[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
ONLINE MUSIC: WILL SMALL MUSIC LABELS AND ENTREPRENEURS PROSPER IN THE
INTERNET AGE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC, MAY 24, 2000
__________
Serial No. 106-59
__________
Printed for the use of the Committee on Small Business
U.S. GOVERNMENT PRINTING OFFICE
67-148 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON SMALL BUSINESS
JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
DONALD A. MANZULLO, Illinois California
ROSCOE G. BARTLETT, Maryland DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey CAROLYN McCARTHY, New York
SUE W. KELLY, New York BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania DONNA M. CHRISTIAN-CHRISTENSEN,
DAVID M. McINTOSH, Indiana Virgin Islands
RICK HILL, Montana ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania TOM UDALL, New Mexico
JOHN E. SWEENEY, New York DENNIS MOORE, Kansas
PATRICK J. TOOMEY, Pennsylvania STEPHANIE TUBBS JONES, Ohio
JIM DeMINT, South Carolina CHARLES A. GONZALEZ, Texas
EDWARD PEASE, Indiana DAVID D. PHELPS, Illinois
JOHN THUNE, South Dakota GRACE F. NAPOLITANO, California
MARY BONO, California BRIAN BAIRD, Washington
MARK UDALL, Colorado
SHELLEY BERKLEY, Nevada
Harry Katrichis, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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Page
Hearing held on May 24, 2000..................................... 1
WITNESSES
Dube, Ric, Senior Editor/Analyst, Webnoize, Cambridge, MA........ 3
Silverman, Tom, Founder & CEO, Tommy Boy Records, New York, NY... 9
Harter, Peter, Vice-President, Global Public Policy & Standards,
Emusic.com, Redwood City, CA................................... 12
Chuck D, Founder, Rapstation.com................................. 16
APPENDIX
Opening statements:
Talent, Hon. James........................................... 53
Bono, Hon. Mary.............................................. 55
Prepared statements:
Dube, Ric.................................................... 57
Silverman, Tom............................................... 61
Harter, Peter................................................ 67
Chuck D...................................................... 81
Additional Information:
Statement of Home Recording Rights Coalition................. 84
Statement of the Future of Music Coalition................... 89
ONLINE MUSIC: WILL SMALL MUSIC LABELS AND ENTREPRENEURS PROSPER IN THE
INTERNET AGE?
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WEDNESDAY, MAY 24, 2000
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 11:15 a.m., in Room
2360, Rayburn House Office Building, Hon. Jim Talent [chair of
the Committee] presiding.
Chairman Talent. We will go ahead and convene the hearing.
I expect the Ranking Member any minute, and if she comes after
I finish my opening statement we will go right to the testimony
and then we can just take a convenient moment and let her make
her opening statement.
Thank you for joining the Committee today for our hearing
to discuss the future of on-line music distribution models and
the ways new technology will affect smaller record labels and
music acts.
This is the third in a series of hearings that the
Committee has held regarding e-commerce issues. It is one that
is certainly very timely. So much attention these days is being
devoted to the controversial music-file-swapping software
Napster, it is a good time to explore how issues like piracy as
well privacy concerns, marketing budget and the omnipresence of
the worldwide web affect the bottom line of smaller music
entities.
The advent of MP3, which is essentially a file format that
allows computer users to download near CD quality music and
audio files, has made listening to music via the Internet a
reality for many computer users. The algorithms used to encode
MP3 files compress data to convert a file that would take 40
minutes to download a regular CD format, so that takes 5
minutes to download as an MP3 file. In order to attain the
smaller file size, this compression destroys some audio parts
that will never be reconstructed which is why MP3 cannot reach
exact CD quality. That is at least as of the time this
statement was drafted, which was last night. Perhaps in the
meantime the technology has changed.
As more people have access to the Internet and MP3 files,
there have been various concerns voiced by various parties in
the music industry. Today, one of the main concerns is Napster,
which gives everyone who uses the software access to all the
MP3 files on one another's computers that they are willing to
share. Napster's own servers compile a large, constantly
updated index of all the music available from its users. Users
simply type in the song title or name of the artist they are
looking for, and Napster generates a list of other users who
already have it. Clicking on one of the selections
automatically copies the file from one user's hard drive to the
other's. It makes everybody, in essence, a music store
reservoir.
Many in the music industry believes programs like Napster
will cause music listeners to cease purchasing musical
recordings. Indeed, a recent New York Times article highlights
the use of Napster by a college student who downloaded 800
musical recordings from the Internet. There are others, though,
who believe that free access to music via the Internet is a
powerful marketing tool and that this new form of distribution
will help, not hurt, sales of musical recordings.
The development of this type of software also has
ramifications for the movie industry. Once this file-sharing
software is perfected and digital delivery via the Internet
becomes quicker, computer users may be able to swap high-
quality movie files in the same way, thus affecting film
studios, movie theaters, and video rental chains.
In this age of Napster and other file-sharing programs like
Gnutella, the question arises as to ``how will record labels
and musicians control the distribution of their music and will
they be able to make a profit?'' The Recording Industry
Association of America has undertaken the long-awaited Secure
Digital Music Initiative which is working to develop an open,
interoperable architecture and specification for digital music
security. Once completed, purchasers of SDMI-compliant music
files and software will be able to play their music in SDMI-
compliant portable and home players. Until then, though, there
are a multiple of file formats available on the Internet, most
without the copyright protection that SDMI-compliant files are
projected to have.
The music industry, as well as other industries we have
examined, the Internet is purported to be able to balance the
inequities faced by small entities. While it is true that
smaller businesses have the flexibility to adapt quickly to
changes in the marketplace, the Committee is concerned about
their ability to absorb losses that may incur due to piracy.
Additionally, in the wilderness of the Internet, how will
small music labels to get their voices heard above the roar of
the big soon-to-be-four record labels?
To answer these questions and to provide us with an
excellent background on these issues, we have a distinguished
panel of witnesses.
Rick Dube is a Senior Analyst and Editor with Webnoize,
which focuses on the entertainment industry's relationship with
the Internet. Tom Silverman, founder and CEO of Tommy Boy
Records is testifying on behalf of the RIAA. Peter Harter is
Vice President for Global Public Policy and Standards of
Emusic.com, the Internet's leading retailer of licensed and
authorized MP3 music files. And Chuck D, recording artist and
founder of Rapstation.com, which features free MP3 downloads, a
television station and information for aspiring artists.
I appreciate the witnesses being here and look forward to
their testimony.
Mr. Dube, we will go right ahead with you, and then when
Ms. Velazquez--I am informed that Ms. Velazquez just wants to
put her statement into the record; and, without objection, we
will do that.
[Ms. Velazquez's statement may be found in appendix.]
Chairman Talent. So we will go right to the witnesses.
First, staff is going to give us a demonstration of how
this music can be downloaded, and also we are not going to do
anything illegal here. I tried, but Mr. Andrews just passed the
bar exam, and he doesn't want to lose his license. So we will
go ahead and give a demonstration. And, Dwayne, why don't you
explain what you are doing so the Committee members understand.
Mr. Andrews. Thank you, Mr. Chairman.
What I am going to do today is essentially for the
Committee just to demonstrate how we can download musical files
in two different formats, one being the MP3 format and the
other being in the streaming audio using real player which can
be downloaded from the real player website real.com. Today we
are going to use the EMusic.com website, surprise, surprise,
and go into the classical musical section since my tastes are a
little different from the Committee member's taste as far as
music is concerned.
The first thing I wanted to demonstrate is how quickly it
would take to download an MP3 file onto the hard drive on this
laptop computer here at the desk. I click onto the sample track
MP3 file, and it starts downloading the file. This is about a
30-second file, I believe; and within seconds the file will be
complete onto our hard drive and I can play it right now.
Also, this is through our regular computer speakers. These
are speakers that are usually hooked up to the computers in our
offices. So this 30-second snippet took about 5 seconds to
download and is permanently on our hard drive until we decide
to erase it.
Chairman Talent. The technology is available to play this
through higher quality speaker systems; is that right?
Mr. Andrews. Since it is an MP3 file I can download this
onto either a portable MP3 player, Walkman-type device or even
home MP3 players.
Also, I can download the same song using Real Player which
is a streaming audio file which it won't be captured onto our
hard drive. It is sort of just like a radio transmission. It
goes through the computer and it is lost again until I click on
that site again.
This, in essence, is just how easy it is to obtain music
via the Internet.
Chairman Talent. All right. Thank you, Dwayne.
Mr. Andrews. Thank you, Mr. Chairman.
Chairman Talent. Now we will go to our first witness, Mr.
Rick Dube, who is the Senior Editor and Analyst for Webnoize of
Cambridge, Massachusetts, sir, with your statement.
STATEMENT OF RIC DUBE, SENIOR EDITOR/ANALYST, WEBNOIZE,
CAMBRIDGE, MA
Mr. Dube. Mr. Chairman and Members of the Committee, on
behalf of Webnoize thank you for inviting me to testify today
at this very important hearing regarding the future of music on
the Internet and small businesses.
I am Rick Dube, an analyst with Webnoize and interim editor
of the company's news publications. I have been on the Internet
since 1991, an Internet industry professional since 1994, and I
have always been a music fan and consumer, heavy-duty consumer.
Ask my wife, ask my mother, I am troubled with a wallet.
Webnoize provides news coverage and analysis of the
entertainment industry's relationship with the Internet, new
media, cross markets and emerging technologies. Our news
reports reach 75,000 industry leaders in music, film,
broadcasting, technology, telecommunications, consumer
electronics, media and business.
We started Webnoize with what at the time was a bold
premise, that the Internet represents the single most
significant outcome of the post-industrial revolution but does
not represent a revolution in and of itself--it is an
evolution. Evolution is bigger. The Internet represents change
and progress and opportunity. Revolution is just one
possibility.
Our news is published all day, every day from our offices
in Cambridge, Mass. Each year in Los Angeles we host the
largest, most successful annual conference showcasing and
discussing how new technologies affect the entertainment
industry.
We have always covered small businesses, because that is
where the action is and because the Internet presents as much
opportunity for them to flourish as it does massive
conglomerates. The problem for both is that taking advantage of
the Internet to evolve a business model requires understanding
outside of the core competencies of many existing companies.
A member of the Committee asked me yesterday whether large
on-line retailers like Amazon.com were hurting privately-owned
music retailers. The answer is not yet. Internet sales of music
are actually not all that impressive. About 1 percent of all
CDs are sold on-line. That is about the same in 1999 as in
1998.
Now it is true that traditional record stores have lost
about 20 percent of their market share over the last 10 years,
but most of that ground has been lost to electronic superstores
and department stores that sell CDs as a loss leader. If
anything is hurting mom and pop record stores, it is the growth
of superstores and large music chains in the real world, not
the virtual world.
But I did say not yet. The Internet will affect small
retailers in the long run but not because Amazon.com sells CDs.
It is because the Internet is so much more interesting than a
convenient place to sell CDs.
At Webnoize we have an internal slogan, one of many. We say
that ``the web is passe.'' the worldwide web is just one
manifestation of the Internet. The Internet is an information
network that can add functionality to any electronic device.
There is a microwave oven in development by Samsung, a
refrigerator by Frigidaire and wireless telephones all over
Europe and Asia, all of which offer Internet connectivity.
I don't know now how much demand there is for a microwave
that downloads----
Chairman Talent. I was going to say, what could a
refrigerator do on the Internet?
Mr. Dube. Well, you would run out of the milk and you'd
blip it, you could wand it in, and the next time your groceries
are delivered you don't have to make a list, you don't have to
go out shopping, but you can also stream music through it and
leave messages for people in the house.
Chairman Talent. Music to drink milk by or something like.
Mr. Dube. Yeah. On the microwave, you blip the food in, and
it cooks it automatically. It downloads the instructions from
the Internet. I don't know if there is any demand for that.
The point is that the Internet is not just one way to use a
personal computer. Thus, using the Internet to grow a business
is not about putting up a dot.com site. So let me give some
examples.
Traditional music retailers, traditional stores, brick-and-
mortar stores like Virgin Megastores, HMV and the Trans World
chains are planning ways to bring the Internet into their
stores to provide more comprehensive services and create more
foot traffic. One example, imagine stepping up to a kiosk in a
record store, browsing through a list of the top 40 hits of the
day, selecting 12 of your favorites and having a CD of them
created for you while you wait. Or maybe some record that came
out 30 years ago that only you cared about, you lost your copy
25 years ago and haven't seen it since. With digital Internet
connections and CD burners and laser printing, nothing ever
needs to be out of stock or out of print.
Another example, this is my MP3 player. I try not to go
anywhere without it. This particular one was manufactured by
Diamond multimedia. It weighs a couple of ounces and holds
about 2 hours of digital music. I am looking forward to a day
when, say I am stuck in an airport, I can pop this device in a
slot in a kiosk and load it with a couple of hours of music, an
hour of songs that I asked for specifically, maybe an hour of
things I haven't heard of but the computer knows it is
something I will probably like, and maybe that kiosk is branded
by a popular record store chain, maybe it is a Tower Records
kiosk, because a couple of square feet of space on the airport
floor is a lot cheaper than leasing space for a whole store.
What this does, it takes the retail experience outside of
stores. We are quite a ways off from that now. It is unlikely
the small independent retailer would bother to participate in
that sort of market opportunity, but there may be other ways
for them to participate. The real opportunity for small
retailers is to extend what has always been their core
competency, serving consumer niches.
We already know that this is working. If you look at a
survey by the National Association of Recording Merchants,
Internet retail represents about 1 percent of chain store
sales, but they represent about 3 percent of sales at
independent stores. Indie stores have more quickly found a way
to connect with their niche and serve them.
The natural course of any market is to limit the number of
sellers, but that never lasts long because consumers grow
frustrated when generalized services fail to meet their
individual needs, and then small businesses come in and fill
the gap.
Small record labels serve the same function. They release
the music that the major record companies don't. It is music
that plays to a significantly smaller audience but generally
one that cares more about the music.
And the Internet has been a great place for independent
music. Websites let small labels market their acts to audiences
in ways that TV and radio could never allow. Any band that
wants to promote itself on line can upload music and pictures
to MP3.com or Riffage, GarageBand.com, or the Internet
Underground Music Archive. MP3.com offers music by 67,000
artists, one or two of which actually make a living from the
CDs they sell on the site.
The independent labels have led the charge to experiment
with downloadable music. Giving away downloadable songs can be
a great way to expose music that will not get air play on the
radio or on MTV. By doing that, indie labels are leading a very
provocative experiment, finding out whether giving away music
online affects sales and, if so, in what direction.
You have probably heard about Napster. Napster has been
called by music executives the most insidious development on
the Internet. Whether or not it is that, it is certainly one of
the most ingenious.
Napster is not a website per se but a software application
that lets users swap most MP3 files back and forth. Most of the
files available using Napster are illegally reproduced copies
of copyright-protected music. Millions of songs are available,
all for free.
Napster is most popular with college students because they
have high bandwidth Internet connections that let them download
music real fast. A Webnoize survey found that over 70----
Chairman Talent. Let me just interrupt you for a minute.
We explained in my opening statement what Napster was. I
think it is real important that the Committee understand how it
works, and would you just take a minute and explain it? When I
was preparing for this hearing, I had no prior knowledge. I was
a kind of a blank slate. So I don't think I am showing any
disrespect to my colleagues when I say to you that don't assume
a level of knowledge about Napster here. Okay? So explain how
it works please.
Mr. Dube. I might borrow a quote from them. They don't
necessarily explain it in the clearest way possible--because I
think--well, you know, they are in legal trouble.
What Napster lets you do is search each other's libraries
of MP3 files. I have a folder on my hard drive that has a
hundred MP3 files in it. Maybe one of you does as well. We both
log into the Napster server, and then I can see the MP3 files
on your hard drive, and you can see the names of the ones on
mine. And if I want any of the ones that you have, I click on
them, and it creates a direct connection between you and me
through which the file transfers.
The file doesn't pass through Napster's server. Napster
serves just as the conduit for us to search each other's
libraries and then, when we find something we want, we click
and order it, and it passes through some other chain on the
Internet to get to us, to get to you or to get to me.
