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





     COSTS OF INTERNET PIRACY FOR THE MUSIC AND SOFTWARE INDUSTRIES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                INTERNATIONAL ECONOMIC POLICY AND TRADE

                                 OF THE

                              COMMITTEE ON
                        INTERNATIONAL RELATIONS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 19, 2000

                               __________

                           Serial No. 106-174

                               __________

    Printed for the use of the Committee on International Relations


        Available via the World Wide Web: http://www.house.gov/
                  international--relations


                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
68-958                     WASHINGTON : 2000

                                 ______


                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVEN J. CHABOT, Ohio               EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE RADAVANOVICH, Califorina      JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    Richard J. Garon, Chief of Staff
          Kathleen Bertelsen Moazed, Democratic Chief of Staff
            John P. Mackey, Republican Investigative Counsel
                                 ------                                

        Subcommittee on International Economic Policy and Trade

                 ILEANA ROS-LEHTINEN, Florida, Chairman
DONALD A. MANZULLO, Illinois         ROBERT MENENDEZ, New Jersey
STEVEN J. CHABOT, Ohio               PAT DANNER, Missouri
KEVIN BRADY, Texas                   EARL F. HILLIARD, Alabama
GEORGE RADANOVICH, California        BRAD SHERMAN, California
JOHN COOKSEY, Louisiana              STEVEN R. ROTHMAN, New Jersey
DOUG BEREUTER, Nebraska              WILLIAM D. DELAHUNT, Massachusetts
DANA ROHRABACHER, California         JOSEPH CROWLEY, New York
TOM CAMPBELL, California             JOSEPH M. HOEFFEL, Pennsylvania
RICHARD BURR, North Carolina
             Mauricio Tamargo, Subcommittee Staff Director
        Jodi Christiansen, Democratic Professional Staff Member
                Yleem Poblete, Professional Staff Member
                   Victor Maldonado, Staff Associate


                            C O N T E N T S

                              ----------                              

                               WITNESSES

                                                                   Page

The  Honorable Q. Todd Dickinson, Under Secretary for 
  Intellectual Property, and Director, Patent and Trademark 
  Office, U.S. Department of Commerce............................     6
Joseph Papovich, Assistant U.S. Trade Representative, Services, 
  Investment and Intellectual Property, Office of the U.S. Trade 
  Representative.................................................     8
Jack Krumholtz, Director, Federal Government Affairs, and 
  Associate General Counsel, Microsoft Corporation...............    21
Thomas C. Tyrrell, Senior Vice President, General Counsel, and 
  Secretary, Sony Music Entertainment............................    23

                                APPENDIX

Prepared statements:

The Honorable Ileana Ros-Lehtinen, a Representative in Congress 
  from Florida and Chair, Subcommittee on International Economic 
  Policy and Trade, Committee on International Relations.........    36
The Honorable Q. Todd Dickinson..................................    41
Jack Krumholtz...................................................    47
Thomas C. Tyrrell................................................    72

