[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
WIPO ONE YEAR LATER: ASSESSING CONSUMER ACCESS TO DIGITAL ENTERTAINMENT 
                    ON THE INTERNET AND OTHER MEDIA

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 28, 1999

                               __________

                           Serial No. 106-83

                               __________

            Printed for the use of the Committee on Commerce


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 61-038CC                   WASHINGTON : 1999
------------------------------------------------------------------------------
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

   Subcommittee on Telecommunications, Trade, and Consumer Protection

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               THOMAS C. SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Dawson, Rhett, President, Information Technology Industry 
      Council....................................................    22
    Harter, Peter, Vice President, Global Public Policy and 
      Standards, EMusic.com Incorporated.........................    26
    Klein, Gary, Vice Chairman, Home Recording Rights Coalition..    33
    Moore, Rondal J., Vice President, Business and Legal Affairs, 
      Rioport.com, Incorporated..................................    47
    Moradzadeh, Michael, Director of External Legal Affairs, 
      Intel Corporation..........................................    40
    Rosen, Hilary, President and CEO, Recording Industry 
      Association of America.....................................    16
    Valenti, Jack, President and CEO, Motion Picture Association 
      of America.................................................    10

                                 (iii)


WIPO ONE YEAR LATER: ASSESSING CONSUMER ACCESS TO DIGITAL ENTERTAINMENT 
                    ON THE INTERNET AND OTHER MEDIA

                              ----------                              


                       THURSDAY, OCTOBER 28, 1999

              House of Representatives,    
     Subcommittee on Telecommunications, Trade,    
                               and Consumer Protection,    
                                     Committee on Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Oxley, Stearns, 
Cox, Shimkus, Wilson, Markey, Boucher, Gordon, Eshoo, Engel, 
Sawyer, and McCarthy.
    Staff present: Justin Lilley, majority counsel; Cliff 
Riccio, legislative clerk; and Andrew W. Levin, minority 
counsel.
    Mr. Tauzin. The committee will please come to order. We 
will ask our guests to take seats, please.
    Today on the anniversary day of the enactment of the 
Digital Millennium Copyright Act, we need to assess the 
availability to consumers of entertainment products delivered 
over the Internet and via traditional forms of media. We also, 
of course, today mark the extraordinary victory of the Yankees 
last night in the World Series.
    I was mentioning to my good friend, Mr. Markey, who has 
suffered through this post-season, that it wasn't the first 
time the Yankees burned Atlanta to the ground and probably 
won't be the last.
    Through this oversight hearing, we hope to get a better 
sense of whether the DMCA has provided the necessary legal 
framework for electronic commerce to flourish. The subcommittee 
also seeks to determine whether it should take additional steps 
to resolve any remaining obstacles to the rollout of digital 
television, to new digital video and audio recording products, 
and to new digital entertainment products.
    In the last Congress, this subcommittee, I think, made 
important changes to WIPO, and in our implementing legislation 
literally, I think, improved the condition of WIPO as it was 
proposed by the Clinton administration.
    One of the most contentious issues involved the scope of 
anti-circumvention provisions of the Act. As my colleagues will 
recall, we sought to clarify ambiguities in the legislation 
produced by our colleagues in the Senate, as well as to make 
certain that the bill outlawed only black boxes and not staple 
articles of commerce such as PCs and VCRs. In doing so, we 
sought to ensure that copyright owners would have all of the 
necessary legal tools to combat cyber piracy and without 
stifling the growth of electronic commerce.
    Today we will get a preliminary assessment of whether we 
have achieved that goal. Since 1981 a debate has been underway 
about home taping. Eighteen years ago this month, the 9th 
Circuit Court adopted a decision that would have kept the 
Betamax recorder from coming to the market. Fortunately, as I 
think everyone will agree, the Supreme Court ended up reversing 
that decision.
    Nevertheless, as a quick review of the testimony shows, the 
home taping debate continues even today. Consumer electronic 
companies, consumer computer companies want to bring new 
recording products to market. Entertainment companies continue 
to worry about the capacities and the capabilities of these 
devices.
    I would hope we would soon reach common ground on these 
contentious issues. As long as we recognize that consumers have 
both longstanding interest in being able to record television 
and other programs for time shifting purposes and that 
entertainment companies have an interest in protecting against 
piracy, we should, hopefully, find some meeting of the minds on 
this subject.
    Today we will see a demonstration of powerful new 
encryption technology that will help motion picture studios 
guard against the theft of their movies. As long as this 
technology is not used in ways that would frustrate legitimate 
consumer expectations, it should provide valuable assistance to 
the studios seeking to combat cyber piracy.
    We need to make sure we keep the interests of consumers 
foremost in our minds. Our constituents, after all, are the 
ones who purchase these products and who contribute to the 
growth of not only electronic commerce but of the wonderful 
companies who produce these products for our enjoyment.
    I want to welcome our witnesses today. We have an 
extraordinary qualified and competent panel before us, a large 
one, as we usually do. We have a rule that your written 
statements are automatically a part of our record without 
objection, and is so ordered, and we would encourage you when 
we get to the point where we finally are listening to you that 
you summarize your statements to us in conversational 
presentation, if you can.
    As we move forward, we will welcome as well your 
recommendations on how the subcommittee might help you in your 
efforts to bring new products to the market and to rationalize 
some of these contentious issues regarding protection and 
consumer rights.
    The Chair is now pleased to welcome and recognize the 
ranking minority member, my friend from Massachusetts, Mr. 
Markey, for opening statement.
    Mr. Markey. Thank you, Mr. Chairman, very much. Thank you 
for having this hearing, and happy anniversary to you, Mr. 
Chairman. Happy anniversary to all of you on the first 
anniversary of WIPO legislation passing. This is a big 
celebration. We should have a cake or something here. We should 
have something celebrating this bill. It was such a momentous 
occasion.
    What better way to celebrate than have all of our friends 
who were here for almost a whole year talking to us and 
explaining to us the importance of the legislation. So this is 
probably the best way in which we could celebrate, having all 
of our friends in here today. I'm sure they feel the same way.
    This legislation, the Digital Millennium Copyright Act, 
implemented two WIPO treaties. The law is designed to give 
copyright owners enhanced copyright protection in the digital 
environment.
    In deliberating upon this legislation last year, the 
Commerce Committee sought to balance many competing interests. 
This was not an easy task. Encryption research issues, privacy 
implications, their use, rights, reverse engineering, and other 
issues were very complicated.
    Yet they represented meaningful public policy perspectives, 
and I believe that we succeeded in crafting for each area 
policies that were fair and balanced.
    In addition, the legislation ensured ongoing access to 
copyrighted works under the so called ``Fair Use'' doctrine, 
permitting consumer electronic manufacturers, computer and 
telecommunications companies to design and produce devices and 
services for consumers in these new digital technologies and 
digital formats.
    As the digital revolution sweeps over industries and 
countries, it will provide new opportunities for market growth 
and innovation, easier access to remote information, and new 
distribution channels for products and services. The Digital 
Millennium Copyright Act tried to take advantage of the rapid 
technological change afoot while striking a balance that will 
establish the United States a clear lead in the world in 
creativity and innovation in both digital software and in the 
hardware to utilize these new formats.
    Today's hearing gives us an excellent chance to gauge our 
progress as a nation in these key sectors of our economy.
    Again, I commend you, Mr. Chairman, for making it possible 
for us to celebrate this very important anniversary and at this 
point, looking forward to hearing from our witnesses, I yield 
back the balance of my time.
    Mr. Tauzin. I thank my friend.
    The Chair is now pleased to recognize the gentleman from 
Illinois. By the way, we celebrated, Mr. Markey, the signing of 
the E911 bill by the White House, which is a big accomplishment 
of our committee, and Mr. Shimkus' bill is now the law of the 
land, and we should recognize him for that effort and, I think, 
recognize the importance of that bill for America.
    The gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. On that note, I want 
to thank the gentleman from Massachusetts for his help in that 
victory for us, and there is more work to be done, we know, and 
we look forward to going at it again.
    I also want to welcome my colleague from the 110 percent 
club for our long duration and the march we did last night, to 
be here punctual and on time to move to a new area and new 
arena. I was trying to wipe the cobwebs from my mind on what we 
did yesterday in Energy De-Reg, and now we are moving into the 
WIPO area.
    Mr. Markey. Will the gentleman yield?
    Mr. Shimkus. I will.
    Mr. Markey. Even though I lost every one of my amendments 
last night until eleven o'clock at night, it was preferable to 
watching the Yankees win the World Series again. So I was 
actually glad to be in that mark-up all night.
    Mr. Shimkus. So I think it's fitting, since I'm still 
trying to figure out what we did yesterday, that you do take 
time to review what we did last year and where we're at with 
the industries and with the international treaties.
    So I look forward to the hearing, I look forward to 
listening to the testimony, and hopefully, offering some 
questions and help clarify some issues for me. I welcome our 
guests and, Mr. Chairman, I yield back my time.
    Mr. Tauzin. I thank the gentleman.
    The Chair is now pleased to recognize the gentleman from 
Virginia.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
commend you for organizing a hearing on a very timely subject.
    During the course of the last Congress, this committee made 
a major contribution to the enactment of the World Intellectual 
Property Treaty Organization implementing legislation. Solely 
because of this committee's efforts, a reasonable balance was 
struck between the rights of copyright owners and the rights of 
information consumers.
    We preserved our nation's commitment to the principle of 
fair use while giving content owners new legal tools in order 
to protect their intellectual property interests in the digital 
era. Our provisions also protected equipment manufacturers from 
unwarranted lawsuits as they bring to the market useful new 
consumer electronics and computer products.
    Today we take stock of developments over the course of the 
past year and, unfortunately, one persistent controversy 
apparently remains unresolved. Notwithstanding the Supreme 
Court's decision 15 years ago in the Betamax case that 
sanctioned the ability of VCR owners to engage in home 
television taping for purposes such as time shifting, the 
debate over home taping continues to this day.
    Equipment manufacturers want to bring to market new digital 
video recording products. Consumers want to purchase these new 
products, but the motion picture companies are interested in 
limiting the recording capabilities of these new devices, and 
consumers are having to wait for yet another debate to be 
resolved before these products reach the market. Even the 
rollout of high definition television is being delayed as a 
consequence of this controversy.
    This is not a new issue for the subcommittee. In fact, we 
balanced these very concerns when we enacted Section 1201(k) of 
the WIPO legislation, which relates to analog recording 
devices.
    We established a common sense rule. In those instances in 
which a video product is obtained by the consumer as part of a 
bargained for exchange in which the consumer should have no 
reasonable expectation of being able to make a copy, the 
Macrovision copy blocking technology can be applied, and all 
new analog VCRs were required to respond to the Macrovision 
copy blocking technology.
    Under Section 1201(k) copyright owners are empowered to 
apply Macrovision to prevent copying of movies that can be 
rented at video stores on pre-recorded tapes. In that instance, 
the consumer who goes to Blockbuster and rents a movie has no 
reasonable expectation that he will be able to copy that movie, 
and so applying Macrovision and having the equipment respond to 
Macrovision is entirely sensible, and no copies can be made.
    For movies that are delivered by cable TV through premium 
subscription services, such as Home Box Office, Section 1201(k) 
permits the making of one copy, so that programs can be 
recorded when that program is delivered only once, and the 
consumer of that program wants to time shift. That is the 
classic time shifting function which is one of the major uses 
of VCRs.
    For basic cable programs and for free over-the-air TV 
broadcasts, copyright owners may not use Macrovision to block 
any copying. This provision effectively codifies the Betamax 
decision and meets the legitimate expectation of VCR owners 
that they will be able to record television broadcasts and 
broadcasts brought to them on basic cable.
    Now these are reasonable and balanced rules and, in my 
view, they should be applied in the context of the new digital 
recording devices as well.
    Unfortunately, the copyright owner community is now 
attempting to apply the latest copy blocking technology, which 
is known as 5C, in a manner that could prevent any copying, 
even the single copy of an HBO movie and perhaps any copying of 
over-the-air broadcasts. They want to encode all content with 
the 5C copy blocking technology.
    A high amount of uncertainty has resulted. Equipment 
manufacturers are fearful that, if their machines are built to 
respond to the new 5C technology, the record buttons on these 
machines will be useless, because all content will be encoded.
    They are fearful, on the other hand, that if their machines 
do not respond to the new 5C technology, their machines will 
then be deemed to be circumvention devices under the other 
provisions of Section 1201 with all of the attendant penalties 
that apply to the manufacturer, distribution and sale of 
circumvention devices.
    So the new digital recorders are not being manufactured, 
and consumers do not have access to them. This controversy 
needs to be resolved, and I propose that the carefully 
negotiated balance that is contained in Section 1201(k) be the 
remedy, and I would welcome the comments of our witnesses this 
morning with regard to that proposal.
    Thank you, Mr. Chairman. I look forward to hearing this 
testimony.
    Mr. Tauzin. The Chair thanks the gentleman again for his 
always thoughtful remarks. I appreciate them.
    The Chair now recognizes the gentlelady from New Mexico, 
Ms. Wilson, for an opening statement.
    Ms. Wilson. Thank you, Mr. Chairman. Starbucks is not in my 
district, but I wish that it was.
    I come to this hearing without the background that my 
colleague from Virginia has on this issue, but mostly to learn; 
but I have to say that one of the things that interests me most 
is the Internet economy and how that is going to change our 
lives and the way we work and the way we enjoy ourselves and 
entertain ourselves, and the way that we learn.
    I say that yesterday I got my latest new toy to try out. 
It's called a soft book, and many of you may have seen them, 
where you can take with you information that you download from 
the Internet and carry it with you.
    Being one of those in this body who spend about 10 hours a 
week on an airplane, this is something that I'm very interested 
in trying out, and the opportunities for people who have 
information to license that information and to be able to sell 
books over the Internet without ever committing those books to 
paper.
    There are a lot of tremendous opportunities for commerce, 
for entertaining ourselves, for informing people, and educating 
people; and I want to see that work in a way that compensates 
fairly those who have worked and created those books or those 
pieces of entertainment while also taking advantage of the new 
technology available for disseminating them.
    Thank you, Mr. Chairman.
    Mr. Tauzin. Would the gentlelady yield a second?
    Ms. Wilson. Yes, sir.
    Mr. Tauzin. Just to point out that at the high tech 
conference we conducted in Baton Rouge this month, one of the 
presenters--I won't mention his company; I don't want to 
advertise him, but he presented a system called Clarity which 
appears to enlarge the size of the script dramatically, even 
though it doesn't. The mind sees it as larger script and, 
because it's apparently surrounded by color, it makes the mind 
more acceptable to electronic script and reading.
    Also presented a hard drive disk that he indicated would 
hold very soon all the books that a child would read from K-1 
through college graduation on one little hard drive. Amazing 
new technologies. The gentlelady is so correct. We haven't yet 
begun to scratch the surface on the new kinds of products and 
services that are coming.
    I thank the gentlelady.
    The Chair is now pleased to welcome the gentleman from 
Tennessee, Mr. Gordon, for an opening statement.
    Mr. Gordon. Thank you, Mr. Chairman. Just quickly, I want 
to welcome our distinguished panelists today and say that this 
is a timely occasion to have this hearing, because we are at a 
point now where our country is facing world record trade 
deficits, and I'm pleased that we're going to hear from 
representatives of our No. 1 exporting industry today.
    I think, if we are going to try to continue to cut that 
trade deficit back, we've got to maximize our No. 1 export 
industry, and that is the products resulting from intellectual 
property rights. If we're going to do that, we have to have a 
strong domestic industry.
    So I am interested in knowing how we're doing 
internationally and whether or not we are keeping the kind of 
domestic market that is going to allow us to still dominate the 
world in this area.
    Thank you.
    Mr. Tauzin. The Chair thanks the gentleman.
    The Chair yields to the gentlelady from California, Ms. 
Eshoo, for an opening statement.
    Ms. Eshoo. Thank you, Mr. Chairman. Good morning to you, 
and welcome to all of the distinguished panelists that are here 
to enlighten us today.
    As my colleagues know, our committee, the House Commerce 
Committee, and the House Judiciary Committee spent many, many, 
many hours in the last Congress on the Digital Millennium 
Copyright Act. I think the legislation represented an important 
compromise on the issue of fair use of copyrighted works.
    We are here today to hear from our distinguished panelists 
and get a 1-year report from some of the principal industries 
involved in the implementation of the legislation. Let me just 
offer some thoughts about this.
    Central to the discussion during last year's legislation 
was the debate over technology and how one industry or others 
were going to build or respond to new hardware. During that 
debate, members were frequently assured by the various 
industries, some of which are here today, that if Congress 
passed the WIPO legislation, the private sector would assume 
the responsibility of working out many of the details and 
challenges that digital technology would continue to present.
    That's why I'm somewhat concerned by some of the 
preliminary reports which indicate that some difficulties 
exists as a result of the compromise on standards that Congress 
proactively left in the hands of the various industries.
    As I said repeatedly last year and will say again today, 
forcing Congress to intervene on setting standards, I think, is 
going to lead to a solution that, quite frankly, I don't think 
any of the sides will regard as a win. I think the last thing 
that the industries need are 535 Members of the Congress of the 
United States and the administration deciding what the 
technical standards should be for transmission of digital video 
and radio, kind of like the FASB board. Right?
    A second issue I want to raise is the need for agreements 
to meet the expectations of today's consumers. consumers expect 
to be able to record and access shows when they want to view 
them. They also expect selectively to record music off various 
tapes or CDs and make their own tape or CD.
    Whatever standards your industries attempt to develop 
regarding the emerging digital technologies, I strongly 
recommend that consumers are not prevented from or charged a 
fee for the capabilities to record or play video and music that 
they currently enjoyed. To attempt to do so, I think, would be 
bad marketing. To permit it to happen, I think, would be bad 
public policy.
    Finally, I want to address the issue of protecting an 
artist's product in the face of developing technologies. There 
is not a technology in existence today, nor do I think there 
should ever really be one, that gives us the ability to take 
someone else's work product without his or her permission.
    I don't think the information age should become the dark 
ages of copyright protection, but it doesn't follow that 
protecting an artist's work product means producing a 
particular way of selling, marketing or delivering that work 
product.
    The Internet is changing everything, and it is enabling 
many people, including artists, to reach consumers directly. In 
the revolution of this electronic commerce age we are seeing 
entire economic sectors change, stock markets, retail markets 
and others redefining themselves.
    Importantly, many new companies are springing up to find 
innovative ways to connect artists and the consumers. Standards 
should maintain an open architecture that encourages and does 
not stifle this entrepreneurialism.
    This is one of the most important issues facing our country 
and the growth of the Internet. So, Mr. Chairman, thank you for 
having this very important hearing today. I look forward to 
hearing from the witnesses, and if I have any time left, I 
yield back. Thank you.
    Mr. Tauzin. The Chair thanks the gentlelady.
    The Chair now yields to the gentleman from Florida, Mr. 
Stearns, for an opening statement.
    Mr. Stearns. Thank you, Mr. Chairman, and of course, I 
thank you again for holding the hearing on the first 
anniversary of the enactment of the Digital Millennium 
Copyright Act.
    I would also like to thank our witnesses this morning for 
appearing before this subcommittee, of course, to provide us a 
perspective on the implementation of this Act 1 year later. I 
know how valuable your time is, too.
    The endless hours of meetings and discussions among both 
members and staff ultimately led to this legislation, which 
many of us think is fair and balanced.
    Though not a perfect solution, the Digital Millennium 
Copyright Act ensured the necessary balance and compromise 
between the needs of the content community who requires a 
modern, global copyright infrastructure, with the legitimate 
concerns of the manufacturing community, who rely on innovation 
and new products to lead the ever changing and even evolving 
consumer driven marketplace.
    Our work, of course, I don't think, is complete. The 
players involved, both Hollywood and industry manufacturers, 
have not yet reached a consensus on licensing and fair use 
terms. As a result, consumers have yet to realize the benefit 
from digital television technology and products.
    I believe both sides of the table raise valuable points 
which affect them equally, and I have no doubt, consumers are 
suffering and being left out in the cold until these issues are 
resolved.
    So I look forward to our testimony, Mr. Chairman, and I 
applaud you for this hearing.
    Mr. Tauzin. I thank the gentleman.
    The gentleman from California, Mr. Cox, for an opening 
statement.
    Mr. Cox. Thank you. I think we have a great panel here, and 
I'm more interested in what you have to say than what I have to 
say about it.
    I have actually read all of the testimony that the staff 
were able to provide us, and hope to be able to be here for the 
whole hearing; but if there is any chance that I have stepped 
out, I'm going to try and follow up and make sure that I get 
not only the formal presentation but also the results of the 
give and take.
    I would just add to what's been said thus far--and I think 
it's very appropriate, Mr. Chairman, to have a hearing on the 
DMCA a year later--that while in some ways the Internet has 
changed everything, in other ways it hasn't changed anything.
    The Internet is the latest development in the continuation 
of what Faraday shared with the King, and you remember that 
story about Faraday showing his dynamo to the King, and the 
King said what good is it? Faraday said, well, I'm not sure, 
but I know this; 1 day you'll tax it. We're all producing a lot 
of revenue that's subject to taxation, creating a lot of jobs 
as a result of the continuation of the harnessing of the 
electron.
    In some senses, the legal principles that we are trying to 
apply here are very familiar, and I don't think we need to be 
spooked by the fact that the technology has changed. We need to 
sometimes just sit back, take a deep breath, maybe have a tall 
glass of cold water before we legislate, because we don't need 
to destroy longstanding principles of equity in order to make 
sure that we continue to take full advantage of the electronic 
revolution, the expansion of the Internet, whatever it might 
become.
    We don't know what it is going to become, and certainly 
right up there preeminently important with all the other 
things, making sure that the creative community continues to 
provide products and services for America and the world.
    Mr. Tauzin. Would the gentleman yield a second?
    Mr. Cox. Sure.
    Mr. Tauzin. Because he has introduced another topic that I 
hope everyone will focus on; that is, taxation of this 
industry. There is a new report out by Progress in Freedom 
Foundation called ``Taxation of Talking,'' and I commend it to 
your reading, because it indicates that, while we have passed a 
moratorium on taxation on the Internet, nevertheless, taxes on 
telephones, which are one of the pipes by which the Internet is 
delivered, have risen 62 percent in the last 12 years and 
becoming a crippling element in the contest for access to the 
Internet and for Internet services.
    It's a compelling piece, and I commend it to your reading.
    The Chair would now recognize himself for a point of 
personal privilege and ask you all to perhaps join me, if you 
will, in a moment of silence for an occasion that's occurring 
today, in recognition and prayerful thought of what a good 
friend of ours and a colleague on our committee is going 
through.
    Bobby Rush lost his son this week in a shooting in Chicago, 
and as we continue our work in the Congress, our hearts are 
with him. I wish more of us could be with him personally, but 
he is burying his son today. If you would, please join me in a 
moment of silence on the grief and the pain that I know his 
family is going through.
    Thank you.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you, Mr. Chairman. I commend you for holding this important 
hearing.
    In recent years, this Committee has devoted substantial resources 
to encouraging the rapid deployment of new technology and expanding 
electronic commerce for the benefit of all consumers. One year ago, on 
this very day, President Clinton signed the Digital Millennium 
Copyright Act into law.
    We meet today to assess the impact of that law on an important 
aspect of electronic commerce: the delivery of entertainment products 
via the Internet.
    As my colleagues will recall, our Committee played a fundamental 
role in drafting the final version of this landmark legislation. Among 
other things, we fashioned a bipartisan, multi-industry compromise on 
the so-called ``anti-circumvention'' provisions of the Act.
    A prohibition against anti-circumvention was critical to ensuring 
that content creators would have adequate incentive to release their 
works in a digital environment. At the same time, we felt it was 
important to limit the scope of the provision to illegal ``black 
boxes,'' and make sure the provision did not sweep in ordinary consumer 
electronics and computer products.
    In adopting a more balanced version of the DMCA than proposed by 
the Clinton Administration, we hoped to spur the development of new 
technology and stimulate electronic commerce for the benefit of 
everyone in society.
    The purpose of this hearing is to check in progress we've made to 
date. As one means of getting new digital products to market, I 
understand that Intel and major consumer electronics manufacturers have 
developed strong encryption technology to help movie studios protect 
against the theft of entertainment products.
    In fact, I look forward to seeing that technology at work this 
morning. As we observe this encryption tool, we should bear in mind 
that consumers have certain expectations when it comes to the issue of 
home recording.
    The digital environment does, indeed, pose unique threats to 
copyright holders. But consumers' expectations of what they can and 
cannot record will not change as we transition to digital.
    This Subcommittee therefore needs to understand today--rather than 
tomorrow, when it may be too late--whether this technology will be used 
to upset those consumer expectations. And if it will, we need to know 
why--today!
    I want to also remind my colleagues that this Committee has made a 
concerted effort in recent years to speed the introduction of digital 
television to consumers. How and when this encryption technology is 
implemented will have a substantial impact on the deployment of digital 
television services and products.
    I'm told, for example, that the lack of HDTV programming on the 
market today is attributable, in part, to the fact that industry is 
still squabbling over how this encryption technology will be 
implemented. I urge the parties to resolve the details of this matter 
as soon as possible, so that the transition to digital can proceed 
apace.
    Finally, I am anxious to learn more this morning about the 
industry's progress in establishing standards that would govern the 
recording functions of new audio products. Sales of music over the 
Internet will be one driving force of electronic commerce, and I am 
hopeful that consumers will have a seamless electronic option available 
to them in the near future.
    In closing, I want to welcome our witnesses. We look forward to 
your suggestions about how our Committee may be able to help you 
resolve any impediments to bringing new products to market.
    Thank you again, Mr. Chairman. I yield back the balance of my time.

    Mr. Tauzin. The Chair is now pleased to welcome this 
distinguished panel, and I recognize everybody except the 
fellow on the left, but I guess we'll start with him, the 
President and CEO of the Motion Picture Association of America, 
Jack Valenti. You're on.