Mrs. Bono. Mr. Chairman, may I ask a quick, relevant
question, please?
Chairman Talent. Sure, go ahead.
Mrs. Bono. Can you please explain to me where you get the
first file that you put up on Napster?
Mr. Dube. Sure. Perfectly legal to create MP3 files from
the CDs that you own for your own personal use. It is covered
by various copyright law. You cannot transfer those files to
somebody else for their personal use. That is an act of music
piracy. Readily available software available for free anywhere
that pulls the track off of the CD and then compresses it into
an MP3 file. When it comes off the CD, it is like a huge, huge
file; and then a compressor turns it into an MP3 file, which is
about a megabyte a minute.
Mrs. Bono. Would you please explain to me the copyright
infringement, let us hypothetically say----
Chairman Talent. If the gentlelady will suspend, let us
take a minute, and if you have questions, let us ask Mr. Dube
the questions so we understand. Because I don't think, if we
don't understand how Napster works, a lot of the rest of the
testimony won't be as meaningful to you. So if anybody has a
follow-up on Ms. Bono's questions, fine. And please go ahead.
Mrs. Bono. Thank you, Mr. Chairman.
Once again, so you are taking--I don't know what you listen
to. Let us say it is the Eagles, Hotel California, for example.
You turn that into an MP3 file, put it up on your server. It is
there for anybody to come exchange with you. Can you explain to
me where there is a copyright infringement at some point,
correct?
Chairman Talent. Or you might be listening to, say, a
Diamond Rio song?
Mrs. Bono. Okay. Diamond Rio.
Mr. Dube. It is a copyright infringement as soon as you
traffic the file, if you are not using it for personal use. The
equivalent of making a cassette of an album you want so that
you can listen to it in the car, creating an MP3 file is
covered by the same end of copyright law, but as soon as you
transfer that file to someone else, that is an act of music
piracy.
Mrs. Bono. Thank you.
Mr. Dube. Is that a sufficient explanation?
Chairman Talent. Does anybody else have a question on
Napster?
Ms. Millender-McDonald. Mr. Chairman, thank you very much.
I did want to--and I am kind of piggybacking my colleague Mrs.
Bono's question as to the copyright issue. It just appeared to
have been perhaps infringement on privacy, but the privacy
laws--I suppose I would like your further explanation of that.
Mr. Dube. Privacy infringement because people can see on my
hard drive?
Ms. Millender-McDonald. Yeah. But I think you kind of
explain because you say once you have seen what you want from
the other party then it goes through another channel and it
does not----
Mr. Dube. It is a voluntary process. Nobody could see any
files on anybody else's hard drive if that person themself
wasn't logged into Napster as well at the same time.
Ms. Millender-McDonald. It is kind of like obligatory name
or your name, and then if they so choose to move into your file
it goes to another channel?
Mr. Dube. Yeah. A file can take zillions of routes on the
Internet, and so the file takes the most direct route it can
from me to you. It doesn't go through Napster. It just zips
straight over to you.
As far as the privacy issue goes, I think anybody logged
into Napster is there voluntarily. They have clicked on some
sort of agreement.
Chairman Talent. The point is, anybody who has Napster can
log into and download quickly music of anybody else who has
Napster. So, in effect, you can get anything that way.
Go ahead. Thank you.
Mr. Dube. Real quick, I have been handed a quote from an
older version of their website. With Napster you can locate and
download your favorite music in MP3 format, all from one
convenient, easy-to-use interface. Oh, and it is 100 percent
free.
So a survey of our own finds that over 70 percent of
students are using Napster at least monthly. More than 19
percent said they are using it daily.
I met one young woman who said to me that she hated dorm
life, she hated the food, she hated the noise. I said, why
don't you move out. She said, I don't know where I would get my
music.
In that same Webnoize study, 63 percent of students said
they are listening to more music downloaded from the Internet
than 1 year ago; and 23 percent said they are spending
significantly less time listening to CDs.
The question is whether Napster is killing the music
industry. It would be rash to assume that every time someone
downloads an illegal music file that the recording industry has
lost a sale. When music is free, people will try a lot that
they wouldn't have otherwise. And while Napster may have
enabled the climate for casual piracy, the music industry is
growing. Total revenue is up. CD shipments are up. However, it
is possible that sales and shipments would be up even higher if
it weren't for all the Internet music piracy going on.
We know that Napster is most popular with young people. The
market share for music accounted for by consumers between the
ages of 15 and 24 has dropped considerably over the last
decade. One reason for this, music competes with games, movies,
television and the Internet itself for disposable income, and
there is a lot more media out there than ever before. This
creates more volume, takes things away from other things, and
as a result the music market has dropped for young people.
But they love Napster. We asked college students who use it
whether they would be willing to pay $15 per month to use it,
and more than 58 percent said that they would. It hints that it
might be time for the recording industry to consider the
possibility of letting people pay for music not just by the
song or by the album but by the month.
Napster touts the size of its user base as its strength.
They call it the Napster community, that the software enables
the sense of community. They have 10 million users, and I don't
know if any of them care a bit about the Napster community. I
think they like Napster because that is where the content is.
Record companies have released very little of their music on
the Internet. Our economy operates on a supply-and-demand
dynamic, and when supply fails to come through demand creates
its own supply. It is sort of a perverse version of the notion
that small businesses fill the niche gaps left behind when
there are too few sellers.
New revenue models for music like digital distribution,
subscription access, personalized radio, pay-per-view webcasts
are all possible, and for now there is nothing stopping
independent labels or private retailers from getting in on
them, exploring them, looking for ways to improve the value of
on-line music experience and the off-line music experience.
And it won't be long before the most enterprising
businesses on the Internet are run by the artists themselves.
It is going on now. The Internet enables music distribution and
programming that fans will pay for. Artists that already have a
following will leave the established music label systems and
strike out on their own.
Webnoize values companies like Napster because they have
great ideas and they put them in action. Just as major labels
watch to see which independent artists have wide commercial
potential, they are also watching smart young companies to see
which ideas to co-opt.
Thank you for the opportunity to testify. I would be happy
to answer any questions that you have.
Chairman Talent. Thank you, Ric. We will have further
questions after all the witnesses have testified, and thank you
for your very informative testimony.
[Mr. Dube's statement may be found in appendix.]
Chairman Talent. Our next witness is Mr. Tom Silverman, who
is the founder and CEO of Tommy Boy Records of New York, New
York. Mr. Silverman.
STATEMENT OF TOM SILVERMAN, FOUNDER & CEO, TOMMY BOY RECORDS,
NEW YORK, NY
Mr. Silverman. Thank you. I passed around--I guess
everybody has got a copy of my testimony, but I am not going to
read my testimony. I am going to go freestyle.
Chairman Talent. That is always preferable. Please do.
Mr. Silverman. I want to tell you a little bit about
myself. About 20 years ago, I got a loan of $5,000 from my
parents, and I started Tommy Boy music in my bedroom in an
apartment in New York City. I was the only employee at the
time, and I didn't know what was going to happen, but we just
had a few good breaks, and we are still in business today, and
we have about 140 employees now and an office in London.
Chairman Talent. Would you move the mike a little closer?
Mr. Silverman. Yeah. So our company has grown to be one of
the largest, if not the largest, independently distributed
label in America. And at various times we have been involved
with major labels as well, so I have a pretty good perspective
of both.
We present artists like Everlast, De La Soul, Capone and
Noreaga. We had artists like Digital Underground, House of
Pain, Queen Latifah, RuPaul, Naughty by Nature, Africa
Bambaata, Force MD and many, many others. We are in the music
business in many genres, not just rap music but also dance
music, gospel music now, and rock music, as well as we are
preeminent in the compilation business.
I would like to talk a little bit about what a record
company does. This is what all record companies do--independent
labels, small labels and large labels, the majors. Really,
record companies find music that they think will have a demand
with consumers, and they contract the services of the artist.
Then they help the artist to make the record, in most cases.
Then they market the record.
So they put up all the money to do this and to market the
record; and the marketing would include everything from radio
promotion to making videos, to giving tour support, to
promoting the record in clubs and other venues, to advertising,
many, many different ways to get exposure. And now we have
added another weapon to the arsenal of promotion, which is the
Internet as another medium to allow people to find out about
the music.
All of this stuff is very expensive, and whether it is an
independent label or a major label, a very small proportion of
the records that we sign or release actually make a profit for
us. So the ones that do make a profit end up having to pay for
all the ones that don't. It is a real crapshoot.
But the difference between an independent label and a major
label, Ric started to discuss a little bit, because we have to
be niche finders. We have to find music. Especially the smaller
labels--we have to get into the music that the majors aren't in
because they will crush us because they take all the slots and
we won't get any exposure.
So when I started in 1981, for example, rap music was a new
thing. There were maybe only like 20 rap groups in the world.
So we had an idea to put out rap records, and there wasn't that
much competition, and no major labels were in it. So we were
able to build our company with the growth of rap as a musical
genre. We were faster, and we were more creative than the
majors, and we weren't afraid of doing something unknown.
The other thing that makes independent labels--you know,
this is probably true of all small businesses--is that we are
undercapitalized, and we are working without a net. If we make
too many mistakes, we are out of business. There is nobody who
is going to bail us out. Forget about getting a loan, we don't
get loans. My loan was $5,000 from my dad. He got paid back in
a year because I got a lucky break, and I had a small hit
record that broke in New York within the first year. Otherwise,
he wouldn't have gotten his money back. But that is the nature
of an independent label, and it is really true today.
I have served on the board of the Association for
Independent Music for 13 years. I have been on the board of
NARM, which is the National Association of Record Merchandise.
I am currently also on the board of the RIAA as an independent
label member.
I would like to mention a few facts about the music
industry that are very relevant and very few people know. In
1999 in America there were 38,856 albums released; 31,933 of
those albums came from the independent labels. So the vast
majority of the releases came from the independent label
community.
In that same year, of the records released in that year, in
the independent sector, only 257 titles that were released out
of that 31,933 that they released sold over 25,000 units. And I
think it is pretty safe to say that if you didn't sell 25,000
units probably you didn't make money on that record because it
costs so much money to make and market music. And, for example,
probably 20,000 releases by the independents didn't even sell
1,000 units; and, in fact, industry-wide only 1.1 percent of
all the releases sell over 100,000 units. That includes the
majors and the indies. So these are factors to keep in mind.
When you hear about the Backstreet Boys doing 2.4 million
or N'Sync doing 2.4 million units the first week, that is one
release. That may be 10 percent of all the record sales in that
release week. It is very top heavy, just the way it is with
retail. In retail, the top 10 accounts are 70 percent of all
record sales. So it is true with artists as well.
So you have this dichotomy between the massive artists that
sell all the records and the tens of thousands of releases that
sell almost nothing to core niche markets, and the independents
dominate that market. Every now and then one of those records
breaks through and becomes really big, and the majors go out
and try and snatch it up, keeping the independents at around 16
percent of the market share for overall sales. They do only 16
percent--between 15 and 18 percent of the market share with,
you know, with 80 percent or 85 percent of all of the releases
that come out. So that is a fact.
And you gave the fact that 67,000 artists have their music
online. And it is pretty safe to say that 66,999 of those are
artists that probably don't even have a record out that sold a
hundred units and that nobody's really interested in owning. I
may be wrong about that, but somebody would have to correct me
if I am.
I really believe the technology will help drive the future
of our business for the independent labels and for the major
labels. We can't be afraid of it, but technology is really just
a conduit for our content. It is the messenger. It is not the
message.
I was really disturbed when I was at my mother's house for
Mother's Day, and my cousin was there, and he was listening to
a CD in the car, and he was kind of holding it secretively. And
he had made this CD himself in his computer on his own CD
burner. He is 11 years old, and he had downloaded from Napster
one of my songs off of the Internet. Eleven years old. We are
not talking college students here.
A CD burner which is how you can make your own CD. What you
described, yes, you can download it onto this or you can burn
your own CD and make an infinite number of copies of those CDs
and sell them or give them away to whoever you want. So the
fact that he was able to do that isn't what disturbed me--well,
I guess it did disturb me that he could figure it out and he
was into it so fast. I thought it would take a while before it
was going to get down to the 11 year-olds, but it didn't really
take that long.
The other thing that really bothers me is I had a meeting
with my biggest artist who just sold three million albums on
his last release and has a new single out, won a Grammy with
Santana for a song called, Put Your Lights On, which is coming
out this week as a single on another label. He brought his new
album, which will come out in the fall, and he played it for
us, but he wouldn't leave the DAT, the tape of the music with
us because he was afraid of it showing up on Napster and--or
anywhere on the Internet before the release so that everybody
would have it. Because he says routinely you can get records a
month before they are even out free online.
It is bad enough you are losing the sales, but you are also
losing the elements of surprise that, okay, Tuesday it is in
the store, everybody gets excited. Well, I have had the record
for a month already; I just downloaded it. That is another
issue.
All of my biggest artists now--this is a new thing--refuse
to give me copies of their work in progress. They will not let
anyone in the record company, not even their A&R person, the
person who makes the record with them, hold any of the music
because they are so afraid of this music leaking out and being
on there.
De La Soul gave me a copy of their CD, and the copy has
three times over every single song on their new album, property
of Tom Silverman, to make sure that if it gets out he knows
where it came from. So I can't even listen to the music without
this guy's voice all over it. The same thing with Capone and
Noreaga. They will not leave a copy in our office. They refuse
to do that.
The combination of Napster and the piracy that is going on
in the street which can also be aided and abetted by the
Internet has made it really difficult for us to actually set up
and market these records because we can't hear them and live
with them. They have to play them and then bring them back. So
I feel for them, but it is affecting us in a different way.
So, you know, that is where we are at right now. Those are
some issues that we are dealing with. And I am open to
questions.
Chairman Talent. Thank you. I am sure there will be a lot
of questions for you later, Mr. Silverman.
[Mr. Silverman's statement may be found in appendix.]
Chairman Talent. Our next witness is Peter Harter, who is
the Vice President of Global Public Policy and Standards of
EMusic.com, Redwood City, California. Peter.
STATEMENT OF PETER HARTER, VICE PRESIDENT, GLOBAL PUBLIC POLICY
& STANDARDS, EMUSIC.COM, REDWOOD CITY, CALIFORNIA
Mr. Harter. Thank you, Mr. Chairman and members of the
Committee. It is a pleasure to be here this morning.
First, a little bit of history about EMusic as a small
business. And I am going to describe EMusic and some of the
issues that have been raised so far this morning from my own
personal point of view as well.
I have been on the Internet since 1986, and I have used all
these file-sharing technologies to exchange information, to
access information. Frankly, in college in the 1980s, I used
file-sharing technology to access publications from computer
servers at universities all over the world to help me with my
work on my papers I had to write for class. So file-sharing
technology is not a bad thing. It is just how people use it may
be controversial or illegal.
But, first, about EMusic, about 2\1/2\ years old,
originally started as a company called GoodNoise, but changed
the name, when we bought another company, to EMusic. It was
started by two people, Gene Hoffman, who is our President and
CEO; and Bob Kohn, who is our Chairman.
Gene is one of those many young executives. He is now 24
years old. When he started the company, he was 22; and EMusic
is his third company. His first company called PridNet he
started in college, and within a year he sold it to a another
company called Pretty Good Privacy, moved out of North Carolina
to California, worked for Pretty Good Privacy, and PGP, Pretty
Good Privacy, was sold to network associates. So after that
Gene and Bob, who met at PGP, decided to start a company in the
on-line music area. This MP3 craze was very, very popular back
in 1997 and 1998.
Bob Kohn, he is a lawyer by training. He is from New York
originally, and his family grew up in L.A. His father worked
for Warner/Chappell Music Publishing for 25 years, and Bob was
an entertainment lawyer working for a firm in L.A. That firm
did work for Liza Minnelli and Frank Sinatra. Then Bob moved
north out of Hollywood to Silicon Valley early on in the 1980s
to work for software companies before anyone really knew or
cared about software. He was general counsel for a company
called Borland and fought many legal battles on copyrights and
standards and really kind of shaped the industry.