 
     COSTS OF INTERNET PIRACY FOR THE MUSIC AND SOFTWARE INDUSTRIES

                              ----------                              


                        WEDNESDAY, JULY 19, 2000

              House of Representatives,    
         Subcommittee on International Economic    
                                      Policy and Trade,    
                      Committee on International Relations,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 2 p.m., in 
room 220, Rayburn House Office Building, Hon. Ileana Ros-
Lehtinen (Chairman of the Subcommittee) presiding.
    Ms. Ros-Lehtinen. The Subcommittee will come to order.
    Thank you so much for being here this afternoon.
    The great expression of talent, innovation and ingenuity 
which Americans have exhibited since the early days of the 
republic have endowed upon the United States the unenviable 
position, yet heavy responsibility of global leadership.
    This global leadership has also permitted the United States 
to more easily adapt and build upon emerging technologies and 
social transformations and herald in a new development and 
possibility propelled by brain power industries and sectors 
built upon ingenuity and imagination, not railroads and 
petroleum.
    These new ideas will redefine the landscape of not only our 
domestic economy but, indeed, that of the global marketplace. 
Yet as more information and business is converted into code and 
downloaded into the Internet, the ability for Internet pirates 
to inflict even greater damage upon legitimate trade only 
grows.
    According to the International Intellectual Property 
Alliance, in their recommendation to the Office of the U.S. 
Trade Representatives for the year 2000, the total losses 
attributed to so-called content industries top $8.5 billion in 
1999, and the Business Software Alliance, represented today by 
Mr. Eric Koenig of Microsoft, calculated a $7.3 billion loss in 
revenue by the year 2008 just for the software industry alone.
    The BSA further estimates that software piracy cost the 
United States over 100,000 jobs in 1998 and by the year 2008 
that number could rise to more than 175,000 jobs lost.
    While the accuracy of these numbers maybe open to debate, 
it is difficult to dispute that by reducing revenues, Internet 
piracy will reduce employment opportunities for Americans in 
the music and software industries. The potential of the 
Internet is limitless. As band width continues to grow and the 
ability to compress increasing amounts of information into 
smaller space continues to improve, the Internet will evolve 
into a vital tool for business, education, entertainment, and 
unfortunately piracy.
    The American advantages which make our industries the envy 
of the global marketplace lead many around the world to emulate 
our experiences through stealing, pirating, and counterfeiting, 
and we must take immediate steps to insure that we are doing 
our best to protect the unauthorized use of American products.
    This is not to say that actions taken to combat the scourge 
of on-line piracy should be solely an American initiative. On 
the contrary, concern spans international borders, and it is, 
in fact, an end epidemic problem far beyond the scores of our 
own country.
    In nations such as Russia and China, the Interactive 
Digital Software Alliance has suggested that some 90 percent of 
entertainment software is pirated. The United States must 
impress upon our neighbors the seriousness of these crimes and 
advocate for the greater enforcement of both local regulations 
and international norms.
    One positive example of such multilateral support can be 
found in the Uruguay Round agreement on trade related aspects 
of intellectual property right, TRIPS, which took effect in 
1996.
    By pursuing international support for the increased 
security of intellectual property rights, the United States not 
only develops forums for dispute resolution, but endorses the 
possibility of future dialogues. It cannot be said often enough 
without allies in this battle, the United States stands to 
become the proverbial boy with his finger in the dam, placing 
American interests before an ominous trickle in a futile 
attempt to restrain the oncoming flood.
    Yet this does not mean that the United States should stand 
idly by waiting for the initiatives of others. Specific 
industry based solutions, such as digital watermarking and 
spider programs, must be employed alongside increased 
vigilance, improved enforcement measures in order to create an 
environment which is more hostile to the efforts of Internet 
pirates.
    However, attention must also be paid to the advice offered 
by the National Research Council of the National Academies, 
which has urged legislators to delay any overhauling of 
intellectual property laws and public policy until markets have 
had ample time to adjust to new models of doing business and 
until sufficient research on the issues is conducted.
    Finally, it is necessary to address certain commercial 
features which some analysts suggest may precipitate the 
trafficking and the use of printed materials. Pricing is 
foremost on this list.
    For example, it has been estimated that a compact disk 
costs as little as 60 cents to manufacture, and depending on 
where you live, a new CD will cost you around $15. When CDs 
were first introduced in the early 1980's manufacturing costs 
represented $3 to $5 per CD and retailed for $15 to $20. As the 
manufacturing price per CD has fallen, there has not been a 
parallel drop in the retail price.
    When compared to the prices offered for music and software 
by Internet counterfeiters, there can be little doubt as to why 
many ordinarily law abiding citizens are swayed into breaking 
the law. This is not an excuse or a justification for on-line 
piracy, but merely one example of the need to look at all sides 
when approaching a problem as insidious as piracy.
    Real jobs, real company, and real lives ultimately depend 
on our ability to protect ourselves from on-line piracy, and as 
our witnesses today will state, this is not only a global issue 
or a national issue. It is also a local problem in our own 
communities.
    And I would like to recognize Mr. Rothman. Mr. Menendez, 
our Ranking Member, has a vote in the Transportation Committee, 
and he will be right back to make his opening statement.
    Mr. Rothman.
    [The prepared statement of Mrs. Ros-Lehtinen appears in the 
appendix.]
    Mr. Rothman. I would like to thank Chairwoman Ros-Lehtinen 
for holding this hearing. I do not have any questions at the 
moment, but I am glad to be here and ready to learn.
    Ms. Ros-Lehtinen. Thank you so much.
    Mr. Manzullo.
    Thank you, Mr. Delahunt.
    Mr. Delahunt. Yes. Thank you, Madame Chair Lady.
    I see many familiar faces in this audience since I serve on 
the intellectual property subcommittee of the Judiciary 
Committee, and I want to welcome Commissioner Dickinson.
    As I am sure most are aware, or in the last session of 
Congress, both the Digital Millennium Act was passed, as well 
as the so-called NEF Act. Hopefully that has had a salutary 
impact on the issue that we are discussing here today, and I 
would be interested in terms of your initial impressions of the 
effect and hopefully deterrence impact of those particular 
pieces of legislation.
    And I yield back to the Chair.
    Ms. Ros-Lehtinen. Thank you so much.
    I would like to take this opportunity to introduce the two 
Administration witnesses who will share their views on the 
impact of Internet piracy on the music and software industries 
with us this afternoon.
    Let me begin with Mr. Todd Dickinson, the Under Secretary 
for Intellectual Property and Director of Patent and Trademark 
Office for the U.S. Department of Commerce, a former Assistant 
Secretary of Commerce and Commissioner of Patents and 
Trademarks.
    Mr. Dickinson serves as principal policy advisor to the 
Administration and to Congress on all domestic and 
international intellectual property matters.
    He will be followed by Mr. Joseph Papovich, the Assistant 
Trade Representative for Services, Investment, and Intellectual 
Property in the Office of the U.S. Trade Representative [USTR]. 
A former employee at the Department of Labor, Mr. Papovich was 
the chief U.S. negotiator on safeguards at the World Trade 
Organization's Uruguay Round on trade negotiations.
    Thank you both for being with us today, and it looks like 
we have some vote. So as soon as we get back, we will get right 
back at it, and I will ask Mr. Manzullo if he would chair the 
remaining time of this hearing because I have a bill coming up 
after this vote.
    So thank you. We have suspended for just a little bit. 
Thank you.
    [Recess.]
    Mr. Manzullo [presiding]. Before we get started, there are 
about five or six students outside the door, and if there is 
any room in here or if they want to sit on the floor, could 
somebody welcome them in?
    Mr. Menendez, did you have an opening statement?
    Mr. Menendez. Yes. Thank you, Mr. Chairman.
    I regret that I had to go to a mark-up that had a roll call 
vote. So I regret that I was delayed, and then of course, we 
had a vote.
    I am looking forward to today's hearing. Clearly the 
problem of Internet piracy grows as fast as the computer and 
the Internet are used itself, if not even faster. Today about 
327 million people in the world have access to the Internet. Of 
those, 130 million of them are in the United States, where 
nearly 50 percent of citizens are Internet users.
    When the rest of the world catches up to the United States, 
Finland, Norway, and a handful of other developed nations with 
the highest per capita Internet use, the numbers will be 
staggering, and it will not take long. When nearly 3 billion 
people have access to the Internet, they will also have access 
to pirated music, software, and other copyrighted materials.
    Pirates will increase the supply to meet the exploding 
demand. Clearly the industry, trade associations, and some 
governments led by our own recognize the need to work toward 
reducing both demand for and supply of pirated material. 
Public-private efforts have succeeded in strengthening 
copyright protection and enforcement.
    The Clinton-Gore Administration has worked diligently to 
implement the TRIPS agreement, and within the WTP and the WIPO, 
push for the adoption of two WIPO treaties that respond to the 
rise of cyber network based deliver of copyrighted materials.
    Secretary Daley, before he left office, made ratification 
of these as a top priority of his, and I understand we are 
halfway toward getting the signatories we need to fully 
implement these.
    Congress and the President worked during the 105th Congress 
to pass the important Digital Millennium Copyright Act, which I 
was glad to support. However, government is aided by an army of 
acronymed industry associations fighting to protect 
intellectual property rights. The IIPA, the International 
Intellectual Property Association; the IIPI, the International 
Intellectual Property Institute; and the other IIPA, 
International Intellectual Property Alliance--and I would like 
everybody to say that five times----
    [Laughter.]
    Mr. Menendez [continuing]. Alone could fill another panel 
today.
    They and many others, the IFPI, the Business Software 
Alliance, the Recording Industry Association of America, and 
the Interactive Digital Software Association are some of the 
most prominent, are testament to the amount of money that is at 
stake.
    The IIPA and the BSA estimate that between eight billion 
and 15 billion a year of lost revenues from music and software 
hard goods alone is a reality. It has been so far impossible to 
accurately gauge losses from Internet piracy, and that, of 
course, is the subject of today's hearing, and I look forward 
to hear from our expert panelists about their work to measure 
the losses and combat the problem.
    But let me just highlight a few thoughts as the Ranking 
Democrat on the Subcommittee, and I would love to hear as you 
give your responses, and possibly some of your answers may be 
in the question and answer period.
    Internet piracy will clearly get worse before it gets 
better as the Internet use explodes, outpacing efforts to 
restrict unlawful infringement of intellectual property rights. 
The problem is probably exacerbated by a feeling among 
individuals, societies, and even governments of the developing 
world that, quote, we are poor, they are rich; we have a right 
to download this free.
    We have got to impress upon our trading partners the 
importance of strengthening and adhering to the rule of law 
because that is what works best for everyone in the long term 
for an investment in their countries and overall trade 
relations will be adversely affected by lack of will , the 
judicial infrastructure, and the ability to combat privacy.
    I encourage and applaud efforts by the Patent and Trademark 
Office and other U.S. Government agencies to provide technical 
assistance to developing nations in their effort to enforce 
intellectual property rights, and I wonder if the associations 
are doing the same.
    We must work toward increased transparency of Internet 
commerce at the same time that we respect the privacy of 
Internet users. The industry rightfully argues that the 
individual who in the privacy of his own home and meaning no 
harm trades or shares unauthorized music, video or software 
files is just as pernicious for the producers of intellectual 
property.
    But can we truly treat the individual who is not making 
money through their actions the same way we treat the organized 
crime syndicates that are involved in piracy in a massive and 
increasingly violent scale?
    How do we seek to strike the balance in the freedom of 
Internet commerce through the legitimate claim of protective 
rights of the producers?
    And I think one of the greatest difficulties in the 
government's efforts here is that someone, for example, in the 
creative genius of performing, creating music, ultimately they 
wish to be heard. They wish to share their creativity. So long 
as that is the burning desire of the creative genius of an 
individual, to be heard, it is also one of the great challenges 
in this process of assuring the rights that they deserve as a 
result of their creativity as their burning desire to be heard 
by an incredible number of people.
    I am not sure how government does the best job of 
reconciling those interests, and I look forward to seeing how 
the panel addresses it.
    Thank you, Mr. Chairman.
    Mr. Manzullo. Does anybody else have an opening statement?
    Mr. Delahunt.
    Mr. Delahunt. I would just make one observation. When it 
comes to the issue of piracy and the music industry, 
particularly, and obviously software, it is clear that we have 
a substantial issue to deal with when it comes to the 
burgeoning balance of trade deficit, and the one account that I 
think now exceeds any other account in terms of the positive 
side of that ledger is our intellectual property account.
    And I know I speak for many who are concerned about this 
piracy issue in that it is absolutely critical and essential 
that we take every step possible to protect our commercial 
interests on a national security basis and our national 
economic interests to do what we can to allay and assuage the 
problem of Internet piracy.
    Mr. Manzullo. Mr. Rothman.
    Mr. Rothman. Thank you.
    I, for one, am at a little bit of a loss, and I look 
forward to the panel addressing this: an elaboration of what 
fundamental American value we put in jeopardy if we do not 
enforce the private property rights of those artists who 
created the music and those who supported the artists to enable 
them to create and market their work.
    I know my Republican colleagues passed the Private Property 
Rights Act to streamline the ability of people to make claims 
about the government taking their property without just 
compensation, and I voted for that. As far as I am concerned, 
the overwhelming burden of proof is on anyone who would 
compromise in any way the private property rights of the 
artists who created the music and those who supported them to 
enable them to market the music. So each should hear what the 
other side has to say.
    Mr. Dickinson.

