringing, that is to be removed or access to which is
to be disabled, and information reasonably sufficient to permit the
service provider or locate that reference or link.
Whether a particular file transfer program, or information location
tool, adequately complies with section 512(d) depends upon the findings
of the District Court. Where a District Court has difficulty
determining the extent to which the individual or company operating the
location tool ``acts expeditiously to remove, or disable access to, the
[infringing] material,'' the Court could appoint an impartial, special
master to oversee compliance while the Court retains jurisdiction of
the case. In any event, the courts would appear well equipped to apply
the law in applicable cases.
E. An individual or company creates a searchable file-transfer
program and allows the general public to use it to download and
transfer music files to others, intending to derive profits from the
program.
Answer: Same as the answer to D above.
F. An individual or company creates a searchable file-transfer
program, intending to derive profits from the program, and allows the
general public to use it to find and listen to one another's music
files--without the user's actually downloading the music files onto
their individual hard drives.
Answer: Same as the answer to D and E above. Whether the resulting
transmission is a stream or a download, a violation of the copyright
owner's exclusive right of performance or reproduction is involved.
We hope this has been a useful explanation of the law and policy
with respect to the very difficult questions raised by the advent of
digital transmissions copyrighted works over the Internet.
Respectfully submitted,
Robert H. Kohn,
Chairman.
Responses of Lars Ulrich to Questions From Senator Thurmond
Question: Mr. Ulrich, you have stated that you do not believe
current laws are adequate to protect musicians' property rights on the
internet. What law or laws would you propose that the Congress should
adopt to solve the problem of the intellectual property theft on the
internet?
Answer: Perhaps my testimony on this issue was not as articulate as
it could have been. I trust and believe that the courts will interpret
existing law so as to provide musicians and songwriters the same level
of protection on the Internet as they have historically enjoyed in the
off-line world. Obviously, I feel that current U.S. Copyright laws will
not support enterprises like Napster that is why my band and I sued
them. In the unlikely event that this proves not to be the case, we
would welcome the opportunity to work with Congress to craft a
solution. Our goal is to ensure that U.S. Copyright law continues to
encourage the creation of intellectual property, which, as you are
aware, is America's largest export.
Question: Mr. Ulrich, while it is possible to shut down web sites
such as Napster that collect and distribute music files, it appears
unlikely that all unauthorized downloading over the internet could be
stopped. Do you believe that musicians will eventually have to enforce
their rights against end-users, even if only on an occasional basis?
Answer: The recording industry has never entirely eliminated
bootlegging, just as the retail trade will never entirely eliminate
shoplifting. All we can ask is that the law clearly and strongly define
our property rights as owners and creators of intellectual property. It
will then be incumbent on us to take whatever measures are appropriate
under the circumstances to combat violations of those rights. I believe
that this is what the recording industry has historically done.
----------
Submission for the Record
Prepared Statement of Marilyn Bergman, President and Chairman of the
Board, On Behalf of the American Society of Composers, Authors and
Publishers
Mr. Chairman and Members of the Committee: My name is Marilyn
Bergman. I am a songwriter and also the Chairman and President of the
Board of Directors of ASCAP--the American Society of Composers, Authors
and Publishers. I am pleased to submit this statement on behalf of
ASCAP's more than 100,000 songwriter and publisher members. We deeply
appreicate this Committee's continuing interest in and sensitivity to
copyright issues. The era of the internet has made the need for your
understanding of our concerns greater than ever. We at ASCAP are aware
of the deep commitment that you, Mr. Chairman, the Ranking Democratic
Member Senator Leahy and the other members of this committee have in
protecting and nurturing copyright. With all of our colleagues in the
copyright community, we know that we will always receive a full and
fair hearing before this Committee.
First, let me relate some information about ASCAP. As most of you
know, ASCAP is the largest and oldest of three performing rights
licensing organization in the United States, the others being Broadcast
Music, Inc. and SESAC, Inc. today, ASCAP has over 100,000 writer and
publisher members and a repetory in excess of four million copyrighted
works. ASCAP licenses on their behalf, the non-dramatic performing
rights in their music.
The right of public performance, granted to copyright owners by
Section 106(4) of the Copyright Law, is one of the most important of
all the copyright rights. It is the largest single source of income for
songwriters, most of whom are not performers and do not benefit from
concerts and recording contracts. From the time ASCAP was founded in
1914 by the leading songwriters, composers and music publishers of that
era, including Victor Herbert, John Philip Sousa, Iring Berlin and
Jerome Kern, our main objective has been to find those who are
performing music publicly and to offer them licenses, at reasonable and
fair fees, to perform our members' music. Our principal licensing tool
is the blanket license--a license to perform any or all of the works in
the ASCAP repertory for which the user pays a license fee calculated on
a mutually agreed upon basis.
One constant in our business has been technological change. With
the advent of radio and commercial phonograph recordings in the 1920's,
then background music services in the 1930's, television in the 1940's,
cable and satellite television in the 1960's and 1970's, and now the
Internet, ASCAP has faced the challenge of licensing new and ever-
expanding industries which rely on music--the ``raw material'' that we
create and own--as a principal source of entertainment to generate
their revenues. When each new technology using copyrighted music
developed, there was, of course, a period of marketplace give and take
before the parties ultimately and inevitably reached a settled and
mutually acceptable licensing regime.