But he and his father had a joint effort. They published a
book on music licensing. It is literally 1,500 pages thick; and
all the lawyers in the music industry, from the major labels to
professors, refer to this as the foundation for understanding
music licensing.
So you combine Gene, who understands technology and new
trends in technology, with Bob, who understands music
licensing, you have a very powerful combination for a legal
business in the on-line music world where copyright law and
Internet often collide and people don't understand how to apply
copyright law on the Internet.
I have been with EMusic for about a year, and in the time I
have been there we have grown dramatically. We are the largest
retailer of music online. Not many people actually try and sell
music online for a variety of reasons that have been discussed
already on this panel. But we believe as a philosophy in our
small business that if we make it easier, more convenient and,
frankly, more fun and interesting to buy music, then people
won't bother trying to hunt down some random file and download
it and it turns out not to be the file you wanted in the first
place. And piracy or free music, a lot of college kids go after
this where they put their own music on the Internet, and there
has been piracy before, and certainly the Internet is
accelerating piracy.
These are important issues. So I think as a business you
work hard enough and build up a loyal customer base, as we
have, and have a lot of great content from nearly 700
independent labels, the small guy, you are going to make
revenue.
We are actually making revenue. We are an Internet company,
and we have revenue. There is a lot of talk on Wall Street
about how Internet companies don't have any real revenue. We
have revenue from advertising because of a lot of traffic on
our site but also from the sale of music and we use the open
MP3 format.
EMusic has been also a participant in something you
mentioned earlier in your opening comments, Mr. Chairman, which
I want to comment on briefly. There is this standards effort
called SDMI. It has been going on for nearly 2 years; and,
frankly, it is not going very far. I would not put your hopes
on security unleashing on-line music. The train has left the
station.
In this industry, you have to have a good business, great
content and loyal customer base. You have to draw them in, your
audience, and we have done that in a variety of ways.
We charge a very low price for music. It is only 99 cents a
track or $8.99 an album, and if you happen to buy a few tracks
and then come back and want to buy the whole album, we will
credit back the tracks you already bought.
If your hard drive crashes--and, of course, PCs never break
down these days--because you are a customer and we have your
profile secure and protected--we protect your privacy, we have
a privacy policy and all that, we take privacy very seriously--
we have your profile, what you bought, you bought it with your
credit card, and you come back and say, hey, my computer got
stolen, my hard drive crashed, I can't access the music I
bought, we will give it all back to you. And because we pay
royalties to the rights holders, because those are actually new
copies of the music, we will repay the royalties again to the
rights holders.
So everybody wins. And because there is no physical goods,
we download the music, all those costs of physical distribution
and marketing, they are removed from the business model. So we
can charge lower prices to consumers and have higher profit
margins to us and the content owners, the artists and
independent labels.
So it is a fantastic business model. It has grown rapidly.
We have over 100,000 tracks for sale on our site and nearly 700
independent record labels with us, and it is just going
wonderfully. We have about 200 employees, mostly in Redwood
City, in Silicon Valley, California. We have a large number of
employees in Chicago.
We have a company called RollingStone.com which we bought
last year, and that provides some editorial content about
music. RollingStone is a wonderful brand.
We bought a company called IUMA, the Independent
Underground Music Archive, that helps artists who are not
commercial become commercial. And, frankly, with our
relationships with independent labels, if you are not a
commercial artist but you want to meet the independent labels
which is, as Tom pointed out, actually how you get a record
released, we have that whole food chain lined up pretty
logically.
And we have offices in Los Angeles, of course; New York, of
course; people in Nashville and Austin, because that is where
music comes from; and we are looking at overseas expansion
eventually as we grow.
But we are a small business, started out of Gene's living
room in his house, and it is just going really well.
As for Napster and piracy, we have been watching the
lawsuit for some time. Bob Kohn, our Chairman, has made
statements in the press about the litigation but more so as a
music licensing expert.
The company is not taking an official position because it
is difficult for companies to take positions on matters of
litigation when they are not involved. It is something you
don't want to say publicly. So I am going to be a bit guarded
in my remarks.
But if you look at what is happening in the industry,
people often say that the music industry is actually a $100
billion industry trapped inside a $40 billion straitjacket. It
is because of the distribution. The traditional business model
like the five major record labels suffocates the release of
music. The independents, as Tom pointed out, release 80 to 85
percent of the content but only garner between 15 and 18
percent of the revenue. And, actually, I have figures that say
they garner 25 percent of the revenue, but you get the point.
There is a huge imbalance.
And surely the majors have more revenue because they have
the big pop stars that are here today and gone tomorrow, like
Britney Spears. She is kind of the poster child for what
characterizes the major label. Now I personally don't have
anything against Britney Spears, but just in the industry
circle she is often held up as the example of what the majors
bring to the marketplace.
The independent record labels, they bring new genres, they
create new markets, they get the small artists out to the
market. And the Internet completely goes around the major
record labels. Now, of course, with SDMI and other tactics the
majors are trying to regain control over the Net. But the train
has left the station, and we have to focus on the issue of
piracy. Because if the artist does not get paid, why would they
create music?
EMusic pays all the royalties. It is all on the computer.
So if anybody wants to come look and say, hey, I didn't get
paid; why are you holding my money back from me? We will show
them this is how many charts got downloaded, and there is the
check; it went to your bank account.
So we offer a very good way to open up the industry and its
accounting practices to show that we pay the publishers and the
rights holders; and we are trying to automate it, pay more
frequently than once a year or once every 2 years. Pay it
monthly, maybe even daily, if we can scale it fast enough.
So a lot of great things about selling music legally in
open formats on Internet.
Another thing about MP3 and why it is so popular is the
format is easy to use. Sure, the sound quality can be better,
but, frankly, if you are going to download music into a little
portable device--not the same device that my colleague has--you
are running down the street, there are buses going by, you are
not going to care about having 100 percent quality music. It is
good enough, it is fast, it is fun, it is convenient.
Chairman Talent. That is a question I did want to clarify
and I almost asked you, Ric, because I was told that the
quality is less than CD quality but it is good enough for
practical purposes. Is that a consensus here?
Mr. Harter. I don't think it is that black and white. We
encode our music files in MP3 at the highest quality, it is
something called 120 fitness, and there is no point going into
what that means.
The fact is, when you take a music file which is a very
large file and compress it so you can store it and transmit it
conveniently, what is happening is you are taking out the ones
and zeroes--you are taking out the sounds the human ear cannot
hear, and that may diminish the higher end music that--
classical music has all these nuances, and some genres may
suffer, but I think technology is changing so rapidly and the
encoders are getting better, it is getting near CD quality, if
not there already, and we encode it in the highest quality
encoders right now. So our sound quality is very, very good at
EMusic.
In closing, Mr. Chairman, I brought these props along.
Elvis Costello is one of our artists. All his music, except
for some recent stuff, is on our site. This is an album he put
out in 1977, Elvis Costello's My Aim is True; and I have got
this thing in here. I don't want to damage it. My friend gave
it to me.
Remember these? I used to have 1,000 of these things. When
I moved from Pennsylvania to California, I couldn't lug all
these things across the country, and that was 5, 6 years ago,
so I gave them away or sold them. I have a few as mementos. I
never play them anymore.
But we have gone from round plastic--and, of course, a CD
is round plastic. I won't bother showing that. People know what
a CD is.
Now, in these devices or on your computer like Dwayne's
computer up there, you have silicon. It is square, square
music. This is a portable memory device. It is a chip that
contains music. So as if you were to take an album and make
copies of the songs you like on to your audio cassettes for
personal, fair use, of course and you were to play the cassette
in your Walkman to go running--we have all done that--or just
to play the songs you want, this is the digital progression of
that.
People make their own compilations. The thing about silicon
it puts the power into the hand of the artists and the
consumers. The major record labels, when vinyl was king, they
controlled, but control is gone from the vinyl in the majors,
and control is shifting to the artists and consumers and to
silicon. It is going from southern California, of Hollywood, to
northern California, Silicon Valley.
Thank you.
Chairman Talent. Thank you, Peter.
[Mr. Harter's statement may be found in appendix.]
Chairman Talent. Our final witness is one of the most
powerful advocates for cutting-edge use of the Internet to
market music. He is Chuck D, founder of Rapstation.com.
Chuck, thank you for your patience; and please proceed.
STATEMENT OF CHUCK D, FOUNDER, RAPSTATION.COM
Chuck D. I thank you, Mr. Talent, and it is coincident
because I have been regarded as talent in the industry, it has
taken advantage of talent.
Chairman Talent. I wish I were as highly regarded in my
line of work. Go ahead.
Chuck D. I would also ask that these doors be closed,
because, you know, that is kind of distracting, and beepers and
cellies be turned off, please.
First of all----
Chairman Talent. If the members of Congress wish to come
in, I have to let them in, though.
Ms. Millender-McDonald. Do we have to?
Chuck D. I feel like Reggie Miller. I have got this shot
clock in front of me.
But, first of all, I would like to say I admire the
comments and facts and figures and respect everything that Mr.
Dube and Mr. Harter has said in their business models, so I am
not going to repeat many of the same things that they said; and
in all due respect to Tommy Silverman, who I have worked with
before, great guy, and he also has a fantastic business model
as an independent record company, all due respect; but the
major corporations have caused the conditions that made it
difficult for independent companies and artistry to compete in
the game of music.
We at Rapstation.com, and I have been involved in
downloadable distribution for about 5 years as a saving grace
for my artistry, have used downloadable digital distribution to
microfocus upon a niche of rap music that I have been involved
with. It has helped build a world community through
communication, cultural exchange, in 40 countries I deal with
on a regular--and I take advantage of rap's worldwide
experience, and I just think the corporate imbalances of the
images making rap music and hip hop, like jail, gun ganging,
drug culture is sort of like balanced out with everybody
participating into the reflecting imagery.
At Rapstation.com I also engage with thousands of artists
to equally market their music without complaint because they
control and own their own destiny. So I choose artistry over
industry any day of the week.
Also, we also have to realize technology whips technology's
ass every time. The 20th century tree that was so fruitful, you
might not be able to pick from so easily. Napster or
downloadable distribution, like we would call it, file sharing,
is leading one million MP3 march. It trades music like baseball
cards, and digital distribution and file sharing is like those
asteroids that wiped out all the dinosaurs. And in this case
the dinosaurs are the big four, Sony, BMG, Time Warner and
Universal.
Now these companies, which will soon probably be three any
week now, have always prided itself in the excitement of the
music industry and the fans. Well, Napster and downloadable
distribution is the biggest excitement since disco, rap and the
Beatles. It is like new radio. And it is not just free music,
but it is a watchdog method for one site industrial rip-off.
The chickens have finally come home to roost.
I think if people look at the artificial price hiking of
CDs, something they made for as little as 80 cents and then
charged the consumers, in cahoots with retail, for as high as
$17, that has never been explained to the public up until
recently. They have taken advantage of the artist and the
public, squeezing out the small entrepreneur with a lawyer-
accountant mentality, and now the industry is now begging
government for this illusion for their inconvenience.
I think the Federal Trade Commission, you know, also found
out the record companies were actually hiking their prices on
the public; and they said, okay, how do you feel as an artist?
First of all, I think the system had to be eradicated for
everybody to participate and start from scratch. I mean, for
the first time now you have who was deemed as the consumer in
the audience, now they are participating in the music business.
And how do we get paid? Well, technology will be there again,
but the select process and the dominance will be eradicated,
and now things will truly be shared. A business model will come
up out of this in the new century. It won't destroy the old
companies, but it will reconfigure their ways.
Piracy, well, the talk of the label 's bottom line is
always the case, and that is why they are screaming. To protect
artists, that is some BS.
You know, they come up with these promo copies and they
press up 5,000 or 10,000 and, you know, in many of the cases
they go to waste. And the downloadable distribution, you have
something that is called on demand, and I know that there is an
artist graveyard out there of artists, especially black
artists, back since Bessie Smith in 1923, that have much more
complaints than downloadable distribution. Their complaints
happen to be with the one-sided contracts.
I have signed a contract that said worldwide rights, and
they couldn't sell the records in Africa, South America or
Asia. So why am I signing something that says worldwide rights?
Then they say, well, the world and the universe. So that
means if I get to Venus, they got the right to sell my records?
So they want to control cyberspace, too, without knowing what
it is.
I would bet, because of the corporate quagmire, more than
50 percent of all artistry is just stuck on shelves or never
comes out in the public anyway. So I think it is very
imperative for artists to adapt to the technology, to try to
avoid this one-sided monopoly, because I do think it is
collusion, for companies now have to share the marketplace; and
I look forward to one million artists and one million labels
all on the Internet.
Now, RIAA, they only answer to people, you know, who are
usually former lawyers and accountants who have assumed
executive jobs, taking in as high as eight-figure salaries. I
have never seen eight figures, but to look at a company's
president who is using stockholders' money and pulling in $18
million for a year, when he gets fired, as an artist I have got
a beef. So, you know, if it ain't about the artist, the
industry damn sure ain't caring about the fans either, because
why would they charge them $17 for something that they make for
79 cents? So I think this organizes and creates a new
infrastructure.
New templates will be created. Yes, 95 percent of all music
will be free, but it has always been 5 percent that have driven
it. And now it is a global entertainment business. And I think
the biggest beef, just like Mr. Harter said, is that now the
entertainment business--and we are not just talking records
companies, we are talking movie industry and television--the
entertainment business is morphing into the entertain net
business. And now you have technology companies that will
actually push the button, as opposed to these ex-lawyers and
accountants that just happen to push pencils and somehow fall
into a 9 million a year salary there. I still don't know what
they got paid for.
So will I think it will hurt actual sales? Nope. They said
the same thing back in 1967 with FM radio. They said the same
thing with the advent of the cassette recorder. The same beefs
popped up. People can tape, but they will still go to
Blockbuster. If they can get HBO and Cinemax and Showtime and
they can tape on their VCR, what makes them go to Blockbuster?
Blockbuster depends on them people bringing back their videos 8
days late. That is how they make their money.
So these companies will still be around. I think the
laziness of the American public will also keep the
entertainment or the entertain net business at an all-time
high. And this new digital distribution will be exposure, and
now, truly, we have global exposure.
So, I mean, I am here testifying in the United States of
America in front of Congress, but the Island of Dominica has
nothing to do with this government and, therefore, they will
get the music, too, and then all of a sudden you will have
Asia, Africa and South America be able to get the music.
So I think it is imperative now that the artists also
understand that they can go to these places and become business
people of their own or set up their own business teams instead
of being locked outside the door because they don't happen to
be in the offices of New York, L.A. or Nashville. So now the
hands are all in the pot together. There is a million hands in
the pot, and that is why you hear a lot of screaming.
I am not screaming. I had ties with Universal, Universal,
Edgar B and the Universal Crew. And I had a lawyer tell me,
well, Chuck, you sold millions of records here, but you will
never see a dime because you owe us. And I said, like hell I
do.
So you think I am caring about them? No. I am doing better
in the digital system selling 10 copies, even if 100 people or
1,000 or 1,000,000 people get my music for free. If I know
1,000 that is coming my way, I will deal with that as opposed
to somebody being shady.
Ms. Millender-McDonald. Mr. Chairman.
Chairman Talent. I think the witness can continue if he
wants to, as long as he would like to.
Chuck D. I have got to go to London tomorrow. I really have
nothing else to say.
Ms. Millender-McDonald. I would like to ask Mr. Chuck D,
``how do you really feel?''
Chuck D. Well, I know that, you know, here in Congress, I
know you have many a stuffy day. I am seeing C-SPAN many a day
where the cameraman was like--so why not bring a little bit of
the entertain net business in the House?
Chairman Talent. We were counting on it. You delivered as
always. Thank you so much.
[Chuck D's statement may be found in appendix.]
Chairman Talent. We will go to some questions. I have a
couple, and then I want to defer to members who have been so
patient.
I don't think anybody referred to something that is going
on in the business that again is important for background; and
maybe, Ric, you can comment on this. We talked before about
Napster. And for those members who came in late, Napster is a
software program that millions of people have and through which
you can access other people's reservoir of music. So if you
want a song you can go on Napster and download it from somebody
else's file without paying for it. This is at least the
concern.