 STATEMENT OF THE HONORABLE Q. TODD DICKINSON, UNDER SECRETARY 
 FOR INTELLECTUAL PROPERTY AND DIRECTOR, PATENT AND TRADEMARK 
              OFFICE, U.S. DEPARTMENT OF COMMERCE

    Under Secretary Dickinson. Thank you, Mr. Chairman.
    Mr. Manzullo. Could you put the mic a little bit closer to 
your mouth?
    Under Secretary Dickinson. I sure will.
    Mr. Manzullo. Thank you.
    Under Secretary Dickinson. It is a pleasure to be back 
before this Subcommittee again today to discuss, in particular, 
what the U.S. Patent and Trademark Office and this 
Administration are doing to help protect American intellectual 
property from piracy at home and abroad, particularly on the 
Internet.
    As was suggested, the Internet has exploded. The President 
likes to say when he came into office that there were something 
like 100 Web sites, and now there are probably on the order of 
100 million.
    As the title of the hearing indicates, two of the U.S. 
copyright industries most intensely affected by piracy and the 
unauthorized use of their works on the Internet are the 
software and the music industries. The losses in these areas 
easily total in the tens of billions of dollars, translating 
into lost jobs, revenues, and foreign royalties for American 
workers and businesses.
    Given the explosive growth of the Internet and the 
increasing use of intellectual property on Web sites, the 
problems of piracy are not going to go away on their own. That 
is why the Administration has been tackling these problems head 
on.
    Here at home we have worked with Congress to equip American 
intellectual property owners and law enforcement authorities 
with better legal tools to fight piracy through the passage of 
measures, such as the Digital Millennium Copyright Act and the 
No Electronic Theft Act.
    At the same time we have partnered with international 
associations, such as the World Intellectual Property 
Organization [WIPO] and the World Trade Organization [WTO] to 
provide similar legal norms at the international level. For 
example, we are working with our colleagues at the U.S. Trade 
Representative and the Department of State to ensure that our 
trading partners implement the protections provided in the 1996 
WIPO Internet treaties, as well as the Agreement on Trade 
Related Aspects of Intellectual Property Rights or the TRIPS 
agreement.
    Adopting these legal norms is not enough, however. Our 
trading partners must also have the technical means and the 
political will to put these legal tools into practice. In that 
regard, the USPTO is receiving more requests than ever from our 
trading partners. These requests are for technical assistant in 
reviewing IP legislation and developing an integrated 
enforcement system consisting of civil, criminal, and 
administrative procedures and remedies, as well as border 
measures.
    Many of these requests are in response to the January 1, 
2000 deadline for all developed and developing countries who 
are WTO members to have domestic laws and enforcement 
mechanisms that are TRIPS compliant.
    Because of the growing problem of Internet piracy, many of 
these countries are also seeking assistance in developing 
enforcement mechanisms to deal with technological advances in 
IP protection and enforcement.
    They also need assistance in understanding and implementing 
the WIPO Internet treaties to establish the legal framework to 
combat these problems. Accordingly, the focus of our Internet 
oriented efforts has been to assist countries in adapting the 
enforcement models appropriated for conventional hard goods--
CDs, cassettes, floppy disks, and the like--to the realities of 
cyberspace transmission of copyrighted works.
    In particular, we are targeting our enforcement training 
efforts to focus on problems of Internet enforcement in areas 
where Internet usage is rapidly expanding, namely, Latin 
America, Africa, and Asia.
    This past May, the USPTO and WIPO provided a week long 
program on developing a TRIPS compliant and effective 
enforcement regime for law enforcement and other government 
officials from a number of developing countries. These included 
China, Hong Kong, India, Thailand, the Philippines, Israel, 
Egypt, and Nigeria.
    Next week we're going to partner again with WIPO to provide 
a similar training program in Senegal for government officials 
from several African nations, which builds on a similar program 
we offered last year in Kenya.
    In September we will sponsor two regional conferences to 
explore the practical problems in developing and implementing 
effective IP enforcement mechanisms in today's rapidly changing 
digital and technological environment. The first event, which 
is actually the second Intellectual Property Symposium of the 
Americas, will be held here in Washington on September 11 and 
12. It will be attended by judiciary officials, public 
prosecutors, domestic enforcement agents, and private rights 
holders from throughout North, Central, and South America.
    The second forum, an Asian-Pacific regional conference, 
will be held in Thailand on September 18 and 19.
    As you know, Mr. Chairman, the music software and other 
core U.S. copyright industries are a key growth sector for our 
economy, accounting for nearly $400 billion in value added to 
the U.S. economy and generating an estimated $67 billion in 
foreign sales and exports in 1997 alone.
    Accordingly, the USPTO and this Administration are 
dedicated to ensuring strong protection and enforcement of 
these IP products in the global economy. In fact, with 
Congress' recent enactment of the National Intellectual 
Property Law Enforcement Coordination Council we now have a 
formal inter-agency coordination effort for domestic and 
international IP law enforcement among Federal and foreign 
entities. We believe the Council will help us partner with 
industry to develop effective strategies for addressing 
Internet piracy, which is a key challenge for the 21st century.
    Thank you very much, Mr. Chairman, and I am pleased to 
answer any questions which you or the Subcommittee might have.
    [The prepared statement of Under Secretary Dickinson 
appears in the appendix.]
    Mr. Manzullo. I appreciate that.
    Mr. Papovich.

      STATEMENT OF JOSEPH PAPOVICH, ASSISTANT U.S. TRADE 
   REPRESENTATIVE FOR SERVICES, INVESTMENT, AND INTELLECTUAL 
       PROPERTY, OFFICE OF THE U.S. TRADE REPRESENTATIVE