 STATEMENTS OF JACK VALENTI, PRESIDENT AND CEO, MOTION PICTURE 
   ASSOCIATION OF AMERICA; HILARY ROSEN, PRESIDENT AND CEO, 
   RECORDING INDUSTRY ASSOCIATION OF AMERICA; RHETT DAWSON, 
   PRESIDENT, INFORMATION TECHNOLOGY INDUSTRY COUNCIL; PETER 
  HARTER, VICE PRESIDENT, GLOBAL PUBLIC POLICY AND STANDARDS, 
   EMUSIC.COM INCORPORATED; GARY KLEIN, VICE CHAIRMAN, HOME 
  RECORDING RIGHTS COALITION; MICHAEL MORADZADEH, DIRECTOR OF 
EXTERNAL LEGAL AFFAIRS, INTEL CORPORATION; AND RONDAL J. MOORE, 
   VICE PRESIDENT, BUSINESS AND LEGAL AFFAIRS, RIOPORT.COM, 
                          INCORPORATED

    Mr. Valenti. Mr. Chairman, I want to have a little show and 
tell, and I hope that you will find this illuminating as well 
as a bit frightening.
    I think that the Internet has great potential. It creates 
tremendous opportunities for a lot of people, but it also has 
the potential to devastate America's most prized trade asset, 
the American motion picture and television program which 
dominates the world.
    What I want to tell you today, I think, focuses on the 
threat of Internet piracy and the way we are trying to combat 
that threat.
    Now let me begin by--am I on the screen here? All right. 
Hard goods piracy and illegal sales of video cassettes--whoops, 
I thought, my goodness, my eyes have gone totally out on me 
here--illegal sales of video cassettes, DVDs and VCDs.
    Now hard goods are physical, like ordering a video cassette 
from some site, and it's sent to you by mail. The Internet, for 
the first time, though, allows pirated products to a broader 
potential audience than it has ever had before.
    Pirates who peddle hard goods advertise on Websites through 
spam E-mails, Internet auctionsites. Now here are some 
examples. This is a site that sells video compact disks or 
VCDs. The newest films, including ``Eyes Wide Shut'' and 
``Mickey Blue Eyes'' or others are available for sale.
    Now these are films that have not yet gone into home video 
distribution. What is even more remarkable is you can purchase 
these films in this site that has just begun their theatrical 
run, and in some cases have not been in theaters. ``Random 
Hearts'' filmed in Washington, DC, was released only 3 weeks 
ago, is available on this site. ``Toy Story II,'' not yet in 
theaters, is also on this site.
    Now this is an eBay auction from yesterday--should be. Are 
we there? I'm sorry, Mr. Chairman.
    Mr. Tauzin. I have a pirated copy of that presentation.
    Mr. Valenti. I saw this happen to Bill Gates in Sun Valley 
once, and it was devastating to him, as it is to me. Well, we 
don't have this.
    Mr. Tauzin. Jack, in the high tech conference I had in 
Baton Rouge 2 weeks ago, Charlie Ergen with EchoStar lost his 
presentation on stage. He hit the wrong button, and it all 
disappeared, and he couldn't bring it back up. He stopped and 
looked at the audience and called out, ``Chase,'' and his 12-
year-old son Chase ran onto the stage and got it up for him.
    Mr. Valenti. I need that kind of help. This would have been 
an eBay auction from yesterday. You can bid on eBay a VCD copy 
of ``Star Wars: The Phantom Menace,'' which, by the way, is not 
available legally in any format anywhere in the world.
    Now we are working with eBay and other auctionsites to 
reduce this kind of piracy. We are trying to develop methods to 
prevent these types of auctions before they become posted.
    The other form of Internet video piracy is downloadable 
media. This form of piracy really poses a much greater threat 
to the creative community. This is the same type of piracy that 
allows downloading illegal software or illegal MP3 audio files.
    Now there are many different formats that have been 
developed to allow the viewing of this audio-visual product on 
the Internet, including Microsoft's Window media player and Rio 
player G2 from Rio Networks.
    What's the threat? The threat is band width and digital 
copies. Therein lies where our future is put to hazard. 
Currently, our films are protected by two factors, the amount 
of time to download and the lack of unprotected digital copies 
of our works.
    With the increased availability of broadband, you gentleman 
and ladies know that you can bring down a full length motion 
picture in 4 to 5 minutes, maybe no later than 15 minutes, 
whereas today it takes 4 to 5 hours.
    Once broadband is here, the peril begins. Likewise, with 
the advent of digital recording devices and high definition 
television, some of our member companies' works are at risk of 
being digitally reproduced without their permission in 
commercially valuable forms.
    Our ramparts are being breached on all sides, and if my 
metaphor is not too labored or bulky, I would say the enemy has 
opened the gate.
    Downloadable media piracy has two characteristics: One, a 
single pirate--now listen to me; this is important. A single 
pirate with a single copy of a film can download thousands of 
copies to be downloaded in a matter of hours. In analog, 
quality is degraded with each copy, but in digital the 
thousandth copy is as pure and pristine as the original.
    These copies can be mirrored, as the term of art, at sites 
all over the world, making even more copies possible. Thus, 
with a single keystroke a pirate can do millions of dollars 
worth of damage to the potential market for a motion picture, 
even though the pirate may not make a nickel.
    By the way, the equipment required to be an Internet pirate 
is inexpensive, and it is portable.
    One of the most recent innovations in obtaining illegal 
downloadable files is through the use of video and audio search 
engines.
    Mr. Tauzin. ``Mini Me'' is back up. ``Mini Me'' is up 
there. Look.
    Mr. Valenti. Here we go. This is a composite page from 
Scour.net. Scour.net allows an individual to search the Web for 
only video or audio files, and then link him directly to the 
site.
    On the screen you can see a still of the Austin Powers new 
movie, ``Austin Powers II.'' ``Keno Reeves'' and ``The Matrix'' 
both became available on home video only within the last month. 
Now we are working with the owners of Scour.net and other 
similar search engines to try to stop this kind of piracy.
    Now this is an FTP site, File Transfer Protocol. You have 
to have a glossary of terms to deal in this business. Now these 
sites were created to allow the transfer of text files over the 
Internet. However, just about any digital file can be 
transferred by using these FTP sites.
    Now get this. This site includes unaired copies of ``Buffy, 
the Vampire Slayer,'' a television program. These are episodes 
not yet on the air. It's also worth noting that the site was 
hosted by the Carnegie Mellon University servers.
    Now this is a screen capture of a direct download site from 
April of this year. This Website allows individuals to just 
click on the numbers and directly download portions of the 
motion picture. When this site was active, the movie 
``Pleasantville'' was not yet released in any home video 
format.
    If you look at that, I might tell you that most pirates 
can't spell. Now let me show you a brief clip from a film 
illegally downloaded earlier this week. The film is 
``Stigmata'' from MGM. It is still in some theaters in the U.S. 
and has not yet opened anywhere else in the world, but it is 
available on the Internet for free.
    Now we go to stopping video piracy. That's ``Stigmata'' 
right there, MGM. All right. Today's piracy of audio visual 
products, though, costs the intellectual property community of 
movies and television more than $2 billion a year and, like 
Kudzu, it is growing.
    Now we are fighting it at MPA, fighting it with hundreds of 
investigators, technicians, lawyers. God, do we have lawyers, 
at a cost of millions of dollars in over 80 countries in the 
world.
    Now technological measures are needed, no question about 
that, but education is also required, as are strong legal 
protections. I congratulate this committee and the Congress for 
passing the DMCA bill which was very, very helpful in 
protecting intellectual property.
    Now how do you stop Internet piracy? Well, first the DMCA 
enactment helped us a lot. Three significant advancements: One, 
it gives us legal remedies against circumvention of technical 
protection. Second, DMCA extends protection to intellectual 
property rights owners who use copyright management 
information. Third, there is a simplified notice and take-down 
for Internet service providers.
    Since the DMCA is very new, we have had limited experience 
in DMCA enforcement. We have filed some expedited subpoenas 
with the Internet service providers, the ISPs, to obtain 
information about individuals who have posted illegal stuff on 
the Internet.
    DMCA will not work as Congress intended unless there is 
access to WHOIS. That's the name, the technical name, for sites 
and who owns them. We've got to maintain the WHOIS programs. 
MPA's piracy investigators must determine which Website is 
responsible for the illegal material, and the WHOIS data base 
is the very first step, Mr. Chairman, in determining the 
ultimate Internet pirate.
    Now again, we are working with the consumer electronics and 
high tech industries to develop effective technological 
protection to prevent illegal copying of our digitized movies. 
These types of protection include encryption, copy protection 
on digital video disks, the 1394/Firewire protection, and 
digital watermarks.
    Gentlemen, ladies, this is high priority, because I'm 
telling you this. If you can't protect what you own, you don't 
own anything; and as Congressman Gordon said, keep in mind that 
at a time when we are hemorrhaging in this country from trade 
deficits, and the last trade deficit number was unbelievably 
high, the motion picture industry is producing billions of 
dollars and serve as balance of trade to help the economy of 
this country and, if this Congress cannot protect the 
glistening trade prize that you have, no other country in the 
world is going to do that.
    They are all trying to protect their interests, and they 
really don't care about protecting hours. So I'm putting it for 
you as forcefully as I know how. This great trade prize must be 
protected.
    Thank you, sir.
    [The prepared statement of Jack Valenti follows:]
    Prepared Statement of Jack Valenti, President & Chief Executive 
             Officer, Motion Picture Association of America
    I appreciate this opportunity to present the Motion Picture 
Association of America's views on assessing consumer access to digital 
entertainment and the threat of Internet piracy. This is an opportune 
time to assess the vast possibilities, and the dangers, of digital 
delivery of motion pictures and other audio-visual works and the one-
year anniversary of the enactment of the Digital Millenium Copyright 
Act (the DMCA).
                   i. the opportunity and the threat
    Motion pictures are about entertainment, romance, adventure, 
excitement, drama, comedy, and mystery--intangibles that no one can put 
a value on except the people who watch films and the people who create 
them. Motion pictures are also intellectual property. The Internet and 
other electronic commerce media create tremendous opportunities for 
MPAA member companies' to market their intellectual property. The 
Internet also provides vast new viewing opportunities for consumers.
    Motion pictures are affordably priced so that everyone can see a 
picture. Affordable pricing is possible because of the multiple markets 
in which the producers can amortize the cost of production, including 
theaters, DVDs, home video, pay TV, free TV, etc.--and now, the 
Internet. If these markets are destroyed because films are placed 
illegally on the Internet or transmitted electronically without 
adequate protection, the result will be an increase in price, a 
degradation in production values and a reduction in viewing options for 
consumers.
    When piracy flourishes, commerce shrivels. Over the years, MPAA and 
its members have, to our chagrin, become intimately familiar with 
trends and developments in the field of copyright piracy. Today, piracy 
of audio-visual products--movies, videos, television programs--is a $2 
billion a year worldwide problem, and growing. We at MPAA are fighting 
it with hundreds of investigators, technicians and lawyers, at a cost 
of millions of dollars, in almost 80 countries around the world. In 
addition, our companies individually invest millions of dollars to 
counter this threat.
    Copyright piracy on the Internet threatens to cause enormous damage 
to our industry, and to other intellectual property industries. If we 
are not successful in combating the Internet piracy threat, we could 
soon be faced with losses that dwarf the dollar amounts we lose today. 
For 1995, estimated annual losses due to foreign piracy of U.S. 
copyrighted works in 97 foreign countries was $14.6 billion. Estimated 
annual losses worldwide are approximately $18-$20 billion.
    Without the proper legal and enforcement infrastructure, Internet 
piracy will engulf the world's creative community. We must attack this 
problem on a number of fronts. Technological measures to combat piracy 
are essential. Unfortunately they cannot solve the entire problem. 
Strong legal protection must be adopted and, more importantly, 
vigorously enforced worldwide if sufficient intellectual property 
incentives for creative effort are to be preserved. Last year, Congress 
took a major step in protecting intellectual property on the Internet 
when it passed the DMCA.
    The remainder of my testimony today is divided into three parts: 
first, defining what we mean by Internet audiovisual piracy; second, 
describing our MPAA's enforcement activities on the Internet since the 
enactment of the DMCA and third, explaining how the MPAA has been 
working with the high-tech community and the consumer electronics 
industry to implement workable technological solutions for preventing 
illegal piracy.
               ii. defining internet audio-visual piracy
    Internet piracy of audio-visual works comes in two varieties: 
``hard goods'' and downloadable media. ``Hard goods'' are physical 
media such as videocassettes, DVDs, and video compact discs (VCDs). The 
Internet provides a worldwide marketing tool for such media by bringing 
pirate products to a broader potential audience than ever before and 
making piracy harder to detect. Pirates who peddle hard goods advertise 
on websites, through spam e-mails, and Internet auction sites. MPAA 
uses traditional enforcement methods to staunch this flow of piracy.
    The other form of Internet piracy is downloadable media. This form 
of piracy poses a much greater threat to the creative community. An 
Internet pirate can load a single copy of a motion picture onto a 
computer, acting as a ``server,'' and make it available for others to 
copy onto their own computers at remote locations. This is the same as 
illegal software downloads or illegal MP3 audio files. Currently, the 
motion picture industry is protected by two factors--the amount of 
bytes needed for a full-length motion picture and the lack of 
unprotected digital copies of our works. A full-length motion picture 
includes more zeroes and ones than almost any other type of digital 
product--more than a song or most software. In addition, there are not 
billions of copies of audiovisual works in digital forms that are not 
protected by technological measures, such as the DVD CSS scheme.
    With the increased availability of broadband Internet access 
allowing for faster downloads and the companion development of the 
higher and better levels of compression, the motion picture industry is 
rapidly approaching the Internet piracy problem already faced by the 
software, video game and music industries. Likewise, with the advent of 
digital recording devices and high-definition televisions, some of our 
member companies' works are at risk of being digitally reproduced 
without their permission in commercially valuable forms. Our ramparts 
are being breached on all sides.
    Downloadable media piracy has the following unique characteristics 
that threaten the foundations of the motion picture industry:

1. A single pirate with a single copy of a film can allow thousands of 
        copies to be downloaded in a matter of hours. These copies can 
        be ``mirrored'' at sites all over the world, making even more 
        copies possible. Thus, with a single keystroke, a pirate can do 
        millions of dollars worth of damage to the potential market for 
        a motion picture, whether or not the pirate makes a nickel from 
        this effort.
2. The equipment required to be an Internet pirate is widely available 
        and costs far less than for other forms of piracy. It is also 
        highly portable, making piracy more difficult to detect. 
        Pirates do not need to remain in a fixed location but can 
        upload illegal materials anywhere in the world on any computer 
        that is linked to a network.
3. Consumers may obtain pirate products in the privacy of their own 
        homes, rather than in the public marketplace, making it easier 
        for the product to get to the consumer and making detection of 
        transactions even more difficult. Moreover, this decreases the 
        social stigma of obtaining illegal materials on the street or 
        in flea markets.
   iii. congress responds--passage of the dmca and mpaa enforcement 
                               activities
    In response to the threat of Internet piracy, Congress began to act 
more than three years ago. In 1997, Congress passed the No Electronic 
Theft (NET) Act. Passage of the NET Act was an important milestone, and 
just this past August the Justice Department began the first successful 
criminal prosecution under the NET Act.
    However, Congress understood that the NET Act was only one step in 
combating Internet piracy. On October 28, 1999, the President signed 
the DMCA. Enactment of the DMCA provided three significant advancements 
in combating illegal piracy. First, the DMCA insures ``adequate legal 
protection and effective legal remedies against the circumvention of 
effective technological measures'' that are used by copyright holders 
in the exercise of their rights, as required by the WIPO Copyright 
Treaty and the WIPO Performances and Phonograms Treaty (the Treaties). 
Second, the DMCA provides protection to copyright management 
information embedded in copyrighted materials, both electronically and 
physically. Third, as part of the DMCA, Congress created a simplified 
notice and takedown procedure for online service providers (OSPs) that 
are hosting websites with infringing materials. Following these 
procedures provides OSPs a safe harbor from copyright liability.
    Because the DMCA is still very new, MPAA has limited experiences in 
DMCA enforcement. Since DMCA enactment, MPAA has filed a number of 
expedited subpoenas with Internet Service Providers (ISPs), to obtain 
information about individuals that have posted illegal audiovisual 
works on their websites.
    MPAA has also worked closely with other portions of the copyright 
community to insure continued access to the domain name WHOIS database. 
Access to this database is essential in combating Internet piracy. The 
DMCA will not work as Congress intended unless access to WHOIS is 
maintained. MPAA's piracy investigators must determine which website is 
responsible for the illegal material. The WHOIS database is the first 
step in determining the ultimate Internet pirate. I want to thank the 
members of this Subcommittee, and the members of the full Committee, 
for protecting free unfettered access to the WHOIS database.
                iv. developing technological protections
    Finally, MPAA and its member companies have been working with the 
high-tech and consumer electronics industries to develop workable 
standards for the distribution of high value content over DVD, HDTV as 
eventually the Internet. Technology is currently in place that permits 
content owners to prevent the unauthorized copying of DVD material. 
This has made possible a thriving new market for movies, and consumer 
electronics devices, and has given consumers a new, improved viewing 
option. Intense discussions are currently taking place on technology to 
provide secure digital outlets for the safe transmission of digital 
content within digital devices, and between devices. Much of this 
discussion involves licensing terms, the details of which I do not know 
and in any case would be inappropriate for me to air them in this 
forum.
    I can tell you in general that content owners, and consumer 
electronics companies and computer companies, are working very hard to 
create a digital environment that offers the security necessary to 
attract high value content. For my part, I take no position on what 
content should or should not be prevented from copying, or from 
redistribution on the Internet. That is a decision that will be made by 
individual content owners, their distributors, and, most of all, by 
consumers. What we are trying to create is an environment where content 
owners have the technological option to prevent copying and 
redistribution of high value content, and consumers have the option of 
viewing high value content in the widest possible variety of times, 
places and formats.
                             v. conclusion
    In conclusion, the promise of the DMCA is just beginning to be 
fulfilled. MPAA stands committed to working with Congress and all law 
enforcement agencies to implement the DMCA in a fair and just manner. 
MPAA and its member companies are committed to making electronic 
commerce work, while still protecting their investments in creating 
entertainment valued worldwide. Inadequacies in the protection of 
intellectual property in the networked environment will stifle the full 
potential of electronic commerce. A plague of piracy--theft of 
intellectual property--threatens to blight this new marketplace.
    Thank you for providing me the this opportunity to share these 
thoughts with the Subcommittee today.

    Mr. Tauzin. The Chair thanks the gentlemen.
    We have 10 minutes before we vote on the journal. We have a 
5-minute window, Ms. Rosen, if you would like to give your 
testimony now. Let me introduce Ms. Hilary Rosen, President and 
CEO of Recording Industry Association of America.
    Ms. Rosen.

                    STATEMENT OF HILARY ROSEN

    Ms. Rosen. Thank you, Mr. Chairman.
    I'm pleased to be here today because, in my view, the DMCA 
has set the framework for a very new and exciting time in the 
music business, and it's a time when we are beginning to see 
completely new business models bringing about unprecedented 
amounts of choices for music consumers.
    Unlike my friend from the Motion Picture Association, I am 
extraordinarily optimistic about the situation at hand, and 
perhaps our experience over the last 2 years can shed some 
light on why that's so.
    Perhaps, I think, the most important result of the DMC in 
some respects was the paradigm shift in the mindset of the 
important players in the online music space. Today there is 
generally universal acceptance of the notion that we can have 
ways to deliver music to consumers that offer both rewards for 
copyright owners as well as an ease of use for consumers.
    In many ways, I think that the DMCA ended years of 
antagonism between the music community and the technology and 
consumer electronics industries. The debate which did begin 
with sort of fights over home taping, I think, ended with last 
year's discussion on anti-circumvention, and we are seeing very 
effective ways it's working in the marketplace.
    One significant achievement for us flowing from that new 
way of thinking has been the creation of something called the 
Secure Digital Music Initiative. SDMI has been a cooperative, 
voluntary initiative between more than 120 companies in the 
music and technology industries. The goal is to develop open 
technology specifications for digital distribution of music.
    I agree with Ms. Eshoo that an open architecture absolutely 
is essential to ensure innovation. The goal of SDMI has been 
simple, and that is that we have to provide consumers with the 
widest possible access to repertoire and that we have to do it 
through many different technology platforms. We have to respect 
the consumer transaction, and we have to make sure that those 
architectures can do it.
    Our copying rules, in essence, have been relatively with 
one simple goal in mind. We want to be able to have consumers 
use music the way they currently do, enjoy their own--making 
their own compilations from music that they have bought and 
done their things.
    What SDMI has achieved is an effort to prevent the 
uploading of music files onto the Internet, onto bulletin 
boards for thousands of people to get access to, a practice 
that I think most people agree is not appropriate, but the 
consumer should have the ability to use their own music any way 
they choose.
    Just a few years ago, obviously, the marriage between the 
tech industry and the creative community was pretty rocky. 
There was--you know, the tech industry was telling us, well, 
forget it, artists are just going to have to give away all 
their music online and, if you want to make money, go on the 
road or sell teeshirts or something.
    That was a nice concept. Unfortunately, that decision 
wasn't being made for them. Really, each industry had a lot to 
learn about each other's perspectives, and I think that we 
have.
    On the creative side, I think that we have gotten a lot 
smarter about how our business models are going to have to 
change, and on the technology side I think that they have 
gotten more interested in supporting creativity rather than 
overruling it, that the technology companies themselves, as I 
think you'll hear, want the consumer experience of accessing 
music to be a good experience, and accessing pirate files is 
not a good comfortable music experience.
    So we definitely have developed our mutual interest. So 
while SDMI is only part-way home, I think in many ways its 
principle objectives have been in long way achieved.
    I want to talk a little bit about moving from a legal 
framework to actually what's happening in the music business 
now online. A couple of things: One, the Webcasting provision--
some of you remember the internal contentious debate early on 
about the Webcasting provisions.
    In many ways, what this committee did on Webcasting was 
somewhat prescient. Webcasting has turned out to be a very 
significant business online in just the last year. Yahoo just 
bought, you know, broadcast.com for $5 billion. AOL has spent 
$330 million to buy spinner. NetRadio's recent IPO raising over 
$100 million for Webcasting has proved that the Webcasting 
business is a new opportunity for everybody, and that the 
licensing provisions that have been created are very important.
    Lots of other things are happening online. I know you have 
a vote, and I'm running out of time, but I'm going to--our 
companies are all online with very significant consumer 
identified projects.
    Universal and BMG have partnered on GetMusic, a retail and 
promotional site which is soon to be a downloading site. Epic 
Records has been offering, you know, just this week a new Rage 
Against the Machine soundtrack on launch.com.
    There are so many examples. I have attached a bunch of them 
in my testimony for what we are doing proactively online, 
because in my view, being proactive online with a legitimate 
business is critical also to combatting piracy.
    I don't want to minimize piracy. The RIAA has the largest 
online enforcement operation for any intellectual property 
business in the world. We have all of the things that Jack has 
shown within the music space and, in some respects, maybe more.
    Obviously, everybody has heard about the MP3 issue over the 
last year, but the DMCA actually has given us very important 
tools here. There's very good relationships now with ISPs, and 
we have been cooperatively getting sites taken down, and we are 
working now on new technical tools to bring things down.
    Mr. Shimkus [presiding]. Thank you for offering. I have 
already been. So we would like for you to wrap up.
    Ms. Rosen. Education is obviously an important component 
here, and I just want to say one thing about the international 
issue. U.S. leadership in passing WIPO implementation and 
treaty ratification has been very, very important.
    I have been traveling around the world this past year 
extolling the virtues of the Internet and the opportunities for 
the music business. Passage of DMCA actually gave me the 
opportunity to do that.
    I contrast my enthusiasm for the development of the online 
music business with some of my colleagues in the music industry 
overseas. Record companies have not tended to license music for 
download overseas.
    There is still a significant concern about their rights in 
many countries to enforce against piracy, and that's why 
adopting WIPO treaties and implementing legislation around the 
world has been a critical priority for the RIAA this year.
    I think, in conclusion, I'll just say that much has been 
made in the press over the last year about the availability of 
MP3 files and how the record industry was threatened with 
extinction. I think, indeed, the opposite is true.
    MP3 has given us a great lesson, and I assure you we are 
smart enough to learn it. Consumers want music online. Our 
challenge now is to develop the business models that consumers 
want to use to get new music, to provide the best, most 
creative outlets possible for artists, and to keep doing it in 
new and exciting ways.
    I'll stop there, Mr. Chairman.
    [The prepared statement of Hillary Rosen follows:]
Prepared Statement of Hilary Rosen, President & CEO, Recording Industry 
                         Association of America
    Mr. Chairman, members of the Subcommittee, thank you for the 
opportunity to be here today on the one-year anniversary of the 
enactment of the Digital Millenium Copyright Act. This historic 
legislation set the framework for the tremendous growth in the digital 
marketplace we have seen in the last year and that will continue to 
bring consumers the promise of a thriving Internet for years to come.
                           i. paradigm shift
    Perhaps the most important result of the DMCA for the recording 
industry was a paradigm shift in the mindset of the important players 
in the on-line music space. Today, there is almost universal acceptance 
of the idea that we need to have ways to deliver digital music to 
consumers that offer security for the creative community and ease of 
use for consumers. Enactment of the DMCA ended years of antagonism 
between the entertainment and copyright industries and the technology 
and consumer electronic industries. This debate, which began with 
fights over home taping and ended with last year's discussions on anti-
circumvention, had raged unabated for decades. Now, new technology 
deals are announced every day between our companies and different 
members of the technology industry.
     One significant achievement flowing from this new way of thinking 
was the creation of the Secure Digital Music Initiative. SDMI is a 
cooperative, volunteer initiative between more than 110 companies in 
the music, consumer electronics and technology industries, to develop 
open technology specifications for protected digital distribution of 
music. The goal of SDMI is to provide consumers with access to the 
widest repertoire of digital music available through many different 
delivery platforms.
    Just a few years ago, the marriage of the technology industry and 
the creative community was very rocky. The gurus of the technology 
revolution all said that artists and record companies should wake up 
and accept that all of our recordings must be given away for free on 
the Internet. Artists could make money by going on tour or selling 
merchandise or advertising.
    However, record companies and artists have been reluctant to 
merchandise themselves in this way just because some technological 
predictor says this is how to survive in the future. They want to be 
able to maintain their artistic integrity without turning themselves 
into a merchandising vehicle. Also, this did nothing for older artists 
who depend on their catalog sales but can no longer make any money 
touring. Artists wanted their creative works protected online, as in 
the physical world. And, if artists wanted to give away their music, 
they wanted to make that choice for themselves.
    Each industry had a lot to learn about the other's business. On the 
creative side, the record industry got smarter about how business 
models would have to change, but the technology companies got more 
interested in supporting creativity instead of overruling it. While 
SDMI is only part way home, its principal objective has been 
established. When people are brought together to work out their mutual 
interests--new explosions of opportunities will happen for artists, 
consumers and industry. And, this has certainly happened in the last 
year.
    The principles of the DMCA supported the creation of the SDMI 
initiative. For example, if a content owner can create an effective 
protection mechanism, e.g., encrypting their work, the DMCA makes it 
unlawful to manufacture, distribute or import devices whose primary 
purpose is to circumvent these protections. In other words, content has 
value and it's worth protecting. And, the technology and consumer 
electronics industries --and ultimately consumers--all benefit by 
working with us to deliver secure content in the digital marketplace. 
This mutuality of interests has flowed from the DMCA framework.
                    ii. the music industry is online
    Moving from the legal framework to the business models, what's 
happening with online music delivery and how did the DMCA get us here? 
The music industry has not just accepted new technology, we are putting 
our creative talents to use, working with technology partners and 
trying out new ways of delivering this important consumer experience. 
Every one of the major recording companies has announced plans to begin 
offering consumers the music they want in new ways.
     It's true that the Internet changes everything, and the business 
world is hustling to react to and exploit those changes to its 
advantage. The music industry is not unique in meeting this challenge. 
The Internet has changed the way stockbrokers interact with their 
customers, with publishing, with e-commerce that covers everything from 
toys to wine and with business services that have put databases and 
storage facilities into cyberspace and out of the file boxes.
     Of course, one thing that distinguishes music from most other 
products is that you can not only market and sell it online--you can 
actually deliver it, instantly, through the very same channel. This is 
a trait shared with the software industry and so of course it's no 
surprise that we share some of the same challenges with respect to 
online piracy, which I'll address in a moment.
     Some have argued that the major record companies have been slow to 
adapt their businesses to the web. In part this is true but it has also 
been entirely appropriate. The reality is that when large companies 
hold billions of dollars of assets on behalf of artists, they are 
careful with how those assets are used. It is one thing to be in your 
mom's bedroom developing the new world order on your computer when you 
have nothing at risk, but record companies and artists still sell 98% 
of their product through traditional bricks and mortar retail. It 
always seemed to me that thoughtful action was the appropriate order of 
the day. No artist, no matter how visionary, wants their record company 
to negatively affect their Wal-Mart sales.
     This recognition of creative rights gives us the ability to 
unleash our creative talent and expertise. Thus, in the last year, we 
have seen dramatic changes at large and small companies. Taking risks 
is now the name of the game. The competition for winning ideas and 
exciting sites has been intense. And the music fan has been energized 
all over again.
The Webcasting Provisions
     An important provision of the Digital Millennium Copyright Act 
specifically set forth a framework for efficient licensing of music 
performed on Websites. Before the DMCA, these ``webcasters'' faced the 
challenge of obtaining licenses from individual record companies, and 
record companies correspondingly faced the problem of licensing so many 
new businesses. The DMCA granted webcasters, and all digital music 
services meeting certain criteria, the access to music they needed to 
operate efficiently.
     Webcasting has grown very quickly and because of this the 
Committee work can be considered prescient. One need only look at 
Yahoo's $5 billion purchase of broadcast.com, AOL's $330 million 
purchase of Spinner.com, and NetRadio's recent IPO resulting in a 
market cap of more than $100 million to see that webcasting is big 
business. The DMCA statutory license ensures that recording artists and 
companies will reap their fair share from webcasting businesses built 
on their music content while at the same time assuring entrepreneurs 
the access to an easy efficient licensing system.
     Since early this year, the RIAA has been negotiating statutory 
license rates with webcasters on behalf of more than 2000 record 
labels. These negotiations are complex and challenging due to the many 
business models employed by webcasters. But the marketplace is working: 
RIAA has completed many deals with webcasters and is negotiating with 
many others.
 What else is happening online?
    Universal and BMG, have partnered on GetMusic.com, which is now a 
retail and promotion site but will soon be a downloading site as well.
    Warner and Sony have bought CDNow to create new branding for a 
comprehensive music site. Both companies are going to start selling 
tracks for download before the end of the year.
    Sony Music is offering online access to two full-length promotional 
tracks from the forthcoming Fiona Apple album in advance of the 
November 9 release of Apple's album.
    Epic Records worked with RealNetworks to make available the new 
Rage Against The Machine album--and one unreleased live track only 
accessible through the Web. Fans who downloaded the album can also get 
a live bonus cut not available on the album by connecting the CD to a 
private website.
    Atomic Pop put Public Enemy's new album on the web first for 
downloading before it went to traditional retail, even though they 
expect to sell more copies at retail.
    Virtually every label, large and small, is using the web to build a 
direct relationship with an artist's audience. Atlantic is doing its 
own webcasting. Astralwerks has more fan interaction with the Chemical 
Brothers than I've ever seen--to the point where fans suggest marketing 
strategies to the band and they are encouraged to do so!
    EMI has partnered with Liquid Audio for the sale of tracks and with 
Musicmaker for compilation downloads. Musicmaker has many small 
catalogs that it has joined together to create one of the largest 
libraries for custom compilations in the world.
     Of course, digital music is not just about the Internet. EMI and 
Digital On-Demand are offering digital distribution of a significant 
proportion of the EMI catalogue into retail stores. The customer also 
receives the original packaging associated with the album, including 
the original cover art and liner notes.
    Virgin Records America and David Bowie offered his new album `hours 
. . .' via the Internet, prior to its arrival in brick and mortar 
stores, and an additional new track was offered exclusively through the 
download.
    Grand Royal Records, Capitol Records and the Beastie Boys joined 
LAUNCH Media, and Microsoft in offering three previously unreleased 
Beastie Boys tracks, and the companies pledged donations to Kosovo 
relief for each new visitor who downloaded the free tracks.
    It is also worth mentioning that even this model of delivering 
music on-line as downloads is up for grabs. If you listen to some 
industry experts, they will tell you that music should never be sold as 
downloads, that we should be streaming the music instead of giving away 
the digits that make up a sound recording. This line of thinking is 
that in this way music becomes even more portable and begins to 
interact with consumers more like a service rather than a product.
    And Todd Rundgren has impressed me with his vision that true music 
fans will get their music via direct subscriptions with their favorite 
artists. He doesn't have a record label, he has a base of devoted fans 
and they are getting ``All the Todd they can eat'' for $50 bucks a 
year.
    Many sites already make customized music recommendations to 
returning clients based on their buying history. Or they suggest 
artists within the same genre as an artist whose name is entered in a 
search. So a site will say, ``If you like Sarah McLaughlan, you might 
also be interested in Mary Black.'' You've all seen this marketing 
technology at work and perhaps, like me, you've been inspired to check 
out bands you've never heard of as a result.
                           iii. music piracy
    The examples listed above demonstrate the promise of electronic 
commerce. However, we must not ignore the threat presented by music 
piracy, especially online. My enthusiasm for new forms of music 
delivery should not be confused with RIAA's continuing commitment to 
fighting music piracy.
    Whether it is street vendors or on the Internet, if copyright 
owners tell us that it is unauthorized, we seek to take it down. On the 
Internet, this has presented some interesting challenges for the past 
few years. The DMCA has given us specific tools to get infringing 
material down immediately. Upon receipt of a compliant notice, Internet 
service providers (ISP's) are incentivized to take down the infringing 
material, thereby minimizing the harm to the artists and companies who 
own the music. We have developed very good relationships with most 
ISP's who cooperate fully. In this way, one of the most contentious 
areas of the DMCA--i.e. the online service provider liability area, has 
worked out just fine.
    However, monitoring the thousand of web sites and sending notices 
to Internet service providers of infringing material is a daunting 
task. We also believe in education--letting music fans know that piracy 
hurts the artists they so admire. And frankly, we believe that the bast 
way to control piracy in the long run is to have available legitimate 
product for consumers to access. Why steal when you can buy legitimate 
product with the same ease?
    Mr. Chairman, I have traveled around the world in this last year 
extolling the virtues and opportunities of the Internet for the music 
business. Passage of the DMCA gave me the ability to do that. I 
contrast my enthusiasm for the development of the on-line music 
business with some of my colleagues overseas. For, while we are seeing 
the fruits of our efforts to keep the Net clear from piracy to enable 
the development of the American music market, many countries around the 
world are still viewing the Internet with concern. Those countries that 
have not adopted the WIPO treaties and implemented the legislative 
changes necessary to give copyright owners protection, are the same 
countries whose consumers are not getting the benefit of a developing 
music market. While some of these exciting new online music experiences 
in the United States are available overseas, it is more limited. Record 
companies aren't licensing downloads for delivery outside the United 
States nor are entrepreneurs building new businesses with the same 
speed. Until there is a seamless web of WIPO implementation worldwide, 
we should not rest. Securing that protection has become a top priority 
of the RIAA as we work with our colleagues around the world.
    We are all going to experience many new opportunities online, but 
one premise should remain our mantra--that the artists and those who 
invest in their creativity should be able to determine their own fate.
     In conclusion, much has been made in the press over the last year 
about the availability of MP3 music files and how the record industry 
is threatened with extinction. Indeed just the opposite is true. Our 
opportunities are greater than ever before. MP3 has given us a great 
lesson. Consumers want music online. We learned that lesson without 
investing a penny. Our challenge now is to develop the business models 
that consumers want to use to get new music, to provide the best, most 
creative outlet for artists to create new works, spend a significant 
amount of money to educate consumers about new music available online 
and use the new opportunities for direct marketing and technological 
innovation to deliver music.
    What happens when music reaches the human ear arousing physical and 
emotional sensations is an organic connection.
    Always has been. Always will be.
    The recording industry is in the business of capturing the magic in 
that connection and delivering the experience to millions of listeners 
around the world.
    It always has been, and always will be.
    Thank you for inviting me here today and thank you your leadership 
and foresight on these important issues.