There is a lawsuit going on now--Ric, would you just tell
us about that, please--against Napster.
Mr. Dube. Dealing with three lawsuits right now. One from
the Recording Industry Association of America for contributor
copyright infringement and vicarious copyright infringement,
and then two artists have sued the company as well, Metallica
and Dr. Dre.
Chairman Talent. So there is an attempt to control this--
since I think most people recognize you can't control it
through the consumers--to control it through the people who are
selling the software.
One question I had, is any of that going to be effective? I
think somebody referred to the fact that there is going to be
no way to have security kind of blocks or to control the use of
this anyway, even if legally Congress tried to do it or the
courts tried to do it. I think, Peter, you talked about that.
Maybe, Tom, you can comment, or anyone who wants to. Because
all this discussion about whether we should or shouldn't do
this is, in effect, moot because it is going to happen whether
it is legal or illegal?
Mr. Silverman. I think it is important to recognize that
copyrights have value and that they are proprietary. Because if
you lose that, I could go out and take the software from
Napster and start Tomster tomorrow and get my $15 million from
Wall Street, which is what happened like last week or this week
with Napster, to finance another kind of theft operation, you
know, that frees up somebody else. And then somebody will steal
my thing because nothing is protected.
I mean, this country is really based, especially small
businesses, on ideas, great ideas. That is all we have, because
we don't have money.
When I started my company, I had an idea. When I heard
Afrika Bambaata DJ and how he put this stuff together, I said,
man, let's--make a record. I didn't know what I was doing. He
goes, all right, why not? And that is how the company really
started.
It was just an idea, and that is intellectual property. If
there is no way to control it, movies, books, television,
nothing creative has any value anymore. You know, software is
all up for grabs, and why would anybody be creative then? It
becomes a Nation of thieves, and it is almost like a riot. Let
us go loot the Pathmark.
Chairman Talent. Chuck, tell us why anyone would be
creative under those?
Chuck D. I think you have to adapt to technology, and none
of those really--except for books, none of those things meant
anything in the previous century. So what we are talking about,
intellectual property and certain laws, existed within the
paradigm I guess of the 20th century.
Now in the 21st century it would take some kind of
adaptation to whatever is going to come along, and a whole new
set of rules may be set up, but as we go along we will figure
those things out, but it is old hat.
What happened last century, like I said, was a whole
different type of tree. And now as we go into the next century,
I look at it as an artist, it is almost like being an
outfielder. Now it is raining on the outfield grass, but the
umpire says play ball anyway. I know I can't haul tail over in
the corner trying to catch a fly ball if the field is wet, so I
have got to figure out how to run on that wet grass and make do
with what is there.
So my whole thing is I know how to adapt. How a major super
dinosaur corporation is going to adapt--I don't care about Time
Warner's bottom line. I don't care about Sony, BMG or
Universal's bottom line. I just don't.
To me, if I make something for $10 and $20 comes in, boom,
now I can get a fish sandwich and a peach drink. But, you know,
the way those cats have swindled the public on, as far as, you
know, stockholders' money and how they all went in there and
raided those companies and pulled all the money out and now
they are crying and saying, well, they are protecting the
artist, that is just a crock of BS.
They just should say, ``hey, you know we want to become
richer than we were in the last century; we want to get paid
more for than we did in the last century. And this is why it is
bothering us.'' Because they have made it in the industry, they
created the auspices of creating artists that are disposable
every year around and throwing them out so they won't
renegotiate. So they say the artists never renegotiate, but the
executive salaries go up.
And I say that Tommy is an exception to the rule because he
is an independent owner of a company. Yes, he has dealings with
those guys, but he is not one of those guys. You don't see one
of those guys here.
You know, I would like to see Edgar Bronfman, Jr., here or
a head from Time Warner or a head from Sony or a head from BMG,
and I would torch them. But I have got respect for Tom because
I know he is dealing with elements that have got to keep him
afloat because he has been torched by the same climate that
these guys have concocted.
Chairman Talent. I wish we had them here. Boy, it would be
fun.
And you will just respond as you want, but also please
include the answer to this. My interpretation is that what is
happening here is the technology may make the middleman
unnecessary, and if that is the case, as difficult as that is
for the middleman or the middleperson, isn't that just
something that a lot of mom and pop grocery stores aren't in
business anymore because of Wal-Mart either?
Mr. Dube. Mr. Talent, copyright laws are incredibly
important, but it would be tragic if an industry used copyright
law to ignore the demand of the public. You have supply and
demand. It is called demand. It is not, pretty please, can we
have downloadable music? They are saying, by any means
necessary, this is what we want.
Now the way things are going, it would enable record labels
to sell direct to the public, but that is not their core
competency. Their core competency is building artists,
marketing them, production, distribution. That is what they are
good at. There is a whole set of middlemen that are good at
getting the music to people, helping people connect with the
music that they have never heard of that they will love, and so
it is an evolution that everybody has to go through. It is no
different from a century ago, horse raisers going out of
business unless they wanted to turn their factories into car
shops.
Chairman Talent. I promise you, Tom, if you want to
comment, go ahead.
Mr. Silverman. There is two ways to look at it. There is
the issue about artists/labels, be they big or be they small,
losing revenue, you know, and that is artists and labels. So
that, for example, someone yesterday called me and said, ``I
hear you are going to give testimony tomorrow, I want you to
know about this artist called The Magnetic Field. They are a
small artist, but they have a devout, college-oriented
audience. Their music is a little bit left field, but they have
like a triple box set, triple album box set out now that has
sold 30,000 units. That is an enormous number, and they are a
tiny, tiny, tiny independent label that probably does a tiny
amount of business. And this guy Stephen Merritt, who is the
head guy in the group, is very, very concerned because he
thinks he could lose half of his business, because that is
exactly who the core of the Napster world is, college kids,
really.'' So that is one argument.
The other argument is, you know, what it costs to make a
record. And if it is of interest to anybody I could break it
down, because Chuck oversimplifies.
It is not 75 cents for a piece of plastic. It is not at
all. I did talk about it a little bit, but, you know, it is $2
to the artist and the publishers, it is $1 for manufacturing,
and it is $2 for marketing, and it is $2 for distribution, and
it is $2 against the massive overheads or the small overheads
of the labels, you know. And all that equals $10, and the $10
is what they sell it to the distributor or I mean the one-stops
or the retailers for. And then they mark that record up from
the $10 to whatever they charge, $15, $18, whatever, and that
is what the retailers make.
If there is this disintermediation that you are talking
about, who is going to be disintermediated? Will it be the
retailer? Will it be the record company? Will it be a little of
both? I don't know, and time will work that out.
I am trying to find a new way to look at the entire record
business now and have a pioneer-like leadership role in
changing the whole model between artists and labels. Because
Chuck is pointing out things that in the new age are more and
more clear that they don't work.
We have a model that has a percentage in there for breakage
of when records were 78s, and they used to break all the time.
It is still in the contract. He is totally right about that
stuff, and I am not down with that. It is just what the
tradition was, so that is what we do.
But I think now we are at a crossroads. It is a time to re-
examine our relationship with an artist. Because an artist will
always need a partner to finance their career, especially at
the beginning in terms of how are they going to get exposure.
Because it is all about mass impressions. Television, radio,
movies, whatever, is mass impression, secondary college radio,
college touring, press and the Internet. At some point, the
Internet might be a massive impression provider like TV might
be and like cable has become, but right now it is all still
really radio and TV specific.
Chairman Talent. If you are not selling the exclusive right
to own that artwork because it is no longer possible to protect
that exclusive right or because we choose no longer to protect
it, then what are you going to be selling? What is it you can
make money off of?
Mr. Silverman. No one is going to be able to invest in
breaking Public Enemy and no one can pay Bill Adler to
publicize it.
Chuck D. Those days are over, Tom. Them days are over.
You are going to have a million artists out there.
Technology has allowed many people to have these home studios
where they are making record-ready material, and there is not
enough room for the major or independent companies that are
your size to actually sign everybody. But they are going to
actually have all their art out there, and those areas on the
Internet are going--you are going to see and more and more
radio stations appear on the Internet, television stations
appear on the Internet in a short amount of time.
You are talking about radio station screaming. Look at an
old network like CBS. They are going to be screaming because
the attention span--as far as everybody going elsewhere for
entertainment, nobody's going to visit CBS. I mean, they treat
it like a goldfish bowl now.
What I am saying is, you are going to have a massive--and
it is not just going to be national. You are going to have a
massive international pot of artistry, as many as 10 million
artists who made their material in their basements. And now,
you know, the majors are going to try to say, well, we don't
want that little kid from Ohio to actually outshine us, but we
can't purchase everybody's copyrighted material. We are going
to have to figure something else out.
Mr. Silverman. They would just wave money in front of them
like they always do.
Chuck D. But they can't wave money in front of everybody.
Chairman Talent. What value are you going to add to this
artwork since you are not going to be able to protect the
exclusive right--what are you going to offer the consumer that
is going to make them go to you, the legitimate business? Even
those words are going to go out. It is going to go to you
instead of somebody else. How are you going to make money? I
guess that is what I am asking.
Mr. Harter. I think that is the big question. Internet
business models offering high-quality sound recordings on-line
at a convenient, all-one-stop-shopping site, where, you know,
you go there and you don't have to hunt around for hours on
end.
Napster is interesting in that its library of music is only
as big as the number of people who are logged on at the time
that you are on. So you can be on Napster one day and you find
the track you want, but, hey, I have got to run out and do
something and come back, you can't find it again. That is not
the same easy, fun experience that consumers enjoy by going to
a commercial retailer where the music is there, its quality is
not a fraudulent copy.
Artists who are not commercially an optimal label, their
music tracks are on the Net with famous names of the song,
inducing somebody to download in the hopes they will listen to
it and then go and track down that real music. So you think you
are downloading the U2 song, Where the Streets Have No Name,
and it is some thrash metal band, and that is not what you are
looking for.
Mr. Silverman. Or you didn't pay so you got your money's
worth.
Mr. Harter. That is a very good point, too, if you didn't
buy it from a legal site.
What I will say about Napster, they are start up, they are
a small business, they have made some tactical errors in their
litigation in how they structured their business. I am not sure
how sophisticated they are, but there are a lot of interesting
relics in Silicon Valley.
There was a company in 1995 called Point Cast. Anybody
remember Point Cast? The start up that was pushing content to
you, as opposed to you going out and getting content. It would
push content to you, and it was so popular that Murdoch was
going to pay almost a half billion dollars for it, but Point
Cast wanted more money. I think what happened to Point Cast,
their executives left, they didn't make any revenue, and it was
sold to somebody else for $10 million, and that company is in
trouble now, too. So Napster could be the great new business or
it could be the next Point Cast.
I think a lot of things in Silicon Valley depend upon who
you hire, how sophisticated the management is, who your
partners are. And if Napster is going to be a player in the on-
line music area they have to have good relations with artists.
And, frankly, if they are not paying out royalties to artists,
besides maybe some promotion, I frankly as a businessperson
don't see how they are going to provide a competitive advantage
to artists.
Artists can go on-line like Chuck D right now and do their
own thing, or maybe the majors will reform themselves and be
more competitive, but I think Napster is going to be one of
these end notes like Point Cast in the industry. There are a
lot of factors at play here; and, as Tom said, let us wait for
time to play things out.
Chairman Talent. Chuck, you want to make a comment? And
when you do--because I think it is a fair point Tom made. You
are so big in the business that you can do a different business
model and you are going to still do okay and you may do better.
What about the new artist trying to get a toehold, needs to
make some money off the first song they get that people really
want to buy and then can't do it because it is being pirated?
Chuck D. Number one, I am telling every artist to be
realistic and start from the bottom up. You get fans one by
one. And also you figure out ancillary areas. I have been
involved in the Silicon Valley areas as far as entertainment is
concerned for the last I guess 4 to 5 years, and just recently
we have designed a model with a few companies and specifically
one unnamed company that has come up with a signature MP3
format which still would allow the public to get it for free
but still would generate income to the artist and to the
company.
I am not going to give that in front of Congress today
because I am not the president of that company, but, you know,
I mean I do work on this as an artist, and as an artist I have
to explain a way that artists can eventually get paid. But,
number one, I would like to see artists get into the game. See,
the music business is probably choosing 2 percent of the
artistry that is out there. So what does that mean for the
other 98 percent, that they can't participate?
At least in sports you have a high school kid play on the
school basketball team. There is no infrastructure in music at
all. It just happens to be there is this big company, I have
got money, I see something I like, and I am going to pick you,
and I choose you. So for the first time a structure can be
built where, if the companies are at the top and they have the
top dollar, they can see a level of recruitment rise to the
top. So this is something where the doors are open for them to
participate, as opposed to being on the outside waiting for
somebody to anoint them or select them.
And I think, you know, I have--I think we have about 1,200
artists on Rapstation.
John Hee, if he is still here, and you know, he has no
complaints. He is trying to--he is in control of his destiny,
and he is looking upwards.
Nobody wants to see the big guys destroy those companies,
but they want to be able to see a fair game out there. So I
think what this has done has leveled out the playing field
where it is a fair game and artists can at least look forward
to areas of business like joint ventures instead of one-
sidedness. Hey, you get 10 percent, and they will say--I used
to ask the question, why would I get 10 percent on my contract?
And a lawyer told me, well, because nine out of every 10
artists fail, Chuck. That is why you get 10 percent. I said,
what has that got to do with me? I am successful.
So, you know, you will see a change in the rules this
century, and I don't think you will see anything go away. You
will just see a lot of adaptation.
Chairman Talent. I recognize the gentlelady from New York.
I appreciate the Committee's patience.
Ms. Velazquez. Chuck, can you give me an example of any
recording artist who has successfully marketed themselves
through the Internet without a label behind them?
Chuck D. Well, first of all, if I am going to talk about
myself, and I used to be on the other side, it wasn't just
through records or music. I had like the first full
downloadable album ever last year, and the whole key is I made
the record for nothing.
Mr. Silverman. I think she means from scratch, a new
artist.
Chuck D. I had artists along with me who made money off
their materials and off their exposure by me putting them on
tour in different countries around the world. They weren't able
to do that before. On Rapstation.com we have 1,200 artists who
are finding ways to expose their art in different area where
they are finding ancillary areas to actually make money.
Well, money comes from--okay, I have a copyright, and I am
going to stay at home and make sure that this record goes out
there and just makes me money. I think that template is over
with. I think now it is up to the artist to find nine or 10
different ways and say, okay, I have got this one song. Hey,
Tommy Boy, can I actually get this one song on that compilation
so that you can sell out there in the marketplace while I have
made 30 other songs and it is doing its other work or whatever
or what might not sell?
So you will see a new paradigm of artistry come about this.
You won't see the lazy artist anymore, Tom, the lazy artist who
wants to stay home and not work. It is over, because you have a
million artists out there.
You have artists like John Hee, who moved here from
Cleveland, who took--he took advantage of the whole Ohio
market, moved here to D.C., is now taking advantage of this
whole market here and actually getting his music around. He is
a true Internet artist right back there. And he wants to go up,
but in the past he couldn't even get in the music game. He
would have to send a demo. And demos, you know, 95 times out of
96 times will sit up in the office and never would get listened
to, and he would have a hard time getting in the game from
Cleveland.
Mr. Silverman. But the answer to her question really is
that no artist has broken from the Internet without assistance
of another person or other exposure from somewhere else.
Chuck D. That will come, because what you are going to have
is more exposed areas.
Ms. Velazquez. But to answer my question, it hasn't
happened?
Mr. Silverman. Hasn't happened yet.
Mr. Dube. MP3.com claims to have a couple of artists that
make a living selling CDs through that site, maybe one or two.
They are not household names, but they are making disks in a
way that you don't have to sell very many to break even and to
make money from it.
Chuck D. You got people that sell a million records, but it
takes them $7 to $8 million to sell a million records, and they
are not making a profit. So, I mean, how much, you know, how
does that idea work?