    Mr. Papovich. Thank you, Mr. Chairman, Congressman 
Menendez, Ms. Chairwoman, and the other Members of the 
Subcommittee.
    We appreciate the opportunity to speak to you about the 
cost of Internet piracy for music and software and other 
industries in the United States dependent on intellectual 
property and USTR's role in this.
    We are a small agency. We have only four of us, including 
myself, who work directly or primarily on the implementation of 
our intellectual property policy. Therefore, we very much 
appreciate the support and interest received from Congress and 
from other agencies, including the Patent and Trademark Office 
with whom we work very closely.
    Our main function or our main policy, as we see it, is to 
press other governments. This is USTR's main activity, to press 
other governments to provide adequate and effective 
intellectual property protection and enforcement, and we focus 
particularly on commercial levels of piracy.
    That means we press countries to have modern laws and to 
enforce them by making available to U.S. right holders 
administrative, civil, and criminal sanctions. We use the tools 
provided to us to obtain these results.
    Our principal focus now, or at least one of our principal 
focuses, is securing full implementation of the WTO's so-called 
TRIPS agreement, which is the intellectual property agreement 
in the World Trade Organization. This agreement requires 
members to enact and enforce copyright and other intellectual 
property protection.
    Obligations for developing countries came into effect on 
January 1, 2000, after a 5-year transition period. We have 
achieved considerable success obtaining compliance with the 
substantive obligations of the agreement. However, compliance 
with the enforcement provisions remain a problem in certain 
developed countries and in many developing countries, and that 
has become increasingly the focus of our attention.
    First we focus on insuring the countries changed their laws 
to reflect modern intellectual property standards or the 
standards of the TRIPS agreement.
    Another aspect of our WTO strategy relates to the WTO work 
program on electronic commerce. For example, we are seeking 
recognition by WTO members of the applicability of existing WTO 
rules to electronic commerce. In the context of intellectual 
property, this means recognition that the standards established 
in the TRIPS agreement are as applicable on the Internet as 
they are in the physical world.
    We are actively consulting with industry to develop the 
best strategy to address Internet piracy. An important first 
step in this, of course, was achieved at the World Intellectual 
Property Organization when they concluded their two copyright 
treaties in 1996.
    We are pursuing this in several ways. We are seeking to 
incorporate the highest standards of protection for 
intellectual property into every bilateral and regional trade 
agreement that we negotiate. We are negotiating now with our 
trading partners in the Western Hemisphere in an attempt to 
conclude a free trade area for the Americas.
    The United States is submitting proposals in this 
negotiation that incorporate the substantive provisions of the 
WIPO copyright treaties. So in this regional agreement we would 
seek to have standards higher than those now in the TRIPS 
agreement.
    Our proposals in the so-called FTAA would also update 
copyright and enforcement obligations to reflect other 
technological developments.
    More immediately, we are engaged in a bilateral negotiation 
of a free trade agreement with Jordan. In this negotiation on 
the IPR Chapter, the Intellectual Property Chapter, we are 
insisting that the Jordanians agree to implement these WIPO 
copyright treaties and put provisions in their law that allow 
the enforcement of those provisions.
    Finally, one of our longer term objectives is to bring the 
substantive obligations of the WIPO copyright treaties into the 
WTO as obligations for all members under the TRIPS agreement. 
At that time, we would intend to further update the TRIPS 
agreement to insure that it provides adequate and effective 
protection for intellectual property in light of the latest 
technological developments.
    We also have a fairly active bilateral program. One of the 
most effective tools we have is the annual special 301 review 
mandated by Congress under the 1988 Trade Act. This tool has 
vastly improved intellectual property standards around the 
world.
    Each year at the end of April, we publish a list of 
countries that we believe do not provide adequate and effective 
intellectual property protection. The mere publication of that 
list warns countries of our concerns and warns investors that 
that country may not be a safe place for them to put their 
investment money.
    In many cases, our actions under special 301 leads to 
permanent improvements. We have had some meaningful successes 
recently in Bulgaria where there had been serious optical media 
CD piracy that has largely been closed down; even more recently 
in Hong Kong, which has taken significant steps legislatively 
and enforcement-wise to combat optical media.
    Perhaps the biggest effort we have made in the second half 
of the 1990's was with respect to China. In 1995 and 1996, 
persistence tolerance of piracy there led us to threaten China 
with $1 billion in trade sanctions. These sanctions helped us 
achieve the closure of pirated optical media production in 
China.
    Our followup work has been to insure that all relevant 
Chinese agencies, including trade, customs, judiciary police, 
and senior political officials stay involved.
    Enforcement of intellectual property rights now has become 
part of China's nationwide anti-crime campaign. During 2000, 
they are conducting a coordinated anti-piracy campaign 
involving a number of enforcement agencies.
    As we begin to move our efforts into Internet related 
piracy issues, we have been raising this issue increasingly 
with countries. While most of our efforts remain with the 
problem of physical piracy, which still is very large, we have 
begun encountering countries' Internet piracy issues.
    My boss, Ambassador Charlene Barshefsky, recently wrote to 
one of the Chinese Vice Premiers, urging him to insure that as 
China amends its copyright law, which they are doing now, and 
in doing so that they make amendments to address Internet 
piracy, including implementation of the WIPO copyright 
treaties.
    In any case, Chinese courts have ruled in a number of 
recent cases that unauthorized uses of sound recordings in the 
on-line environment are acts of infringement under their 
existing copyright law.
    Similarly, with Hong Kong, a number of U.S. agencies 
recently provided for a training program for Hong Kong's 
Department of Customs and Excise. Hong Kong sent members of its 
Internet Anti-piracy team to the U.S. Government's Cyber 
Smuggling Center in Virginia for a week-long training session 
on ways to curb Internet piracy.
    On June 22, just a month ago, after Hong Kong's people 
returned, they smashed a syndicate there in Hong Kong which had 
been soliciting orders for pirate CDs over the Internet. Those 
people are now training others in Hong Kong in how to conduct 
such enforcement activities.
    We need to do much, much more training, and that is 
something that we will cooperate with other agencies to do, in 
terms of just teaching other governments how to move from 
dealing with the still very large physical piracy problem to 
trying to tackle the Internet piracy problem.
    Intellectual property protection remains one of our most 
important and challenging tasks. We protect U.S. intellectual 
property rights to encourage research, investments, and ideas 
of some of America's leading artists, authors, private sector 
and academic researchers.
    Congress, through passage of the special 301 law, the 
passage of the Digital Millennium Copyright Act, implementing 
the WIPO treaties and other actions, including hearings like 
this, deserves great credit for bringing public focus to these 
issues. We look forward to continuing this effort together as 
we move forward.
    Thank you very much.
    Mr. Manzullo. Thank you.
    Mr. Rohrabacher. Todd, good to see you again.
    Under Secretary Dickinson. Congressman, and you.
    Mr. Rohrabacher. You are doing a good job over there.
    Under Secretary Dickinson. Thank you.
    Mr. Rohrabacher. I would say you guys have got your job cut 
out for you on this one. I do not know what the answer is, but 
it is getting more complicated every day, and that is all I've 
got to say.
    [Laughter.]
    Mr. Manzullo. Congressman Menendez, can you follow that 
one?
    Mr. Menendez. Well, that is the start. So, you know, to get 
a compliment from Mr. Rohrabacher and just to say that is as 
little as he has to say on the subject is historic. I do not 
know that I can----
    Mr. Manzullo. You know, we do not have to ask questions. 
They gave good testimony.
    [Laughter.]
    Mr. Menendez. I do have some questions that did not get 
answered.
    Mr. Papovich, let me ask you. You mentioned, I think, in 
your testimony that only 4 of the nearly 200 employees at USTR 
are dedicated to the implementation of intellectual property 
policy, which is only about 2 percent. Is 2 percent the amount 
of--does that represent USTR's work overall on intellectual 
property right issues? And do the trade losses of U.S. 
businesses represent only 2 percent of the overall issues that 
USTR faces?
    Mr. Papovich. Actually, my statement may have been a bit of 
a misstatement in that sense. First, I included secretaries, 
support staff in the 200, and that is some significant number.
    But I said primarily involved, and, in fact, the way we 
organize ourselves, at least half of our units at USTR are 
regional staffs. We have an office for Japan, an office for 
China, an office for Europe, and each of those people has as 
part of their portfolio the protection of American intellectual 
property interests in other countries.
    In fact, I will share this with you. A few years ago as I 
was sitting with an OMB official talking about our budget 
proposal, this person said, ``You know, we ought to change the 
name of this institution from USTR to USIPR because you are 
spending entirely too much time on intellectual property 
issues, or let's put it this way. You are spending an awful lot 
of time, not too much time, but an awful lot of time on 
intellectual property issues.''
    We, the four of us, are responsible for overall policy. We 
then, if you will, direct our regional officers to raise 
intellectual property issues with the countries that they 
interact with on a daily basis. So it is not just the four of 
us.
    Mr. Menendez. But the question still stands. Are you 
expending the resources that are commensurate with the losses 
to American industry in this regard? Is it something that 
should be reallocated or that your department should be added 
to?
    I mean obviously we all talked in your statements, as well 
as ours, about the explosive nature that is going to take place 
as a result of greater Internet use, and therefore, the 
potential for piracy is only going to grow. Getting the respect 
of countries to respond, those who are on the 301 list, 
developing countries who have no excuse other than political 
will, and developed countries versus developing countries; it 
seems to me that you are not by design or desire, but it seems 
you are shortchanging what, in fact, we should be doing in this 
regard.
    Do you think you have all of the capacity to deal with 
this?
    Mr. Papovich. It is a tough question for me to answer 
because the 200 of us, or the 120 or so who do the substance of 
the work, have to cover our entire trade policy for the United 
States. Our job is to coordinate trade policy, including 
international intellectual property enforcement policy, with 
those in our building.
    We then have to rely heavily on other agencies to make that 
happen, and that is the way the system is set up. So we rely on 
PTO, State Department----
    Mr. Menendez. By way of example, let's look at China. You 
spoke of the huge problem of piracy in China, and the 
government's efforts beginning in 1995 and 1996 to curb those 
activities.
    The question is: when are we going to see a drop-off in 
piracy? Because if you look at the IIPA and BSA statistics, 
they show little positive change from 1998 to 1999. So, you 
know, that is by way of example, one example, of what I am 
concerned about in this regard.
    When do you see some positive changes moving in the context 
of China?
    Mr. Papovich. I do not know when we will see that. I hope 
we see----
    Mr. Menendez. I can understand, sir.
    Mr. Papovich. I hope we see it this year, but it is not 
easy. It is not easy.
    Mr. Menendez. What do the 301--I mean, I know what they are 
supposed to do. What do we actually do when we have the 301 
list that we promulgate? I mean, what do we do to move 
countries?
    I mean, developed countries in my mind have even less 
reason to be in the midst of not enforcing and providing the 