    Mr. Shimkus. Thank you for your testimony.
    We are going to move a little bit out of order because of 
the presentation, and I'd like to ask Mr. Rhett Dawson, who is 
President of Information Technology Industry Council, for his 
testimony, 5 minutes. Your full statement is inserted into the 
record. With that, welcome.

                    STATEMENT OF RHETT DAWSON

    Mr. Dawson. Thank you, Mr. Chairman.
    The Information Technology Industry Council, ITI, 
represents hardware, software, networking, internet service 
companies, and we are, as you know, at the cutting edge of 
technology, responsible for 35 percent of the economic growth 
in this country.
    According to a University of Texas and Cisco Systems study 
released yesterday, in 1999 the Internet economy is expected to 
pump about $507 billion into the U.S. economy this year, and 
employ about 2.3 million Americans.
    To put this into perspective, by comparison such well known 
industries as airlines at $335 billion and telecommunications 
at $300 billion are relatively smaller, and these are rewarding 
people with high paying jobs on average of $53,000 versus an 
average of $30,000 for the economy at large.
    The key to this can be summed up in one word, and that's 
innovation. The industry's success is built on the expectation 
by our customers that we are going to delivery a constant 
stream of new products with new capabilities and new features 
able to do more new things. This recognition drives our 
position on copy protection.
    We think that we are responding to consumer demand, and our 
willingness to work collaboratively with the industries that 
you see here at this table is a way to protect consumers and 
intellectual capital at the same time.
    Passage of the Digital Millennium Copyright Act was an 
important milestone for our industry, and we think that 
updating copyright laws to account for a world where nearly all 
copyrighted content, which is what it did and nearly all 
digital devices will be connected, was a good step forward.
    In our testimony before this committee last year, we spoke 
of the important role that truly effective technological 
measures will increasingly play in protecting copyrighted 
materials in a digital world. At the time of our testimony, we 
had already invested several million dollars in copyright 
protection technology and years of collaboration with the 
consumer electronics, recording and motion picture industries, 
and that collaboration and that investment continues today.
    Because modern copy protection locks up content, and it 
subjects it to its restrictions on recording, it must not be 
misused to restrict consumers from lawful and other kinds of 
recording, such as time shifting. For this reason, the IT 
industry has made encoding rules a condition for using our copy 
protection technology.
    Requiring computers to degrade performance or quality for 
content is not an acceptable way to start this conversation. 
There is no current danger of consumers intercepting an analog 
signal between the computer box and the monitor, and the 
technological solutions really are on the way to protect this 
interface.
    The IT industry will continue to work on effective copy 
protection technology that balances the rights of all copyright 
holders to protect their intellectual property in this new 
digital world, and we will do that without degrading the 
capabilities of our products or restricting the ability of 
consumers to use those products.
    We believe that current disagreements that may emerge in 
the context of these discussions have not and will not 
significantly delay the rollout of high quality copyrighted 
material, and we are going to continue to work with these 
industries to try to reach those goals.
    Thank you, Mr. Chairman.
    [The prepared statement of Rhett Dawson follows:]
     Prepared Statement of Rhett B. Dawson, President, Information 
                      Technology Industry Council
    Mr. Chairman and Members of the Subcommittee: My name is Rhett 
Dawson. I am president of the Information Technology Industry Council 
(``ITI''). On behalf of ITI's member companies, I would like to thank 
the Subcommittee for holding this important hearing today, one year 
after the passage of the Digital Millennium Copyright Act (``DMCA''). 
ITI is the association of leading information technology (``IT'') 
companies. We advocate growing the economy through innovation and 
support free-market policies. ITI members had worldwide revenue of more 
than $440 billion in 1998 and employ more than 1.2 million people in 
the United States.
    ITI's members are on the cutting edge of the fast-evolving Internet 
economy that is fueling the expansion of the U.S. economy. Information 
technology is responsible for 35% of the growth of the U.S. economy in 
the past four years. According to a University of Texas study released 
just yesterday, the ``Internet Economy'' actually grew 68% from 1998 to 
1999, pumping about $507 billion into the U.S. economy and employing 
2.3 million Americans. To put this in perspective, the Internet economy 
generates more annual revenue than such entrenched American industries 
as airlines ($335 billion) and telecommunications ($300 billion).
    Of the 3,400 businesses surveyed to measure the size of the 
Internet Economy, more than one third did not exist before 1996. The 
new businesses alone now employ 305,000 people. And these are good 
jobs. Jobs in the IT industry pay an average of $53,000, compared to 
$30,000 in the economy at large.
    The effectiveness of the information technology industry in fueling 
the U.S. economy can be summed up in one word: innovation. The IT 
industry's success is built on the expectation by our customers that we 
will deliver a constant stream of products, each with new capabilities, 
new features--able to do more things. This recognition has, to some 
extent, driven our positions on copy protection when some parties have 
sought to protect their material by asking the IT industry to dumb down 
its products or remove features that consumers demand.
                  the digital millennium copyright act
    Passage of the DMCA last year was an important milestone for the IT 
industry, updating copyright law to account for a world where nearly 
all copyrighted content will be available in digital form and nearly 
all digital devices will be ``connected'' in one form or another. To 
deal with the novel intellectual property issues presented by the WIPO 
Copyright Treaties and the DMCA, ITI developed a set of principles to 
guide our advocacy and evaluation of the various legislative 
permutations of the implementing legislation. These principles are 
still relevant today:

1. Intellectual property should be strongly protected domestically and 
        internationally.
2. Whenever possible, rely on strong enforcement of existing copyright 
        laws.
3. Regulate behavior, not technology. Legislation should focus on the 
        intent to infringe, not on the provision of technology that 
        could be used to infringe.
4. Do not harm the IT innovation engine, which is a key building block 
        for economic growth and provides the tools and infrastructure 
        that makes the GII possible.
5. Promote, rather than stifle, innovation.
6. Maintain the proper balance, inherent in the Constitution, between 
        the protection of intellectual property and the promotion of 
        innovation.
7. View technology as an opportunity, not a threat. Technology not only 
        provides mechanisms for distributing content and generating 
        revenues, it enables creative and effective solutions to 
        protect intellectual property.
8. Remember that IT companies are content providers as well as 
        technology providers. There are many synergies to be gained 
        from working with content providers to develop mutually 
        beneficial solutions. In fact, there are so many synergies that 
        some companies have both content divisions and IT divisions, a 
        convergence that is likely to grow.
                       history of copy protection
    In ITI's testimony before this Subcommittee last year on the 
Digital Millennium Copyright Act, we spoke of the important role that 
truly effective technological measures increasingly play in protecting 
copyrighted material in the digital environment and the role of 
innovation in creating such technology. At the time of our testimony, 
the IT industry had already invested millions of dollars in research 
and development and several years of discussion with the consumer 
electronics and motion picture industries to develop such technology.
    ITI's involvement began in 1996, when the consumer electronics and 
motion picture industries proposed the Digital Video Recording Act 
(``DVRA''), which would have required all IT and consumer electronics 
device manufacturers to include special circuitry in their products 
that would detect and respond to simple digital copy control 
information (``CCI'') bits in the digital content by restricting or 
preventing copies. Under this approach, every data stream would be 
checked by every digital device to detect and block unauthorized use of 
movies by the home user.
    ITI opposed the DVRA because we found the specific technical 
solution to be burdensome, ineffective and inconsistent with how our 
products worked. Because the system relied on nothing more than an 
embedded ``don't copy'' or ``copy once'' message, it would have been 
trivial to defeat with the simplest software or device. The content 
itself would be unprotected and circumventing it would mean nothing 
more than ignoring the embedded copy control information. In some 
circumstances, it could even be done accidentally.
    More importantly for our purposes, it would have required computers 
to look for copy control information in every digital file, whether it 
was a movie, spreadsheet, or personal correspondence. This would have 
slowed personal computer performance by as much as 50% with no apparent 
benefits to the users. The IT industry could neither accept such a 
burden, nor in good faith could we pass it on to our customers, many of 
whom were not even interested in watching Hollywood movies on their 
desktop systems.
              it industry joins the copy protection effort
    Even as we objected strenuously to the technological specifications 
in the DVRA, the IT industry recognized the importance of protecting 
copyrighted digital content and joined with the motion picture and 
consumer electronics industries to form the Copy Protection Technical 
Working Group (``CPTWG'') to develop a mutually acceptable 
technological approach to digital copyright protection.
    By October of that year, the CPTWG had already agreed on a video 
scrambling method proposed by Toshiba and Matsushita called ``CSS.'' 
With scrambling, computers would not need to check every data stream 
for copy control information. Instead, they would only need to pay 
attention to anti-copy rules when they affirmatively de-scrambled 
movies to make them watchable. Under the content scrambling system 
(``CSS''), manufacturers are licensed to de-scramble (and therefore to 
access and play) the video under terms that require the licensed device 
to obey embedded copy control information (``no copy,'' ``copy once,'' 
``copy freely,'' etc.).
    More recently, the three industries have made substantial progress 
with the ``5C DTCP'' system, which allows digital devices in a home 
network to share copy protected digital content with one another 
through a secure interface. Before transferring a secure file to 
another device in the network, a ``5C'' licensed device will use a 
digital signature ``handshake'' to verify that the receiving device is 
also secure and subject to the appropriate licensing terms. The content 
is then encrypted and sent over an IEEE 1394 connector.
    Combined with CSS, the 5C technology creates a secure system where 
copy protected content will only be received, decrypted, played and 
shared with devices that are programmed to respond to the embedded copy 
control information. Any unlicensed device that de-scrambled copy 
protected content from this system would be outlawed as a 
``circumvention device'' under section 1201(b) of the DMCA.
                             encoding rules
    Because copy protection technology effectively ``locks up'' content 
subject to the embedded copy control specifications and because it is 
likely to be so widely used, its terms of use are very important. From 
the viewpoint of technology companies, the encoding rules were 
developed to ensure that the technology we developed to protect 
Hollywood's rights would not be used in a way that hurts our customers 
and makes our products less useful and more expensive.
    Designed to track existing law and customary consumer copying 
practices, the encoding rules specified when the various copy control 
information designations of ``never copy,'' ``copy once'' and ``copy 
freely'' could be used. ``Never copy,'' the most restrictive standard, 
was reserved for pay-per-view, video on demand and packed media (DVD or 
tapes). ``Copy once'' would be applied to premium channels like HBO and 
Showtime. To be consistent with existing consumer practices, free and 
basic programming, like over-the-air broadcasts and basic cable, would 
be designated ``copy freely.''
    These encoding rules were incorporated in the DVRA language 
negotiated between the consumer electronics and motion picture 
industries and the IT industry's voluntary cooperation to develop 
effective copy protection was based on the same framework. In fact, the 
encoding rules are an even more important part of the CPTWG and 5C 
negotiations since the technology at issue encrypts copy protected 
content. That is why the current draft license agreement for the 5C 
technology would bind content owners to the encoding rules.
                       computer screen resolution
    Another MPAA proposal in 5C discussions is a requirement for 
computers with analog connections to their monitors to intentionally 
degrade high-resolution pictures to either produce a smaller picture or 
a full-screen image with lower picture quality--something the IT 
industry finds unacceptable. The studios have advanced this proposal to 
prevent users from capturing an unprotected high-resolution signal 
between the computer box and the screen.
    At present, however, devices which would capture such a signal are 
not available to consumers. At least one IT company has made 
substantial progress in developing technology to protect this interface 
and our door remains open to accommodating such technology as soon as 
mutually agreeable terms can be worked out. In the interim, though, 
degrading screen resolution is not an acceptable method for protecting 
an interface that is not presently in danger.
    Higher rates of resolution have been the norm for even low-end 
computers for many years, and there is substantial, well-founded 
resistance to the computer industry making this change. Consumers have 
a right to expect that more expensive DVD drives and digital TV tuner 
cards will produce high-quality signals that reflect the monitor's full 
capabilities and it is unfair that consumers who make the investments 
in such new technologies should be denied the best possible viewing 
experience.
                               conclusion
    The IT industry will continue to work on effective copy protection 
technology that balances the rights of movies studios, recording 
companies and all copyright holders to protect their intellectual 
property in the digital environment without degrading the capabilities 
of IT products or restricting the ability of our customers to use our 
products for lawful and customary purposes. We sincerely hope the 
current issues and disagreements that have emerged in the context of 
the 5C negotiations do not significantly delay the roll-out of digital 
television or the availability to our users of premium copyrighted 
material. We will continue to work with the motion picture and consumer 
electronics industries to reach these goals and hope that no 
congressional intervention is necessary in this context.

    Mr. Shimkus. Thank you for your testimony.
    We will next move to Mr. Peter Harter, Vice President of 
Global Public Policy and Standards. Welcome again. Your full 
statement is in the record. Oh, he's from EMusic.com, Inc. 
Excuse me. Welcome to the committee, and you can begin.