I mean, increasingly--what got me out of the record
business in this old model is the fact that, you know, I would
have a record and then they would tell me that, ``Chuck, it is
going to cost you about $750,000 in order to get the record
played on radio.'' And I would say, ``well, I have got a good
record.'' You know, I have got a good record regardless, so why
have I got to go through that political red tape to get my
record played? It sounds like a whole bunch of hogwash to me. I
want to create something that destroys radio. You know, if they
are going to red tape me out----
And the same thing with television. If you don't have a
$250,000 to $400,000 video, you can't get your video seen on
MTV. So what does that do to the small business person? That is
not right.
Ms. Velazquez. You answered my question. Thank you.
Mr. Silverman, there has been occasion when I have
purchased the same music in several formats--CD, cassettes and
albums; and I assumed that the artist is receiving a royalty as
a result of that. In these instances, the artist has received a
royalty several times over as a direct result of the technology
enhancements. My question is, is MP3 technology driving the
music industry or is the industry driving technology? In other
words, has the music industry in some small way helped create
its own Frankenstein in Napster through the ability of users to
obtain free music?
Mr. Silverman. Well, it is a complicated question. Because
when CD came out, vinyl and cassettes would be replaced, so
people would rebuy the records that they already owned, and so
there was sort of a free ride for record companies. For a
while, that helped them. Besides selling the new music they
were selling the old stuff over again. That has stopped now,
and that is one of the reasons for the lethargy in the record
business now.
Could this be the same thing? Yeah. If a device comes out
that I could put 12,000 songs on tomorrow and an easy way to
download them for a reasonable amount of money comes out, I
could do two things. I could take all my CDs and put them in my
computer and spend 6 months copying them all into the hard
drive or whatever on something that is the size of that little
Walkman thing, and I will carry that around with me and have
every song I like that I have ever had, that I have ever liked
with me in the car, when I am jogging or at home in a thing the
size of a Walkman. I think that is a beautiful thing. Do I want
to rebuy all my music? If it is easier, I think people do what
is easier if the price is reasonable.
So there may be a chance for the replacement again of CD
collections. By just pressing a few buttons and saying I want
these, you wake up in the morning, they are all downloaded. And
they are also filed with names and artists' names so that
whenever the song comes up they are that way, and I can program
them at a party so I can get Yo! Bum Rush the Show and then I
can have Planet Rock right after it. So I can have a jukebox.
The thing has all this programming capability that you
don't really have even with CDs, but for 10,000 songs, we are
only a few years away from that. So, you know, it might be that
way. Some people say we are going to not own music at all
anymore, we are just going to have cell phones that we plug----
You know, in Sweden, they are working on this model. They
are calling it WAP, W-A-P. Because other technology that is
coming, where you just put your headphones into your thing and
some wireless system gives you the song you want to hear
whenever you want to hear it. So I want to hear this song and
every time I play it, it costs me a quarter, just like a
jukebox, or 50 cents. I will just listen to whatever I want
when I want it. If it is the Delphonics or if it is a record
coming out tomorrow, I can just listen to it for the same price
or it might be multiple prices. I don't know.
All we know is that nothing is going to be the same. It is
the most exciting time in the history of the record business, I
think, certainly in the 23 years that I have been in it. So I
am really excited, and I see that it is a possible opportunity,
but the opportunity only exists if the copyright can be
controlled by the artist. And the artist's partner is the
record company, and I don't want to talk about what the nature
of that partnership is because that is a whole other----
Chuck D. Tommy, you are honorable, like I said. It is not
like you are Hillary here or the rest of the record companies,
because they would get beat down.
Chairman Talent. Chuck, given the venue, you ought to make
clear which Hillary you are referring to.
Ms. Millender-McDonald. Thank you so much, Mr. Chairman.
Chuck D. Well, not the one that is running for Senate, but
you know--and I am a good friend of Hillary Rosen. It is just
that you said--you are protecting cats that really, you know,
look at you as having a job, you know. You are protecting their
interests, and their interests--you know, and I am not saying
the guys in the record companies are shady or bad guys. I am
just saying this has been a one-sided system over the last
umpteen amount of years, and now all of a sudden the audience
or the consumer has gotten to the technology first before the
industry. Now the industry is begging government to help them
out. You know, did the consumers beg government to help them
out when the industry was high-pricing them?
So I mean it is the laws of nature that have just balanced
out. It is like the guy that walks to the corner, and he has
this gigantic bag of M&Ms, and he dishes them out one by one,
here, here, here, and this guy----
Ms. Velazquez. Mr. Chairman, I think I have consumed my 5
minutes.
Chuck D [continuing]. The bag breaks all of a sudden, and
there are M&Ms all over the corner. It is hard to tell them,
no, don't pick that M&M up, don't pick that up. It is like it
is all over the street.
Chairman Talent. Is the gentlelady finished?
Ms. Velazquez. Yes.
Chairman Talent. All right.
Next, I will recognize another gentlelady from New York,
Mrs. Kelly.
Mrs. Kelly. Thank you, Mr. Chairman.
You know, with the Internet, e-commerce explosion, this
Congress has had to deal with lots of issues of security and
privacy and taxation and infrastructure development. We are
sitting here struggling with a lot of issues on not just your
field but many fields, and I would like to ask each of you to
answer just one question for me. If you could write legislation
that would affect and protect small music labels and
entrepreneurs, how would you write it? What would you do to
help protect yourselves?
Chuck D. First, I would like to be able to say that
everyone would have the opportunity to become a small record
label.
Mr. Silverman. You don't need legislation for that. They do
have the opportunity.
Chuck D. Now they do.
Mrs. Kelly. What would you do to protect the small record
labels, the artists?
Mr. Silverman. First of all, I think that it is possible
that the judiciary can deal with the issue based on the laws
that are currently on the book. If new legislation were
necessary, you know, it would be hard to write it that would
protect only the small business, but you would want a level
playing field for sure so that no economy of scale would give
an unfair disadvantage in the creative process to somebody who
had more money which to some extent is the case right now.
For example, you know, because of economies of scale, those
four majors own slots on radio stations and thus on the chart.
I can't break in and I can't get my record that is worthy of
getting played because I don't have the flow.
Chairman Talent. Explain what slots--you referred to that
several times.
Mr. Silverman. Radio's top 40 radio station plays 40
records. They play in the top 10 those records are getting
played 50 times a week or more. If you look at every radio
station in the country, the top 10 records, 99 percent of their
records they are playing on their entire play list are major
label records. They are not from this 31,000 selection. They
are from the 7,000 selection.
Part of the reason is the big companies have, you know, so
much flow of product at such a high level and they are spending
so much money that they have special relationships with
independent promoters, they have special relationships with the
radio stations themselves in terms of how much advertising that
they can spend. So the cream doesn't necessarily get to rise to
the top.
I am saying the same thing that Chuck has been saying,
because an independent label and an artist are so close in what
our concerns are. And as I have grown as a label I can see it
from the major's perspective, too, but I have always fought for
systems that will give us a level playing field.
I don't believe an independent label has the same shot to
get a record played on the radio that a major label does
because they have a guy who goes into every station every week
and knows the guy and buys presents for his kids. We only go
maybe twice a year. And, you know, we have to do it over the
phone because we only have a few people in the field and we
don't have one in every market like the big companies do. So
that is an economy of scale, for example, where it shuts out
things.
We actually haven't had that problem at MTV, and we
certainly don't have that problem at BET. So on the video side
we don't have that problem, but we find that problem is
incredibly insidious at both black radio and pop radio.
Mrs. Kelly. Mr. Silverman, if I understand you correctly,
you implied by your testimony just now that you feel we should
let the lawsuits play out.
Mr. Silverman. Yes.
Mrs. Kelly. That you feel that the laws that we have are on
the books, that should be enforced, they are adequate enough,
and you would not willingly go into this and rewrite law. Is
that what I understood you to say?
Mr. Silverman. Yes. I think that would add another level of
confusion. I think the consumer and businesses are already
confused. You know, the dust has to settle. Like Chuck said, no
one knows what's going to happen next.
So if we wrote laws now they probably wouldn't be
sufficient in 2 years because we don't know how it is going to
shake out. We don't know if people are going to want this or
they are going to want it through their cell phone. There is a
hundred ways we might get digital music. Like you said with
Point Cast, a million things are going to happen. There are way
too many variables to be able to write laws. We have to wait
until there is more consistence and we can see how it is going
to play out.
I think the only thing that is important is that Congress
has to understand that intellectual properties have to be
protected because it is probably the biggest--it is the biggest
export of this country; and we cannot condone cultural piracy,
which is a Napster, Gnutella or whatever kind of a model. That
is a model that gives no credence to the concept that an artist
or an artist and its partner, the label, could possibly own a
copyright, and I think that is the one thing--it is just
clarity that is necessary now. If Congress can understand that
and if the judicial can understand that, there shouldn't really
be a problem for very long. These entities will come, and they
will go.
I can't believe that people are financing these companies
because, you know--basically, why don't you just finance an
underworld operation? Because it is criminal activity.
Mrs. Kelly. Ric, do you have something you want to add to
that?
Mr. Dube. I think, in terms of the specific question, the
independent labels are the ones best poised to benefit from
what is going on right now. The Internet brings unprecedented
exposure to those labels and those acts. It also means that a
lot more labels are coming on board, so competition becomes
fierce.
We are in a real awkward period right now. It sort of
speaks to a question that was asked earlier whether the
industry made its own bed here. It did, to a certain extent,
but it wasn't conspiratorial. I think they were caught very
much unaware, had no idea how quickly technology was going to
be embraced and how quickly digital copies can be made and
spread around. As a result, now they have got to figure out
what they are going to do.
Right now, I think it is far too awkward to commit to any
sort of legislation that would end up impacting things far down
the road before we know how anything is going to pan out. What
are consumers going to embrace? We have no idea. And how are
the old world industries going to evolve their business models
to take advantage of what people want.
Mrs. Kelly. Thank you very much. I thank all of you
panelists for being here, because you are really giving us an
insight that we would not have had otherwise.
Chairman Talent. All right. I thank the gentlelady.
Let us at least begin Ms. Millender-McDonald's questioning
before the vote.
Ms. Millender-McDonald. I kudo, not kudo, just piggyback on
the remarks that my colleague from New York has said. You have
absolutely opened our eyes to something that otherwise would
have been totally blinding to us. Because this concept was not
privy to me, I should say; and I did not even know it existed.
We are at a crossroads in this country, in this world, and it
appears to me like, as I look at the MP3, you are working under
the joint directions of international standards organization,
international electrotechnology, everything that is
international, which means everything is going global,
everything is coming in from many fronts, many areas, many
countries, and we have got to deal with that.
But in Congress, as you speak about laws, and perhaps we
need to hold off until we find out where industry is going in
this type of thing, we are makers of laws. We have to abide by
laws, and those laws are on the books. Ofttimes, they are
sometimes an infringement on rights or deals or the laws--the
laws do not bring about competitive environments. And it
appears to me like the laws that we have on the books have been
as such where it is choking those who want to be innovative in
their thoughts and their thinkings and want to move from areas
that have been so restrictive.
And I say this because, as I look at you and look at what
you have brought into the music world and how you are causing
artists to have other directions for creating climates for
selling their wares, then we need to look at the laws that
might be restrictive for your doing that, especially those that
are, I guess, promulgating the lawsuits that we have here.
But my question to you is, what do you feel is a level
playing field and how do we--you know, what is the level
playing field here?
Mr. Dube. I think one way to look at a level playing field
is in terms of copyright law. The World Intellectual Property
Organization wants to make as many countries as possible ratify
a treaty that would bring some sort of similarity, resonance to
copyright law across the world. The issues that we are talking
about are not domestic issues. They are worldwide issues. And
if every country adopts different sorts of copyright laws to
protect what is going on, there will be even more confusion
than there already is.
Ms. Millender-McDonald. I was about to say, until you open
up these markets, can you then talk about that?
Mr. Silverman. China is the biggest source of pirated CDs
right now, and it is the army that runs the plants.
Chuck D. Yeah, but there are no record companies in China.
Mr. Silverman. There are.
Ms. Millender-McDonald. Oh, what a day this has brought
about.
Chuck D. What does this mean if I want to have my record
company from Nigeria? Is that not a country that is part of the
world? So how does this apply? I am a worldwide person. I am
heading to London tomorrow. I deal with the world. I just don't
deal with the U.S. Of A.
I would like to know that my music is getting around now
because of the Internet. Whereas I had a contract that said
they would get it around and exploit my work through a company
that said they could get it around but couldn't get it around
and let me go to Nigeria and worry about that. Let me go to
China and figure that out. Because I will be damned if I am
letting the company say they went to China and not pay me for
it.
Ms. Millender-McDonald. Well, Mr. Chuck.com, see, you are
thinking global, and a lot of us aren't there yet. We are
beginning to be and have that concept, but we are not--some of
us are, but some of us are aren't, and this is where I suppose
conflicts are coming in.
What do you perceive--I mean, when I hear the whole concept
of artists can go on-line, but where does that put that artist
if he or she needs those traditional entities like distributor,
whatever the promotional things are to promote your business?
Is that not the traditional way by which you move your record
on the Internet now?
Chuck D. No, ma'am. It is a whole new thing happening. The
Internet has allowed global exchange and global communication
with a lot of people that want to be able to get in the game of
entertainment music.
You have promoters that are in the Eastern Bloc that want
to do hip hop, and they want to figure out how they can involve
themselves or how they can get a group over into Prague or how
they can get somebody over in Ghana. And now this interaction
is creating a parallel industry to the industry that has
existed before but just was really, you know, held to a
domesticated situation. So these new understandings have to
also be equipped with people that understand how this process
is going down or how the radio station--how can I play
something on Internet radio and it actually is listened to at
the same time in Korea that it is listened to in East St.
Louis. This is all new.
Ms. Millender-McDonald. The only thing I want to say in
ending my statement is that competition is what has been the
norm. You are stating that competition by the mainstream music
industry has kind of circumvented some of what is going on by
the Internet, but then what happens when yours take on fire and
the mainstream then becomes more dormant or can we expect that?
Mr. Silverman. Then he will be the mainstream.
Chuck D. But the thing about it, if you have got a million
people all participating in the mainstream it is a better
situation than what exists now. You have got four companies,
soon to be three, making all the determination on what goes
down. That is wrong.
Ms. Millender-McDonald. So you are saying that this really
opens up a better competitive type of environment?
Chuck D. Yes, and Tom knows. It is like he is pressured
into having one of his top groups have to do a $500,000 video,
where if he doesn't have the flow why does he have to do a
$500,000 to get it on MTV standards? What is good is good. It
is not based on the money you spend, but the money is based on
the corporate game of how they operate.
I don't want to be privy to be none of that. I want to be
able to say, well, I have X amount of artists with me and what
we present is good and we just want a fair chance to compete.
And what Napster has done is just say, hey, you know what, it
has created out of that limitation that existed before. So I
mean, you know, what has come up out of this is that there is a
lot of independent people who are now participating in the
music business. And you know, of course somebody said, well,
they are taking it or they are doing this for free, you know.
Now they are in the music game, and this is the situation.
Ms. Millender-McDonald. Mr. Chairman, thank you so much for
such an innovative hearing.
Chairman Talent. We have to break for the first vote today
on China trade, and so we will come back in about--we will try
and come back in 15 minutes with--Mrs. Bono will be next.
[Recess.]
Chairman Talent. Could I call the Committee to order,
please? If the witnesses could take their seat, please.
When Mrs. Bono returns, I will recognize her, but I had a
couple of questions, and I thought I would take advantage of
this lull to ask them.
Really I am pursuing, following up on what I asked before,
to some extent pressing your imaginations. Tell me what this
market is going to look like and let me pose an assumption here
that may or may not be correct. Let us assume for a second that
either the Congress and the courts do not have the will or do
not have the ability to control the free flow of this art
through the Internet, so that, as a practical matter, a person
who is willing to do it can legally or illegally get somebody's
music--or let us take the next step, get a motion picture, you
know, get the next other piece of art over the Internet.
Now, what then will you be selling? Because you are the one
in this, you are still selling at bottom, yet you are selling
convenience of access, but you are still selling the right to
this music. And, yes, there is some piracy and the rest of it,
but there is still a lot of value to holding the license to
that music.