I would be less than candid if I told you that all music users obey
the Copyright Law or even cheerfully pay license fees for the property
they use. Songwriters and publishers have been forced to fight
courtroom battles with the background music, radio, television and
cable industries, among others. While this has not been the course that
we wished to follow, this history has produced a framework within which
most license fees are negotiated between ASCAP and representatives of
user industries, or sometimes determined by a federal court. This model
for license fee dispute resolution is established by a consent decree,
the Amended Final Judgment entered in United States v. ASCAP. Under the
ASCAP Consent Decree, any user may obtain a license to perform the
works in the ASCAP repertory merely by written request to ASCAP, and
ASCAP can never say ``no,'' as long as the user is willing to pay a
reasonable license fee. If ASCAP and the user cannot agree on a license
fee, the user may apply to the court for a determination of the
reasonable license fee.
The fact is that each new technology using copyrighted music has
presented not merely challenges, but opportunities both for those who
develop the technology and those whose copyright property made the
technology profitable. We must always keep in mind that, without the
music which my writer and publisher colleagues at ASCAP create and own,
and without all the other creative works such as movies, sporting
events, computer programs, and books, technological marvels would be
empty and unprofitable shells. Our creativity, our property, fuels
their engines. The public--the audience--wants to enjoy what we create.
When a technological development comes along which can provide our
works to the public in a new way, we applaud it, and we want it to grow
and prosper. Please understand that the last thing in the world we want
is to shut down new uses of music; to the contrary, from our
perspective, the more music that is performed for the public, the
better. We simply want to be paid a fair fee for the use of our musical
property, because, after all, our creative property is what makes these
new technologies succeed. Therefore, we must all prosper, or none of us
will.
Let me now turn to ASCAP and the Internet. In 1995, ASCAP set out
to license the performances of our member's music in that new and
evolving medium. We did so by creating a Department of New Media and
Technology and formulating an Experimental License Agreement for
Internet Sites on the World Wide Web. In its earliest form, the ASCAP
Website License was a blanket license, granting the operator of a
website that employed music access to the entire ASCAP repertory. The
fee for the license was calculated as a small percentage of either
revenues or operating expenses. In addition, for websites that could
track and account for their transmissions of music, or ASCAP music,
there were alternative fee rates that could result in reduced license
fees.
As I have said, ASCAP began its efforts to license Internet
performances of its members' music in 1995. By the end of 1997, we had
only 125 websites license, By December 1999, the number of licensed
website's had grown to over 1,500. These include some of the largest
entertainment websites, as well as the most popular aggregators of
streamed music sites. Last year, for the first time, collections from
Internet licensees reached almost one million dollars. And,
importantly, ASCAP is the only performing rights society in the world
that makes regular distribution of royalties to it members for Internet
performances.
This past December, ASCAP began offering a new form of license
agreement for website operators. Based on comments from many licensees
and prospective licensees, we made a major modification in the new
license, eliminating the operating expense-based fee calculation and
replacing it with a fee that is based on website traffic. The new
license also provides for simplified music use reporting, which we use
in distributing royalties to our writer and publisher members for
Internet performances of their music.
As part of our licensing efforts, ASCAP sought early on to make use
of the new technologies. For example, the Website License was made
available on the ASCAP website, www.ascap.com, where the potential
licensee can also find ``ASCAP RateCalc,'' an online, interactive
program that calculates the license fee based on information provided
by the licensee. In additional, we employ ``ASCAP EZ-Eagle,'' a program
that search the Internet for Web sites that are transmitting music
files and, therefore, are potential licensees.
The important message from these facts is that the free marketplace
is working exactly as it should. ASCAP's licensing team is meeting
continually with industry groups, Including the operators of major
music-using websites, to discuss the issues and, perhaps, an
industrywide license agreement, just as we have industrywide agreements
with other user groups. We've had what we believe are some promising
meetings, and we hope they will bear fruit. It is certainly our desire
to continue in this vein, for this is how markets work.
In addition, many Web site operators, including radio stations and
they bulk of the country's commercial television broadcasters, have
requested ASCAP licenses for their Internet performances. We will use
our best efforts to agree on license fees for their uses; if we cannot
agree, the court will set reasonable fees under the contract decree.
ASCAP has also entered into a number of partnership arrangements with
leading players in the Internet world, designed to benefit our members
by increasing exposure to their music and providing them with
reciprocal services such as advertising and web pages.
What lies ahead both for the near term and the future for ASCAP's
members and the Internet? Certainly, we watch with great interest and
some trepidation the battles being fought today between our colleagues
in the record and motion picture industries and their adversaries.
These are the types of growing pains with which we are familiar from
our own past experiences, which I mentioned earlier. But, more
importantly, our experience reflects the ability of reasonable people
to work out negotiated solutions to difficult business problems.
Compulsory license legislation is neither necessary nor desirable. The
marketplace works.
ASCAP's Board of Directors, its management and its members do not
fear the new technology--we welcome the challenges it brings to us as
the world's leading performing rights organization, to continue our
efforts to protect the rights of creators and to ensure that they are
fairly compensated for the use of their copyrighted works, and to
benefit the public by ensuring the availability of the world's greatest
music.
In conclusion, Mr. Chairman and members of the Committee, I urge
you to proceed with caution in considering whether to enact more
legislation with respect to Copyright and the Internet. Certainly from
the point of view of creators and copyright owners, I believe that in
this arena, which changes from minute to minute, less is more. I remain
confident that, as has been ASCAP's experience in the past, reasonable
men and women can agree in the free market, a free market which is at
the very core of America's values, on arrangements that will produce
fair prices for valuable property--fair license fees for performances
of copyrighted music on the Internet.