rule of law, enforcing the rule of law, and creating the 
infrastructure that they have committed themselves to in 
international agreements.
    Developing countries might have some arguments about their 
technical abilities. Developed countries do not. What are we 
doing with, for example, developing countries that are not 
meeting their responsibilities?
    Mr. Papovich. Well, we are using the WTO dispute settlement 
system. We have brought disputes against Sweden, Denmark, 
Greece, and Ireland over parts of their IPR system that are in 
noncompliance with the TRIPS agreement.
    In the case of Denmark and Sweden, the problem was that 
they did not permit ex parte searches of otherwise legitimate 
business operations that are using pirated software. This is 
very important to the software industry to be able to have 
these surprise searches.
    In both instances Sweden already changed its law after we 
challenged them to comply. Denmark is in the process. In the 
case of--I did not mention Portugal--Portugal was in 
noncompliance. We challenged them in the WTO. We started the 
formal dispute settlement process, and then they complied. One 
of the biggest problems we have is in the enforcement side 
where countries have less stringent penalties than the United 
States might have.
    A good example is Greece and Italy where crimes of very 
severe magnitude committed there do not receive the punishments 
that would be allocated here. For economic crimes, like 
intellectual property, penalties are also considerably less 
than what we would consider appropriate to deter, and we have 
been putting pressure on these countries, and it has been a 
challenge because they have a hard time seeing that the 
economic crime of intellectual property piracy rises to the 
level that deserves the punishments we deserve.
    But we have used a variety of pressures to get them to 
change this, but it is not easy. The Italian government has 
legislation, an anti-piracy law, that we hope they will pass 
this summer, but we have been working on it for about 4 years 
now using different pressures to get that done.
    But it is often just a case of perception. The countries, 
even developed countries, do not always see intellectual 
property as a form of private property even though their own 
citizens create a lot of intellectual property. They still are 
learning the importance of it as a form of property that needs 
to be protected.
    Sorry for the long answer, but I wanted to elaborate.
    Mr. Menendez. I have other questions that I will submit for 
the record. I hope you will answer them.
    Mr. Manzullo. I was going to ask you a question about 
Macau. I was over there in December 1997 just before the 
turnover. Your mentioning of Portugal explains how Macau's 
transition from Portugal to the PRC, reminds me of just a 
wonderful hand-off to people who do a great job of preserving 
intellectual property rights.
    But my understanding is that one of the biggest areas of CD 
pirating in the world taking place in Macau. Is that still 
going on?
    Mr. Papovich. Yes. It has begun to improve, and I am not 
sure quite what to make of it, but I----
    Mr. Manzullo. I will not ask the question to what extent is 
it improving because it cannot go anywhere but improve, I 
understand.
    Mr. Papovich. I have made several trips to Macau on this 
problem, and in one meeting I had with one of the chief 
prosecutors, I had the impression he was afraid for his life; 
that if he prosecuted these people, he would put his life in 
danger. This was a Portuguese origin person.
    The last time I was there I met with one of the Chinese 
prosecutors who did not look very frightened to me, and he 
talked about how he was going to clean this up, and I hope he 
does. I worry a little bit about insuring the rule of law. I do 
not know what tactics he is going to use, but I have noticed in 
the past few months that the Macanese police have become more 
aggressive about attacking pirates than they were before.
    So I see some improvement, and I do not know how much to 
attribute that to the hand-over, but I just will note that I 
have seen some improvements in recent months.
    Mr. Manzullo. There is supposed to be a 5-year period of 
time during which developing countries were supposed to phase 
in agreements or statutes that would be in compliance with 
TRIPS. What is going on there?
    Mr. Papovich. As I said in my testimony, there has been 
fairly good performance by developing countries in changing 
their substantive standards, in modifying their copyright, 
patent, trademark laws to make them TRIPS compliant. It is not 
perfect by any stretch of the imagination, but pretty good, and 
we have a long list that I would be happy to submit if you 
would like to have it for all the countries, developing 
countries that have amended their intellectual property laws in 
the last year in an attempt to comply.
    The bigger problem is going to be on the enforcement side. 
If a country has a poor judicial enforcement system generally 
or a corrupt judicial enforcement system generally, it is going 
to be an uphill battle for us to get them to adequately enforce 
the intellectual property components of their law.
    Mr. Manzullo. Are we mostly talking about piracy here in 
terms of reproducing CDs?
    Mr. Papovich. That is a big part of it.
    Mr. Manzullo. What other aspects are there besides that?
    Mr. Papovich. Well, software piracy is often called 
corporate end user piracy, where an otherwise legitimate 
corporation will buy one piece of software, get no licenses, or 
licenses for 1 or 2 machines, and then copy it onto 500 
machines.
    Mr. Manzullo. Well, that is done in this country.
    Mr. Papovich. That is against the law, and that is a 
priority for BSA.
    Mr. Manzullo. That was a good answer.
    Mr. Papovich. I will let them speak to that, but we put a 
lot of pressure on countries to act against this.
    In the trademark area, of course, counterfeiting is just a 
gigantic problem, whether it is footwear or blue jeans or 
whatever. That is a problem, too.
    Mr. Manzullo. Well, you have both been very candid here. Is 
there any hope? All it takes is one country to be a pirate, and 
that is enough to destroy intellectual property rights around 
the world.
    Mr. Papovich. Well, I am an eternal optimist, and I believe 
we have been making progress. My bigger fear, despite my 
eternal optimism, is that we chase this problem, particularly 
this optical media one. We chased it out of China. China was 
the central production center for optical media piracy.
    Mr. Manzullo. Explain what you mean by that.
    Mr. Papovich. Optical media, these are CDs, CD-ROMs, VCDs, 
DVDs, all of those, the optical things that go on disks.
    We put enormous pressure on the Chinese to stop this in the 
mid-1990's. They did shut down the production of these 
products. They fled to Macau and Hong Kong first and Taiwan. We 
put pressure on all three of them, and we are seeing progress, 
particularly in Hong Kong.
    The Hong Kong and Macanese police have raided factories 
where the machinery was boxed up with addresses like Malaysia, 
Thailand, where the product, the machinery was being shipped 
because the police pressure was getting too hot on them.
    So then I have been traveling to Thailand and Malaysia 
doing the same thing and hopefully will see progress, but two 
problems loom out there. One is these pirates could move to 
places I do not have very easy access to, some place like 
Burma, let's say, or it goes to the Internet, which is going to 
become much more difficult for everyone to police. It is one 
thing for people to have a factory that the police can raid. It 
is another thing to have a computer in their house, when they 
are facilitating the transfer of all of these CDs.
    Mr. Manzullo. Thank you.
    Steve, I think it is your turn.
    Mr. Rothman. Thank you, Mr. Chairman.
    I have a couple of questions. How big is this problem? What 
is it costing the American industry? And what does it cost the 
American consumer? Do we have any numbers on that?
    Mr. Papovich. The only numbers we have are ones that 
industry has provided to us. We do not have any capability 
ourselves to estimate this, but our annual special 301 review, 
each spring the IIPA, the alliance of copyright alliances, 
submits a very comprehensive set of estimates to us of the 
losses they suffer and the piracy rates and the number of 
countries, not every single country, but in many countries so 
that we have a feeling for that.
    I do not remember the numbers off the top of my head, but 
it is something like $4 billion. It was in your testimony.
    Mr. Papovich. Yes, we are getting around $4 billion.
    Mr. Rothman. And it would be interesting to know $4 billion 
out of how many.
    Under Secretary Dickinson. Well, the same estimate from the 
same entity of how much the contribution to the GDP that the 
copyright industry makes is somewhere around $530 billion. 
Probably a little over 6 percent of our GDP is dependent on 
copyright industries.
    Mr. Rothman. $4 billion out of $5 billion?
    Under Secretary Dickinson. $530 billion.
    Mr. Rothman. $530 billion; $4 billion out of $530 billion. 
I do not need to do the calculation. I just want the raw 
number.
    Under Secretary Dickinson. Now, there is about $66 billion 
of foreign sales that are generated, as well. That is all in 
the number of domestic and foreign.
    Mr. Rothman. OK. I have another question. Do you have 
sufficient legislation from us to help you? Do you need 
anything from us?
    Mr. Papovich. No. The special, from my side----
    Under Secretary Dickinson. Let me make a correction, by the 
way. That 4 billion represents industry estimates from just one 
industry, the recording industry. Software industry estimates 
are somewhere on the order of $12 billion in just their 
industry.
    Mr. Rothman. Well, each of those is----
    Under Secretary Dickinson. The $530 billion is all 
copyright industries all together.
    Mr. Rothman. OK. So now we have got recording is $4 
billion, and the other one is what?
    Under Secretary Dickinson. Software is, according again to 
BSA, the Business Software Alliance, and the Software Industry 
Association, $12 billion.
    Mr. Rothman. Twelve. So we are up to $16 billion out of 
$530 billion. I am not saying whether that is big or small.
    Under Secretary Dickinson. And the estimate, and I 
apologize for looking down a little further here, the IIPA 
estimates the U.S. copyright industries worldwide losses are 
$22 billion total.
    Mr. Rothman. $22 billion on top of the $16 billion?
    Under Secretary Dickinson. I think the total is the $22 
billion.
    Mr. Rothman. Is the 22. So it is $22 billion out of $530 
billion.
    Under Secretary Dickinson. Yes.
    Mr. Rothman. OK.
    Under Secretary Dickinson. Out of $67 billion.
    Mr. Rothman. $22 billion out of $67 billion?
    Under Secretary Dickinson. Let me just check.
    Mr. Rothman. No, because if 16 is the domestic out of 530--
well, you know what? We can get those if you have them.
    Under Secretary Dickinson. We can get those numbers back 
for you, Congressman. It is a lot of money. Let's put it that 
way.
    [Laughter.]
    Mr. Rothman. It is a lot of money, but you know, we can to 
get a sense of the scale of the problem.
    Under Secretary Dickinson. We do.
    Mr. Rothman. What do cigarettes cost us? What do car 
accidents cost us? What does alcohol cost us? It runs into the 
billions as well.
    Under Secretary Dickinson. Indeed.
    Mr. Rothman. Again, I do not mean to minimize the extent of 
the danger of this particular bill, and it is a big one, and it 
bothers me greatly, but what bothers me is the sense I get, and 
I hope I am wrong that the Internet being free, that everything 
is for free, and I am not sure all Americans yet have a feeling 
for the value of intellectual property, and I think they should 
because what is a capitalist society, aside from general 
fairness, sense of fairness that one owns, you know, the 
product of one's own labor; people have made a great deal of 
investments in these intellectual property items, and they want 
to be able to be assured of whatever return is due to them and 
that some of the proceeds will not be stolen from them.
    So what can we tell the average American young person or 
average citizen about what their role should be in a world 
where they may have a great exposure, greater exposure to these 
ill-gotten gains, this stolen property? Should there be some 
national campaign or is there one already from the industry?
    I think I have seen some of those saying, you know, there 
is no such thing as a free lunch or something like that, and I 
have had young people say, ``Oh, it is just for free.''
    And I said, ``When you go into the candy store and steal 
something, that is shoplifting. There is no difference if you 
steal someone else's property.''
    Do you have any thoughts on that?
    Under Secretary Dickinson. Congressman, I think you have 
stated the case very well. I think one of the challenges we 