If we can't protect it for you, what will you--let me give
you an example of a market that was supposedly going to seed
that was a problem. The satellite TV companies were able to
pipe in to people who had the dish the local network
programming so that you didn't have to watch the 10 o'clock
news on the local network anymore, you got it over the
satellite, or you got Denver's news if you were living in St.
Louis or something, which threatened to just crumble this
property interest that the local stations had. And Congress was
able and desired to stop that because you could control the
satellite companies.
Tell me, is the technology going to get to that point? And,
if so, what is it you are going to sell to people, Peter?
Mr. Harter. I am pretty confident that existing copyright
law will be enforced effectively in some way that is fair to
consumers and benefits artists.
Chairman Talent. Let me press you on that. Because won't
the technology be there? I mean you hit Napster, it is still
out there, the software is still out there.
Mr. Harter. It sure is.
Chairman Talent. And if you take a consumer--in many
instances, somebody buys a house and they happen to be still
hooked up to the cable even though they haven't paid for it.
What are they going to do, call the cable company and come out
and say, you know, cut us off because--some people will, a lot
of people won't. So assume that they can't. I mean, does this
mean the end of the legitimate music business?
Mr. Harter. I think if you look at Napster and its traffic,
the amount of content available in Napster is highly unreliable
and varies, based on what I said before, on the number of
people logged on to Napster. And all of the tens of millions of
Internet users out in the world, a very small subset can even
access Napster effectively. You have to have a broadband
connection to really be able to download music.
I mean, here Dwayne demonstrated downloading music. It is
because there is a fast connection here. And we have this
critical problem of the digital divide where people don't have
access to the net, let alone to a fast connection.
Most of the Napster traffic--if you analyze the IP address,
the Internet protocol address, most people on Napster are
coming through cable broadband networks, not DSL, no satellite
not yet. And I have talked to other broadband players about
Napster, and they are trying to understand why this traffic is
on their network. Because if all this music, all these big
files are going back and forth and they are not making money on
it and it is potentially an infringement issue that could go
upstream back to them and it diminishes the quality of
service--because if I am hogging the network----
Too, some of these TV commercials on TV, Pacbell in
California advertises their broadband network to compete with
cable. Because of cable's infrastructure if you are on the
network all the time, your neighbor, he can't access the
network as quickly. They call them web hogs. And DSL is
apparently a different architecture you can access more
quickly.
I think this is really a small, small problem. It has got a
lot of press that has kind of magnified it in way that is very
interesting, very amusing.
So if you look at the tantamount of users of Internet out
there, only a small, elite population of broadband networks
have access to Napster. And will it spread beyond that? Well,
Napster doesn't work all that well, frankly. It is an
unreliable supply.
And if Napster goes away because it has competitors--there
is Listen.com. They are a legal competitor. There is Scour
Exchange funded by Michael Ovitz in Hollywood. There is
Gnutella, this rogue program from AOL. These things are very
hard to use, and they are not going to transfer well into the
mass market.
Chairman Talent. So you are saying that we are going to end
up, if we are halfway smart about it and don't panic, that we
can have our cake and eat it, too? We can have reasonable
protection for artists' exclusive ownership and anybody they
make a real deal with and also be able to fully exploit the
Internet for the benefit of the consumer and for new artists?
You think that we will be able to control this enough so we can
eliminate, you know, what all of us would agree are real abuses
of people's right to profit off their creativity? You are just
denying the premise of what I am saying?
Mr. Harter. I think the DMC is working fine to level the
playing field. Our business, EMusic, proves that, where
consumers get cheap access to great music from independent
labels and artists, the small guys, and we make it fun and
affordable.
Piracy has always been in our industry, just like credit
card fraud is out there. It is a part of doing business. And I
think people are really getting too wound up on Napster because
they have yet to show what their business model is. How are
they going to pay their employees? They have got venture
capital funding but how are they going to build revenue? And
then these lawsuits are going to cripple the company. It is a
mystery to me where they are going to go. They are going to be
Point Cast.
Chuck D. I think there will be more music sold than ever.
And like I talked about previously, the Blockbuster analogy,
you know, people you know still have blinking VCRs, and they
can tape off of the television, and they still go to
Blockbuster to rent the movie that came on Showtime that they
saw that they could have taped. It is still sophisticated on
the computers, and that is why I look at, you know,
downloadable distribution and file sharing as the new radio. It
is the new radio for this century or I should say this decade
and--or at least this first 3 or 4 years, and now it is radio
across the planet, and as this technology gets better and
better it will expose more people to more music from more
places.
Now, like I said, the domination of just four hands in the
pot, I think that has just got to be split and shared. So I
think, yes, you need a Tommy Silverman and a Tommy Boy who will
look across the terrain. And, matter of fact, it gives us A&R
guys credence to say, well, instead of checking out a room full
of CDs, tapes and decks, now I can go to a bunch of sites and
see who is doing what and pick the best minor league home run
hitter and see if they can do their thing in a major.
And I just think the price of music will come down. I think
the contracts of artists will actually be, you know, you will
see the thousand dollar artist deal. I just think that with
parity and everything across the board you will see a lot of
different changes.
Do I think it is healthy? Yeah, I think it is healthy. I
mean, because I looked at the music business for the longest
amount of time, and I never saw anything that quantified who
was better than the other. It was never that competitive field
and especially in rap music. It was just like a bunch of guys
live around New York so the A&R guys will pick a bunch guys
that lived in the area. Where rappers were coming out of
Houston and Cleveland and now Nigeria, but these guys wouldn't
get signed because they wasn't within the eyesight.
Now you have got all these business models that are coming
up, and I think people have to start from dollar one. They have
to be able to make their art for little or nothing. They can
make it for little or nothing with the new technology that
allows them to make this. So the CD has just become part of our
language for the last 20 years. It is not like people were
talking CD in 1948.
So when these changes take place and take about, you know,
we have to figure out, you know, how you go about making that
art without spending beyond your means, and I just think it got
silly for a while.
Chairman Talent. And will deliver to people high quality
music for less than 17 or 19 dollars that the CD--when I buy a
CD as a gift or something to somebody, I am looking at this
thing and I think to myself, how do the kids who really enjoy
this music, how do they afford it? They can't buy 17 or 19----
Go ahead, Ric.
Mr. Dube. I am just going to say, labels charge as much as
they do for records because they release so many that fail, and
to a certain extent successes have to compensate for a lot of
the failures.
One of the ideas you are asking before, what will they
sell, one of the things they can sell is just a terrific
experience. If they can package a music experience on-line that
is better than what Napster or Gnutella or any illegal forum
provides, people will pay for it. Our research shows that
people would be interested in paying for it. How would they?
Well, maybe a subscription fee.
Right now, we know that 32 percent of college students said
they spend less than $10 on music monthly. If you get some
subsection of that group to commit to spending $15 a month on
an all-you-can-listen-to subscription, whether it is streamed
or downloadable, whatever, you have just expanded that section
of the music market. So maybe it is time for the music industry
to think, well, maybe it is not just about selling by the song
or by the album, by the month, how do the consumers want to
consume it, and give them that experience.
The other way to look at it is, in terms of artists, who if
they make a buck and a half or two bucks on a CD sale on an $18
CD, that is a pretty wild margin. If you look at what they make
from a performance, people will always want to go see a live
performance. They make far more money on a concert ticket.
There are some musicians out there right now, top name acts,
who are perfectly happy to let kids swap the music for free
because they know it is putting asses in the shows and you make
a lot more on the concert ticket.
So that brings up the question, maybe, should music be
free? Could music be like network television where everyone is
invited to come along and corporate sponsorships and
commercials and things like that bring in the money? Maybe that
could actually expand the music market. Maybe media companies
wouldn't have to take a hit on this.
Chairman Talent. I recognize the very patient gentlelady.
Mrs. Bono. Thank you, Mr. Chairman.
First of all, I want to commend you for holding this
hearing. I was talking about this issue and these sorts of
issues to some of my colleagues not too long ago and saying we
ought to get together and at least begin a dialogue on where we
are going, where the music industry is going, and try to
foresee some of the problems that we are already hearing about
here today. Of course, copyright issues, I think are the most
paramount among all of them.
But I wanted to say that my background in the music
industry is interesting, and I understand it somewhat, not as
well as I should or as well as I would like to. But beginning
in the '60s and moving on until today for various reasons--and
I have a lot of friends who are in the business, I am trying
with the best of my abilities to understand where we are going
and what you are trying to do, Chuck. It is hard, and I am
listening, and I want to learn and understand where we are
going.
But I want to say something, Tom, to you about what you
said earlier--and I also just want to let you all know that a
friend of mine is here--and he is an artist, and I am happy
that he is here and listening to this dialogue. I have watched
some of the frustration he had with his label as well. Not too
long--it was very funny. They just cut a new record, and I
asked him if I could hear it. Oh, no, no, no.
It is back to your comment about nobody wants you to hear
it. Nobody will let you hear the music any more. He said, no,
no, no, I won't let you hear it. And I said, you know what? I
have a top secret national security clearance, and you won't
let me listen to your record. I had to prove that I had that
before I could even hear it.
Understanding where the industry used to be, we used to
have masters, and now everything is a master, correct?
Everything, every file except for an MP3 file, because it is
somewhat less--although it is not audible to the human ear, it
is not a master file. It is not anything quite as good as
master, but basically you want to control your masters somehow.
Is there a way that you can do what you are doing and go right
to the Internet but artists who want to be on labels and be
protected--can have a dual system where people are happy to be
with their label and continue on that way, you can go your way
and can we have a dual system of music that would exist?
Mr. Silverman. More than dual, probably be seven or eight
different options.
Mrs. Bono. Well, basically by dual I would mean those who
care about their own copyright protection and those who don't.
I know that Chuck, for instance, has permitted his material to
be on the Internet. But at the same time, as I understand you
have a couple of lawsuits pending against Bad Boy Records and
St. Ives beverages because they have used your music without
authorization. There is always a fine line.
Chuck D. But it was defamation of character in both
instances. It wasn't just uses of the music for their purposes.
The St. Ives was a malt liquor company that used my voice, and
I disdain the uses of malt liquor and other elements by
corporations amongst the black community so I definitely took
them on that. And the other one was, the Bad Boy situation, the
10 Crack Commandments record which endorsed crack with my voice
all through it. So those were the two instances.
Mrs. Bono. Good for you.
Mr. Silverman. Let me ask him a question. I am going to
cross-examine the witness here. Do you mean if it wasn't that
and they were just using your copyright to make money for
themselves you wouldn't have had a problem with that?
Chuck D. Well, being that they was major corporations, I
have got problems with major corporations definitely tapping
into me.
Mr. Silverman. He was making a lot of money----
Chuck D. I have been sampled, Tom, by millions of people. I
don't have a problem with that because me as an artist--and
this is just something I just hold to myself--me as an artist
it is like, okay, boom, I will make art, and I will keep making
art. I have got five studios, so maybe that has something to do
with it. I wouldn't necessarily want another artist to adapt
and take on my beliefs, but if somebody defames me as far as my
opinion, oh, yeah, I am going to try. Because I can't go to
them and beat them down because that is illegal. So you know,
my manager says this is something that you should do.
So, you know, those were the two instances where I actually
sued. I have been sued like crazy.
Mrs. Bono. Any public figure gets sued. That is,
unfortunately, a given in this day and age.
But reclaiming my time a little bit here--and, Tom, I
appreciate that you would like to be a Member of Congress and
ask questions, but if I can do it now. I think this brings up a
great issue, though, of realizing that these things have far-
reaching consequences. Two years ago we had a major fight in
the Judiciary Committee about these sorts of things, with the
restaurants broadcasting music and to what level could they do
it without paying royalties.
So these things do have far-reaching effects. These things
need to be thought out carefully, and I don't want to see--and
I understand again your frustration with record labels and have
had them myself, but I don't want to see the artist throw out
the baby with the bath water. I think we have to recognize
there has to be a fine balance between artist and consumer, and
we have to strike that balance.
Chuck D. Excuse me, Congresswoman, the only thing I was
saying pretty much before was that these changes wouldn't have
come about if it wasn't for the technology forcing the hand,
and the technology has forced the hand so now this is being
dialogued where before it was just like--this truly was an old
boys' network, and it was dominated by a select few and still
is, and they are the ones that is crying now.
The RIAA has sent Tommy Silverman. The four major company
guys are not here, and they are screaming the most because they
played musical chairs with stockholders' money and all of a
sudden they gutted these companies out, they stuffed the money
in their pocket, and they are jumping out trying to play three
sides of the fence. And, at the same time, don't say that you
are protecting the copyright for the sake of artistry because
the copyright pretty much is controlled by the labels at the
end of the day.
You know, there is an artist you know that could exist in
the 1950s whose masters and copyright was soaked up and bought
long after they had moved on, and they really don't know what
is happening with their copyrights or works of art, either,
within the legitimate system.
So it is very easy to point out an illegitimate system as
it is being formed, but how about this system that has existed
that still hasn't paid Screaming J. Hawkins or many of the
black artists that existed in the '40s and the '50s and the
'60s who were exploited with bad contracts and who still--to
this day, works are still being sold and they have yet to see a
dime?
Because you know it is easy for somebody to say, oh, you
haven't recouped the expenses that we divvied out to you. I had
a lawyer tell me, said, ``Chuck, you are not going to see a
dime from Universal because you haven't recouped because we
spent X amount of money on your behalf'' and I am like saying,
``ain't that something.'' I mean, I would like to actually have
the money, don't spend it in my behalf and then charge me and
say I ain't never seeing no money again.
Mrs. Bono. I don't want to be adversarial here, but maybe I
am misunderstanding the advance system. There are advances
given to artists by the record company and then you don't
actually pay that back, do you?
Chuck D. And money that is spent in your behalf you end up
paying back.
Mrs. Bono. The label asks you to pay back?
Mr. Silverman. It is recoupable but not returnable, if that
is what you are asking.
Mrs. Bono. Mr. Chairman, may I have one additional minute?
Chairman Talent. This is an interesting line. Go right
ahead. But what is recoupable but not returnable?
Mr. Silverman. Means if I give an artist $100,000 to make a
record, they take the $100,000 and spend it and we never put
the record out because it turns out really bad or they never
finish the record, we don't get that $100,000 back. It is 100
percent our risk. If we sell a million records we can take out
of their royalty payments the $100,000 and we get that back.
That is called recouping the $100,000.
Mr. Dube. You can dock their pay, but you can't make them
write you a check.
Chuck D. I give you a case in point. My first artist
contract was 7 percentage points, 7 out of a hundred. I am
being real brief because it is a crazy mathematics, but I made
my first album for $17,000. That record to this date has sold
over a million copies----
Mrs. Bono. That was your best album?
Chuck D. No--at varied price ranges of wholesale prices and
retail prices. And also it also brought in international
figures that, you know, you would have to really send a team of
accountants to comb out the money that that corporation had
made.
Now, when they actually go into the area of recoupment, it
gets into a gigantic mathematical quagmire that maybe myself as
a fighter can go into, but not every single artist had the
wherewithal to actually do this. So the amount of change that
they have that has been split out of the glut of greed of
pockets that have been stuffed along the way is astronomical.
And so when the companies actually claim they have lost or are
losing money you have to kind of like--guess okay, where--and
where you gain money in all these aspects.
So I am not giving into that whole conversation, because
that is neither here nor there, but I am just saying, in the
level of business and in the level of artistry, when you hear
the corporations talk about protecting copyrights and artistry,
no, they are into protecting their masters that they own and
the copyrights that they have taken control of, and that is
their biggest concern.
Mrs. Bono. Sort of changing gears here and going another
way, again, when you sell over the Internet, and you talked
about technology that will allow you to pay per download or
whatever to earn the money on that, but at this point in time,
are you earning money or does an artist on the Internet earn
money from eyeballs or from advertising hits, from people
buying spots there?
Chuck D. That will come about. We will have ancillary areas
in all of the above. What we do at Rapstation is we set artists
up with their own sites where they are able to sell goods and
merchandise through the sites directly to them, 100 percent,
without us being a middle person.