                    STATEMENT OF PETER HARTER

    Mr. Harter. Good morning. Thank you. It's an honor to be 
here.
    First I'd like to start my remarks this morning with a 
little history about EMusic. EMusic.com is based in Silicon 
Valley, and it is a startup. We are about 1\1/2\ years old, 80 
employees. I joined the company back in April of this year 
after having served 3\1/2\ years doing public policy at 
Netscape Communications. So I personally have been out in the 
Valley working on copyright Internet issues for quite a long 
time, if you measure it in Internet years.
    So the issues of the DMCA--I do remember going out for my 
first interview at Netscape in the summer of 1995 carrying 
Bruce Layman's green paper report. It was too big a file to E-
mail to Netscape. I had to physically carry it across the 
country.
    So DMCA has been with me a long time, and I have spent time 
internationally over at WIPO at the treaty conference in 
December 1996, spent a month over there at the treaty 
conference. So I bring a long perspective on these issues, even 
though EMusic is only 1\1/2\ years old.
    EMusic, even though we are a startup, we have people from 
Hollywood and New York, veterans of the recording industry from 
Walt Disney and Time-Warner. We have people from the software 
industry, from the portal industry, and from the music 
licensing area. So we have a very diverse culture in our 
company, despite its youth and size. So, hopefully, we can 
bring some measure of credibility, despite only being 1\1/2\ 
years old.
    EMusic is traded on NASDAQ. Market cap varies between half 
a billion and three-quarter billion dollars. We reported last 
quarter's revenues of a whopping $180,000. So we are part of 
the Internet economy, and we have high expectations for 
consumers being able to buy music very cheaply and very 
conveniently online. This will be a supplement to people buying 
music through mail order, through sites like Amazon and CDNow 
and, of course, through traditional brick and mortar retail 
stores in the physical world.
    This is about not so much disintermediation of the existing 
record promotion distribution industry but reintermediation 
using the efficiencies of the Internet to give consumers more 
choice and to level the playing field between artists and fans, 
in a sense getting artists directly in contact with their fans. 
They can download directly to their fans, no matter where they 
are in the world.
    EMus.com is a new business model. We are not a label per 
se. We are a digital distributor. We don't have any physical 
products. We download music files for a dollar a song or nine 
dollars an album, and we have music from all genres, classical 
and jazz, hip hop, rock and many other music formats.
    At present, we use the very popular MP3 format, but let me 
be clear. We use this format because it is to date the most 
convenient and widely adopted format. In order to get this new 
business model out to market, you have to go to where consumers 
are, and the consumers are using MP3.
    There are other formats out there such as Liquid Audio, 
Windows Media and RealNetworks, and there will be successor 
formats to MP3. MP4 will be coming out, and that has security, 
watermarking, new technologies built in, which are very 
interesting.
    So for the record, EMusic--we like to think of ourselves as 
somewhat neutral, but we are very much in favor of MP3, because 
it is an open format, and it's most widely used, and as 
business people you shouldn't use a format that ten people use, 
because your competitor will certainly use a format that 
hundreds of millions of people use, and they will beat you in 
the marketplace.
    With regard to security and piracy, these issues have come 
up. At EMusic, we are an Internet company, but we also sit in 
the other world as a copyright holder. We license from artists, 
independent labels and other rights holders long term contracts 
to sell their music.
    We have to pay them royalties. So if we cannot pay 
royalties from sales, if pirates are undercutting us, that's a 
business problem. Oftentimes, we own the masters ourselves. So 
we are, in fact, the copyright owner directly.
    So the comments of Mr. Valenti and Ms. Rosen are very 
important to take into account here, but I have to say, with 
our perspective of being a technology company in the sense of 
our Internet experience, security is a very tough issue.
    This Congress has dealt with key escrow export controls and 
has dealt with the FBI asking for years for a very complex 
architecture called key escrow and public key encryption. Most 
consumers use the most easy to use format like American Online, 
a very popular service, because it is easy to use.
    AOL succeeded in the marketplace because they make 
accessing online content very easy, and I think that, if you 
put a complex system of architecture in to protect content, it 
will either inhibit the market or people simply won't use that 
format.
    So with security, we have to be very careful not to have a 
closed system that's very complicated. Although EMusic is a 
participant in SDMI, we do have concerns about the complexity 
of the architecture proposed there, but that is an ongoing 
process, and we wish to engage in the dialog down the road with 
this committee and others in the industry as SDMI comes closer 
to its completion in its first phase.
    In closing, Mr. Chairman, I wish to also support the 
comments of my colleagues here on the panel about international 
issues. Content is an export industry, and EMusic is based in 
California, but we sell our music worldwide.
    Oftentimes we have worldwide distribution contracts with 
the artists and labels we work with, and they contract with us 
exclusively for multi-years, 5 to 10 year contracts to sell 
music worldwide. But given the physical nature of other kinds 
of music distribution, there are entities overseas called 
collection societies that, under a national law in their 
countries, have an obligation to collect a mandatory rate, a 
statutory rate.
    In this country you have the Harry Fox agency and, for 
example, in Germany you have a group called GEMA. If we 
download music internationally and we have a contract to 
collect the statutory rate for Harry Fox, this is sort of what 
the Internet tax issue has been, too many people trying to 
collect the same--their own cut in the same transaction.
    We'll be coming back to you to discuss this issue in the 
future. So DMCA has been very good for the industry, but there 
are many more upsetting issues to look at down the road. Thank 
you, Mr. Chairman.
    [The prepared statement of Peter Harter follows:]
Prepared Statement of Peter Harter, Vice President Global Public Policy 
                    and Standards, EMusic.com, Inc.
                            i. introduction.
    Mr. Chairman, distinguished members of the Committee, good morning. 
My name is Peter F. Harter, and I would like to thank you for inviting 
me here today to testify before the Committee.
    One year ago, Congress enacted the Digital Millennium Copyright 
Act. The DMCA represented a comprehensive effort to update our existing 
copyright laws for the digital age. The fact that Congress was able to 
enact this legislation so soon after the conclusion of the WIPO 
treaties that it implements is a major accomplishment, and a testament 
to this institution's ability to stay on top of a rapidly changing 
technological environment. It is, quite frankly, a model that our 
friends in Europe and Asia would do well to emulate. The European Union 
is, for example, still engaged in the time-consuming process of 
drafting a new copyright directive to implement its WIPO obligations. 
Once that process is finished, it will still be a number of years 
before the individual Member States of the European Union implement the 
directive--and therefore a number of years before there are laws on the 
books in these countries to combat digital piracy.
    I might also note that Congress' quick action in this area puts the 
United States in good standing coming into the WTO Seattle Ministerial. 
As you know, the effective protection of intellectual property rights 
under the WTO system is always a critical agenda item for the United 
States, and we can only enhance our negotiating position by being up-
to-date in fulfilling our own multilateral commitments.
    With that said, I would like to describe the business of Emusic.com 
and to make a few comments about the potential impact of the DMCA on 
the digital music industry. In addition, I would like to inform the 
Committee of some international trade barriers to ecommerce in digital 
music that the DMCA did not contemplate.
                          ii. emusic.com, inc.
    I am here in my capacity as Vice President for Global Public Policy 
and Standards of EMusic.com Inc. As one of the largest Internet sellers 
of digitally formatted music, EMusic.com is at the forefront of the 
newly emerging market for downloadable digital media products. This new 
market and the technology on which it is based have the potential to 
alter fundamentally the way in which music is distributed and consumed. 
Greater efficiencies in distribution, expanded consumer choice, and 
ease of access will result in lower prices, better products, and a 
larger overall market. This will benefit everyone-consumers, artists 
and the entertainment industry.
    EMusic was founded in January 1998 by Gene Hoffman and Bob Kohn, 
two executives from Pretty Good Privacy (PGP), with decades of combined 
experience in Internet start ups, software firms, security, and music 
licensing. Formerly known as GoodNoise Corp., EMusic has been publicly 
traded since May 1998 and can be found today on NASDAQ under the symbol 
``EMUS.'' We have 80 employees, mostly based in Silicon Valley, and 
have a market capitalization of over half a billion dollars. We sell 
music from our website for 99 cents a song and $8.99 an album. We have 
music from all genres and are aggressively acquiring the exclusive 
rights to digitally distribute the music from independent labels, 
artists and back catalogs. Mr. Chairman, we even have music from 
Louisiana: EMusic acquired the Jewel-Paula catalog from Stan The Record 
Man Lewis. We also have a distribution deal with Deep South records. We 
have focused our digital distribution efforts on independent labels, 
artists and backcatalogs in order to level the promotion, marketing and 
distribution playing field for such participants in the music industry 
because before the Internet they were always at a disadvantage with 
regard to the five major record labels. With open standards like the 
MP3 file format, Internet distribution and promotion firms like EMusic 
can help labels and artists reach a world wide audience of consumers 
much more effectively than they could on their own. To further explain 
MP3 I have included a primer as an appendix to my written testimony.
               iii. unintended consequences of the dmca.
    I realize that you have invited me to talk about the Digital 
Millenium Copyright Act. And I will. But at the center of my testimony 
today is a different and far more potent law--the law of unintended 
consequences. I would like to suggest to the Committee that, even 
before it is fully in effect, the DMCA has already begun to cause 
difficulties that could not have been foreseen when it was adopted.
    When Congress enacted the DMCA one year ago, it had to legislate 
against a backdrop of rapid technological change. As with any such 
effort, Congress had to craft new law based, in large part, on a 
prediction of what the future would hold. One of the predictions that 
Congress appears to have accepted was quite plausible on its face: As 
more and more ``content''-books, films, music-is distributed in digital 
format through the Internet, copyright holders will increasingly seek 
to protect that content from piracy through the use of so-called 
``copyright management'' systems. When a digital copy of a copyrighted 
work can be flawlessly reproduced and made available to a potentially 
unlimited number of persons, the security that surrounds that content 
will be vital to ensuring that the copyright holder gets his due-or so 
the DMCA assumes. Based on this assumption, Congress introduced a novel 
concept into copyright law-for the first time, the law protects not 
only the copyrighted work, but the means that are used to control 
access to that work. In effect, the law protects both the book and the 
bookstore-or, more specifically, the lock on the bookstore's door. In 
addition to penalizing unauthorized uses of copyrighted work, the law 
now penalizes efforts to bypass any technological devices-such as 
encryption-that are used to control access to that work.
    And so begins the story of the law of unintended consequences. For 
while the anti-circumvention provisions of the DMCA appear, on their 
face, to be a perfectly reasonable and well-measured response to a new 
problem-how to protect copyrighted works in the age of the perfect 
digital copy-the anti-circumvention provisions of the DMCA may, in 
fact, have a profoundly adverse effect on the emergence of new markets 
and new distribution mechanisms for digital media. A law designed to 
foster the growth of digital media may, in fact, have just the opposite 
result.
    In order to illustrate why this is so, allow me to provide a brief 
overview of the state of play in industry I know best-downloadable 
music. The word ``revolution'' is used freely-and perhaps to excess-in 
describing the impact that the Internet is having on business and 
society. The term is unquestionably deserved, however, when it comes to 
describing the impact that the Internet has had on the ways in which 
people are able to access music. For almost the entire history of 
recorded music, the variety of music that has been available to 
listeners has been dictated, in very large part, by a relatively small 
number of recording companies that decide which artists belong on the 
``big'' labels. Those labels are, in turn, likely to be available in 
major retail outlets and played on major radio stations-factors that 
largely determine which artists become successful. The practical effect 
of this system is that, with the exception of aficionados who actively 
seek out independent artists, most people listen to what they're told 
to listen to.
    Now, with the advent of MP3 and other file formats that permit 
people to download music directly from the Internet, artists are able 
to make their music directly available to anyone anywhere in the world 
who has access to the Internet-a number that expands by orders of 
magnitude each year. A music industry that was once funnel-shaped-with 
a small number of companies deciding what came out the other end-now 
more closely resembles an ocean. Virtually any band can make its music 
available on the Internet and become ``known'' to the rapidly expanding 
and increasingly vibrant community of music lovers on the Internet. 
Emusic.com forms a part of the community by gathering together and 
categorizing a large number of artists in one place and making their 
work available at relatively little cost to the consumer.
    It will come as no surprise to any of you that the old-line 
recording interests have reacted to this revolution with some alarm. 
The ubiquity of the Internet and the power that it gives to the 
individual artist to reach out to potential listeners threatens to 
undermine the chokehold that the recording labels have long held on the 
music industry. If the listener no longer has to rely on the recording 
labels for making the music available, what role will the labels 
continue to play in this industry? And, most importantly, how will they 
continue to make money?
    Which brings me back to the DMCA. How does the recording industry 
plan to put the genie of downloadable music back in the bottle? Why, 
through copyright management systems. Imagine a system in which the 
devices that are used to play digital music-whether at home or in 
portable devices-only recognize music files that bear the right digital 
``watermarks.'' If the music file does not have encoded within it the 
information that the device looks for to determine whether the file is 
``compliant'' with the copyright management system, then it won't play 
the music. By the same token, a music file that is encoded with the 
``right'' digital watermarks will not play on a device that does not 
recognize those watermarks. Because most consumers will want to own 
devices that play the well-known artists who are under contract to the 
big labels, as well as the massive collections of music that are owned 
by those labels, they will buy playback devices that comply with the 
industry-sponsored copyright management standard. In that one step, the 
big music interests will effectively regain control of the music 
distribution system-and the central role that they play in it. The 
genie will be back in the bottle.
    So what do the anti-circumvention provisions of the DMCA have to do 
with any of this? Well, those provisions make it unlawful to attempt to 
bypass any technological device that controls access to a copyrighted 
work-including the type of copyright management system that I've just 
described. Copyright holders can sue individuals who bypass those 
technological devices, and can even seek criminal prosecution. Imagine, 
then, that the industry comes up with a copyright management system 
that it wants to foist upon consumers as a means of regaining its 
control over music distribution. Companies and individuals that are 
opposed to the adoption of that system--because of the adverse impact 
that they believe it will have on the market for downloadable music-
want to test that copyright management system to see if it will, in 
fact, provide the level of security that its proponents claim it will. 
After all, the history of efforts to control access to, and copying of, 
any type of copyrighted work is littered with failures, usually for one 
of two reasons--either the security provided by the ``system'' was not 
good enough or it was too good. The protection system was either 
overtaken by new technologies that made it easy to evade or it was so 
single-minded in pursuing security that it prevented users from using 
the product easily. Usually, protection systems were one or the other--
either ineffective or obtrusive. The DMCA, I'm sorry to say, creates 
incentives for the deployment of protection systems that are both.
    How do security professionals prevent the deployment of weak 
security? There is only one way. It has to be attacked, publicly, 
relentlessly, by people with every imaginable motive--paid researchers 
working under contract, university professors and students publishing 
research. And a host of others motivated by everything from making a 
name for themselves to showing their defiance of authority. Painful as 
it may be, companies thinking about deploying a security system for 
copyright protection need to give every one of these individuals an 
opportunity to evaluate the system's potential flaws.
    The DMCA, however, does not encourage this kind of testing. 
Instead, it provides the perfect tools whereby the proponents of an 
industry-sponsored copyright management standard can squelch legitimate 
evaluation and criticism of that standard. By making it illegal to 
attack a security standard to find potential flaws, proponents of a 
security standard can use lawsuits and the threat of criminal 
prosecution to chill investigations of that technology--even 
investigations that are motivated not by any desire to make infringing 
uses of copyrighted content, but to prevent an industry and consumers 
from investing in a technology that is fundamentally flawed. Squelching 
such legitimate evaluation and criticism will only make it harder for 
consumers to have as broad a choice as possible in available music.
        iv. anti-circumvention provisions harm strong security.
    The anti-circumvention provisions of the DMCA greatly increase the 
probability that poor choices will be made by decision-makers in 
implementing copyright protection systems. The criminal penalty 
provisions and research exception as currently drafted will likely have 
a ``chilling effect'' on legitimate efforts to rigorously test and 
criticize copyright protection systems by the general encryption 
community. This will in turn create an environment in which a system to 
be implemented within the industry may only be ``tested'' by the 
designers and a select few others. And once a choice is made, industry 
will have the further incentive to shield a flawed system from critique 
and exposure within the legitimate encryption community because of the 
``sunk cost'' of implementing the system.
     By providing such protection, the DMCA tries to thwart the 
``Darwinian'' process that weeds out flawed and ineffective systems. 
Worse yet, by trading off effective technological protection for legal 
protection, it creates a false sense of security. The flaws will still 
come to light, but later--after far too much has been invested in a 
flawed system.
    That's why I believe the DMCA encourages bad security systems. 
What's truly unfortunate is that it also encourages security systems 
that interfere with a consumer's enjoyment of the content. By providing 
criminal prohibitions for ``circumvention'' generally, the Act 
unnaturally tilts the entire industry toward a security-based paradigm 
for protecting copyright interests in this market. It encourages 
copyright holders to invest heavily in building ``technology 
fortresses'' to protect their rights. So far, the results have been 
expensive, cumbersome, and hostile to the formats that are most common 
on the Internet today.
    Let me be clear. EMusic opposes music piracy. We are a distributor 
of copyrighted material, and we want to protect those rights. But 
building a technology fortress that locks in the clout of the major 
labels is by no means the only way to protect copyright interests, nor 
is it necessarily the best. It is simply too early to answer that 
question. Market forces operating naturally may very well produce a 
totally different industry model.
    This is a critical point. The choices that industry sectors make 
with respect to these systems will in many ways directly shape the 
market for digital media and the manner in which digital media are 
distributed. This in turn will directly influence the options that are 
available to consumers, both in terms of the ease with which they will 
be able to access digital media and the equipment that they will 
require to do so. Poor choices made this early in the game will retard 
the growth of this market, hurting everyone's interests.
                       vi. implementing the dmca.
    To avoid these problems, I ask the Committee to watch the 
implementation of the anti-circumvention provisions carefully for 
abuse. If those abuses appear, the committee should consider 
drastically pruning or eliminating the bias toward a ``technology 
fortress'' that the provision creates and instead move back to a system 
that simply punishes piracy, including piracy committed by means of 
circumvention. In addition, the Committee should encourage the 
Administration and the courts to properly clarify the following 
ambiguities in the anti-circumvention provisions. EMusic has been 
participating in the public comment process at the Department of 
Commerce and Office of Copyright that was mandated by the DMCA. The 
following suggestions grow out of what we have learned so far from that 
process. This Committee should carefully monitor the process and the 
recommendations that will be made by the Department of Commerce and the 
Office of Copyright later this year when they report back to Congress 
on their findings. It is important to recognize that despite some hard 
fought compromises in this area of the DMCA the fact remains that anti-
circumvention is a complex issue. The DMCA recognized this fact and as 
a result mandated that the anti-circumvention provisions should not be 
implemented right away--a two year delay was set out. This comment 
process should not be taken lightly.
    First, Section 1201(g)(2)(C) should be construed so as to insure 
the ability to circumvent a system for legitimate research in cases 
where the owner has refused to consent. Otherwise, advocates of a 
particular system would simply be able to deny all requests from 
``outsiders'' for authorization to test the system.
    Second, Section 1201(g)(3)(A) is especially dangerous because it 
presents a false dichotomy. It states that one factor in determining 
whether an individual falls within the encryption research exception is 
whether the individual disseminated information about the research in a 
manner designed to advance the state of knowledge in encryption 
research, or whether it was disseminated in a manner that facilitates 
infringement. This is a distinction without a difference. Every time 
someone disseminates information about a potential security flaw, it 
both facilitates the state of understanding within the legitimate 
information security community while at the same time notifying 
potential hackers of a new ``back door.'' The identical information 
serves the same purpose, without regard to the manner in which it is 
disseminated.
    Third, Section 1201(g)(3)(B) language which makes the ``training or 
experience'' of the person performing research on a system relevant to 
a determination of the legality of the research should be interpreted 
broadly. Otherwise, the language may be used to exclude a vast number 
of individuals who are otherwise perfectly capable and willing to lend 
their talents to strengthening encryption systems and expanding 
knowledge in this area.
            vii. what is happening in the real world today?
    Even though the anti-circumvention provisions of the DMCA are not 
yet in effect and even though the European Union and other important 
centers of intellectual property policy have yet to finalize their 
position on the issue, copyright management systems are being proposed 
and one in particular touches upon the issue of anti-circumvention. 
EMusic has been a participant in the Secure Digital Music Initiative 
(SDMI) of the Recording Industry Association of America. While SDMI was 
initiated by the RIAA in the name of fighting digital music piracy, its 
ultimate goals and consequences remain unclear. When it becomes 
available SDMI aims to provide watermarking and rights management. In a 
sense, then, SDMI is a copyright management system.
    Through the past several months the information technology industry 
and the traditional recording industry--the five major labels--have 
been negotiating the terms for licensing the SDMI trademark and logo 
that will brand products and services as SDMI compliant. While these 
negotiations continue, the issue of compliance with the DMCA and its 
anti-circumvention provisions arose many times. It was an issue of 
contention between the high technology industry and the traditional 
recording industry. EMusic took the side of the high technology 
industry. Other Internet firms involved in the distribution and 
marketing of music online also sided with the high technology industry. 
However, it should be noted for the public record that the five major 
record labels very much wanted to have language in the SDMI license 
that would effectively bind all SDMI licensees worldwide to the US law 
on copyright, the DMCA, and with specific reference to compliance with 
the DMCA's anti-circumvention provisions. Putting aside for now the 
challenges and problems resulting from enforcement of an 
extraterritorial application of US law to a fast moving and changing 
digital media industry, it is important to note that the recording 
industry asked for this licensing language even though the specifically 
cited provisions of the DMCA are not yet in effect and are, in fact, 
under review, in part, by the Department of Commerce and the Office of 
Copyright. Some members of the press have taken the view that SDMI is 
not about piracy at all and is really about an attempt to use a 
proprietary copyright management system technology coupled with 
trademark license to prevent open systems like the MP3 format from 
succeeding in the marketplace via the sheer market power the five major 
record labels bring to bear with their strong support for SDMI and 
noted opposition to MP3 and open systems.
    SDMI is still underway and I do not want to turn my comments in a 
specific criticism of this one example of a contemporary copyright 
management system that depends on the anti-circumvention provisions of 
the DMCA. However, it is too important of a development to not mention 
at all.
   viii. international trade barriers to ecommerce in digital music.
    Another issue that the DMCA indirectly touches upon insofar as it 
implements a significant copyright treaty is the issue of who gets a 
cut of the downloading transaction action. Since this Committee is 
reviewing the DMCA one year after its passage into law it is important 
for the Committee to be aware of new copyright issues, especially as 
they appear in the international context and in the context of 
electronic commerce.
    Downloading a song from EMusic and other electronic retail websites 
involves two copyrights. First, there is a copyright for the sound 
recording. For example, many of us are familiar with Frank Sinatra and 
Tony Bennett versions of the same song. A record company typically owns 
the copyright to Frank's and Tony's sound recording of the song. 
Second, there is a copyright for the underlying musical work--the song 
itself. A music publisher owns the copyright and one has to pay for a 
license to the musical work before it can be legally distributed 
online. The fee for this license is set by US law (17 USC 115) at 7.1 
cents. One can either pay the music publisher directly or the Harry Fox 
Agency.
    The question for companies like EMusic today is one of jurisdiction 
on the Internet. Consumers from all over the world can access our site 
and purchase music. You don't have to be a US citizen or based in the 
US to obtain and use a credit card and other electronic payment 
systems. And since one downloads music (rather than has a physical 
product delivered to one's home) your physical address where you 
consume the download of 1s and 0s is irrelevant to consummating the 
transaction between EMusic and the customer. However, the collection 
societies in each country around the world are inclined to assert that 
they have a right to request payment of their statutory licensing rate 
fee for any transaction that they believe terminates or passes through 
their country. For example, when a consumer downloads a song from 
EMusic (a merchant based in California) to their PC in Germany, which 
rate should be paid--the US rate or the German rate? Also, what if the 
music publisher and the artist have contracted with the online 
distributor for a world wide digital distribution at one set rate and 
have stipulated jurisdiction? It is important to note that EMusic and 
other merchants really have no reasonable way to ascertain or prove 
where all of their customers consume the music they download. Without 
being a physical product, digital downloads add a new wrinkle to the 
expanding debate over jurisdiction on the Internet. EMusic is exploring 
this fascinating issue and will testifying before the European 
Commission in early November at their Internet jurisdiction hearings. 
We would be happy to continue a dialogue with the Committee on this 
important issue.
                            ix. conclusion.
    To conclude, Section 1201(g) of the DMCA as currently written has 
the potential to pervert the natural growth of the market in 
downloadable digital media, undermine the quality of the products in 
that market, lead to investments in inefficient technologies by both 
consumers and industry, and in the final analysis leave copyright 
holders no better off than they were before passage of this law.
    EMusic is in favor of robust copyright management systems that 
actually work and that are based on open, transparent technical 
standards. Copyright management systems are necessary for the 
development of a sophisticated digital media marketplace. Such systems 
can be used to provide value added information about the content, to 
facilitate ecommerce transactions, to audit royalty payments to 
artists, and to engage third party firms in connecting their 
information and transaction services to content via the Internet. 
EMusic's concerns should not be misconstrued as some sort of break from 
the delicate compromise that was reached over a year ago to forge 
closure on the DMCA. I personally participated in the years of 
negotiations over copyright legislation here in the US as well as in 
Europe; I also participated in the World Intellectual Property 
Organization (WIPO) copyright treaty conference in December 1996. I 
fully realize how important the anti-circumvention provisions of the 
DMCA are to the copyright community and especially to traditional 
copyright holders in the music, motion picture and software industries. 
But those pre-Internet industries are not the only interests at play 
here. If the law of unintended consequences demonstrates anything it is 
that Congress should not pass laws that prescribe business models or 
technologies. Nor should Congress tolerate laws that benefit incumbents 
and harm new market entrants. Do not be fooled by the sirens wailing 
from the rocky shoals of Isle of Piracy in the great sea of data called 
cyberspace. There is much more at stake here than combating piracy; 
technological excellence, free speech, innovation, and competition are 
on the line.

    Mr. Shimkus. Thank you. I was wondering. This isn't the 
site that the guy--the music guy on Doonesbury uses, is it? His 
is real time, though, I think. It shows my knowledge of the 
industry.
    I would like next to go to Mr. Gary Klein, Vice Chairman of 
Home Recording Rights Coalition. Welcome. Your full statement 
is submitted for the record. If you would summarize in 5 
minutes, with that you may begin.

                     STATEMENT OF GARY KLEIN

    Mr. Klein. Thank you, Congressman Shimkus. Mr. Chairman, 
the Home Recording Rights Coalition consists of consumers, 
manufacturers, retailers and electronic servicers and was 
formed 18 years ago in response to attempts by the motion 
picture industry to ban the sale of video recorders to----
    Mr. Tauzin. Mr. Klein, would you pull the mike just a 
little closer. Thanks.
    Mr. Klein. It seems hard to believe that anyone ever wanted 
to ban VCRs. In fact, for much of the last decade the movie 
industry has worked with us to pursue outcomes that offer them 
protection but do not intrude on a accustomed consumer rights. 
But today I must report that we may have come full circle.
    We've helped develop technologies, known as technical 
measures, under the DMCA that may now be employed, over our 
objections, in a very anti-consumer fashion. Perhaps no good 
deed goes unpunished.
    In 1993, in response to Congressional requests, the HRRC 
joined in negotiating with representatives of the motion 
picture industry with the goal of drafting a balanced digital 
video recording act or DVRA that would address content owners' 
concerns over new formats and interfaces, but would also 
recognize and preserve the reasonable and customary practices 
of consumers.
    The basic bargain was: In exchange for joint development of 
technologies that could block consumer viewing and recording, 
the movie industry would accept encoding or recording rules 
that would limit the application of the technologies to clearly 
recognized, stated, and defined means of product distribution, 
and no others.
    After the initial draft of the DVRA was rejected by 
representatives of the information technology industry, the 
Copy Protection Technical Working Group or CPTWG developed 
technologies involving digital encryption, which potentially 
can block consumer viewing as well as recording. But we didn't 
worry, because we had a deal assuring us that, despite the use 
of these technologies, reasonable and customary consumer 
practices would be maintained in the digital era, the recording 
rules as Mr. Boucher has described them.
    Congress actually borrowed and adopted those rules in 
1201(k) of the DMCA that applies to analog VCRs. It was 
anticipated that digital technical measures could and would be 
enforced instead for multi-industry license agreements, but it 
is in the context of such licensing agreements that the MPAA 
has now dug in its heels.
    Indeed, the use of encryption has allowed the MPAA to raise 
its objectives so as, in some cases, to endanger lawful 
consumer viewing as well as recording. If a program has been 
protected against recording by means of encryption, the MPAA 
does not want to allow a signal to pass between a settop box 
and a TV unless that interface is encrypted as well.
    So what that means is the more programs the MPAA wants to 
protect from home recording by means of encryption, the greater 
the number of programs that consumers will be unable to view on 
digital monitors or TVs unless they have built-in encryption 
technology.
    If the content owner arranges to cutoff the analog output 
of settop boxes, the consumer whose display device lacks built-
in decryption is simply out of luck, even if he or she has paid 
to view the program. Obviously, Mr. Chairman, this was not what 
we had in mind when we said let's work together on constructive 
and cooperative solutions.
    In disavowing the original digital recording compromise, 
MPAA cites the growth of Internet technology, potential 
expansion of bandwidth and the availability of new types of 
home recorders. But since the time of the 1996 DVRA compromise 
on recording rules, very little has changed that is relative to 
or should disturb the essential contours of the deal.
    Motion picture companies still have the strongest interest 
in protecting their newly released content from copying until 
they have exploited the home video, pay per view, and video on 
demand release windows. The recording rules permit them to do 
this.
    Nothing about the Internet or the emergence of new types of 
recorders with integrated hard drives has changed the 
distribution dynamic nor have consumer recording practices 
changed significantly since the high tech industry agreed to 
develop these technologies.
    In going down this road in 1993, the parties made a fair 
bargain about home recording that ought to be respected and, 
obviously, consumers should also be able to view the programs 
that they pay for.
    We are willing to work with MPAA and other interested 
parties to develop appropriate technologies for interfaces not 
yet protected, provided that the MPAA or its members return to 
acknowledging these principles, as well as reasonable recording 
rules.
    We are, to say the least, skeptical that source encryption 
of free, over-the-air TV broadcasts, which we understand the 
MPAA has been unwilling to rule out, is the answer to any of 
the MPAA members' problems, nor should consumer access to the 
Internet be threatened.
    Finally, Mr. Chairman, let me just say consumers are not 
pirates. Pirates are pirates. In the examples Mr. Valenti 
showed, ``Toy Story II'' which he said is not in theaters at 
this point, unseen episodes of ``Buffy, the Vampire Slayer''--
well, where did they come from?
    They didn't come from consumers downloading anything. They 
obviously came from somebody in the distribution chain who had 
access to the masters, made copies that would never be 
protected or encrypted anyway.
    All a consumer would need to view pirated copies, whether 
they purchased them intentionally or not, is a playback device, 
not a recorder. We assume that the motion picture industry is 
not yet ready to declare all playback devices illegal.
    So in sum, Mr. Chairman, having cooperated with Hollywood 
to develop these measures, we look forward to working with them 
again, but we will not sit back and see the measures we have 
developed turned back against consumers to exercise their 
accustomed rights.
    Thank you, Mr. Chairman. I'll be happy to answer questions.
    [The prepared statement of Gary Klein follows:]
Prepared Statement of Gary Klein, Vice Chairman, Home Recording Rights 
                               Coalition
    Mr. Chairman and Members of the Subcommittee: I am Vice Chairman of 
the Home Recording Rights Coalition (HRRC). HRRC is a coalition of 
consumers, manufacturers, retailers and servicers of consumer 
electronics and computer devices, dedicated to preserving the utility 
of such devices for consumers. On behalf of the HRRC I would like to 
thank the Subcommittee for holding this very important hearing today, 
and for inviting me to testify.
    It is appropriate that the Subcommittee hold this hearing on the 
occasion of the first anniversary--to the day--of the enactment of the 
Digital Millennium Copyright Act (DMCA). It is also worth noting that 
we have just recently passed another anniversary--the 18th anniversary 
of the decision of the U.S. Court of Appeals for the Ninth Circuit, in 
the ``Betamax'' case, that would have outlawed the sale of video 
cassette recorders to consumers. October also marks the 18th 
anniversary of HRRC's formation, in response to that decision. (Next 
year, in addition to the Millennium, will mark the 16th anniversary of 
the Supreme Court decision that overturned the Ninth Circuit's decision 
and thus kept VCRs on the market.)
    At this time of review and reflection, Mr. Chairman, it seems 
appropriate to ask: why would anyone have wanted to ban, as illegal, 
the sale of a device such as a VCR in the first place? To paraphrase 
the answer given by motion picture studios, ``it seemed like a good 
idea at the time.'' Nobody would want to ban this device today, as it 
has been one of the principal foundations of the motion picture 
industry's great success over the past two decades. But every so 
often--indeed, as it did when the DMCA was under consideration only a 
year ago--the call goes out to hobble, if not ban, new electronic 
devices that consumers would find useful. It has been HRRC's task to 
respond to such initiatives, to identify any reasonable objectives that 
may be behind them, and to seek a resolution that is fair to consumers. 
This Subcommittee and Committee were equal to the occasion when the 
DMCA was pending, and we welcome your interest now.
    Today I must report that, only a year after passage of the DMCA, 
there are many issues under discussion that are of concern to us. 
Proposals made by the motion picture industry would imperil not only 
the ability of consumers to use new, digital devices for customary home 
recording; they would also threaten the ability of consumers to view 
programs that have been acquired through clearly lawful means and 
devices. This would be a very serious, though perhaps unintended, 
consequence of positions put forward by movie studios.
    In my testimony today I would like to review the role that multi-
industry technical working groups, as applauded and encouraged by 
Congress and the DMCA, have played in fashioning tools that can produce 
outcomes that are either beneficial or harmful for consumers. In this 
respect I would define as ``beneficial'' any outcome that makes content 
available by technically superior means without constraining consumers' 
reasonable practices and expectations. By ``harmful,'' I mean outcomes 
that constrain such practices, or don't make the content available at 
all.
    I will also discuss the role HRRC and my own industry, the consumer 
electronics industry, have played in actually enabling the potentially 
harmful outcomes over which we are now concerned--and why we feel they 
should be prevented. And I will discuss why it would be unwise, as it 
was when VCRs were introduced, to attempt to constrain all consumers 
because of things some potentially might do.
Home Recording Should Not Be Confused With Commercial Piracy
    The fears that have been expressed over giving consumers the 
ability to acquire and use home video recorders were vastly overstated 
from the start. Home recording has often been confused, intentionally 
or otherwise, with commercial piracy. Home consumers are not pirates, 
and their ordinary and entirely legitimate practices do not have 
consequences that are remotely similar to commercial piracy.
    Pirates go into business in competition with authorized program 
distributors, without making any attempt to acquire the rights to do 
so. They make copies in large batches, using professional equipment 
comparable to that used by the authorized distributor. By contrast, 
consumers generally record off the air, or play back copies that they 
have rented or purchased. Those U.S. consumers who do, wittingly or 
unwittingly, acquire pirated goods need to have only a playback device 
in their home. They don't need a recorder at all. So piracy, and its 
commercial impact, have nothing to do with home recording, or home 
recorders.
    Nevertheless, commercial piracy is often cited as a reason to 
constrain simple home recording. Such arguments were not valid when the 
Betamax case was brought, and are not valid now, in the age of the 
Internet. Unauthorized commercial Internet distribution will occur, and 
will be addressed, whether or not consumers have access to computers, 
home recorders, or the Internet. The movie industry may have valid 
concerns regarding the unlimited transmission over the Internet of 
programming that they intend to make available on a restricted, or 
advertiser-supported basis. But these concerns should be addressed in a 
context of respect for consumers, and their lawful, reasonable, and 
customary conduct to date.
HRRC And The Electronics Industry Have Been Part Of The Multi-Industry 
        Creation Of Powerful Technical Measures That Could Harm 
        Consumers If Agreed Limits On Their Use Are Disavowed By The 
        MPAA
    There is an old saying, Mr. Chairman, that no good deed goes 
unpunished. For most of this decade, HRRC and representatives of the 
electronics industry have worked in good faith with the motion picture 
industry to develop powerful technical measures. Depending on how they 
are implemented, these technologies have the potential to bring home 
recording to an absolute halt. And, since they depend on digital 
encryption, they could shut off all consumer viewing that is not 
specifically authorized. Clearly, in cooperating in the development of 
these technologies, this was not what we had in mind.
    Indeed, it was a condition from the very start of our talks with 
the motion picture industry that clear constraints would be placed on 
the potential use of these powerful technologies. The HRRC and the 
companies from the consumer electronics and computing industries 
insisted from the outset that the tradeoff for giving copyright owners 
such powerful new tools would be the agreement of the studios to 
refrain from misusing such measures. Accordingly, the studios, the HRRC 
and hi-tech companies reached an accord on ``encoding,'' or 
``recording,'' rules. The rules limited the circumstances in which new 
copy protection technologies could be used to undermine consumers' 
expectations and practices in unanticipated, and decidedly adverse, 
ways. Today, however, we are on the verge of seeing these technologies 
deployed without the recording rules--the very consumer protections 
that were and are instrumental to their development.
    I need to explain how we put ourselves in this position. From its 
founding in 1981 through mid-1989, HRRC successfully opposed any 
technical or legal measure that might have limited consumers' abilities 
to record programming in the home. As we entered the digital era, 
however, the issues became more complex, and became subject to 
technological, rather than simply legal, compromise. In 1989, HRRC 
joined the recording industry in proposing what ultimately became the 
Audio Home Recording Act of 1992 (the ``AHRA''). The AHRA involved a 
compromise technological solution preserving the right and ability of 
consumers to make digital copies of digital audio recordings, but not 
to make digital copies of those copies. This Committee played a key 
role in enactment of that legislation.
    In 1993, responding to congressional requests, HRRC and MPAA 
proposed to join in developing a ``Digital Video Recording Act'' 
(``DVRA''), which would address concerns over new formats and 
interfaces, but would recognize and preserve the reasonable and 
customary practices of consumers. The genesis of the deal reflected in 
the DVRA was that, in exchange for the cooperation of consumer 
electronics companies in developing and implementing technologies that 
could block consumer viewing and recording in certain agreed-upon and 
well-defined circumstances, the movie industry would accept 
``encoding,'' or ``recording,'' rules that would appropriately limit 
the application of these technologies to clearly recognized, stated, 
and defined means of product distribution, and no others.
    For three years, HRRC, the consumer electronics industry and the 
MPAA negotiated in good faith to put this bargain into practice. In 
March of 1996 we announced agreement on a draft of the DVRA that would 
have done so. We had a setback when representatives of the information 
technology industry objected to the particular technical means that 
were anticipated and the legislative approaches we had contemplated. 
But then, representatives of all three industries formed the Copy 
Protection Technical Working Group (``CPTWG''), and got back to work 
pursuing the same, agreed goals by other means. The technologies that 
were then developed were even more powerful than the ones that we had 
jointly envisioned with the MPAA for initial deployment. Unlike the 
DVRA, the technologies developed at CPTWG involved digital encryption, 
which potentially can block consumer viewing, as well as recording. 
From our standpoint, however, it had always been intended that while we 
worked collaboratively to develop the tools to address and constrain 
recording practices, such tools would not be put in the hands of 
copyright owners absent a mechanism to enforce the compromise set of 
``recording rules.''
    The CPTWG still meets every month in Burbank, California, and the 
encryption-based technologies that were first proposed there are being 
licensed for use throughout the world. Just as these technologies are 
ready for application, however, the motion picture industry's 
commitment to the other half of the bargain that had been struck--the 
``recording rules''--seems to be fading to black.
    What are these ``recording rules'' that are the subject of so much 
discussion and the present debate? Simply put, they are rules that 
would permit, prohibit, or limit copying of programming, depending on 
consumer expectations and the medium of delivery. The final, detailed 
negotiation of the specific encoding rules took several years. In 
brief, the recording rules allow technical coding to be applied to 
content when it is distributed indicating whether all copying would be 
prohibited (the ``never copy'' state) or a copy could be made, but not 
a copy of the copy (the ``copy one generation permitted'' state). 
Essentially, the rules allow application of never-copy encoding to 
distributions that are relatively close in time to the date of 
theatrical release, but give consumers the increasing ability to record 
as distance from that date passes. The rules provide:

 Never copy encoding can be applied to packaged home video, 
        pay-per-view, and video-on-demand programs.
 Consumers may record from subscription pay-cable channels, but 
        ``no-more-copy'' encoding can then be applied to the consumer 
        copies.
 Consumers would retain an unrestricted right to record from 
        other cable channels or similar services, or from any 
        programming originating as a free terrestrial broadcast.
    Although the DVRA, in which these recording rules were spelled out, 
was never enacted, the Congress recognized, borrowed and adopted these 
rules in Section 1201(k) of the DMCA. However, section 1201(k) applies 
only to certain analog VCRs (primarily VHS format) and imposes a duty 
to respond to widely used analog ``Macrovision'' anti-copy encoding. 
Section 1201(k) does not apply to digital video recording devices. In 
the DMCA, Congress did not mandate the use of any particular digital 
technical measures. It was anticipated that such measures could and 
would be enforced, instead, through multi-industry license agreements 
pertaining to encryption technology.
    For the past year, such encryption technology (e.g., 5C ``Digital 
Transmission Content Protection, or ``DTCP'')--has been available for 
license, as anticipated. The developers of such technology in the 
consumer electronics and information technology industries have 
included, in the license agreement by which content owners would be 
licensed to use DTCP to protect their content, those same ``recording'' 
rules as are set out above. While not a party to those discussions, 
HRRC supports the principle behind the recording rules that are 
incorporated in the license that has been offered. They accurately 
reflect and incorporate the original bargain that led to the 
development of these technologies. We understand that, in the course of 
these license negotiations, the MPAA has now largely renounced any 
commitment to these rules.
The Use of Encryption Technology Puts Home Viewing, As Well As 
        Recording,At Risk
    This situation would be aggravating enough, Mr. Chairman, if our 
problems pertained only to home recording. However, because program 
encryption is now employed in the technologies developed for cable, 
satellite, in-home (such as DTCP), and potentially even terrestrial 
distribution of audiovisual programming, programs distributed digitally 
may also in some instances become unviewable by consumers who have paid 
for the right to view them. Consumers could find themselves in this 
position unless (a) their sets are licensed and equipped to decrypt the 
signal, or (b) they have a set-top box that does the decryption and 
provides the signal in a form useful to their TV set.
    The fundamental problem is this: MPAA is insisting that high 
definition analog outputs from set top boxes be encrypted, or otherwise 
copy protected. (In-home digital encryption such as DTCP applies only 
to the digital outputs of such boxes.) Absent copy protection on high-
definition analog outputs, MPAA has opined that perhaps its member 
companies would not license their encrypted programs to broadcasters, 
cable and other pay television distribution media to be converted to 
such ``unprotected'' outputs. This problem of support for HD analog 
outputs, difficult in its own right, is greatly aggravated by the MPAA 
renouncement of recording rules--because the more programs the MPAA 
wants to protect, from home recording, by means of encryption, the 
greater the number of programs that consumers will be unable to view 
unless they have monitors with built-in decryption technology. If the 
content owner arranges to cut off the analog output of the set-top box 
for such programming (or refuses to distribute at all where such 
outputs are available) the consumer suffers--even if the consumer has 
no intention of recording the program.
    How many monitors today have this sort of decryption capability 
built in? None. You will hear today of the efforts by DTCP to license 
the technology to make such devices available. But with MPAA adhering 
to its rejection of the previously agreed recording rules, 
manufacturers who go ahead and require products to respond to DTCP, 
without insisting on recording rules in the licenses to the studios 
allowing them to implement DTCP encoding, might reasonably believe they 
are dooming their products, and betraying their customers. So a 
stalemate exists as to the very decryption technology that can defeat 
or enable viewing and recording in the digital age.
    What is MPAA's present position as to how many program sources it 
wants its members to be able to encrypt? Our understanding is that the 
answer is, now, all of them. We hope for some movement in this respect. 
It goes without saying, however, that the proposal to encrypt all 
programming, over-the-air, basic cable, along with pay television and 
pay-per-view, is one that has substantial public policy consequences 
because it affects the viewing, and recording, of all television 
programming. In the view of HRRC, accordingly, it raises a set of 
issues that are more than appropriate for public discussion.
    The potential consequences, for consumers, of the MPAA adhering to 
its view that there should be no recording rules and that studios 
should have the freedom to encrypt all programming would be as follows:

 If the MPAA insists on carte blanche ``recording rules,'' even 
        those consumers who have purchased the latest DTV and HDTV 
        products, fully licensed with decryption technology, would not 
        be able to record any program if it has been encrypted and 
        designated by a studio or programming distributor as ``never 
        copy''--even if that program originated as a free, terrestrial 
        TV broadcast or was supplied over ``basic'' cable or over a 
        channel to which the consumer has subscribed.
 If a consumer has purchased a DTV or HDTV receiver not yet 
        licensed for decryption, the consumer would not be able to view 
        any encrypted program, unless transmission by some other means 
        (e.g., component analog HD output from a set-top box) is 
        allowed. However, MPAA states that its companies are not likely 
        to allow transmissions over such ``unprotected'' analog 
        outputs.
    MPAA does recognize the unfairness of denying viewing to consumers 
who have already purchased DTV receivers. There are no readily 
implementable solutions, however, to accommodate such consumers and 
their receivers. The MPAA has not proposed any workable mechanism for 
doing so, even though such problems of viewability would arise directly 
from the exercise of the power that they seek--their ability to encrypt 
all programming.
Position of the HRRC As To ``Recording Rules''
    HRRC has not been a party to the discussions relating to the 
licensing of DTCP, or any other technology, that have been taking place 
over the last year between the promoters of technologies and the MPAA 
and its members. However, we were involved in putting the idea of 
agreed technical approaches, limited by ``recording rules,'' on the 
table, so we feel a responsibility that consumers not be shortchanged 
as a result. The HRRC view on these issues is:

 MPAA cites the growth of Internet technology, and potential 
        expansion in bandwidth, as contributing to its present 
        disavowal of ``recording rules.'' Nevertheless, since the time 
        of the 1996 DVRA compromise, very little has changed that is 
        relevant to or should disturb the basic deal. Motion picture 
        companies could still apply never-copy encoding to the content 
        in the earliest release ``windows''--movies packaged for sale 
        or rental, or distributed through pay-per-view or video-on-
        demand. There has been no evidence at all that the dynamics of 
        movie distribution have changed in this respect. Nor has the 
        emergence of new types of recorders with integrated ``hard 
        drives'' changed this distribution dynamic or its impact on 
        ``recording rules.
 Consumer recording practices, at least with respect to 
        broadcast and cable/satellite-delivered programming, have not 
        changed significantly since the DVRA bargain. Acceding to the 
        studios' demands--that they be given essentially unconstrained 
        flexibility to prohibit certain types of consumer recording--
        has not been shown to be justified economically, or in light of 
        the studios' present and future business practices.
 It is simply unacceptable to make content that consumers have 
        lawfully acquired and paid for unavailable or degraded for 
        viewing because an MPAA member regards the home interface 
        between set-top box and DTV receiver as insufficiently secure. 
        If programs are to be encrypted, a non-degraded, alternate 
        path, protected or not, must be available for consumers who 
        need it for viewing. We are willing to work with MPAA and other 
        interested parties to develop protection for such a path, 
        provided that MPAA or its members return to acknowledging 
        reasonable ``recording rules.''
 We understand that MPAA is concerned about potential 
        redistribution of its programming over the Internet--a practice 
        that, if taken to extremes, could compete with commercial 
        distribution. As has been stated repeatedly, we are willing to 
        work with interested parties in identifying sufficiently 
        targeted approaches to address issues relating to Internet 
        transmission, without penalizing consumers in their daily, 
        reasonable viewing and recording practices, or in their access 
        to the Internet.
 We are, to say the least, skeptical that source encryption of 
        free, over-the-air TV broadcasts is the answer to any of the 
        MPAA's members' problems. Congress, too, may well want to 
        assess whether such source encryption is consistent with the 
        public trusteeship concept for broadcast spectrum, and whether 
        encryption would, in fact, further the public interest.
Technological Advances Should Reward Rather Than Punish Consumers
    As taxpayers and supporters of the free marketplace, consumers have 
funded the very technological advances that now threaten their rights. 
This is not a new problem. For the past decade, the HRRC has judged 
technological policy proposals that potentially could have an impact on 
consumer rights by asking these three questions:

 Will technology advance in some useful way?
 Will consumers receive a fair share in the improvement in 
        technology (or will it all be applied to restraining or 
        charging more for consumer practices)?
 Will the result be greater legal certainty in the marketplace 
        (rather than litigation and attendant uncertainty)?
    Going forward at this critical juncture in the transition to 
digital and broadband technologies, we think this Subcommittee should 
insist on answers to these questions. We pledge to work with the 
Subcommittee and all interested parties in achieving outcomes that 
provide to consumers a fair return on their investment in new 
technologies.
    Thank you again for having invited me to appear today.

    Mr. Tauzin. Thank you very much. I might note, by the way 
that at least 3 or 4 of our members took down the name of that 
Website when Jack Valenti put it up. I'm not sure about 
consumers not being pirates.
    The Chair is now pleased to welcome Mr. Michael Moradzadeh 
of Intel. Mike, I understand you are also going to have a video 
demonstration for us. So maybe we can get everybody ready with 
the lights, and let me introduce Michael Moradzadeh.

                 STATEMENT OF MICHAEL MORADZADEH

    Mr. Moradzadeh. Thank you, Mr. Chairman. With your 
permission, I'd like to show the video at the end of the 
testimony, as it may be somewhat disruptive.
    Mr. Tauzin. You're on.
    Mr. Moradzadeh. Thank you. First, on behalf of Intel and 
the other four companies that form DTLA, I'd like to thank you 
for the opportunity to be heard today.
    Somewhat to my surprise, I find that I am able to say that 
I agreed with every word Jack Valenti said except that I will 
challenge him for the title of flagship industry of the United 
States. However, the real problem is not the commercial video 
pirates that he was pointing out.
    Today we're here to talk about what happens in American 
homes. We're here to report on the status of our efforts to 
protect digital content in homes over home digital connections.
    I have three points that I want to cover today. The first 
is that we have built a system for protecting movies over 
digital connections. The second is that that system enforces 
the same set of rules that Congressman Boucher described and 
that others have alluded to in their testimony. The third is 
that we are slowed up, because Hollywood has changed its mind 
about these rules, and they now want quite a bit more, 
including the ability to block all home recording.
    The system we built is called 5C Digital Transmission 
Content Protection. It arose from a multi-industry effort that 
began in 1996, and the idea there was we were trying to build 
some technology that would keep honest people honest without 
the requirement of mandated--legislatively mandated technology. 
This is, however, a technical measure under the Digital 
Millennium Copyright Act.
    DTCP, as we call it, provides protection for movies by 
encrypting them in one device, say a DVD player or a settop 
box, and then transmitting it over a home network or home 
connection to another device. I see we do have the demo, but 
we'll get to in a second--transmitting it to another device--it 
could be a digital TV or a PC--that decrypts the movie under a 
license.
    The license which was issued to the manufacturer requires 
that the manufacturer have added something to the box as a 
condition of decrypting to be triggered to stop copying. There 
is also a requirement that certain easily copied outputs are 
also controlled or have some anti-copy treatment on them such 
as Macrovision.
    If we could just pause the demo for a moment--they are both 
connected together. Now one of the issues is this. If 
manufacturers are being asked to add something into their 
systems that automatically limits consumers' use of their 
product, they are going to want to know how it's used.
    It's kind of like my car. I'm willing to have an airbag in 
my car, but I'm unwilling to have it there unless I know that 
it will only be triggered in a collision and not in normal 
driving. Similarly, we needed rules about how this ``Do Not 
Copy'' gets triggered.
    The rules we went to, the rules that are reflected in the 
DTCP license that we delivered to the studios in mid-'98, 
reflect the same recording rules that we've been talking about 
here, the recording rules that were found in the DVRA proposed 
in 1996 and that were embodied in Section 1201(k) of the 
Digital Millennium Copyright Act.
    The license itself is dirt cheap. It's offered on far below 
commercial rates, but it does contain limitations, field of use 
limitations on how it can be applied to inhibit consumer 
copying.
    Now that we've built this system, we've licensed it out to 
over 30 companies, we built products, we've received a series 
of last minute requests from the MPAA. The first, which we've 
alluded to, is that the MPAA does not believe that any 
recording rules are appropriate. I'll summarize the other 
points very rapidly.
    A few weeks later they asked that we find some way to keep 
all unprotected content such as TV off the Internet. There is 
some current lack of clarity over whether that applies to free 
TV or encrypted TV. The studios have suggested that all TV be 
encrypted, although again there has been some variation in that 
position.
    Finally, the studios have said that they would like movie 
images on computer monitors to be degraded to 480 lines of 
resolution. Now a PC with one of these new DTV cards in it--
that's the cheapest way a consumer is going to get digital TV 
for a while, and yet to inform consumers that the quality of 
their experience is being intentionally degraded seems like an 
insult to consumers and a very difficult thing to sell.
    The concerns raised some serious issues. Our companies are 
very willing to work with the MPAA to address those, both 
individually and through 5C. Intel, for example, is building a 
new technology to protect the digital link to new monitors.
    Other companies are building other pieces of the solution, 
based on a common understanding of how they would be used. 
However, on this particular issue, on the adoption of this 
protected link, we do need to understand how it will be used 
and reach conclusion on that, because in the meantime consumers 
are waiting for it to happen.
    Thank you, Mr. Chairman.
    Mr. Tauzin. Thank you very much, Mike. Do you want to 
demonstrate now.
    Mr. Moradzadeh. If I may, very quickly. Bill, if you will 
start it up.
    What we have here is a--you will see on the set-up over on 
the table, there's a black consumer electronics device. It, in 
fact, is a digital VCR, but it could be a DVD player. It could 
be a settop box.
    What it's got is a protected 1394 output, protected with 
the 5C DTCP. What's coming out of the--well, it is. What's 
coming out of the system right now is content that is marked 
uncopyable or ``Copy No More.'' What that means is, when it 
goes out digitally, it shouldn't be copied.
    We've connected these two large screen monitors to a PC 
that is also equipped with DTCP 1394 technology. So it is 
decrypting the technology, decrypting the signal, under a 
license that requires that it not be copied or that, for 
situations where one copy is permitted, that one copy be made 
in an uncopyable fashion.
    The other box that, unfortunately, is faced away from you--
but, Bill, if you will just stand up and point to it--is a 
garden variety computer, although both do have Intel inside, 
but it is not equipped with 5C DTCP. When a ``Copy No More'' 
signal is being transmitted over it, all you get is a black 
screen.
    Now right now you're seeing a commercial for a product that 
I've never quite figured out exactly what it is, but this 
commercial is marked ``Copy Free,'' and it is appearing on both 
screens, both the compliant DTCP licensed computer and the 
noncompliant, because copy free content, as far as we know, 
doesn't need protecting. That was certainly the arrangement 
that we had all understood.
    Now you can--can you turn that monitor so it's visible to 
the committee? You'll see on this noncompliant computer monitor 
a black square where the copy protected content would have 
appeared, but it doesn't appear there because it's inaccessible 
to the computer without the license, and it's as simple as 
that.
    We didn't need an Act of Congress to be able to design the 
technology, but we do appreciate the DMCA which provides 
additional legal capability for protecting it in the case of 
collateral attack.
    [The prepared statement of Michael Moradzadeh follows:]
Prepared Statement of Michael Moradzadeh, Intel Corporation, Chairman, 
            Digital Transmission License Administrator, LLC
    Mr. Chairman and Members of the Subcommittee: My name is Michael 
Moradzadeh, I am the Chairman of the Digital Transmission License 
Administrator, also known as DTLA or ``5C.'' I am also Director of 
External Legal Affairs at Intel Corporation. On behalf of Intel and the 
other four companies that developed the 5C Digital Transmission Content 
Protection system, I would like to thank you for this opportunity to 
discuss the efforts we have undertaken over the last several years to 
give consumers and content owners better access to each other through 
digital technology.
    The 5C DTLA was formed by five companies: Intel, Hitachi, Ltd., 
Matsushita Electric Industrial Co., Ltd., Sony Corporation, and Toshiba 
Corporation. This led to the ``5C'' nickname. Our mission in creating 
DTLA was to combine the best our companies had to offer to develop a 
system for protecting content over home digital connections. Today, I'd 
like to talk about 5C DTLA's protection system and its progress in 
bringing entertainment content more firmly into the digital world.
    Many of today's comments may seem to resist suggestions made in the 
name of copyright protection, so I'd first like to point out that my 
own company, Intel, is a strong supporter of copyright protection. We 
sell nearly thirty billion dollars worth of products that rely at least 
in part on legal protection for the copyrighted works embodied in them. 
We maintain an active antipiracy program and have successfully 
litigated copyright infringement cases even on our core microprocessor 
products.
    Today's discussion, though, is not about whether copyrights should 
protected, but how and when.
  5c dtcp is a tool to deliver consumer access; fear of the future is 
                              blocking it
    We're here, in part, because of an initial multi-industry consensus 
about how and when to protect digital movies from unauthorized copying. 
That consensus was reflected in the Digital Video Recording Act 
proposal offered up by the MPAA and consumer electronics industry in 
1996, it is reflected in terms under which we offered our DTCP 
technology at deeply sub-commercial rates, and it is reflected in 
section 1201(k) of the Digital Millennium Copyright Act.
    To implement that consensus, which carefully balanced content owner 
wishes and existing consumer recording practices, we built a technology 
to copy-protect connections between DVD players, PC's, digital TV's, 
and even cable and satellite settop boxes. We undertook our work at the 
urging of the entertainment industry, and devoted significant technical 
resources to getting it done. However, having delivered exactly what we 
promised, and having received technical approvals across the board, we 
now find that the game has changed.
    Instead of supporting the DTCP system for use as originally 
planned, the major motion picture companies are now seeking to create 
significant new policies and burdens at the expense of consumers and 
manufacturers as a condition of accepting this protective technology.
    I'm speaking to you today because this positioning may have impact 
on the adoption of digital television and the deployment of next-
generation digital cable devices. More importantly, it may take away 
from consumers their ability to access the new digital content in a 
usable form.
    I would also like to note that the concerns raised here are largely 
independent of any particular technology or proposal. Whether we are 
talking about DTCP, a cable specification, or some other system 
entirely, today's issues relate to the proper balance between the 
interests of entertainment distributors, consumers, and the technology 
industries.
                             what we built
    This development arose from some of the most remarkable cooperation 
among the computer, consumer electronics and entertainment industry I 
have ever heard of. Following the proposal of the ``Digital Video 
Recording Act of 1996,'' and its rejection for mandating anticopy 
circuitry that my industry found would be both burdensome and 
ineffective, the three industries formed a technical working group to 
explore technical solutions to protect entertainment content.
    Our goal was to develop technical protections adequate to ``keep 
honest people honest.''
    One outgrowth of that working group was the definition by all three 
industries and subsequent development of Digital Transmission Content 
Protection or ``DTCP'' to allow a protected connection between digital 
devices. It encrypts video being sent over digital connections and then 
decrypts them at the receiving end for display.
    The decryption technology is available to manufacturers under a 
license that requires the receiving device to obey ``do not copy'' 
instructions included in the encrypted signal. This license also 
requires manufacturers to provide protections on certain outputs, such 
as NTSC video, to prevent VCR copying.
System Description
    Let's start with a box which has some digital copy protected 
content in it. It could be a DVD player, PC or Settop Box. The content 
in it is encoded with a ``do not copy'' state.
    Instead of using the analog connection on the back of the box, we 
want to use the digital connector, in this case IEEE 1394, also 
provided by some companies under the terms ``iLink'' or ``Firewire.'' 
This connector lets us use a digital TV or PC-based system to enjoy our 
movie with digital perfection.
    License terms for certain DVD players and other digital devices 
call for digital connectors like these to have copy protection on them. 
Without such protection being present, a DVD player, for example, would 
not even let the movie go out over the wire. So the sender will have 5C 
DTCP programming or circuitry to encrypt the movie before sending it 
out. The receiver will also have a 1394 connector and, hopefully, 5C 
DTCP as well.
    When the two devices are turned on and connected to each other, 
they recognize each other over the 1394 network. Then the 5C DTCP 
content protection system begins its three fundamental operations:
    The first step is authentication. Using well-known and thoroughly 
tested cryptographic techniques, the sending device asks the receiving 
device to demonstrate whether it also is equipped with 5C DTCP by 
responding with an authentic code, known as a ``certificate.'' If the 
device fails to respond with the certificate, then the 5C DTCP system 
will not transmit protected data to that device.
    If the device produces an authentic certificate, the sending device 
then checks the certificate to determine whether that certificate comes 
from a known hacked device. If the certificate is found on a list of 
certificates that have been revoked by the DTLA, then the 5C DTCP 
system will not transmit protected data to that device.
    If the device passes these two tests, then the content will be 
encrypted and transmitted along with an encrypted key to the receiving 
device. The 5C DTCP selected an algorithm already in commercial use for 
protected satellite television transmissions, and which can be built 
into CE devices and computers, in hardware or software, without 
significant expense to consumers.
    Over at the receiving device end, this encrypted content is coming 
in and gets sent to an internal 5C DTCP module. It uses the derived key 
and the algorithm to decrypt the content inside the system. The content 
is protected because the receiving device or software was made 
according to a license that specifies how to keep the content safe, 
including requirements concerning the making of permitted copies and 
only using secure or protected outputs.
    Today, this technology is only being provided for video on IEEE 
1394. Efforts are underway to apply this same technology to Universal 
Serial Bus and other connectors, and to adapt it for the much more 
complex environment of audio content.
                            what's the cost
    Technical costs of implementation are designed to be minimal. 
License fees are far below commercial rates for technology licenses, 
and essentially cover costs of administration. Total cost to a licensee 
in 1999 is $18,000, plus a nickel per device for the certificates that 
we have to generate. Our contract calls for us to reduce fees as costs 
go down, which we expect to happen as volumes increase. Other than 
asking movie owners to contribute the same $18,000 annual fee as billed 
to manufacturers, and to pay for the costs of any device revocation 
they request, there is no charge to the content industry. This is one 
of the least expensive licensed technologies available.
    We made the costs so low because the member companies of DTLA 
believe that both they and the market are best served by imposing as 
low a barrier as possible to technology which is intended merely to 
provide interoperability. Further, given that this technology has the 
effect of removing capabilities from a device that could otherwise make 
recordings, we felt it somewhat mean-spirited to charge any amount not 
commensurate with our costs.
    Fees to studios are similarly just nominal. This is not a typical 
commercial technology transaction, but instead a technical 
implementation to enforce a balance of rights; studios are able--and 
encouraged--to benefit from this technology without any kind of per-
title fee. We do ask the studios to bear any costs relating to putting 
a particular certificate on the ``hacked'' list, since they asked for 
us to develop and implement this certificate revocation capability. 
Moreover, the license imposes recording rules defining when home 
recording of broadcast signals can be limited or freely permitted, so 
as to prevent a content owner from arbitrarily shutting off consumer 
copying where custom and consensus--the same consensus described 
above--have permitted it.
    We have included other parts of the consensus, including a 
contract-based right of content owners to sue for non-compliant 
implementations of licensed devices. We have also designed the 
technology to fall within the scope of sections 1201(a) and (b) of the 
Digital Millennium Copyright Act, giving aggrieved studios a second 
route of action to protect their interests.
             barriers to adoption: fear--uncertainty--doubt
    Many independent companies and organizations have subjected us to 
technical review. 5C DTCP has been incorporated in standards by the 
IEEE, Society of Cable and Telecommunications Engineers, Cable Labs and 
the International Telecommunications Union. The Motion Picture 
Association of America, Cable Labs, the National Association of 
Broadcasters and the National Cable Television Association have 
publicly stated to the Federal Communications Commission that they 
believe 5C DTCP is a robust and mature technology. It is ready for 
implementation in consumer digital products.
    Yet, even with the progress we have made to date, we have yet to 
see broad implementation of the system. One reason is that, despite 
technical support, and the encouragement they have provided us 
privately, motion picture studios have yet to provide any kind of 
general public support or adoption of this technology. Without strong 
content owner support for a system, manufacturers adopt a ``wait and 
see'' attitude in the face of uncertainty. Meanwhile, more digital 
products are made and sold in a cycle that eventually can only be 
described by reference to horses and barn doors.
    Movie studio reluctance to commit support for the use of 5C DTCP 
has been surprising and disappointing to us. In particular, this 
reluctance seems to be based not on technology grounds, but on a wish 
to secure policy concessions and engineering commitments that go well 
beyond the capability of DTLA or its member companies to provide.
    We released draft license terms in June of 1998, and we began 
licensing product manufacture in September of 1998, once we got our 
export approval. After about a year of near silence from the studios, 
having only received vague comments there were concerns with the 
``recording rules'' and that there were other ``drafting issues'' we 
began to get a series of formal comments.
    Unfortunately, the ``issues'' have turned out to be a series of 
requests from June to October directed to our five companies that not 
only undoes the basic framework under which we have been working, but 
goes well beyond what is in our capability to deliver. These include:

 A demand to eliminate all recording rules, so that a studio 
        would have the power and the right to block all consumer 
        copying (including time-shifting) at will,
 A requirement that 5C DTCP encrypt all programming, including 
        over-the-air broadcast television, so as to prevent programs 
        from being sent over the Internet, and
 A requirement that computer monitors degrade their picture 
        quality when displaying high-definition digital movies.
The studio representatives have also informed us that they still have 
more drafting issues.
Blocking Copying: Recording Rules
    In May of 1999, MPAA representatives finally informed the DTLA that 
they considered themselves ``no longer bound'' by the long-standing 
framework for recording rules because ``we aren't getting everything we 
asked for in the DVRA.'' That is, movie studios now wanted the 
unlimited ability to use our technology to block copying of broadcasts, 
and even to block access to content through devices they deemed 
untrustworthy.
    These recording rules, sometimes called ``encoding rules,'' had had 
their genesis in the original compromised legislative proposal between 
CE and MPAA to protect digital content: the DVRA. This proposal had 
defined several states which devices would be legally required to 
honor:

 Copy Never, for which all copying is prohibited.
 Copy Once, allows one generation of copies, which are marked 
        ``Copy No More.''
 Copy Freely, for which no technical protection is used.
    Arbitrarily applied, this arrangement could have made make many 
products with record capability useless if broadcasters turned on the 
``Copy Never'' signal all the time. So the proposed legislation had 
included limits--recording rules--on the power of the movie industry to 
block customary consumer recording of particular types of content. As 
one participant in the DVRA process put it: ``If I'm going to let you 
put a knife to my throat, I want to be sure I know how you're going to 
use it.''
    It was agreed that only pay-per-view, video on demand, and packaged 
media (DVD or tapes) could be encoded with the supremely restrictive 
``copy never'' bits, while premium channels, like HBO or Showtime, 
could be encoded as ``copy once.'' To be consistent with existing 
consumer practices, free and basic programming, like over-the-air 
broadcasts and basic or extended basic cable, would not carry any 
technical anticopy signals.
    While this legislative proposal had met opposition on technical 
grounds and was dropped in 1996, our voluntary private cooperation to 
deliver a similar result in DVD and elsewhere is based on this same 
framework. In fact, this precise tradeoff between required recognition 
of anticopy signals and limits on their use is found in Section 1201(k) 
of the Digital Millennium Copyright Act.
    To learn in 1999 that the studios intended that the technology 
we've been building for four years was there to put themselves in 
control of all entertainment in the home is quite startling.
    The studios are now, in effect, asking us to create an ``off'' 
switch in our customers' new digital devices that, without any notice 
or discussion, can block copying, time-shifting, or even access to 
entertainment, education, and news programming transmitted. If the 
studios are ``no longer bound'' by the framework we have been 
supporting, will they also require the ability to use watermarks, 
invisible signals in digital and analog video and audio, to interfere 
with traditional consumer practices as well?
    One proposal that the studios have floated to help make it easier 
to block consumer copying and to attempt to regulate the Internet is 
that all broadcasting should be encrypted, even free, over-the-air 
television, so that better control can be exerted over the receivers in 
American homes.
Internet
    The DTCP license terms are designed to inhibit Internet 
transmission of protected content. However, the studios have now asked 
that 5C DTCP now protect unprotected content. The studios have 
concluded that digital retransmission of even their broadcast 
programming over the Internet represents a threat to their businesses, 
or at least the businesses of their broadcast affiliates. Their concern 
is that someone in, say, New Jersey, create a video stream for the 
Internet and send it to a friend in California, depriving someone of a 
legitimate business opportunity.
    As a group, individually, and as members of our respective 
industries, we acknowledge the concerns of these rightsholders. The 
concerns, while directed to a future several years out at best, are 
neither trivial nor frivolous. We don't think that 5C DTCP necessarily 
holds the answer, however. Because we built an anti-copy system, its 
applicability to blocking the transmission of copiable, unprotected 
materials is speculative at best. Nonetheless, we have offered, and 
restate our offer to engage on this issue. Our industries have worked 
to resolve prior issues, and we can address this one as well, but 5C 
cannot solve this problem alone or dictate a result to the world.
Degrading Screen Resolution
    Another new issue is a proposal, first made only a few months ago, 
that higher definition video be intentionally degraded in a computer or 
in any other device having better than standard definition connectors. 
The goal of 5C DTCP, and the CPTWG project that led to its development, 
was to protect signals transmitted over digital buses and to support 
open interoperability (some call it convergence) between CE and PC 
devices. MPAA companies now insist that until a new system is developed 
to protect analog signals between the PC box and the computer monitor, 
that the video signal should be ``dumbed down'' to a maximum of 640 X 
480 resolution. In other words, the display would either be less than 
full quality or smaller than full screen size.
    The 5C have told the MPAA that we are willing to work toward 
addressing their concerns. Indeed, acting independently, Intel has made 
substantial progress toward a Digital Video Interface specification 
with content protection that would facilitate protection for future 
digital monitors. However, higher rates of resolution have been the 
norm for even low-end computers many years, and there is substantial, 
well founded resistance in the computer industry to making this change. 
Consumers have a right to expect that more expensive DVD drives and 
digital TV tuner cards will produce high quality signals that reflect 
the monitor's full capabilities. It is unfair that consumers who make 
the investments in such new technologies should be denied the best 
possible viewing experience.
                            keep on working
    Despite these new demands, and rumors of even more startling ones 
being considered by the studio group, we continue to explore options 
for resolution. In particular, on several of the issues which are 
clearly beyond the 5C's power to mandate, such as screen resolution or 
Internet retransmission, we have proposed the formation of a small, 
focused working group composed of known effective participants from the 
affected industries to see whether creative solutions may be developed. 
It is not even clear that 5C need play a role.
    On other issues, we remain committed to seek input from our adopter 
customers and to work with the studios to find a common ground of 
trust, shared interest, and service of the consumers' needs.
 vigilance and oversight are required to assure a fair and successful 
                                outcome
    The Digital Millennium Copyright Act wisely declined to attempt to 
legislate into place any particular scheme for protecting copyrighted 
works in the new digital space. Instead, the Act penalizes those who 
would deliberately destroy technological measures that effectively 
protect these works. This formulation fosters innovative solutions to 
rapidly-changing technical challenges, and is applicable to not one, 
but many approaches.
    We are relying on the DMCA to add security and legal protection to 
our system, with the ultimate goal of seeing it be used to provide 
ubiquitous access to high-value content. And while we mostly want to be 
left free to develop our solutions for packaged media, broadcast, cable 
and Internet, we are acutely aware of the importance of the public 
interest.
    This interest exists not just as a market factor but as a matter of 
policy. If we ultimately reach a result that deprives consumers of 
access to the country's communications infrastructure, or that places 
control of products in the home entirely in the hands of seven movie 
distributors, or even that forces consumers to pay a significant 
technology tax just for the privilege of protecting one industry 
segment's profits, then we think we should be hearing from you.
    Keeping an eye on us will help keep us honest people honest.
    Thank you for your attention today.

    Mr. Tauzin. Thank you very much, sir.
    Mr. Moradzadeh. Thank you.
    Mr. Tauzin. Our final witness, who will be Mr. Rondal J. 
Moore, Vice President of Business and Legal Affairs of 
Rioport.com, Incorporated.
    Mr. Moore.

                  STATEMENT OF RONDAL J. MOORE

    Mr. Moore. Thank you, Mr. Chairman. On behalf of 
Rioport.com, thank you for inviting me to testify today.
    Rioport, together with Diamond Multimedia, designs and 
markets what some have called the Twenty-first Century Walkman, 
the Rio handheld music player, and a digital download platform 
for obtaining and organizing electronic music files.
    With the Rio you can record music, news programs, audio 
books, and take them with you wherever you go. Using the Rio 
audio manager software application on a PC, you can organize 
music in many different ways, freeing yourself from the 
inconvenience of having to skip music on disks or tape that you 
don't really want to hear, sort of the A and B side problem.
    Rio audio manager also links to the Rioport.com Website in 
a way that makes downloading simple and convenient for the 
average consumer. Rioport.com, in conjunction with partners 
like Emusic offers downloads of thousands of audio tracks.
    Emerging bands offer free downloads to create awareness 
with new audience as they lack the marketing muscle of the 
major record labels, and established bands use free downloads 
to promote sales of new CDs or sales of concert tickets or 
other merchandise.
    Increasingly, consumers are being offered music for sale at 
99 cents per song or $9 for the equivalent of a CD. The Rio 
arrived on the recording industry's doorstep about a year ago, 
almost coincident with the passage of the DMCA.
    As Mr. Klein noted, the MPAA would like to make playback 
devices illegal. The recording industry has already gone down 
that path, and we felt that we were offering a new important 
technology from which all could benefit. The recording industry 
saw us as a danger to their entrenched distribution system.
    In their zeal to attack the Rio, the RIAA claimed that the 
Rio had only one purpose, to support Internet piracy, a theme 
that we've heard both the recording industry harp on about a 
year ago and the MPAA here we have heard today oppose 
vociferously.
    Nothing could have been farther from the truth. Today I 
think that the RIAA is actually pleased that they lost the 
case. From that case, the secure digital music initiative 
sprang into open forum. That was joined by, as Ms. Rosen noted, 
120 different companies. Before that it was a closed initiative 
making little progress.
    One short year later portable devices like the innovative 
Rio are made by companies like Thompson, RCA and Sony, and 
these and more than 100 other companies are cooperating to 
develop a secure system for distributing music via the 
Internet.
    SDMI can deliver that secure system for music distribution, 
but I'm concerned that the ultimate success of this system 
depends not on its design but on the willingness of the music 
industry's five major labels who dominate the current 
distribution channels to release a significant number of tracks 
for online distribution.
    If this market is to reach its full potential, in addition 
to access to music, several legal issues must be resolved. 
First, this subcommittee is already grappling with issues such 
as Internet taxation, digital signatures, encryption and 
privacy. All of these issues are important to every company 
that is engaged in e-commerce.
    Second, deployment of broadband Internet access must be 
extended to all Americans, and barriers to providing such 
access need to be removed. Now this initiative is as important 
to today's economy as rural electrification was earlier this 
century.
    Third, current copyright principles which are based on 
physical phono records need to be updated to reflect 
distribution of electronic files over the Internet. For 
instance, Section 110(7) of the Copyright Act exempts music 
played in stores from the payment of royalties due to the 
promotional nature of the use. Internet retailers need the 
same--have the same need to provide consumers to preview music, 
and the Act should be clarified to explicitly recognize that 
need.
    Similarly, the law should clearly distinguish between 
digital downloads of music that transfer a copy to the end 
user, which is similar to selling a CD from a regular store, 
from the streaming webcasts which are public performances 
similar to radio broadcasts.
    Currently, performing rights organizations in the recording 
industry try and characterize digital downloads as being both a 
public performance and a mechanical license, and they ask the 
digital download companies to pay the royalties twice. A music 
for sale business model should not be burdened with more 
royalty payments merely because the sale is electronic and not 
physical.
    Finally, as we've heard from others, the global reach of 
the Internet offers tremendous opportunities to provide global 
distribution of music in an extremely cost efficient manner.
    Cost efficiency and global reach are the major focuses of 
the Internet, and that should be promoted with laws that 
harmonize the copyright collection procedures across boundaries 
and that remove barriers from digital files moving across the 
Internet.
    I appreciate the subcommittee's interest, and I'm ready to 
answer questions, as you may have. Thank you.
    [The prepared statement of Rondal J. Moore follows:]
  Prepared Statement of Rondal J. Moore, Vice President, Business and 
                    Legal Affairs, RioPort.com, Inc.
    Mr. Chairman and Members of the Subcommittee: My name is Ron Moore. 
I am Vice President for Business and Legal Affairs for RioPort.com, 
Inc. On behalf of my company, thank you for inviting me to testify here 
today. This hearing, like the Subcommittee's efforts last year in re-
calibrating the Digital Millennium Copyright Act, recognizes two 
competing interests that, in truth, should be shared, unifying goals: 
the promotion of digital media technology that will drive consumer 
acceptance of electronic commerce; and the need for copyright policies 
that balance the interests of content providers, technology companies 
and, above all, consumers.
    In my testimony this morning, I would like first to tell you about 
RioPort.com and the online music market, then to discuss the legal 
challenges that threaten the development of electronic music sales.
           rioport.com and the rio 500--the revolution's here
    RioPort.com, a new company created recently from the computer 
peripheral manufacturer Diamond Multimedia Systems, designs and sells a 
digital audio delivery platform that includes ``the Walkman of the 
future''--the Rio 500 handheld personal music player. As small as a 
pager, and weighing less than three ounces, the Rio plays one to two 
hours of music recorded digitally from a personal computer. The Rio has 
no moving parts. Instead of tapes or discs, the Rio stores music on a 
small memory card, similar to the cards used to store photographs in 
digital cameras.
    The Rio records audio files from a personal computer, primarily 
music and spoken word recordings such as news, audio books or radio 
programs. So, for example, a jogger can download from the RioPort.com 
website music from thousands of artists who give away or sell their 
music over the Internet, or he can record favorite tunes from his CD 
collection, and take high fidelity music on the road. Or, a commuter 
can download news programs or audio books to listen to on her morning 
commute. The Rio lets you set and reset the order of songs for 
playback. The Rio automatically can set up to 16 bookmarks, so you can 
instantly return to segments in a news program that you would like to 
listen to again, or pick up in an audio book precisely where you left 
off. There are no worries about CDs skipping or changing tapes. A 
single AA battery provides 13 hours of power. Quite simply, the Rio and 
other handheld MP3 players provide consumers with a compact and 
convenient personalized sound experience wherever they go.
    Of course, Rio users also need music and spoken word programs for 
their players. The Rio and Rio Audio Manager software application 
provide an easy-to-use, fully-integrated platform from content provider 
through handheld player to provide consumers a powerful new set of 
tools for enjoying audio. RioPort.com partners with record and Internet 
audio companies to provide quality music and spoken audio for 
downloading by all Internet users. For example, in the music category, 
we offer free downloads from new releases by rock artists such as the 
Eurythmics and Stone Temple Pilots. Our spoken word offerings include 
classic comedy routines from Bob and Ray, health programs and, in time 
for Halloween, readings from Edgar Allen Poe, Anne Rice, Washington 
Irving's ``Legend of Sleepy Hollow,'' and a radio adaptation of Mary 
Shelley's ``Frankenstein.''
    Most of these audio tracks are available for free, as a way for 
established artists to generate interest in a new CD or concert tour, 
for new artists to gain exposure that potentially will lead them to a 
record contract, or for publishers to promote sales of books and audio 
books. Increasingly, our partners are selling tracks that we download 
to consumers, generally for 99 cents per song. Interestingly, consumers 
are not just buying new rock or rap acts, as you might expect. They are 
purchasing classic recordings from many of our greatest artists, such 
as Marian Anderson, Billie Holiday and Bob Wills and his Texas 
Playboys. Right now, sales are modest. But considering that the first 
portable MP3 player--the Rio 300--was released in the United States 
less than one year ago, this is truly a remarkable start for an 
exciting new industry.
                     what's mp3 got to do with it?
    All this was made possible because of a technology known as MP3, 
developed as a digital audio format for movies on CD under the aegis of 
the Motion Picture Experts Group (MPEG). Until recently, downloading 
music from the Internet was an excruciating process, requiring the 
skill of an alchemist and the patience of a monk. A typical song in 
full CD audio format could comprise a huge file of 40 megabytes or 
more. To download that 40 megabytes over a typical 28k or 56k modem 
connection took more than an hour. Any transmission errors would result 
in a 40 megabytes of useless bits, an expensive and wasted Internet 
session, and a very frustrated consumer who would debate whether to 
start again or just throw the computer out the window.
    MP3 compresses the size of the original music file by about a 
factor of 11. That 40 megabyte song file is only around 3 megabytes in 
MP3. Suddenly, that hour-long 56k modem download takes only 5 minutes. 
Over a broadband connection, such as a cable modem or DSL line, a song 
can be downloaded in less than a minute. And the sonic quality of MP3 
compares favorably to the experience from a full CD, particularly since 
MP3 music most often is played through headphones on the go or through 
computer speakers.
    Although the MP3 format has been around for a decade, about two 
years ago, the Internet suddenly exploded with MP3 files. At the 
vanguard of the MP3 revolution stood tech-savvy music fans. Using a 
software process known as ``ripping,'' fans transferred music from 
their CD collection into MP3 files on their computers and laptops, to 
listen to music at work or on the road. Not surprisingly, these files 
soon were being posted onto the Internet and other computer networks 
where they could be shared with music fans around the world. MP3 files 
and free player software spread throughout the Internet and the 
educational community.
    The almost viral proliferation of MP3 understandably raised 
concerns in the established record industry, as brand new CDs would be 
uploaded to the Internet the day they hit the stores ``sometimes even 
before they hit the stores. But MP3 also proved the role of the 
Internet as a great technological equalizer. Independent record labels 
and undiscovered musicians immediately embraced MP3 as an invaluable 
tool to market their music without incurring the costs of pressing, 
distributing and marketing compact discs. Soon, major recording artists 
such as Alanis Morissette, the Beastie Boys and Tom Petty began 
offering free MP3 downloads of songs from their new albums. Even 
popular artists, such as The Offspring, whose works were widely pirated 
on the Internet began to believe that the MP3 ``threat'' was overblown, 
inasmuch as they still were selling millions of CDs. Now, it is common 
practice for artists to release promotional MP3s to generate buzz for 
their new albums. Alternative artists, such as the ground-breaking rap 
group Public Enemy and the prolific rock duo They Might Be Giants, are 
selling their new recordings only over the Internet at 99 cents per 
song and $8.99 for the entire collection.
    Today, tens of thousands of bands in every genre post their music 
to the Internet. Some claim that the direct relationship between artist 
and consumer created by MP3 and the Internet someday may eliminate the 
role of the record label. Others contend that the record label will 
become even more important, but that the days of the brick-and-mortar 
record store are numbered. What is undeniable is the powerful influence 
MP3 is exerting on the music industry and the Internet. Although we 
have yet to see a major artist broken through MP3, I am confident that 
it is only a matter of time until popular MP3-based artists like Red 
Delicious or Trance [] Control find their way into the traditional 
offline music market.
    riaa v. diamond multimedia systems: the war is over; we all won
    The value of MP3 initially was, shall we say, underappreciated by 
major record labels, which focused on the potential for piracy rather 
than on the commercial opportunity. It was not so long ago when, 
unfortunately, we were at war with the RIAA. In September 1998, we 
announced the introduction of the first-generation Rio handheld MP3 
player, scheduled for November 1998. In October, 1998, the RIAA filed 
suit against us in United States District Court, contending that the 
Rio violated the Audio Home Recording Act of 1992 (``AHRA'') because it 
did not incorporate the SCMS serial copy protection system. Now, given 
the central role of the House Commerce Committee in crafting the Audio 
Home Recording Act, you may recall that the AHRA applies only to 
certain types of digital audio recording devices, and that it 
specifically exempts multifunction personal computers. To us, it seemed 
clear from the defined terms in the AHRA that a device that records 
music files only from exempt personal computers would also be exempt. 
Moreover, since the Rio only has a headphone jack and no other output, 
you can only listen to a Rio and cannot copy music from it. Thus, a Rio 
with SCMS would behave no differently than a Rio without it.
    The district court judge agreed with us and denied RIAA's request 
for a preliminary injunction against bringing the Rio to market. On 
June 15, 1999, the U.S. Court of Appeals for the Ninth Circuit 
affirmed. The Ninth Circuit held that the Rio was not subject to the 
Audio Home Recording Act, noting that the Rio without SCMS inherently 
permits less recording than a digital audio recording device with SCMS. 
Moreover, the Court confirmed that, to the extent that the Rio was 
intended to permit consumers to make their existing music collections 
more portable--what the Ninth Circuit termed ``space-shifting''--using 
the Rio for such paradigmatic non-commercial personal use is entirely 
consistent with the purposes of the Audio Home Recording Act.
    I think the RIAA is as pleased as we are that we won that 
litigation, because ultimately we always shared the same goal: Building 
a legitimate market for music over the Internet. Even as the lawsuit 
was being prosecuted, the legal standoff between the recording and 
Internet industries rapidly gave way to a collaborative effort to 
create standards to secure the electronically-delivered recordings 
against unauthorized redistribution. Diamond Multimedia and RioPort.com 
were among the earliest members of this effort, known as the Secure 
Digital Music Initiative (``SDMI'').
   the challenges ahead: broadband deployment, parity of rights with 
            offline retail, and enabling international sales
    This has been an exhilarating and exhausting year for RioPort.com, 
but we recognize that the market for recorded music is still in its 
embryonic stages. Success on the Internet today does not guarantee 
long-term survival. Many challenges lie ahead, with many roadblocks in 
our path.
    Among the obstacles to a robust electronic commercial marketplace 
are legal issues that revisit debates resolved years ago for the 
physical commercial world. I know that this Subcommittee and the 
Commerce Committee have worked to address many of the legal problems 
that face all Internet companies, including RioPort.com, such as 
domestic taxation of Internet sales, digital signatures, encryption and 
privacy. Another critical issue for building e-commerce in music is the 
need for widespread deployment of broadband technology. Purchasing 
music by downloading will draw consumers online only when it is fast 
and convenient. Broadband Internet connections permit delivery of the 
equivalent of an entire compact disc within minutes. That degree of 
immediacy will have a tremendously beneficial impact on the consumer as 
well as the recording and online industries. RioPort.com therefore also 
appreciates the efforts of this Subcommittee to grapple with the 
complex public policy issues implicated by broadband, and to craft 
legislation to stimulate competition for broadband delivery.
    Additional issues particular to sales of music over the Internet 
must be sorted out in the years to come. First, will SDMI succeed and, 
if so, what impact will SDMI have on the market for sales of recorded 
music? In many respects, SDMI is merely accelerating a process that 
would likely have occurred de facto among a few market leaders, but 
SDMI is accomplishing this in a more open forum. RioPort.com believes 
that the market for recorded music will not reach its full potential 
unless reasonable and workable rights management tools are available to 
recording companies. However, these tools must balance flexibility for 
the consumer with protections for recording companies. Customers 
reasonably should expect that music they purchase electronically will 
be as useful and valuable as music they purchase today in physical 
stores. Despite numerous speedbumps and potholes, and the clash of 
cultures among the participants, SDMI appears still to be on the road 
toward this goal. I remain optimistic that the collective determination 
and energy of the recording, consumer electronics, computer and 
Internet industries will bring SDMI to a rapid and mutually acceptable 
conclusion.
    Second, if and when SDMI does produce workable standards, will the 
record companies make good on their anticipated commitment to release 
works in electronic form? Today, the major record companies are using 
the electronic marketplace only for promotional purposes. They release 
a few promotional tracks for electronic downloading; or provide CD 
purchasers with a website address and a key to download a bonus track. 
This experimentation is encouraging, and we hope the record labels' 
experience will instill in them confidence in the Internet marketplace, 
so that it will only be a matter of time until the true digital record 
store carrying a vast catalog of virtually all recorded music becomes a 
reality. We also hope that the record companies will see the wisdom of 
granting distribution rights to those entrepreneurs who are building 
today's business on the Internet, and that they will not merely retain 
those rights for their own websites. Indeed, only the promise of broad 
access to recorded music justifies the current investment of computer 
and Internet companies into e-commerce and SDMI. If that access never 
materializes, the online music market may suffer the same fate.
    Third, if we are to make digital downloading a successful business, 
we have to resolve the thorny issues of digital music rights. Some of 
these issues should not be tough to resolve, in that they require us 
only to extend principles from the physical world into the online 
space. For example:

 Exemption for Music Performed in Online Retail Establishments. 
        There already exists in the Copyright Act an exemption from 
        payment of music rights fees for music performed publicly in 
        record stores. 17 U.S.C. Sec. 110(7). This exemption, which has 
        been part of our copyright law since 1976, recognizes at law 
        the rather commonsense notion that record stores should not 
        have to pay copyright owners for promoting the sales of their 
        copyrighted sound recordings. Over the last few years, Congress 
        has attempted to extend copyright rights into the digital 
        environment. We believe that it also makes sense to extend the 
        limitations and exemptions in the Copyright Act so as to 
        promote electronic commerce. To maintain parity between ``brick 
        and mortar'' and online sales establishments, the privilege 
        that applies to today's physical record stores should extend 
        into the online environment, and clearly apply to digital 
        performances of both the underlying musical works and the sound 
        recordings which embody them.
 No Double-Dipping against Distributions by Transmission. The 
        law currently draws sharp lines between the distribution of 
        physical copies of sound recordings and the public performance 
        of music. As noted in the September 1995 ``White Paper'' Report 
        of the Working Group on Intellectual Property Rights of the 
        Information Infrastructure Task Force, ``[w]hen a copy of a 
        work is transmitted over wires, fiber optics, satellite signals 
        or other modes in digital form, so that it may be captured in a 
        user's computer, without the capability of simultaneous 
        `rendering' or `showing,' it has rather clearly not been 
        performed.'' Some want to blur or ignore this distinction by 
        claiming that selling sound recordings by digital transmission 
        is a public performance as well as a sale and, so, that e-
        commerce companies should pay music publishers twice. Such 
        double-dipping is unacceptable. E-commerce will fail if it is 
        burdened with duplicative payments not required of physical 
        retailers.
    The far more challenging issues pertain to international rights. 
The Internet as a global marketplace offers unprecedented opportunity 
for the music and recording industries. Manufacturing, marketing, 
inventory and shipping costs will no longer stifle companies' ability 
to sell inexpensively and immediately overseas. Yet there is no greater 
threat to the potential of this market than the existing trade barriers 
erected over music rights. Record companies traditionally have parceled 
out markets to international affiliates or other record companies. Some 
international copyright royalty collecting societies have asserted the 
right to collect multiple times on the same transaction--once at the 
point of emission and again at the site of reception; but even where 
only one international payment is due, different rates are charged in 
different countries, payable to numerous sets of different 
rightholders. Administration of these rights might be somewhat easier 
if an e-commerce company reliably could know the location of its 
customers. But in the Internet environment, we do not always know with 
certainty where the end customer resides.
    RioPort.com obviously cannot be saddled with an impossible 
obligation to prevent international sales. Yet, we also recognize that 
the proper parties should be paid for their rights. In many respects, 
this issue is analogous to the problem of Internet taxation, where the 
potential for multiple states exerting taxing authority over a single 
transaction threatened to stifle e-commerce aborning. Members of this 
Subcommittee wisely led the way toward a moratorium on Internet 
taxation, so that an orderly and workable tax regime could be developed 
for implementation. For e-commerce in sound recordings, we believe a 
similar international effort may be needed over the next months and 
years, to bring order, predictability and efficiency to Internet music 
sales.
    In summary, Mr. Chairman, this is a time of exciting opportunity 
for the creative and entrepreneurial business communities. The 
transition to electronic distribution poses economic changes equally as 
revolutionary as the invention of recording technologies themselves, 
and new, more challenging legal issues. But unlike that prior 
transition, we do not have the luxury of knowing that it will take 
decades before these problems come to a head. We are operating on 
Internet time, where paradigms shift in a matter of months. However, 
some basic principles will remain constant. We will capitalize on these 
global opportunities by giving all parties to the ecosystem a reason to 
migrate to electronic commerce:

 For the consumer, by combining the ease and immediacy of 
        online transactions with the value they have come to expect 
        from physical purchases.
 For copyright owners, by reducing production and distribution 
        costs and providing for secure rights management.
 For online distributors, by assuring predictable legal 
        requirements while building efficient administration 
        mechanisms.
    Thank you, Mr. Chairman and members of the Subcommittee, for your 
interest and your support in making electronic commerce a reality for 
business and the American consumer. I would be pleased to answer any 
questions you may have.