face is that intellectual property is an intangible thing, and 
being so easy to copy, it is often perceived as something which 
is fair game, and if you can get away with it, it is OK. And so 
that creates some obvious problems.
    We have also seen that problem enormously enhanced by the 
rise of the Internet and technologies which have been developed 
on the Internet that have allowed for the copying, in some 
cases fair use, but in many cases not, of copyrighted works. 
That has become a major problem.
    And there has been hearings both here and on the other side 
of the Hill to deal with this recently and to deal with this 
question.
    Mr. Rothman. Well, maybe it's up to the people whose goods 
are being stolen to do that, and they may very well have 
programs to talk about, but I would be interested in that. You 
know, as a father, as a member of the community, it is our job 
to educate our young people about what is right and what is 
wrong.
    Under Secretary Dickinson. There is no free lunch. 
Sometimes this is perceived, for example, as very wealthy 
individuals in the recording industry losing a little bit of 
their wealth. What that fails to overlook is the number of 
people who are genuinely in that industry at all levels, from 
the people who run the pressing machines to the people who run 
the recording studios, the people who just have regular jobs in 
those industries that are not glamorous and exciting as the 
stars might be. Those are real jobs that are lost and real 
wages that are affected.
    Mr. Manzullo. Mr. Delahunt.
    Mr. Delahunt. Thank you, Mr. Chairman.
    To attempt to quote Everett Dirksen, I think, it was a bit 
in here, a bit in there, and after a while you are starting to 
talk about some serious money.
    Mr. Manzullo. He is a good Republican.
    Mr. Delahunt. I understand that. I know that there are some 
good Republicans, Mr. Chairman.
    [Laughter.]
    In fact, some of my best friends are Republicans.
    Mr. Manzullo. Not enough. Well, your time is up.
    [Laughter.]
    Mr. Rothman. Mr. Chairman, he includes you among them.
    Mr. Delahunt. Just let me pursue a little bit because I 
really think it is important to underscore that in terms of our 
economy and its relationship to the global economy, how 
significant the intellectual property account is in terms of 
the trade deficit.
    Are we talking about a $4 billion loss or a $22 billion 
loss, in terms of exports? I think we can agree, you know, that 
we have a balance on the export side of some $67 billion, and 
what is the best estimate you have in terms of domestic piracy 
overseas as opposed to domestic piracy because they really do 
present, you know, different problems, if you have it.
    Under Secretary Dickinson. I do not happen to have it. Do 
you have it, Joe, in terms of the----
    Mr. Papovich. No.
    Under Secretary Dickinson. I have worldwide estimates by 
some of the entities who make these estimates. We can try to 
get the breakdown for you.
    Mr. Delahunt. OK.
    Mr. Papovich. But there is a further complicating factor. 
It is not all lost exports. Some of this work would have been 
produced in the markets that it is intended to serve. You know, 
not every CD that is sold in Asia that is legitimate is not 
made--that has, as we say in America, a recording artist on 
it--the CD itself is not made in the United States. The CD may 
be made in a country where the market is. So it is lost revenue 
opportunities, but it is not necessarily exports.
    Mr. Delahunt. In terms of the legislation that we passed 
last session, the so-called Net Act and the Digital Millennium 
Act which dealt with the issue of these anti-circumvention 
devices, the prohibition thereof, if you will, and I am sure 
that maybe our next panel can respond to it and maybe they have 
some experience, have we been able to determine or make any 
evaluation as to the effectiveness of what we did last session?
    Under Secretary Dickinson. My understanding, Congressman, 
is that both of these acts have only recently begun to be used. 
We have not had extensive experience with them yet, but my 
understanding, for example, is that some parts of them have 
been used extensively so far. Under the DMCA, for example, the 
notice and take-down provisions that the ISPs and the OSPs use 
to bring down Web sites which are inappropriate have been used 
rather extensively. Some of the defenses in the DMCA, I 
understand, have also been used.
    So we will have to wait and see what the ultimate result 
is, and some of the other witnesses may have some insights.
    Mr. Delahunt. OK.
    Mr. Papovich. There is an indirect value, too, and that is 
the example that we set for other countries. If we were to 
delay, if we had delayed in implementing our requirements under 
the WIPO copyright treaties, it would have made it all the 
harder for a person like me to go to another country and say, 
``You need to do something to implement those WIPO treaties.''
    Mr. Delahunt. Right.
    Mr. Papovich. The same with the Net Act.
    Mr. Delahunt. Well, I think we have got to do that to be in 
compliance with the EU and with the TRIPS Act.
    Mr. Papovich. Right.
    Under Secretary Dickinson. Well, actually the contrary is 
the case, Congressman. We have taken the lead internationally. 
We were one of the earliest nations to ratify those treaties 
and pass the implementing legislation. The EU and European 
countries have not yet ratified the treaties, and one of our 
biggest jobs is trying to convince our colleagues and friends 
in Europe that they need to move forward in a timely way.
    Mr. Delahunt. Right. I think you responded, you know, in 
terms of what we can do, in terms of legislation and 
substantive law. You have the books that we have just alluded 
to at your disposal, and again, I think maybe it was Mr. 
Menendez that was talking about, you know, there are four of 
you in the USTR that are working in terms of intellectual 
property, but I think your coordinating role or mission, if you 
will, is really the key here, and maybe you can list for us the 
agencies that are dealing with this particular issue.
    I think, if my memory does not fail me, I think the 
Attorney General, Ms. Reno, has established a task force in 
terms of dealing with the issue of piracy and intellectual 
property.
    But I guess the bottom line, after you look at that, is: 
are we spending enough resources at this point in time in your 
judgments, and not, again, just simply from your agency 
perspective, but in terms of what we need to do to protect 
American intellectual property in the global marketplace?
    Under Secretary Dickinson. Congressman, let me start off. 
Among the agencies that are involved, and these are the ones 
which are members of the National Intellectual Property Law 
Enforcement Coordination Council that we mentioned, the 
Assistant Attorney General for Criminal Enforcement, the Under 
Secretary of State for Economic Affairs, the Deputy USTR, the 
Commissioner of Customs, the Under Secretary of Commerce for 
International Trade, and the Register of Copyrights.
    Mr. Delahunt. Commissioner, I think it is important to 
enumerate them, but I guess what I am saying is what kind of 
resources, for example, is the Department of Justice allocating 
to this particular initiative. I mean, how many FBI agents are 
dealing with this issue? Do we have enough personnel from 
whatever Federal agency is involved to really do this job and 
to start to make a difference in terms of sending out a 
deterrence message?
    Under Secretary Dickinson. I think we do not do enough yet. 
We do not have enough resources. I think that you would have to 
ask the Justice Department the magnitude of their----
    Mr. Delahunt. I am not just picking on the Justice 
Department.
    Under Secretary Dickinson. No.
    Mr. Delahunt. But I am talking about all of these, whether 
it is Commerce or Customs or whatever.
    Under Secretary Dickinson. Well, as you know, one of our 
biggest issues this year is gaining access to the fees that are 
paid to our office to make sure we have the resources to do the 
job.
    Mr. Delahunt. I do, and you know that you have a strong 
advocate in me in that particular undertaking.
    Under Secretary Dickinson. Yes.
    Mr. Delahunt. If I can just have one additional question, 
in the end in terms of Internet piracy, I was very pleased to 
see that the Administration has issued some new guidelines in 
terms of the export of encryption technologies, and I would be 
eager to hear from the next panel in terms of what the industry 
is doing in terms of incorporating into our intellectual 
property products the necessary technologies so as to prevent, 
if you will, piracy, and maybe either one of you can comment on 
that.
    Mr. Papovich. I am sorry. I cannot.
    Under Secretary Dickinson. I cannot comment directly, but I 
think you have obviously hit on a key issue. Besides 
traditional law enforcement activities and training activities 
that we work on, there are certainly technological mechanisms 
for dealing with this.
    Mr. Delahunt. I think this is really, really critical, and 
I am sure there is a role for government there somewhere in 
terms of assisting the private sector because this is about law 
enforcement, which I suggest is a government role, and we ought 
to be, you know, really working with the private sector to 
develop the kind of technologies that they need.
    Mr. Manzullo. Mr. Chabot.
    Mr. Chabot. Thank you.
    I will be brief so that we can get to the next panel, but 
would you address the wisdom of going against pirating either 
through criminal law, whether it is international agreements, 
etc., versus just allowing those that have been harmed, the 
private sector, the companies or whomever, to go civilly 
against the folks that are involved in this either in other 
countries, and I assume you are going to say we need to do it 
criminally and here is why, but I would just like to hear the 
philosophical and efficacies of going one way versus the other.
    Under Secretary Dickinson. Well, I think one of the 
challenges on the criminal side that Mr. Papovich mentioned is 
making sure that the law enforcement actors who were 
responsible for it raised the priority up high enough. They 
have to deal with violent crime and other major criminal 
issues. That is a concern here both in the United States and 
overseas.
    On the civil side, it is often in the United States, for 
example, a matter of a very long, often dragged out enforcement 
proceeding which does not always get the same priority in the 
court system. So I think there is some room there.
    Another activity which we also engage in, which I think 
should not be overlooked, we do it when we do our training, is 
to cause developing countries, in particular, to understand how 
important intellectual property can become in their own 
economies.
    As the very large and growing component of our economy 
demonstrates, reminding and assuring and educating developing 
countries on how important IP can be to their own country, I 
think also as an economic incentive will go a long way toward 
helping, too.
    Mr. Papovich. Civil remedies are almost always inadequate 
in many developing countries. So from my perspective, which is 
just an international one, far too often the outcome, first of 
all, can be many, many years, but then the outcome is some very 
modest sanction, a slap on the wrist.
    Mr. Chabot. OK. Thank you very much. I yield back the 
balance of my time.
    Mr. Manzullo. Well, thank you. We appreciate your coming 
this afternoon.
    If we could get our second panel seated as soon as possible 
before some more votes come off that would be appreciated. I 
see someone is handing out some CDs. I presume those were made 
legally.
    [Laughter.]
    Did not even catch it, did he?
    OK. To complement the expertise of our first panel, I would 
like to introduce two gentlemen who are quite sensitive to the 
implications of Internet piracy and know first hand the 
problems and prospects which face the music and software 
industries.
    First, I would like to introduce Mr. Jack Krumholtz, 
Director of Federal Government Affairs and Associate General 
Counsel in the Law and Corporate Affairs Department at 
Microsoft Corporation. Jack is a graduate of Georgetown 
University School of Foreign Service and the University of 
Pennsylvania Law School.
    He is Vice Chairman of the Microsoft Political Action 
Committee--these are not my notes--and also serves on the 
Advisory Council to the Congressional Internet Caucus.
    Finally, I would like to introduce Mr. Tom Tyrrell, a 
Senior Vice President and General Counsel and Secretary for 
Sony Music Entertainment. He is a former head of CBS Records' 
Law Department. Mr. Tyrrell served as Senior VP of 
Administration in North American Operations for Sony Music 
International until 1991.
    You know, I was talking to a friend several years ago. He 
said at one time knowledge was discovered, but today it is 
invented, which leads to this incredible technological 
revolution that continues.
    Mr. Krumholtz, do you want to lead off, please?

