[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
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                                 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

                              ----------                              
                                                                   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?

                              ----------                              


                        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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