    Mr. Tauzin. Thank you very much.
    The Chair will recognize himself for 5 minutes, members in 
order.
    Let me try to put this in the context that we face it as 
members representing constituents who happen to be consumers of 
these wonderful products, services and devices.
    Basically, Jack, you put your finger on the problem in your 
opening statement, and that is that in a digital age it's 
possible to make unlimited numbers of perfect copies, and we 
all understand that. We also understand that consumers now have 
certain expectations that may change, depending upon what rules 
are concocted regarding home recording.
    Consumers' expectations generally right now--they're not 
going to copy pay-for-view programming, and they're not going 
to copy, as someone pointed out, movies rented from Blockbuster 
or what have you. But their expectations are indeed that they 
can copy some things.
    As Hilary pointed out, they can copy some music and put it 
together in their own format at home. They can copy some 
television programming for later viewing, etcetera.
    The concern that I think we are beginning to hear is that 
now in a digital age, with the background of the Act we passed 
in place, that technology is now going to be available, as 
Michael pointed out, to effectively declare what is copyable 
and what is not; but the rules under which that will be 
determined are going to be decided in some sort of contract 
compromise between the recording industry and those of you in 
the computer industry and related consumer products industries, 
and that once that compromise is agreed upon, that consumers' 
expectations may have to alter, depending upon the terms of the 
compromise, and that those consumer expectations, having been 
changed by an agreement made by industries--having been 
changed, the expectations changed, we are probably going to 
hear from them in big numbers.
    Why would you let this happen? Why did you let our 
expectations not be realized in this new world? So from the 
standpoint of those of us who return home every 2 years and get 
approval for our jobs, we are going to have to answer why did 
we allow their expectations to be dashed, if they are going to 
be dashed, in the exercise of compromises made in the rules of 
the road now.
    I need you to come back to me on that. Jack, you want to 
start. Then I want to get a few of you to just dialog with me 
on it.
    Mr. Valenti. Mr. Chairman, what you said is very sensible 
and makes good sense. If I were in the Congress, which I always 
wanted to be and, unfortunately, never was able to make that 
dream come true, I would feel precisely the same way.
    There is no sound more perilous than the angry buzz of the 
multitude called voters. So I understand that. Now let me be as 
clear as I can, as unambiguous as I can. As of this moment, 
time shifting continues. Everything the consumer is doing now, 
the consumer can continue to do. Time shifting was what all the 
brouhaha was about for many years.
    That will continue, no question about that. But the digital 
world, Mr. Chairman, is something that is very mistily 
observed. Nobody--Nobody knows what it's really going to be.
    I was at a business conference in Sun Valley with the 
titans of the computer industry, i.e., Bill Gates of the 
computer chip industry, i.e., Andy Grove, Warren Buffett, the 
head of Dell Computer, Amazon.com, Yahoo, and you name it, as 
well as the moguls of the movie industry and television 
industry and the investment community.
    I asked several of these well known legends, tell me where 
we are going to be in the digital world 3 or 4 years from now. 
Without exception, they all said, we haven't the foggiest idea. 
But as one famous name in the computer industry said to me, all 
I'm doing is trying to position my company so I can take and 
manage whatever curve is rising.
    So I'm saying to you, we are dealing with an ephemeral 
situation here full of dark shadows, full of unlit corridors 
that we are walking down. I'm saying to you I don't know where 
it's going to be. However, I also know that the consumer needs 
to be able to do what he's doing now.
    Now the negotiations that are going on right now, I have to 
say, are going on in good faith. There are no villains on the 
other side. Every one of the people at this table who are 
involved in those negotiations are honorable people who are 
doing their damnedest to try to protect the people they 
represent, and I don't blame them. That's what we all do, but 
there is no antagonism. There is no deliberate attempts to 
sabotage. Good people on both sides.
    This is a very complex, complicated situation.
    Mr. Tauzin. Oh, yes; oh, yes. You took us from clarity to 
mystical and ephemeral observations.
    Mr. Valenti. And into the fog. I want to come out of the 
fog here.
    Mr. Tauzin. Can somebody add to what Jack has said before--
my time has expired, but you can answer. If someone can add to 
that clarity for us, where is it really going, and would you 
guys conclude your negotiations? Is it going to be a fait 
accompli, and consumers are going to say, well, what the heck, 
we can't do things we always thought we could do?
    Mr. Valenti. Well, I'm saying time shifting is there, Mr. 
Chairman. That's part of the negotiations.
    Mr. Sawyer. Mr. Chairman, I would ask unanimous consent 
that you have another 3 minutes to complete your questioning.
    Mr. Tauzin. I would very much appreciate that. Thank you, 
sir.
    Mr. Sawyer. If, in fact, you would ask Mr. Valenti, what is 
time shifting?
    Mr. Valenti. That is recording a program, say, that goes on 
at eight o'clock at night, and you're at dinner and you want to 
watch it tomorrow at 2:30 in the afternoon. So you time shift.
    Mr. Sawyer. Very clear.
    Mr. Tauzin. It's also what you do in budgeting if you want 
to count the money in--that's another story.
    Mr. Moradzadeh.
    Mr. Moradzadeh. Well, I think the point, Mr. Chairman, that 
you raised is quite right. In considering some of the 
suggestions that motion picture companies have made as to what 
we might do today to alter the consumer experience as they move 
to the digital world, we've been very, very conscious of and 
concerned about changing what happens at home.
    Suggestions which would have prevented time shifting of 
certain programming were especially troublesome. Now we have 
been exploring many possibilities, but anytime we came close to 
a proposal where the consumers would lose a right that they 
currently enjoyed, lose the ability to tim shift, lose the 
ability to choose what TV or what device at home they enjoyed 
entertainment on, we become very, very concerned.
    As we entered into our effort to build 5C, to build the 
digital transmission content protection, we thought we were 
building a technology that would simply capture the consensus, 
capture the consumer expectation, and preserve that.
    One of the issues that we have been grappling with and 
haven't even figured out enough for either side to develop a 
firm opinion on is what do we do about the future. The future 
will be different. That's the only thing we know for sure.
    There will be different business models. There will be far 
more avenues for entertainment content in digital and perhaps 
other forms to come into the home, and there will be at some 
point, especially in the video space, competition and a robust 
competition for how to deliver content to the home.
    There, we will be looking at the possibility of working 
with the other industries toward changes to the 5C so that we 
are able to satisfy all kinds of new business interests as they 
are addressed; but for today, we were unwilling to put complete 
power over how consumers view video into the hands of one 
industry group.
    Mr. Tauzin. And the longer that debate goes on, the longer 
new products are kept from the marketplace. I mean, that's part 
of our conundrum here, right?
    Mr. Moradzadeh. Not only are new products kept from the 
marketplace, Mr. Chairman, but also some existing products are 
brought into the market which make changing consumer 
expectations more difficult.
    Mr. Tauzin. Exactly. Mr. Harter, and then I'll yield to Mr. 
Boucher.
    Mr. Harter. Thank you, Mr. Chairman. Consumers have a lot 
of expectations about digital media products, and I can only 
speak to music. I don't have a lot of experience yet with 
video, but I think what happens in the long haul for music, 
downloading music files over the Internet will have some 
implications for downloading video files.
    I can say that the early adopters of this revolution in 
downloading music are typically people who are--some are 
voters, but most are 25 years and younger. They are in high 
school and college.
    They are very comfortable with computers. They have access 
to decent broadband networks, and they like music. Forty 
percent of the music purchased is by people of that age group, 
and it's a very important demographic to watch in trying to 
ascertain the future for consumer behavior.
    I can tell you that, when they download a track and they 
pay for it, they probably are going to be pretty firm on their 
expectation that, if they pay for a song, that they can have a 
copy of it on their personal computer, on their portable device 
like the Rio player, on their car stereo, and Intel and other 
companies are building local area networks to the home.
    So in a sense, you have a hard drive in your house where 
all your video and music and all the data files are accessible, 
whether in your bedroom, your kitchen, down in the basement, 
and in a sense, if you purchase some music while driving your 
car or if you're at Starbucks buying coffee, you can hotsync 
your device where you purchase it and upload it to the mother 
hard drive so you can enjoy it, no matter where you are. You 
can organize it, manipulate it in the house under fair use. You 
can share it with your family members.
    I think that's where consumers' minds really are. It's a 
very important issue to get your hands around. I think this 
committee could look at that issue more closely down the road.
    Mr. Tauzin. Thank you very much. The Chair now yields to 
the gentleman from Virginia, Mr. Boucher, for a round of 
questions.
    Mr. Boucher. Thank you very much, Mr. Chairman. I'd like to 
use my time this morning to address a practical problem and see 
if there can be a consensus developed among this panel of 
witnesses about what the solution should be.
    There is a reluctance today on the part of equipment 
manufacturers to introduce the new digital recording devices, 
because of uncertainty about the application of the new 5C 
encryption technology for various applications of the content.
    This is really not a new issue for us. We wrote a very 
comprehensive resolution of that precise problem with regard to 
analog recorders in the DMCA, and it is contained in Section 
1201(k). That was a common sense solution.
    It basically said that, if the consumer has a reasonable 
expectation that he can make copies, that expectation will be 
honored. If he has no reasonable expectation that he can make 
copies, then he is not going to be able to, and we translated 
that general principle into precise examples.
    So, for example, if you go to the Blockbuster store and you 
rent a movie and it's a prepackaged product, you've got no 
reasonable expectation that you can make the recording of that, 
and under the rules set forth in 1201(k) that recording cannot 
be made.
    The equipment manufacturers will have to recognize the 
Macrovision technology that prohibits the recording, and with 
the agreements that have been made with the industry with the 
content owners, Macrovision will be encoded on movies such as 
that.
    Moving down the scale one step, and again realizing the 
expectations that consumers have, if you subscribe to a 
television service that's a premium service such as HBO, you 
can make one copy of that HBO movie. It's delivered to you only 
once, and for time shifting purposes you may want to view it at 
some other time. So the agreements in place allow you to make 
one copy of that HBO movie.
    Moving one step further down the scale with regard to over-
the-air television and basic cable television, the consumer can 
make as many copies as he wants. Now these arrangements are 
perfectly in line with consumer expectations and at the same 
time require that the analog recorders recognize and respond to 
the industry's Macrovision technology.
    Why can't we simply apply this same set of common sense 
principles to the debate that we now have? That debate is what 
are the rules going to be with regard to the arrival of digital 
recorders.
    I would like to get responses from our panel members this 
morning about the appropriateness of simply applying that same 
set of common sense rules to the problem that we now have. Mr. 
Moradzadeh, I'd like to begin with you.
    Mr. Moradzadeh. Well, basically, what we have attempted to 
do is apply precisely those rules to digital content in order 
not to upset consumer expectations. So the draft agreement that 
we have presented to the motion picture studios, as well as the 
agreements that we have already put into place and signed with 
over 30 manufacturers, reflect exactly that set of 
expectations.
    Mr. Boucher. Mr. Klein?
    Mr. Klein. Congressman Boucher, as I'm sure you recall, 
1201(k) was originally derived from the encoding rules that 
were part of the 1993 agreement of the original DVRA between 
the Motion Picture Association and members of the consumer 
electronics industry.
    Going back to consumer expectations, certainly, one of the 
reluctance of manufacturers to come out with new products that 
would respond to this copy protection technology is that, if I 
can borrow Lenin's phrase about capitalists selling the rope to 
their own hanging, they are in a sense agreeing to essentially 
obsolete their own products, because if they do not know that a 
content owner will not lock up the content, well, then they can 
essentially be rendering their own devices useless, since free 
over-the-air broadcasting can be locked up at the source.
    So the recorder that responds to that copy protection 
technology would be useless. So at this point, I think that's 
the reluctance, but I agree that simple encoding rules that 
were part of 1201(k) should simply be carried forward.
    Mr. Boucher. Thank you, Mr. Klein. Mr. Dawson, would you 
care to comment on this question?
    Mr. Dawson. Well, I think Mr. Moradzadeh said it exactly 
right. I think we're trying to make sure it's as transparent as 
possible.
    Mr. Boucher. Now, Mr. Valenti, what we have is a statement 
from the equipment manufacturers and the computer industry that 
it would make sense to simply apply the Section 1201(k) 
solution which was carefully negotiated, well balanced, and a 
part of the DCMA to the debate we now have before us, which is 
the arrival of digital recorders. What is your response to 
that?
    Mr. Valenti. I think that we would be willing to make the 
same deal on digital that we made on analog in the DMCA, but 
the computer industry, I don't think, will accept that. We 
would be quite willing to make that deal.
    Mr. Boucher. Well, I heard Mr. Moradzadeh say that he has 
presented to you a proposal that would do precisely that. Did I 
misinterpret you, Mr. Moradzadeh?
    Mr. Valenti. Well, there's a lot of rhetoric--Let me just 
finish this, Congressman.
    Mr. Boucher. Well, let me just say I'm delighted to hear 
your answer, because maybe we have this issue resolved. It's 
very rewarding to hear that.
    Mr. Valenti. See, here's the issue. I wrote down a little 
note. In 1996, Mr. Klein talked about, there was a deal where 
we agreed that we would have limitations on what we could copy, 
if we got in return a legislative requirement that all digital 
recording devices, including computers, would have to respond 
to copy control signals and programs.
    Now, frankly, the computer industry killed that deal before 
any legislation could be done. Now today we are being asked to 
pay the price--that is, copy control limitations--without the 
benefit of a legislative mandate or something that devices 
would respond to our copy control information.
    So we would take--if you just take the language of analog 
in DMCA and make it digital, we're on the way to a solution.
    Mr. Boucher. Well, that's a very encouraging response. Mr. 
Chairman, I would ask unanimous consent for 1 additional 
minute.
    Mr. Tauzin. Is there any objection? Hearing none, the 
gentleman is recognized.
    Mr. Boucher. Mr. Valenti, what I assume then from that 
response, that you would agree to an arrangement where, just as 
in the case of Section 1201(k), you would be in a position to 
apply the 5C encryption technology to the prepackaged products 
where there is no consumer expectation that copying would be 
made, that you would then allow one copy for things such as the 
HBO movie that's presented on the premium cable subscription, 
and that you would not encode at all the items that would come 
over over-the-air television or basic cable.
    Now that's the situation for 1201(k). That's the situation 
for analog. I understood you to say that you would agree to 
that for digital. Do you, in fact, agree?
    Mr. Valenti. First, Mr. Boucher, I'm not going to get into 
negotiations. We are dealing in sensitive anti-trust problems 
here. I've got more anti-trust lawyers in the room than we have 
negotiators, because this is a sensitive issue. So I don't 
think that it's quite proper or appropriate for me to negotiate 
with this committee in public.
    I will say again simply and clearly, if we applied the 
analog protocols that are in DMCA to digital, I think that we 
would be well on our way. Now that's a simple way to put it.
    Now keep in mind, however, that there are some interesting 
things here. We are not really debating legislation, Mr. 
Chairman. What we are debating, really, is we are talking about 
licensing terms that are trying to be imposed by five companies 
on us to protect, frankly, their manufacturing devices, and I 
have no problem with that. But I'm saying to you, we have no 
guaranty that the technology being offered by the 5C companies 
is as advertised, whether it will work or not.
    That's an issue. No one is sure of it, and they can't 
guaranty it either. That's okay. We understand that.
    Mr. Tauzin. Can you run the demo again one more time?
    Mr. Valenti. But I want to say again, this is high priority 
stuff for us, Mr. Boucher. Our whole future--I literally mean 
the whole future of the American movie and television program, 
the content providers--without the things we create, none of 
these machines would be worth a damn, and everybody understands 
that.
    If we can't protect that in this new digital binary number 
environment, we're dead. So I go back again. Let's put the 
digital--we make digital the same language and protocols that 
we had in analog in DMCA, and then I think we take it back to 
the negotiating group, and we go forward.
    Mr. Boucher. Well, thank you, Mr. Valenti. Let me simply 
say it was a high priority when we wrote 1201(k). We all 
understand the priority, and to the extent that we can apply 
those same rules, that would be a very good solution. I'm glad 
to hear your comments, and I thank the other members.
    Mr. Tauzin. Thank the gentleman. The gentleman from 
Florida, Mr. Stearns, is recognized.
    Mr. Stearns. Thank you, Mr. Chairman. Let me take a little 
different approach. You know, around my house when I complain, 
my wife takes her index finger and her thumb, and she takes it 
and rotates it like that, and she says, my heart cries for you, 
she tells me. You've heard President Bush say don't cry for me, 
Argentina.
    Let me just take the approach. I mean, we've got some very 
powerful, wealthy individuals here today complaining about a 
lot of things, but I think you folks are doing pretty well.
    Ms. Rosen, let me take you back to 1970. Two Hollywood 
studios unsuccessfully sought to stop the Sony Betamax from 
coming to market in the late seventies. They lost their case in 
the courts, and VCRs have produced enormous revenues for them 
in the market.
    Your industry sought to block the MP3 player from coming to 
market, but similarly failed in the courts. Is there a parallel 
here between that and what we're talking about, the Sony 
Betamax? I mean, are we sort of overreacting here?
    Ms. Rosen. With all due respect, Congressman Stearns, I 
don't think that you either heard or read my testimony nor the 
testimony of the Diamond folks.
    Mr. Stearns. That's probably true.
    Ms. Rosen. Because indeed I haven't complained about a 
thing today. I am probably the most optimistic, enthusiastic 
person at the table. I think we are doing just fine in the 
music business, and I wish I could lose every lawsuit that I 
lost the Rio case with so well, because the result has been a 
tremendous development of strategy and working together and 
marketplace solutions in the music space that is bringing 
consumers a whole new host of issues.
    So I think that the general assumption that you make, that 
the entertainment industry would be against technology, is No. 
1, clearly wrong.
    Mr. Stearns. No, no, no.
    Ms. Rosen. Let me just say one more thing. The other 
notion--you know, we have made a lot of decisions in the music 
space about what consumers' access should be to music, and I 
think everybody at this table involved in those decisions would 
say that the music industry has gone very, very far, clearly 
much farther than what's in 1201(k) for video and the like. But 
those have been decisions essentially based on our marketplace 
perspective of what the consumer wants.
    We are in the consumer products business, too. We care 
about selling, and we know that unless we can provide value for 
the consumer, giving them something that they want, all they 
are going to do is go up on the Web to find some other site to 
get it for free.
    So we're not--you know, we're very clever about this 
opportunity.
    Mr. Stearns. Reclaiming my time here, I think what the 
consumers are telling me: Okay, the industry has digitized 
information, and now they are going to encrypt it, and it's 
going to make it a whole lot harder for us. And the average Mom 
and Dad with their family at home is fearful that they won't be 
able to do lots of things that they do in their TV room.
    For example, you know, VCRs in the first two decades, two 
decades of home recording, there's been a lot of changes here. 
So I think, if any of you can help the consumer have some level 
of confidence that what you're not promulgating is encrypted, 
digitized information that is going to make it harder and 
harder for them just to do the normal things--and I only bring 
up what happened in the seventies and what happened to the MP3 
to show how the industry reacted, went to court.
    You know, I don't know if we are yelling fire here when 
perhaps we don't have to be so concerned. Yes, Mr. Harter?
    Mr. Harter. Thank you. Another example is DiVX, a failed 
enterprise to compete with DVD, DiVX and--panel, please correct 
me if I'm wrong here, because it's not my main business, but 
DiVX was a consumer technology that would control number of 
copies a consumer could view, a pay for use technology.
    DiVX closed its doors this year at a loss of $300 million. 
So despite the success and wealth of the high tech industry, 
there are many losers out there on the information 
superhighway. I think DiVX and other examples from the software 
industry and the e-commerce transaction industry--complicated 
security schemes often end up punishing law abiding consumers, 
and the bad actors who will pirate or hack still have the 
aptitude to hack around even the very best solutions from major 
companies that try their very best to prevent bad actors from 
doing the wrong thing.
    So I think when you look at security, you have to weigh its 
complexity and its impact on consumers, which is often more 
negative than positive, and how simply that people are trying 
to punish, the bad actors, the pirates, can continue their 
business, because they have access to tools to get around the 
security.
    Mr. Stearns. Mr. Klein, did you want to make a comment?
    Mr. Klein. Yes, just quickly. In my day job I also--I'm 
Vice President of the Consumer Electronics Manufacturers 
Association whose members make the devices that Mr. Valenti 
said wouldn't be worth a damn without the content. So I feel 
like I have to defend at least some of them.
    He's right, to a degree. Certainly, the devices don't work 
without content, but the devices also have provided a 
distribution stream that has provided an incredible amount of 
money for Hollywood. So I think we have this symbiotic 
relationship, and we do need to work together.
    In response to your question about giving people at home 
some guaranty that their devices will work, well, again we're 
talking about being able to encrypt free over-the-air 
broadcasting. In essence, what I hear Mr. Valenti saying is 
let's take the L out of the play button and just make it a pay 
button.
    Mr. Stearns. That's what I'm hearing, too, and that's why I 
said to Ms. Rosen I was hoping she would give me that guaranty 
that the family at home won't have to worry about losing this 
versatility, this flexibility they have, they've had for two 
decades, because the history has been that they have sued and 
prevented these things.
    Mr. Klein. Exactly. As far as legislatively licensing, as 
you recall, one of the things in the DMCA, in addition to 
1201(k), was an encouragement to the industries to get together 
and to work out voluntary agreements and licenses that would 
resolve the problem in the digital age. I think the whole 
process of 5C and the MPA negotiations are encouraged by DMCA.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentleman. That's a quotable 
phrase, take the L out of the play button. We're going to hear 
that again.
    By the way, the new majority would like you to quote a guy 
like--well, anybody but Lenin, maybe Adam Smith.
    Mr. Klein. Maybe it was John Lennon.
    Mr. Tauzin. Might have been John Lennon. The gentleman from 
Tennessee, Mr. Gordon.
    Mr. Gordon. Thank you, Mr. Chairman. Mr. Klein, as I was 
coming back from voting, you were finishing up your discussion. 
So I didn't hear all of it, and also I didn't hear you being 
introduced.
    It says you represent the home recording rights coalition. 
Who are the major partners there? Who are your major 
supporters?
    Mr. Klein. Electronics servicers, small businesses, 
equipment manufacturers, consumer groups, and thousands and 
thousands of consumers.
    Mr. Gordon. Do those thousands and thousands of consumers 
pay dues to you?
    Mr. Klein. No.
    Mr. Gordon. This is benevolent? You are representing what 
you think they want? I mean, they are not paying dues or 
telling you what they want or anything of that nature? Is that 
correct?
    Mr. Klein. Yes.
    Mr. Gordon. Okay. Now as I was coming in, again I heard the 
last part of your discussion, and you seemed like you were 
making a parallel that, you know, we've heard that guns don't 
kill, people kill. You were saying that consumers don't steal.
    In terms of talking about this--I guess ``The Toy Store''--
I never saw the movie, but the one that Mr. Valenti was 
mentioning earlier that was being downloaded before it was even 
out on the market, and it was sort of like consumers don't 
steal, that it was their fault because they let somebody steal 
it from them somewhere in the production chain, is sort of what 
I was hearing.
    So I guess I'm interested in is your thoughts. Let's just 
say a consumer is walking down the street, and somebody in the 
alley says, hey, come over here, I've got a box of Intel chips, 
and with this box of Intel chips I've got some copyrighted 
software, and I can sell it to you at a tenth of what you would 
have to pay in the store; and by the way, it's not even in the 
store yet.
    Now what would you think about that consumer? Would that 
consumer be stealing? Would that consumer be a part of 
something that wasn't right?
    Mr. Klein. If the consumer, obviously, knows that it's 
pirated material, then obviously it would not be right for a 
consumer to purchase that pirated material. Sure. But what you 
have to remember is, specifically in the examples that Mr.--How 
do you get a copy of ``Toy Story II'' if it hasn't even been 
released in the theaters yet?
    Mr. Gordon. Just like somebody might have gone into the 
Intel warehouse and stole some of their chips. But maybe let's 
say, well, what about somebody is--you're going down the street 
and you find out that somebody stole your car, and then they 
took your car, and then they are driving it down, and they come 
up to somebody on the street and say I got too many cars at 
home, so I'm going to give you a really good deal on this car; 
I'm going to sell it to you for $100, this multi-thousand 
dollar car. But you know, I didn't bring the title or anything 
with me, but you know, I'm going to sell it to you real cheap.
    Does that consumer have any kind of responsibility there?
    Mr. Klein. Well, growing up in New York City where most 
transactions start with ``Hey, buddy,''I'm not sure how to 
answer that, and it's sort of--with all due respect, I think 
we're just off the topic.
    First of all, that----
    Mr. Gordon. I thought that's what you were talking about. 
When I came in----
    Mr. Klein. What I'm talking about is--what I said is 
consumers are not pirates. A consumer who record at home is not 
a pirate. A consumer who uses his VCR or any recording device 
to download material that he's paid for or has a right to see 
is not a pirate.
    Mr. Gordon. All right. So if that consumer wasn't on the 
street but our entrepreneur has this box of Intel chips and 
software, and they go knock on your door and say I got these 
really good Intel chips and software, I'm going to sell them to 
you for a tenth of what they are in the store and, by the way, 
they're not even in the store yet--so does the consumer--would 
he have a problem there, since he's in his own home or her 
home?
    Mr. Klein. Congressman, if you know that property is 
stolen, it's obviously not ethical to purchase stolen property.
    Mr. Gordon. Okay. You know, again I just came in. I'm just 
trying to get caught up on what was going on in the middle of a 
statement.
    I really want to know a little more about--Mr. Valenti, if 
you have sort of facts and figures, I am concerned about the 
economy in this country, and I am concerned that, with so many 
things going on so well, that sort of what you look at now that 
is our biggest liability is our trade deficit.
    I think that could be a problem that could unravel all the 
good things that are happening. You know, what are the facts 
and figures in terms of your industry in terms of net export 
versus what we're importing?
    Mr. Tauzin. The gentleman's time has expired, but the 
witnesses will be able to respond, anyone who wants to respond. 
Mr. Valenti?
    Mr. Valenti. Very quickly, the intellectual property 
community exports today close to $70 billion worth of material. 
It is, in total, a surplus balance of trade.
    The movie and television industry has a surplus balance of 
trade with every country in the world with whom we do business, 
and it's over 140. The total amount of money that we estimate 
is a surplus balance of payment for intellectual property is 
probably $15-$20 billion a year.
    Mr. Gordon. Thank you.
    Mr. Tauzin. I thank the gentleman. The gentleman from 
California, Mr. Cox, is recognized.
    Mr. Cox. I know that Mr. Harter in his testimony had a 
specific section of the DMCA in mind. I'd just like to invite 
any member of the panel to tell us whether they are prepared 
to, virtually in legislative language, give us any suggestions 
for changes in the law, because it's been a fascinating 
discussion and I've learned a lot. Yes?
    Mr. Moradzadeh. In a sense, I'd like to respond negatively. 
The DMCA very wisely stepped back from the idea of mandating 
legislative--legislative mandating technological capabilities 
and devices and said, you know, the Internet is moving too 
fast, technology is moving too fast. It's not the job of 
Congress to try to architect the next generation of PCs; you 
guys go do that.
    If you build a protection system in it, we'll make it 
possible to protect it. Somebody attacks it, just as if 
somebody is going door to door selling pirated Intel chips, 
we'll make it possible to sue them, to call the FBI or 
international help, if it's under WIPO.
    It raises the issue of the proper role of encryption and 
the role that encryption plays in some of the solutions that 
we're providing here. It is not so much intended as this 
armored Fort Knox solution. What it is intended to do was two 
things: One, as protected by the DMCA, provide a better 
protection for movie content than was originally envisioned 
with just, you know, the dots that were originally proposed, a 
couple of little flags in the content, or even Macrovision 
which you can circumvent with some readily available devices in 
the back of airline magazines.
    The other purpose of encryption--and this is how we came 
about it in the first place and one of the reasons we had broad 
multi-industry support for it--is by using encrypted streams to 
manage what's protected content versus what's open content. You 
are able to segregate within the digital economy and, important 
to me, within a computer the content that you need to check, 
that you need to watch, that you need to verify--this needs a 
watermark detection; you need to look at these signals--and the 
content that you don't need to worry about.
    Now why is that important? It's important, because in a 
computer you do a lot of things besides watch movies. In fact, 
there's a lot of ways you can get value out a computer without 
Hollywood. You can play games. You can do software. You can 
surf the Internet.
    Mr. Cox. You could even do work.
    Mr. Moradzadeh. You could--is my boss watching? But some 
proposals would have it that, whenever you are doing all these 
things, including work, I suppose, you would always be checking 
the information that's flowing through the computer to make 
sure that it isn't pirated, to make sure that your door to door 
Intel chip salesman didn't show up.
    The concern there is that checking consumes computer 
resources, resources for which the purchaser paid. It slows the 
performance down, and that's why we've tried to use encryption 
to cause a separate space within the computer. This is the 
protected content space. If you're deliberately accessing that, 
you got to follow all the rules. And this is the open space. 
Get back to work; keep driving America's economy.
    Mr. Valenti. I'll answer your question, Congressman Cox. 
Yes, I'll go along with Congressman Boucher. Let's just take 
the language of 1201(k) as it applies to analog and apply it to 
digital, and you got a deal.
    Mr. Moradzadeh. Which would slow down computers.
    Mr. Cox. Do you want to respond to the complaint that it 
would slow down computers?
    Mr. Valenti. Well, as Mr. Emerson once said, for every loss 
there's a gain, and for every gain there's a loss. That's what 
negotiations are all about. I think the computer industry would 
not be for that, but as Mr. Boucher said, it's good enough for 
analog and DMCA. Let's make it for digital, same language, and 
we'll abide by it.
    Mr. Cox. Mr. Harter?
    Mr. Harter. Right now the DMCA has a 2-year hold on 
encryption research provisions of legislation while the Office 
of Copyright and the Commerce Department look at what came out 
of this Congress a year ago, and EMusic and a dozen other 
companies have filed comments in this public process. From what 
I can understand, the Office of Copyright and the Department of 
Commerce are nearly done with their analysis of these comments, 
and it will be interesting to see this committee react to the 
findings produced by this several month long study.
    Encryption research, as an exception to the penalties for 
circumvention of copyright protection mechanisms, is a very 
important issue. It's kind of a Catch 22, in a sense, that if 
we somehow fetter the ability of ethical hackers and security 
experts to really understand what works and does not work in 
security, then this country will lose its competitive advantage 
in leadership in information security.
    We know from the export control on encryption debate that, 
if we bottle up U.S. industry and U.S. expertise, experts 
oversees, including ethical as well as bad actors, will have 
supremacy in this key technology, and any copyright protection 
mechanism we may invent and put into the market here will be 
attacked by people who are more expert overseas and not subject 
to our laws, necessarily. Those people will not care about our 
trade surplus or trade deficit.
    So I think this issue of encryption research in the context 
of the very important issue of circumvention in the DMCA should 
be looked at closely as the Department of Commerce and Office 
of Copyright come back to this Congress with their findings.
    Mr. Cox. I thank you. I think my time has expired. If 
anybody else wishes to answer the only question I've put, I'd 
like to hear the answer.
    Ms. Rosen. Since I'm the only woman at the table, I'll 
continue with my Pollyanna theme here and say that I think that 
the DMCA is working just fine. The marketplace is on its way, 
and there may be a video resolution that I'm certainly not 
party to, but with respect to music, we're doing fine, thank 
you very much.
    Mr. Tauzin. I think Mr. Klein wanted to respond.
    Mr. Klein. Yes, just quickly, Congressman Cox. I have to 
agree with Mr. Moradzadeh in the sense that legislation frees 
this technology, whereas licenses can always be renegotiated 
and changed, depending on the circumstances. The DMCA itself 
encouraged licenses. So I believe that's the way to go.
    Mr. Cox. Well, I would almost agree with your statement 
that regulation frees this technology. It certainly does, if 
we're not technology neutral in our legislation. If we follow 
Rhett Dawson's point No. 3, which is regulate the behavior, not 
technology, we can probably avoid that pitfall. But your point 
is well taken.
    Mr. Dawson. Could we answer more fully for the record to 
you?
    Mr. Tauzin. Absolutely. We'll keep the record open for the 
next 2 weeks and give you good time to respond in writing. 
Also, Jack, if you want to rewind and revise, you can always do 
that, too, in the next 2 weeks.
    Mr. Cox. Rewind and revise?
    Mr. Valenti. You've entered a whole new phrase into the 
vocabulary now, Mr. Chairman.
    Mr. Tauzin. I thank the gentleman. The gentlelady from 
California, Ms. Eshoo, is recognized.
    Ms. Eshoo. Thank you, Mr. Chairman. I want to use an 
analogy, and I'm glad that my staff is doing much better than I 
am, because they had two $100 bills on them. I want to hold 
them up.
    Here is the older version with Benjamin Franklin on it. 
Here's the old one. Here's the new one, enlarged visage of Mr. 
Franklin. Now the Federal Government does not have a reputation 
for being tremendously efficient, but if the Federal Government 
can assure the authentication between the old and the new--they 
could develop this--why can't the leading U.S. industries do 
the same?
    You know what the implication is here, you know, the major 
threats to counterfeit copies, piracy. You've led with your 
testimony on that, Mr. Valenti. If we can do this, why can't 
the industries?
    Mr. Valenti. Well, I'm not a technician. I've established a 
strategic technology committee of technical experts. We've got 
a chief technology officer who is every hour of every day 
consulting with people like Intel and MIT and IBM and others, 
all trying to search for the right kind of protective shield 
that would allow us to protect our product, precious product. 
But again, we have to have a rapport with the people who do the 
machines, so that whatever technology that is formulated and 
designed would have response from the people to whom this 
material is going.
    So, yes, I think it can be done. We're on the cusp of it 
right now, and I think these negotiations going forward, we can 
come to a conclusion shortly, I hope. But as I said, both sides 
are acting in good faith. There's no deliberate attempt to slow 
this down, but I think we can do it.
    Ms. Eshoo. If you have to characterize how close or how far 
apart you are, how would you do that?
    Mr. Valenti. Congresswoman Eshoo, I really hope you allow 
me not to answer that question, because that's part of the 
negotiation.
    Ms. Eshoo. I'm asking you to give us some hope here, 
because I think that we did a good job.
    Mr. Valenti. Well, yes----
    Ms. Eshoo. I think we did a good job. I'm interrupting you. 
I'll give you, obviously, time to respond. I think that we did 
a good job in establishing the architecture of the law, so to 
speak. But again, I think that I speak for probably all of my 
colleagues here, that the market needs to establish the rules 
of the road.
    So what I'm asking you: Are you--you know, do you have 
the--you're close?
    Mr. Valenti. Well, we could settle it tomorrow if we just 
applied the analog protocols and 1201(k) to digital, and that 
would solve it all. But what the issue is, and that's as much 
clarity as I can give you, is one of the problems is that the 
VCR people, manufacturers, and the computer industry are really 
trying to impose their licensing terms on us as to how we 
protect our material.
    We don't try to tell the computer industry or the VCR 
people how to make their machines. Therefore, we don't think 
they ought to try to tell us what we can try to protect and 
what we can't protect. Our very existence depends on that, both 
as a national resource, i.e., surplus balance of trade, but 
also for the continuation of this extraordinary and dazzling 
thing called the creative community of this country.
    So that's what it's all about. We are narrowing the gap, 
but it all comes down to, if you go along with imposing the 
analog protocols and just turn it and make it digital, the ball 
game is over.
    Ms. Eshoo. Let me ask if Mr. Moradzadeh would like to 
respond to that.
    Mr. Moradzadeh. Yes, thank you. This discussion that we are 
in started, at least for the computer industry, in 1996 when 
Mr. Valenti showed up with a legislative proposal that we would 
effectively make all of our products illegal, that they would 
be taken off the market, and that there would be no market for 
computers until they were all revised to check for a certain 
set of bits within a movie.
    So we've been talking in a space since then that has been 
not really fully free market. Free market would have called for 
computers to go on forever doing what they are doing, and other 
devices doing what they are doing.
    What we reached instead was a compromise, was an agreement 
that we would use encryption to create sets of content for 
which we would check the propriety of the content, the status 
of the content--doesn't even belong on that system--and for 
other content there would be no obligations.
    Now we have heard Mr. Valenti say that the framework in the 
DMCA sounds like it's pretty good. There are, of course, two 
pieces of 1201(k), one being confirming the consumer 
expectations, and the other being mandatory response on VCRs.
    Within the 5C license we intend to confirm those consumer 
expectations, and for content delivered via 5C we have the 
mandatory response to the signals within the 5C signal. But, 
remember, this is an encrypted flow. It is a flow that, 
therefore, can be segregated and treated separately in the 
computer without burdening the rest of the computer, without 
burdening the rest of the Internet industry.
    A second point, though, that I would make is entirely apart 
from 5C. We believe with the movie industry that it is valuable 
to find ways of combatting piracy. I'm meeting with the chief 
technology officer of the MPAA on November 5 in my offices in 
Santa Clara to explore a number of ways of going about that, 
and I know that other meetings are going on.
    We are committed to preserving intellectual property. We're 
one of the biggest intellectual property companies, as part of 
one of the biggest intellectual property industries in the 
world. We absolutely believe in this. There's just some ways of 
going about it that don't work.
    Ms. Eshoo. Thank you. I think my time has expired, Mr. 
Chairman. Thank you.
    Mr. Tauzin. The Chair thanks the gentlelady. The gentleman 
from Ohio, Mr. Sawyer, is recognized. Did I get the order 
wrong? Let me make sure. It's Ms. McCarthy. I'm sorry. I'll get 
to the gentleman later. The gentlelady, Ms. McCarthy, is 
recognized.
    Ms. McCarthy. Mr. Chairman, I want to thank you for having 
this hearing today.
    I come to this issue--and I want to thank all the 
panelists, too; I've learned a lot. I come to this issue from 
an interesting perspective, because, of course, I put the 
rights of the artists foremost in decisions that I make in that 
regard. But, Ms. Rosen, I did read your testimony, like other 
members questioning you today, and I found it so ``uppy,'' I 
felt what is the problem here, because your industry has really 
reached out and sought solutions and is moving forward, and 
it's showing what's possible.
    Mr. Harter, I visited with your CEO when I was out in 
Silicon Valley last summer, and I was blown away by EMusic. I 
came home talking about it and raving about it and thinking 
this is the future.
    So I'm listening today, and I'm wondering, along the lines 
of Mr. Boucher who questioned you well over an hour ago about 
the solution. Since the music industry has taken a lead, seems 
to me others could learn from your successes.
    You know, how do we get to the solution for my guy out in 
Independence, Missouri, who is just trying to sell digital TVs, 
and I get this letter from him. He's frustrated. I mean, we're 
pushing this technology. We're trying to get everybody moving 
in that direction, and he sees the potential for the market, 
and he wants to take advantage of it. But the consumers are 
concerned, because they won't have the same application right 
now.
    Isn't the solution to what we all want, which is 
competition, which is making sure we can compete globally with 
the technologies and the products that we have with the artists 
that we revere--isn't it right here at this table today?
    Seems to me, just listening to you today, we are getting 
much closer to an understanding of what's possible and doable 
and what the consumer wants. So I really look to you for--I 
guess, with the larger question, is there anything we can do 
here in the Congress to help toward this solution?
    Ms. Rosen. An excellent question, and just from an 
outsider's perspective, it seems a little disingenuous for some 
people like Mr. Klein and others to come to the committee 
complaining about the attitudes of the entertainment companies. 
Yet what they don't want is legislation to fix the problem.
    So I think that it is appropriate to have these discussions 
in the marketplace. To try and engage Congress in a dispute 
over licensing terms seems sort of silly. Nonetheless, I think 
that you can take some comfort from the music experience, and 
that is that in essence we have lived over the last 3 years 
with what all these companies on the motion picture side and 
the hardware side are going to be living with soon in motion 
pictures as bandwidth expands.
    The consumers are not begging for motion pictures online, 
because their bandwidth would make a 2-hour movie a 15-hour 
movie right now. So in essence the marketplace is moving, and 
there are opportunities there to have responsible, reasonable 
solutions; and as the opportunities become clearer for the 
technology companies, as it has in music, I think you will also 
see a more common understanding among the two industries such, 
as you described, we have experienced.
    From my perspective, the best thing that you can do is 
continue to have that perspective of encouraging marketplace 
solutions and not falling into the trap that Mr. Boucher fell 
into before he left, which is, well, will you agree, will you 
agree, will you agree; yes, fine, we'll agree; oh, but no 
legislation.
    So the point is probably no legislation. You know, let the 
marketplace work.
    Ms. McCarthy. Well, I'm not an advocate of passing laws 
just to pass laws, and I agree with you. I'd rather that we not 
have to do anything, but I watched the technology today, and 
it's there, and I applaud you. It seems to me that solutions 
are out there.
    Mr. Valenti?
    Mr. Valenti. Congresswoman McCarthy, one of the things that 
we all, unfortunately and lamentably, have to understand, is 
there's a lot of technical people tell me that the digital 
standards here don't work. You can't receive it with rabbit 
ears. There are a lot of people who want to go to the European 
standard, because our digital standards, according to a lot of 
people, don't work. That's one of the problems.
    When your retailer says why don't I have digital, well, 
that's one of the problems. He doesn't. But I can tell you 
this. We're not standing in the way of it, because it's to our 
long range advantage to protect our property and to make it 
available to consumers all over the country as soon as 
possible. But it's the digital process itself in this country 
that is under high criticism.
    Ms. McCarthy. Would anyone else like to weigh in? Thank 
you, Mr. Valenti.
    Mr. Moradzadeh. I think, in many ways, this subcommittee 
has done our industries and the public a service by giving us a 
place to bring some of these issues out. There is a public 
policy to try to advance digital services in this country and 
to make it happen perhaps faster than the market would make 
happen all by itself.
    That's one of the reasons that we felt it was important to 
come report to you on some of the activities that we've been 
dong to make that happen. Over the next year you'll probably 
hear reports from other segments of the industry that may be 
running into similar problems as they grapple with these same 
issues in delivering digital content.
    So in terms of allowing us to explain what's going on in 
our segment, perhaps we have also been able to provide more 
background for the next set of issues that come up.
    Ms. McCarthy. Well, I thank you. I appreciate the 
technology that you have developed and the wisdom that you've 
brought today to the committee. Does anyone else want to 
comment? Yes, Mr. Moore?
    Mr. Moore. Yes. I think that the difference between the 
video and the audio industry is that there is a lot more push 
from independent artists in the audio industry, music on the 
Internet through MP3, that gave the recording companies the 
impetus to actually come to SDMI and make reasonable 
compromises.
    What I hear today is that, just in this little bit, the 
movie industry may not have that same incentive. There aren't 
independent movie producers that put $200 million movies on the 
Internet and let people download them for free. So there is no 
real--and the artists that make the movies don't really have so 
much of an interest in getting digital distribution out there 
either, that the corporations that control the distribution of 
movies may not have the same motivation that the RIAA's members 
did.
    Ms. McCarthy. Well, as someone who loves movies and loves 
to go to film festivals but can't always get there, I would 
love some of these independent movie makers to have other 
opportunities to get those movies to the viewer. But I agree 
with what you've just told us and the incentives there.
    I just--you sit here, and you just want to make it work, 
because it's a good law, and the future is so full of promise. 
I'm grateful to all of you today for sharing your thoughts.
    Mr. Chairman, again thank you for bringing us altogether on 
this. In the end, it's all about the artists and the consumers, 
and we need to work together to see that their needs are met.
    Mr. Tauzin. I thank the gentlelady. If everyone in this 
whole issue were as kindly and nicely spoken as Ms. McCarthy, 
we probably could work this out this afternoon. Thank you very 
much.
    The gentleman from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you, Mr. Chairman. Sitting here listening 
to this discussion, I am reminded of those things that, I 
think, I enjoy as much as anything about the products, the 
intellectual products that each of you represent. That is that, 
particularly with film but almost equally with live concerts, 
it is the human experience that makes it an extraordinary 
shared event.
    Watching a film on television is wonderful, but it's 
nothing like sitting in a dark theater with an audience of 
people who share your reaction and whose reactions feed upon 
one another. It's not quite as obvious in a concert of whatever 
kind, but I think it's there, nonetheless. That's one of the 
things that would be lost if we don't find a way to solve this 
problem.
    When I came in Mr. Klein was talking, and he described that 
he had hoped that there would be a kind of working together, 
but he then described what he thought was not what he had in 
mind in terms of what you had hoped for in working together?
    Mr. Klein, could you tell us briefly what you did have in 
mind?
    Mr. Klein. Well, we are working together in what we call 
the CPTWG. It's a monthly meeting out in Burbank between the 
information technology, consumer electronics, motion picture 
association.
    We send people out there every month. They send people out 
there every month. There were engineers meeting there 
developing these technologies that will protect content over 
digital interfaces.
    At the Consumer Electronics Manufacturers Association we 
have standards committees that are open committees, including 
members of the entertainment industry, that are working on 
standards, digital standards for copy protection.
    Mr. Sawyer. What did you mean by saying that the work had 
been going on for the last 2 years was not what you had in 
mind?
    Mr. Klein. What I meant was changing the rules of the game 
to what was agreed to 2 years ago in terms of encoding rules 
which now appear to be backed away from. When we were 
negotiating the digital video recording act, he originally had 
rules by which the encryption or the encoding would be 
followed, which allowed copying under certain circumstances, no 
copying under other circumstances.
    Now, while we want essentially those rules carried through 
into this digital encryption stage, it appears that the other 
side has backed away from that agreement. I believe that's what 
you are referring to.
    Mr. Sawyer. That may be what I'm referring to. I was trying 
to get a sense of what you were referring to.
    Mr. Valenti, why didn't that work?
    Mr. Valenti. Mr. Sawyer, I just suggested a solution to 
this, and that is to take what the Congress has already passed 
in DMCA, the protocol and rules applying to analog, and lifting 
that language and apply it to digital.
    Mr. Sawyer. Mr. Moradzadeh, you've been a pretty reasonable 
guy sitting here. If I were to ask you to be the mediator in 
all of this, where would you lead us?
    Mr. Moradzadeh. I should disclose that I am on one side, 
but I'll try to mediate for a second.
    I think the first thing I would do is bring out the very 
clear point that in Mr. Valenti's straightforward statement, 
there is a bit of a surprise.
    Mr. Sawyer. Is that the same ``this'' as Mr. Stearns 
mentioned?
    Mr. Moradzadeh. No. This is a different surprise. The point 
is this. The reason we got into this whole debate--we have 
become exquisitely familiar with the Burbank Airport Hilton--is 
that we have been working on----
    Mr. Sawyer. This is a four-star destination?
    Mr. Moradzadeh. It's a forced destination, yes. We have 
been working on a way of protecting content by encrypting it 
and delivering it in order that we can provide protection, on 
the one hand, without burdening the whole information industry, 
on the other.
    What isn't clear from Mr. Valenti's proposal--and if he's 
offering that as a legislative proposal, maybe we discuss it 
here--is whether he is trying to now go all the way back to a 
proposal that would say every computer all the time, before it 
does anything from checking your E-mail to creating a greeting 
card to working, must check every bit of information that flows 
through it, just in case--just in case it's pirated.
    What we've said is we will sign up for the existence of 
whole classes of information that, before you take the overt 
step of getting into them, you got to check. You got to be 
honest. You got to look and make sure that it isn't stolen. And 
those will be great, but that's it.
    Mr. Sawyer. Thank you. And I have to tell you that what you 
just said put a lot of this other conversation into much better 
perspective for me. I really appreciate that very much.
    Thank you, Mr. Chairman.
    Mr. Tauzin. Thank you, Mr. Sawyer. We are going to wrap. 
Let me mention a couple of things. First of all, one is that 
I'm not sure we on this side of this room have anywhere near 
the understanding of the complexities, technology and policy 
that you're trying to work out for us.
    I can tell you this. We have a pretty good sense of people 
or we wouldn't be on this side of the room. My knowledge of 
people tells me that I don't know very many homeowners who, 
with an apple tree that overhangs their yard from their 
neighbor's yard, is not going to pick any apple that falls on 
their side of the property line.
    Whatever you want to call consumers, describe their 
insatiable appetite for these wonderful products that are 
produced or call them bad names or not, if you drop those 
apples onto their computer and they can get them, they're going 
to get them, and they are going to enjoy them, and they are not 
going to ask where they come from or how it got there.
    That's the nature of, you know, the problem. So it's got to 
be solved in a way that honestly protects those of you who 
produce these products, at the same time recognizes that human 
nature is that, if I know there's a Website on my computer that 
I can get a movie, Jack, that's not out yet and I can see it at 
home and just run a wire from that DVD copy I make over to my 
big screen television, I'm in hog heaven.
    Consumers do that, not because they are crooks. It's just 
the nature of that apple falling from the tree in their 
backyard. They are going to pick it and eat it.
    The second thing, Jack, is that I promised you a long time 
ago that I would give you a copy of my rendition of George C. 
Scott's ``Patton.'' The staff has labeled it copy protected. I 
don't think it is. It's a bad copy of George C. Scott's acting 
ability, but it's a lot of fun. So I have it here for you, 
Jack.
    Let me thank you all and--there's no royalty on the tape, I 
don't think. Let me thank you all. There is a full committee 
meeting at one o'clock, mark-up at one o'clock, and I will ask 
those of you who have demonstration products to please clear 
them as quickly as you can.
    My thanks to all of you. I think the last comment Mr. 
Sawyer made is pertinent here. You have clarified a lot of 
what's happening. I don't know that we have resolution yet, but 
we have a clearer understanding.
    One final word is that I think Ms. McCarthy said it best. 
We don't want to legislate for the sake of legislating. It 
would be much better if this can be resolved in a way that 
works for you and, at the same time, protects consumer 
expectations as much as possible, so that we don't have to come 
back and revisit it with legislation.
    I would encourage you to even spend more time at the 
Burbank Hilton.
    The record will remain open for 2 more weeks. We thank you. 
The subcommittee stands adjourned until Wednesday.
    [Whereupon, at 12:42 p.m., the subcommittee adjourned.]
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