  STATEMENT OF JACK KRUMHOLTZ, DIRECTOR OF FEDERAL GOVERNMENT 
        AFFAIRS AND ASSOCIATE GENERAL COUNSEL, MICROSOFT

    Mr. Krumholtz. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman and Congressmen Menendez and 
Members of the Subcommittee. On behalf of Microsoft and the 
other members of the Business Software Alliance, including Auto 
Desk and Lotus, I appreciate the opportunity to appear before 
you today to speak about the challenges confronting software 
publishers in protecting their intellectual property against 
theft in this age of electronic commerce.
    I want to thank Ambassador Barshefsky, Secretary Dickinson, 
and Assistant USTR Papovich for their leadership in protecting 
copyright protection on a global scale. Software publishers and 
technology companies not only are among the chief architects of 
electronic commerce. They recognize the tremendous potential of 
offering their own physical intellectual property based 
products electronically.
    Forester Research estimates that E-commerce among 
businesses will reach $1.3 trillion worldwide by the year 2003. 
The software industry is one of the fastest growing sectors of 
the U.S. economy, each year creating thousands of new jobs and 
unlimited opportunities for entrepreneurs and small businesses.
    I would like to submit for the record a copy of a report 
that outlines the industry's contributions to the global 
economy. In the 61 countries covered by this report, the 
packaged software market reached $133 billion in 1997. In non-
U.S. countries, the industry provided 740,000 jobs. In the 
United States in 1998, the industry employed over 800,000 
workers.
    In addition, the industry contributes significantly to tax 
revenues, in the billions of dollars to governments around the 
world.
    Despite its significant economy contributions, the U.S. 
software industry has not reached its potential due, in part, 
to global piracy. Software theft cost the industry an estimates 
$12 billion on a global basis in 1999. This translates into 
thousands of lost jobs and billions of dollars in lost tax 
revenues.
    The Internet creates tremendous opportunities. However, it 
makes no distinction between legitimate businesses and 
criminals who want to exploit E-commerce to market their stolen 
products. You will hear today about the latest tools Napster 
and Nutella from Mr. Tyrrell.
    Recently BSA member companies' software has been found on 
Napster. We anticipate that this trend will only continue as 
broad band technologies become more readily available. Today I 
would like to just highlight two types of theft on the 
Internet, Web sites and counterfeit goods.
    Many thieves today simply set up brazenly illegal Web sites 
on any given day by typing in ``wares,'' which is the pirate 
slang for stolen software. You can find 2 million Web pages 
offering illicit software. These sites are easy to find and are 
in every language.
    I think you have before you a copy of a site that actually 
appears in Spanish, and we would like to submit that for the 
record as well.
    Hard statistics on the financial losses via the Internet 
are not readily available. We estimate that the losses can be 
in the billions of dollars.
    In terms of the second for of theft on the Internet, 
counterfeit, the Internet is used by pirates to advertise, 
market, and coordinate the distribution of pirated software 
CDs. I have got an example here. These are two of Microsoft's 
more popular products, Office 2000. This is a genuine Office 
2000 and this is a counterfeit product. I think you would agree 
that it would be very hard for a consumer to know what the 
difference is, but there are some very important differences.
    On the pirated CD there will not be any product or 
technical support, any warranties or any discounted or free 
upgrades, and in addition, the pirated product is often plagued 
by viruses.
    After the sale is complete on the Internet, CDs like the 
one I just held up are delivered by mail. Developments in CD 
replicating technology have made it possible to manufacture 
very large volumes of near perfect copies. Here is another 
example of Office '97, which is also a counterfeit product.
    There are many other types of Internet theft which are 
highlighted in my testimony. For example, these include 
bulletin boards, news groups, Internet relay chat channels. To 
appreciate the Internet's potential impact, one need only to 
contrast the number of people who can crowd around a flea 
market card table that offers pirated software and the number 
who can simultaneously access a pirated Web site.
    What can government do? Worldwide governments can help 
promote legitimate electronic commerce and fight Internet 
piracy by doing a number of things.
    First, by insuring that they fulfill their obligations 
under the WTO TRIPS agreement by adopting and implementing laws 
that provide for effective enforcement.
    Second, by ratifying and implementing the WIPO treaties 
that insure copyright protection in the digital age.
    Third, by putting strong software management policies in 
place.
    And finally, by dedicating resources to the investigation 
and prosecution of Internet piracy.
    In closing, Mr. Chairman, electronic commerce promises a 
new revolution in development, distribution, and use of 
products and services protected by intellectual property. I 
appreciate the Subcommittee's interest in these critical issues 
and for holding this hearing today. I would be happy to respond 
to any questions.
    Thank you.
    [The prepared statement of Mr. Krumholtz appears in the 
appendix.]
    Mr. Manzullo. Mr. Krumholtz, the two documents to which you 
referenced will be made part of the complete record without 
objection.
    Mr. Tyrrell.