Mrs. Bono. So are we then at the risk of commercializing
music here? My fear--and I have a degree in art history. I know
it is sort of strange, but at the same time I do believe in the
artists heavily. I spent 5 years studying this and married to
one and all of that, but are we now at the risk of
commercializing music? Will we see one day product placements
in song, where you are paid by Coca-Cola to sing----
Chuck D. If a song is sold for one red cent, it is
commercial. My whole thing is like this, if the artist has to
survive and the traditional way is outdated, then ancillary
areas have to step up. You know, if a person makes a song and
it is legitimate for Coca-Cola or whatever to pay them a
million dollars, then that artist makes a living. You have got
these companies out there that say, hey, we want to be able to
trigger our products. How does Seinfeld get paid? We don't pay
for Seinfeld when we turn on the TV. He is getting paid from
somewhere or somebody. So is television commercialized?
Mrs. Bono. I am sorry, maybe I have given a bad description
of commercial here. Again, I guess I think more in two-
dimensional art form where--a painting versus a soup can label
or something like that.
Chuck D. I think art is subjective.
Mrs. Bono. That is my point, are we at risk somewhere down
the road of hurting an art form because people----
Chuck D. We are at risk by keeping it within three hands,
truly.
Mrs. Bono. I am not disagreeing with you.
Chuck D. I know.
Mrs. Bono. If nothing else--and thank you, Mr. Chairman,
for the indulgence of allowing me so much time. But I believe,
if nothing else, that what you are doing should serve as a very
loud wake-up call to the record companies. And I know tomorrow
in the Intellectual Property Subcommittee of Judiciary we have
a hearing on the work for hire issue; and it is interesting
because it is so diverse, these two issues, yet they are
similar as far as looking back at protecting past copyright and
moving forward here.
Chuck D. I disagree that companies should have a copyright
and then own it forever. They have talked about expanding it to
56 years, of owning a copyright for a situation, and I am like,
okay, you know, I could see that if it is a joint venture, but
if it is not a joint venture, you know, business to me, it is
like something that you work out. The music business has not
been music business. It has been music employment.
Chairman Talent. I think Mary can answer this, but we
lengthened the time you can own a copyright, didn't we? That
was for Mickey Mouse because Mickey Mouse was going to enter
the public domain and that was considered to be not viable,
anybody could use Mickey for whatever they wanted.
Mr. Dube. In response to that question, the way you are
talking about commercializing music, I think we will see that.
I think downloadable music, digital music in general, really,
the ease of the format means that pretty much anybody can be a
music company if they want to be. And if that means that when
artists' contracts end, Procter and Gamble or Coca-Cola company
wants to put in a bid on a popular artist, that they become
associated with that product. Just like television in the '50s.
Everybody knew that Bob Hope was Texaco or Dinah Shore was
Colgate, Palmolive, whatever. We could have that same sort of
close association.
Now, we talked about the risk of cheapening music or kids
in particular have pretty good bullshit detectors. If they put
out crap, they won't embrace it.
Mrs. Bono. I disagree with that.
Mr. Dube. Art is subjective.
Chairman Talent. If the people who buy the music don't want
you to talk about Pepsi, or don't want you to talk about Pepsi
if you are getting paid to talk about Pepsi, you won't be able
to talk about Pepsi, will you?
Mr. Dube. On the other hand, artists already are
subsidizing their incomes with corporate sponsorships. If you
have a real big, expensive tour and there is no way you can
make money on the ticket, that is the biggest reason.
Chairman Talent. It is the reason Tiger Woods wears Nike,
right?
Mr. Dube. Exactly. We will see more of that with music.
Chairman Talent. I thank the gentlelady.
Yes, Mr. Phelps, sure.
Mr. Phelps. Thank you, Mr. Chairman. Just a few questions.
So I can be straight in my mind, as a new member and
somewhat involved in the music industry, if I understand, all
of you do agree that the issue is not copyright protection. You
all believe that there should be protection of copyrights for
artists' work? Okay. I guess I hear Mr.--but I should call you
Mr. D?
Chuck D. Call me Chuck.
Mr. Phelps. Chuck, I believe your message is that you are
wanting anything in the natural order of things to work in this
industry without too much regulation or any big attention being
drawn to what is concerning Mr. Silverman, as long as the big
boys who I guess have abused the system----
Chuck D. Right.
Mr. Phelps [continuing]. And the question I have is that
people like you that emerge through that bad system, how are
you successful, as opposed to some of these little guys that
you are giving a break through the openness of this system now,
what separates the men from the boys here?
Chuck D. I don't know. I always rebelled the system while I
was within the system. I didn't ask for a record label. I was
recruited by Rick Rubin. I told Rick Rubin, who was then the
head of Def Jam records, if I get in the music business I am
going to change the music business, and we are going to work
something out between me and you. And I worked it out with Rick
Rubin, not Russell Simmons, not CBS. That was his relationship
with them.
Mr. Phelps. So this agreement you had that you described
some time ago----
Chuck D. My thing was to make rap music global music.
Mr. Phelps [continuing]. $17,000 agreement that you
mentioned a few minutes ago, even though that was not good for
you, you thought that was all right to go ahead and proceed in
the music business?
Chuck D. I made the record for $17,000, and therefore I
turned then to Rick Rubin who had agreements with the major
record companies. His agreement was with the major record
companies. He didn't have the best of all deals either. I think
Tommy could attest to that. So, therefore, I understood the
situation I was getting into. I had a goal to get into the
music business----
Mr. Phelps. For reforming it, evidently.
Mr. D [continuing]. To reform it, to get a lot of people
involved in it, to stand up for a genre that was scrutinized,
to try to be an ambassador for a genre, to try to make a
global, cultural exchange out of the genre, to try to speak up
for a lot of people from my community, and to try to tie this
together into being a participant in the music business. And
one thing led to another and certain things, certain ideas were
reached. And there is still work to do, but don't think I came
in the music business because I had my hand up just wanting to
make a record. I was way past that.
Mr. Phelps. So your view of this technology is sort of
doing justice to what--the big guys have abused the system. It
is a way of bringing them to their knees maybe?
Chuck D. I wouldn't say that, but I would say that it is
creating one of the biggest transitions ever in the world of
music, and I think it needed it.
Mr. Phelps. Because what I see in this is that--I know we
are talking about one segment of the music industry which is a
big one, but how do we not talk about all the other segments in
the music industry, such as your licensing organization--I am
an affiliate of BMI. What do we do about ASCAT, BMI, and what
do we do about the radio stations because without those
vehicles it doesn't matter what you produced? Who decides what
the Top 10 is? Is it 10 people who get in the room and say this
is what we will play or is it money flowing?
Mr. Silverman. Up to now it has been record sales, and I
know that SoundScan that tracks record sales will also be
tracking downloads.
Mr. Phelps. But record sales on the digital----
Mr. Silverman. Both.
Mr. Phelps. Right now it is?
Mr. Silverman. They have just started tracking. They are
planning to track all digital.
Mr. Phelps. That could be deceiving in a way.
Mr. Silverman. What?
Mr. Phelps. About what really the public is wanting to
hear?
Mr. Dube. It has never mattered before whether a person
bought something on a CD or cassette. Format was irrelevant. So
in terms of singles which is the way most MP3 songs or digital
songs are distributed, hopefully then it wouldn't matter. It
would format agnostic.
Mr. Phelps. Should we worry about BMI for them to collect
their fee, for a rider such as myself to get their part before
it goes out to the radio station or on disk?
Chuck D. Like I say, you will see new paradigms being
created. I remember one time this well-versed person working at
ASCAT suggested that the mechanical rights for particular songs
might go down or might disappear but the performance rights of
a particular song might have to be adhered to with a
downloading of a song on the Internet. You know a lot of this
stuff is just proposed and it is guesses and people are trying
to figure out which way this is going to lead to.
Like I said, I am a big proponent of at least getting
people into the game and getting involved; and that is where
this digital revolution has been, I guess, most rewarding. So
when it comes down to your works actually getting exposed or
downloaded, yes, maybe it could become a licensing issue. That
is a sophisticated discussion for the average artist who is
usually kowtowed into the industry and just told to make
records and don't think about anything else.
I think what you will see what come out of this is a more
educated artist, and like I said before, the lazy artist is
over with. The guy who just wants to make records and just be
dumb, those days are over with. It is not my calling. It is
just like rain, it is going to rain on everybody, and
technology is going to rain on everybody and this is what is
going to happen. My whole thing is, Chuck D, how do you exist
when it rains. Well figure out how I put up my umbrella and
adapt in walking on water.
Mr. Phelps. So you don't fear a Chuck D, Jr. taking your
most cherished rap work and maybe doing a different twist to
it?
Chuck D. Sir, I have been sampled more than anybody. I
don't have a problem with anything.
Mr. Phelps. Elvis might have a little bit different to say
about that if he was here. That is probably true now.
Chuck D. Don't combine me with Elvis.
Mr. Phelps. But you are talking about global, the Beatles I
don't think were really the Beatles until they came to the U.S.
of A, were they?
Chuck D. But I don't see--we can't talk 1964 when we are in
2000.
Mr. Phelps. We are talking about evolvement of an industry.
Chuck D. But the industry is evolving. Over the last 5
years, it has evolved at greater levels than it has ever
evolved. Would you agree? In the last 5 years, each and every
month in the music business right now constitutes for a year
that would have been in the seventies.
Mr. Dube. At least.
Mr. Phelps. Thank you very much.
Chairman Talent. A very interesting line. Thank you. Mr.
Davis has been very patient. I want to recognize him now.
Mr. Davis. Thank you, Mr. Chairman, and I want to commend
you for calling this hearing. I know it sounds kind of exotic
and in some instances erotic, but I think it is a very serious
issue that we are exploring. It is a very complex matter, and I
think the level of participation and the engagement that we
have heard this morning is indeed quite enlightening.
I also want to thank each one of the panelists and commend
them for their participation and appreciate very much the
information that they have shared with us this morning.
I have two questions that will be kind of put into one, but
Chuck, let me suggest that I commend you for what you are doing
in terms of trying to expose in a way and take a hard look at
what has happened in the industry and especially as it relates
to artists. I have a large number of very personal friends who
are, in fact, in the business. Foremost among them probably is
also another elected official, Jerry Butler, whom I served with
for several years on the Cook County Board of Commissioners,
who is a very serious politician in addition to being a great
artist dating back many, many, many years, and there are a
number of other individuals as well.
You see, I hope that as a result of these kinds of
discussions that not only will artists but also, Chuck, in the
case of the impact that I think your involvement may have on
many of your fans, that they too would realize that they don't
have to take things simply as they are, that they too can be
engaged and be involved, and while some of the art form itself,
I can't suggest that I am so heavy into it, probably my age has
something to do with that, especially when it comes to certain
kinds of language and that kind of thing but certainly the
effort.
The question that I really have for the entire panel is,
are you suggesting in any way, shape, form, or fashion that
maybe we ought to be looking at regulation of the use of the
Internet as it relates to commercial property rights of any
kind, I mean whether we are talking about music or whether we
are talking about something else that can be pirated, used? I
come from the City of Chicago; and, of course, if there is any
way to pirate anything, there are people in Chicago who will
find it. I mean, they will find it if there is a way; and the
other part of that question, though, is also will use of the
Internet result in an increase, decrease, or make any
difference in the amount of money that is generated by the
music industry?
Chuck D. I would like to answer that, Mr. Davis. I would
like to say that there is no quantitative method that says that
the music business has lost money or will lose money. And
looking at particular companies, and I am not trying to go
there again, but looking at their wealth of catalog that they
have, that they fail to exploit, although they have the rights,
if somebody wanted to go get Jerry Butler's, Your Precious
Love, from 1959 and they was going to the company that had that
right to that master or that copyright and they couldn't find
it in the store, the Internet serves as a perfect vehicle to
get it across to them.
Now what is going to happen, instead of regulation of the
Internet, I think a navigation process of the Internet might
take place first to make this wealth of catalog which is
obscured by I guess the red tape of retail not being able to
fit it in their stores. One gentleman, I think it was Mr. Dube
who said that you know an obscure song by a great, which might
not be reprintable because they say it is not beneficial to
press up 20,000 copies, you know, that one song that you
probably liked from Jerry Butler in 1961 can be searched,
researched, and found on the Internet. If there is some
signature code and signature file on that MP3 which allows you
to get that song, I think we are moving to that point.
Like I told everybody before, I am involved in a situation
that still would allow the consumer to get the MP3 for free but
moneys still be generated for that copyright. The Internet is
the saving grace for the record companies because they are
sitting on a wealth of catalog that they don't know what to do
with. And understand this, this primarily is the biggest
problem with the music business today, is that they are
gigantic, but they don't have people equipped to handle the
speed of technology, and they don't have the people that
understand the wealth of catalog that they own. So they haven't
even touched upon everything that they own because you have a
lot of people who--it is not a job that is built yet.
I had relationships with Polygram before they merged with
Universal or got absorbed, that is really what happened, but
their catalog department which had a wealth of catalog and
copyrights that they control, the Motown catalog, the ANM
catalog from Herb Albert. The problem was--is that the heads of
these companies were business people and they could care less
about the art. But the people that were in the catalog
departments were true music people that wanted to do things
musically and also commercially with the music, but the
overstructure on top of them wasn't sophisticated enough to
give them the go ahead answer. So these are big corporations or
multinational corporations, but the hand and elbow might as
well be three miles apart.
So what you have got is the business changing, the music
business still operating off a traditional model, with people
that haven't had clearly defined jobs. So you want to talk
about waste, there is waste because your good friend Jerry
Butler has done hundreds of songs, and there is a listening
audience that want to hear those hundreds of songs that cannot
get those songs in the regular traditional marketplace. The
Internet provides that opportunity.
Mr. Davis. Yes.
Mr. Harter. There are some studies out there, and these are
all preliminary, but they project on-line distribution whether
it is by downloading or streaming will produce an additional
amount of revenue for the music industry on top of what they
are already selling, and a lot of people already say on-line
distribution takes away from CD sales. I don't think that is
credible. I think that is a bunch of hogwash. The fact is
several billion dollars will be added to the revenue of the
record industry and largely independents who comes to, like, my
company because we are putting product on the market that could
not easily get to market.
And then the back catalogue is an excellent point.
Publishers tell me that over 50 percent of the art of the music
ever created, produced is not on the market. It is not being
monetized, it is not being put into commerce because retail
space is too expensive. If you have a song from 50 years ago
that will only ever sell 1,000 copies a year worldwide, you
can't put it on a CD in a store. It is just inefficient. The
retailer will lose their shirt on that kind of business
process.
But the Internet, it doesn't matter. One copy or a hundred
copies, it costs the same. You get a big server with millions
of songs on it, different versions of the same songs, anybody
in the world can come on the Net and download and pay for it.
Or if you want to have a subscription-based service or use
advertising to pay the artists then people can download for
free. And you can charge a quarter for it, charge a dime for
it, charge $1 for it, or charge $18 for it; but I don't think
they will come to your site if you are charging those kinds of
prices.
I think there is tremendous amount of money to be made for
all kinds of art that is out there that many people haven't
seen. All we get is Britney Spears it seems.
Mr. Davis. Either one of you?
Mr. Dube. Yeah. I would say that right now in the same ways
the stock market goes through correction periods, right now the
price of music and entertainment in general is going through a
correction period, and until the industry and the public can
figure out what they want and how to make that happen, in
direct response to the question, I would advocate no specific
regulation other than to point out one more time that these are
not domestic issues. Some of these are worldwide issues, and
then there are treaties that exist to bring countries together.
I think the U.S. laws are already WIPO compliant. I could be
wrong about that but there is a lot of countries out there that
have committed to ratifying the treaty that are not; and if we
can help that, that is something that can be done.
Mr. Davis. Well, go ahead.
Mr. Silverman. I just think pricing, it is difficult to
talk about pricing, but pricing is really, it is about supply
and demand, and demand in music is how much somebody wants a
record. Somebody really wants a record, like a collector will
pay 50 dollars for a 45 if they really want the record. A
person who doesn't care about the record won't pay $2 for that
same record or if even you offer to give it to them, because
sometimes at our label, we get all these promos and stuff, and
we leave a stack out there for people to take. No one takes
them. The cleaning people won't even take them. No one wants
them because they don't know about them, and MP3.com is like
that, 60,000 tracks that people don't want.
You have got mom and pop playing a banjo and singing along.
Everyone can have their record on there, great, I am published
now, I am a record company. You know what, you go into Tower
they have 50,000 titles. They have one of the biggest
selections of any of the record stores, and people get choice
anxiety, they walk out with nothing or they walk out with
Britney Spears because they went in there because wow they have
an obscure blues artist, wow, there is Ella Fitzgerald, Louis
Prima, and all of these records are all around and they walk
out with Britney Spears anyway which they could have gone to a
store that only had 3,000 titles and walked out with.
Now you go to an environment that has a quarter of a
million artists on-line, the people are even more confused,
what do they do. It is just too much for people. A lot of
people just want to say, okay, my kids, they want Britney
Spears or Bloodhound Gang or whatever the hot record is because
either they heard it on the radio or they saw the video,
period. That is what the record business is going to be.
Digital, analog, I don't care, people want to buy what they
know and what everybody is talking about. They are talking
about what they saw the video on and what they heard on the
radio last, and that is irrelevant of whether there is an
Internet or there is not an Internet.
Chairman Talent. Regardless of whether there is an
Internet, MTV is still going to tell everybody what to buy?
Mr. Silverman. MTV and radio stations.
Chuck D. I beg to differ because I think in 2 years, you
know, the fact you would be able to see a video on call instead
of seeing--I would love to see an Afrika Bambaata video. But
why would I wait for them too? No, I would like to go to the
Tommy Boy site and drum that up on real player and then whoa,
Afrika Bambaata, or go to another name and say, wow, I want to
be able to see that Naughty By Nature, Feel Me Flow video, and
then you are seeing video on call and on demand which drives
you right back to the product again. This is all new paradigms.
But I am saying the average consumer is changing. And I will
say that, yes, there is going to be tons of product out there.
But you are going to have a billion people with access; and
like you just said, with the cellular phone you are going to,
like, say people are going to be in Kenya you know probably
being able to say--you know you won't be able to sell the album
to them for five or $10, they might be able to buy those albums
for 30 cents Kenyan money. So it is going to add into a world
pot somewhere. You are going to have an expanded global place.
So you can have a lot of artists because you are going to have
umpteen amount of expanded target audience.
Chairman Talent. Okay. I will let Peter have the last word;
and then if the gentleman is done, Mr. Sweeney will be next.
Mr. Harter. To answer the gentleman's question, I don't
think there is a need for regulation right now. Let us see how
the DMC works out. I want to point out, there is another start-
up business that is going to be, if not already is, the leading
directory, the leading information location tool for music on
the net. It is called Listen.com. Now, for the record, the five
major record labels have invested in the company as Madonna's
record label Maverick Records, and they power the search engine
on EMusic's site, and they are a business partner of ours.
But what I think they are doing is helping people make
choices. Where I go into Virgin Megastore in San Francisco, and
they have listening booths and have a DJ spinning tracks, all
to influence you to buy things, because buying music is largely
impulse. Listen.com has a director of music. They have artists
reviewing music saying this is what this music is and the
career of this artist, this band, and hey, there is a need to
know this artist was in this band and if you like this artist,
this music, we suggest you like this because it is similar for
these reasons. They inform the consumer. So instead of just
buying what is flashed in front of you on the cycle, on MTV or
the radio, you can actually learn more about the art, find out
what makes the artists make that art and where they got the
influences from and what is similar to it. So I like listening
to Miles Davis, I want to find out why he went through a
different stage of his career and who influenced him, like in
the fusion age and the sixties.
Mr. Silverman. You are an anomaly, too.
Mr. Harter. I think that is changing.
Chuck D. People want to be interactive instead of being
programmed. I think we are going from a program marketplace
into a marketplace that is being more and more interactive.
Mr. Silverman. If that was true there wouldn't be a
blinking 12 on everyone's VCR.
Mr. Davis. Let me thank the gentleman very much. You have
shed a tremendous amount of light on a very difficult and
complex subject, and I will certainly be using some of the
components of it as I speak with young adults and as I speak
with young people about not only the content of things but also
what happens as we explore this whole question of who makes
decisions in our country, and so I thank you very much, and
thank you, Mr. Chairman.
Chairman Talent. I thank the gentleman. As always his
questions were gracious and enlightening; and I recognize
another gentleman from New York, Mr. Sweeney.
Mr. Sweeney. Thank you, Mr. Chairman. Let me say thanks to
you and commend you on holding this hearing and thank the
witnesses as well in what is turning out to be one of the most
informative panels that I think I have ever participated with.
It is kind of an interesting day. I missed some of your
testimony, read a lot of it. This is a day that we are in
Congress trying to balance the equities on how to make the
world marketplace a freer place and how to deal with 1.2
billion people in China and all of the judgments you have got
to make in that, and I am listening to testimony.
I have got to say, Chuck, I came in with some preconceived
notions; and you have turned me because I think your message is
about freedom, freedom of choice for people and the marketplace
largely. And I understand what you are saying, Mr. Silverman;
but I think in the end, we as a legislative body are always
going to try to strive to find the way to give Americans
greater access to whatever it is as consumers because it is the
definition of what we have.
I have also learned, where I grew up if you don't know an
awful lot about something you sit back and listen and are quiet
and so I am going to do that, and in doing that, I am going to
turn over my time, to yield my time to someone who knows a lot
more about this than I do, and that is my colleague from
California, Mrs. Bono. I thank you.
Mrs. Bono. I thank the gentleman for yielding. I have been
in politics long enough if you can't dazzle them with
brilliance, baffle them with something else. I don't know that
I know that much more about this, and I don't want to be the
one to stand in between Chuck D and a fish sandwich or a peach
drink because I know this hearing has gone on for a while. I
just want to ask one last question of Peter and that is, you
are saying that this has not yet hurt CD sales, but isn't that
a little bit unfair--not unfair. Wouldn't you say in 2 or 3
years as people become far more familiar with MP3 format that
will change?
Mr. Harter. I think it is true that the physical delivery
system of music, whether it is buying through Amazon, have a CD
shipped to your house, or going to a big store in person, big
store or local store, chain, nonchain or mail order, that will
always have a place. That won't be eliminated.
Mrs. Bono. But the ratio will change, CD sales are going to
decline?
Mr. Harter. If the market is $40 billion roughly today and
if you bring all this content that is not on the market that
Chuck and I have been talking about and independent artists
break their music on their own or with small labels on the net,
you are actually making money on content that was never in
commerce in the first place. So the gross revenue of the
industry goes from 40 billion to a hundred billion dollars or
more, and some of that will be CDs, but I think a lion's share
of that will have to be Internet because physical distribution
is economically inefficient and defunct for a small niche
market.
If there are 90 million Francophones on the planet, in
Europe, in the former colonies in Africa and in southeast Asia
and people have that common language and they want to give back
to their roots French music, not many Americans are going to
listen to French music, but somewhere else in the world, people
want that French music, and say it is a Cajun artist in
Louisiana and his family has roots back in France, I am going
to download it from a Web site in New Orleans or wherever the
server happens to be. Is that music going to get marketed in
the major stores? Probably not because it won't sell in the
volume necessary to justify that physical CD taking up precious
retail space.
Mr. Silverman. How are they going to know about it?
Mr. Harter. Promotion on the Net.
Mrs. Bono. I hate to lose the respect of all four of you,
but I just bought Britney Spears new album last week on
Amazon.com for my 9-year-old daughter. So I hope you still
respect me.
Mr. Harter. My girlfriend likes Britney Spears, and we had
an argument about that the other day. I lost.
Mrs. Bono. That is why you are here and she is not, right?
My last question, and thank you, Mr. Chairman again. Something
we haven't talked at all about and I am glad to hear us all say
go slow in regulation, we don't need it now and let us go
slowly as this evolves. I hate to bring up the big T word, but
have y'all thought about what could possibly creep in the form
of taxation here and what we do to avoid that?
Mr. Harter. In preparing for this hearing, I talked to some
very smart lawyers who actually listen to digital music. And
they downloaded and I gave them players and they actually
understand the technology and asked them if copyright law were
not to be held by the courts or Congress to apply to Napster,
what about State, local or Federal tax law? And there is the
issue of whether barter or exchange taxes apply to Napster. And
while Napster's business model is evolving, if it facilitates
an exchange of commercial goods, which music is, between two
individuals and they profit from it because they make money on
the eyeballs, they trap the site in advertising and other
marketing revenue streams, some interesting State and local or
Federal taxes may be applicable to barter and exchange of
music. If Napster is going to do commercial business with
investors and shareholders and employees, people want to
collect taxes for that kind of activity. I don't know if they
thought about that issue. I am not sure if it really applies. I
am not a tax lawyer, but it is an issue that needs to be
raised.
Mrs. Bono. Thank you. Anybody else?
Mr. Silverman. Who do you pay taxes to?
Mr. Harter. I am glad you asked. We want to pay all the
royalties to artists and rights holders, and if there are
applicable taxes we will pay them. All our servers are in
California, but if someone is going to tell me that they think
we have a customer over in Europe--and we don't care where our
customers come from. They pay by credit card, and the artist
gets paid.
We are not going to invade the privacy of the consumer to
find out where they consume the music. We are going to pay
based on the country of origin of our servers, not the
destination of where someone tells us that download occurs
because that just requires us to become Big Brother and find
out where you are when the music enters your ears. And I think
there is some very large policy questions in terms of Internet
law about jurisdiction, which country of origin, the server or
the company or destination of where the consumer is.
This administration is split on the issue, and the
Europeans want to move to a country of destination position. It
is very controversial, and it applies to taxes and assessment
of royalties. So that is going to be an issue that may impede
small businesses because they can't afford to understand these
issues or implement a solution.
Mr. Silverman. Another example of what he is talking about
that is not necessarily taxes. If I have a licensee in France
that breaks my record in France and invests the equivalent of
$100,000 in promotion to do that and I have a deal with EMusic
and they sell 10,000 copies in France digitally, should the
French company get a piece of that royalty because they are the
ones who made it, like they got it on the MTV of France and
they got it played on the radio stations in France, they are
the ones who paid and invested in making the demand in that
market, or should I get that?
I mean, that is a big question as well. Maybe a bigger
question than France, and I think that I would have to say,
yeah. I have to know where, if the records are being sold in
France, I am going to have to share with it with my partner who
helped to break it in that territory because they deserve it.
Otherwise, if people aren't ordering from Italy because my guy
didn't break it in Italy and they are ordering from France, why
shouldn't he get it? It is clear that it was his
responsibility.
I also have a study, I want to tell you about your prior
question, that just came in today that I thought I should share
with you because I would be remiss if I didn't. A new study
came out today, a entertainment study with VNU, with SoundScan
basically, which reveals on-line file sharing is the likely
cause of decline in college market album sales. They actually--
this was just released, and the study concluded that sales were
down by 4 percent in stores within a 5-mile radius of 3,000
colleges. And stores near 67 schools that had banned Napster by
late February had a greater sales decline of 7 percent over the
past 2 years, and that is in light of record sales going up
everywhere else. So this is the first actual study that has
actually shown a connection between file sharing and sales drop
offs.
Mrs. Bono. Thank you. Thank you, Mr. Chairman.
Chairman Talent. Is that study of illegal file sharing or
legal file sharing or both?
Mr. Silverman. Well, it says, here is the quote, ``It is
now clear that the controversial practices of companies that
provide directories and an easy interface to libraries of
unlicensed music are, in fact, detrimental to the growth of the
music business and those artists whom they claim to support.
Record sales are up despite the widespread use of MP3, not
because of it. These figures should put to rest the ongoing
debate about the effects of on-line file sharing.''
Chairman Talent. I think it is probably, owing to this one
gentleman who wrote me, and maybe the retailers in general to
read this into the record, too. It is a letter from the man who
owns Oliver's Record in Syracuse, New York, as a matter of
fact. It says, ``Syracuse University allows free access to
Napster. In several interviews with the Syracuse newspaper, has
stated that have no plans in firewalling Napster. My business
has fallen off to about twenty percent of what it was before
this started. I had not heard of it until the Christmas break
when a young man came in and told us how great this new program
was that allowed all students across the country to trade their
music and then asked me, so, how long do you think you will be
in business. And that kind of question can only come from the
young. I didn't think much about it then since I had no idea
what he was talking about. I then went on and tried it for
myself and it is everything I thought it would be. As for Limp
Bizkit's lame reply that people are just sampling the music
before they buy, Oliver's has proved that that is totally off
the mark. I just wanted you to know from someone at the lower
end of the food chain. Thank you, Charles Robbins.''
I guess maybe a closing question for you all. You have been
very patient. And I want to wrap this up by 1 o'clock, and we
are almost there. We have sort of--you all have told me, and I
will accept on what you say, that you think that the law can
effectively control the illegal on-line distribution of music.
Will the legal distribution of it, Mr. Harter, end up in
cutting out the retailer? I am not saying that that is
necessarily bad, the economic change affects people, but is
there going to be a place for people who still have music
stores and sell CDs?
Mr. Harter. I love this question. People have a life beyond
their computers. They are not going to sit at their computers
doing everything. They will be in Starbucks at a kiosk and
buying music, and actually Starbucks sells quite a few CDs of
their prepackaged compilations. And people love music and are
going to get it where it is fun and less convenient. I think
people in retail stores pretty well understand their customers
and how to market to them and appeal to them to get them to buy
something and induce them. So as Chuck was saying earlier, they
have to adapt to the new market and piracy has been around just
like credit card fraud has been around. It is the cost of doing
business. I think everyone is going to be able to adapt in some
way.
Chairman Talent. That assumes price competitive products.
One of the questions I have got is because there is significant
overhead to maintaining a retail establishment, if you can get
the stuff off the Internet and it is as good and you get it in
the same form you would buy it, in other words, not like a book
where there is some value in having a book, even if you can
download it on a computer, you like to give it as a gift or
whatever, I am wondering whether this may not be a line of
business where Internet sales really will swallow up retail
businesses.
Mr. Harter. I think it is a bit of back to the future.
Richard Branson, the founder of Virgin records, in reading his
biography a while ago, when he opened his record shop he drew
people in because from what the book said, they could smell pot
in the record shop, hang out and listen to music all day, it
was a lounge, and the longer you stay in the record store, the
more likely you will buy more music. And I think now that we
are kind of going back to the situation where you go to a
Virgin Megastore, they have a coffee bar, a book shop,
magazines, there is merchandising, there is a DJ playing great
music, there are listening kiosks, or Borders. I think the
retailers large and small will find very interesting ways to
create a new customer experience.
Chairman Talent. You are probably right. It comes down to
value added, doesn't it?
Mr. Silverman. And he is talking about the big stores. On
the small business level, George's Music Room in Chicago and
Rock and Soul in New York and these small stores, DJs are going
to go there and people are going to go there who are regular
customers because the people who work there know the music,
know what they want and turn them on to new music.
Actually, the independent record store, they used to call
disrespectfully the mom and pop stores, are actually doing
better now against the Best Buys of the world even though they
are selling things at full list price and competing at $17 for
a CD than they were 5 years ago because they have realized that
their niche is to know their customer in the way that no big
store can ever know their customer. They have to put in
espresso bars in order to compete and create an upbeat and
entertainment destination for another reason. So I think that
these independent stores are going to be less vulnerable except
in the college area unless they are offering other
opportunities like these guys might make up for it by selling
blank disks.
Chairman Talent. Part of the problem is not adjusting
quick. There seems to be some consensus here that assuming we
can protect against piracy to a reasonable degree anyway, on-
line purchase or access to music is going to result in lower
prices for consumers, access to a whole lot broader range of
music, a fairer deal for artists over the long term and maybe
breaking the control over the business that has heretofore been
exercised by a few people. Is that a good way to sum up what
you all think? Does anybody disagree with that?
Mr. Silverman. Except it won't break the control of the
media because they are the media. The same people who control
the media own the record companies.
Chuck D. That will break up because the expanded media
exists in that parallel world of the Internet.
Chairman Talent. When it is fractionalized enough. Thank
you all for coming. The hearing is adjourned.
[Whereupon, at 1:10 p.m., the committee was adjourned.]
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