STATEMENT OF THOMAS C. TYRRELL, SENIOR VICE PRESIDENT, GENERAL 
        COUNSEL, AND SECRETARY, SONY MUSIC ENTERTAINMENT

    Mr. Tyrrell. Thank you.
    I would like to thank Madame Chairwoman in absentia and her 
fellow Subcommittee Members.
    I want to begin by describing Sony Music. Sony Music is the 
lead global producer, manufacturer and marketer of recorded 
music, video, music publishing. We are headquartered in New 
York.
    We employ approximately 7,000 people in the United States 
in our many record labels, including Columbia and Epic, in our 
disk manufacturing plants and our state-of-the-art recording 
facilities in New York, and we generate significant U.S. 
revenues from our record music publishing business worldwide.
    I am here before you today representing the Recording 
Industry Association of America, the trade association of 
America's record companies, large and small.
    The United States is the greatest single source for 
copyrighted music exported worldwide. The music business is 
very much a U.S. driven business. Whether you are a large 
record company like Sony Music or a small, independent company, 
all record companies share a common thread, a fragile existence 
wholly dependent upon the protection of our intellectual 
property.
    It is copyright protection upon which so much creativity, 
ingenuity and commerce rests, and this protection is under 
constant attack. You have before you an unparalleled 
opportunity to strengthen this protection by leading the global 
fight against piracy. In every instance, whether on the Net or 
in the physical marketplace, defeating piracy means the 
creation of market opportunities and the expansion of our 
cultural and economic well-being.
    Given the tremendous stakes for our country, none of us can 
afford to permit ourselves to be daunted by the natures of the 
obstacles that we confront. The record industry and other 
copyright industries currently confront a piracy phenomenon 
with two faces, or should I say at least two faces?
    For the record industry, I have submitted to the 
Subcommittee our current report on worldwide state of piracy, 
which I think will address many of the statistical questions 
and country-by-country breakdowns referred to earlier.
    One face of piracy is in the physical marketplace, which we 
confront increasingly organized and multinational criminal 
enterprises involved in massive production and trafficking of 
pirated CDs and other optical media.
    Long gone are the days when piracy music was either 
accomplished by die hard fans devoted to recording and 
distributing every conceivable bootlegged product of their 
favorite band or by some small, underground Mom and Pop 
operations making a few dollars from the production and sale of 
poorly reproduced pirate cassettes.
    Today's pirates operate through multinational criminal 
syndicates simultaneously involved in trafficking around the 
globe. For example, in today's environment a pirate CD found in 
the streets of Sao Palo, Brazil is likely to have been mastered 
in Singapore, manufactured in Taiwan, shipped on spindles, 
meaning that it has not even been placed into jewel boxes yet, 
by air to Uruguay, trans-shipped to Paraguay where the product 
is finally assembled and then literally trucked over the bridge 
into Brazil, where it goes to central distribution centers, and 
then sub-distribution throughout the country, and all of this 
is with little worry about anyone facing criminal charges.
    With the advent of the CD, the pirate has gained access to 
the equivalent of a master recording. It does not degrade no 
matter how many times he copies it. The pirate now has a new 
tool for his trade, CDRs, recordable CDs.
    With CDRs the pirate now has the ability to tailor his 
pirating according to demand. No need to worry about inventory. 
As much as we have improved the quality of our product over the 
years, these same improvements have been accompanied by new 
risks.
    Today's pirates also rely on traditional means of avoiding 
punishment, such as bribery and other forms of corruption, but 
they also have new tools in their arsenal relating to their 
increased stature: force and threats of violence, the ability 
to rapidly change the location of various components of their 
enterprises when confronted with governments prepared to tackle 
the piracy issues.
    Pirates actively seek out jurisdictions in which either the 
law lacks enforcement or for relative safety for their 
operations. Our job is to decrease, if we can't entirely 
eliminate, these zones of safety.
    The second face of piracy could not look for different. It 
involves not criminal syndicates, but generally law abiding 
citizens that mean in some sense no harm and who, in the 
privacy of their own homes, are now actively involved in 
anonymously unauthorized trading of massive numbers of recorded 
music files.
    Appearances aside, the impact of this activity on the 
copyright owner is no less prejudicial than the other more 
obvious forms of unauthorized activities.
    The response to these two forms of piracies may be quite 
different, but the need for forceful response is no less 
pressing. The fight against piracy has been increasingly more 
complex with developments in technology that permit the 
instantaneous and global reproduction and distribution of 
materials with the touch of a button.
    In a global information network, protection of the creative 
materials that are such a critical part of our country's 
economic backbone is only as strong as the weakest link in the 
information communication exchange.
    Thus, there is an absolute need to eliminate existing gaps 
in international legal structure that undermine the protection 
enjoyed by copyright holders in national and international 
channels of commerce. The WIPO treaties adopted in 1996 set the 
stage for fair international digital distribution of music. 
These treaties represent significant and necessary improvements 
in the international legal structure and contain necessary 
provisions relating to the ability to effectively enforce 
rights in the digital age.
    These global improvements are critical to the ability of 
record companies and other copyright owners to do business in a 
global information society. These treaties accomplished a 
number of extremely important economic objectives.
    First, the treaties make it absolutely clear that copyright 
holders are granted exclusive rights to control the electronic 
delivery of their works to individual members of the public. 
This both anticipates and responds to the realities of the 
electronic marketplace where copyright owners are likely to 
rely increasingly on the communication of signals rather than 
the delivery of physical products to meet consumer demand.
    This level of copyright protection in conjunction with 
technical protections also dealt with in these treaties is 
indispensable to the willingness of copyright owners to make 
their works available through these new media.
    Second, the treaties confirm that existing national 
copyright laws and the international copyright system apply in 
a generalized manner to all technologies and media and not in a 
technology specific manner.
    Third, the treaties require countries to effectively 
prevent the circumvention of technical measures in interference 
with rights management information used by copyright holders to 
protect or identify their works. Such technical measures and 
rights management information will play an increasingly 
important role in the protection and licensing of copyright in 
the digital age.
    Technology must play a critical role in solving some of the 
same problems created by technological developments. These 
technological solutions which simultaneously protect 
intellectual property and foster technological innovation in 
the expansion of commerce must be protected.
    A great deal of work is being conducted around the globe to 
develop technical systems of protection and viable information 
systems to facilitate the administration of rights. These 
systems of protections and rights management information will 
be meaningless unless countries effectively deter and punish 
circumvention or interference.
    These WIPO treaties will require countries to do this, thus 
establishing key elements of security for global electronic 
commerce. The treaties represent an essential building block 
for the development of E-commerce and the cultural and economic 
development that will ensue if we create the right conditions 
for promoting local creativity and its global distribution.
    Mr. Manzullo. Could you summarize?
    Mr. Tyrrell. Sure. I am almost done.
    Mr. Manzullo. You are a fascinating reader. I would love to 
have you read to my kids.
    Mr. Tyrrell. OK. The position we are in right now is one 
where if we look from here backward, I think we have a certain 
level of comfort and support, and we believe that in the 
executive agencies, such as the USTR, have been wonderful 
partners. We believe the WIPO law, this treaty, will provide us 
with the protections we need.
    But we are not looking backward. We are looking forward, 
and in looking forward, we see the whole world changing and at 
an accelerating pace, and we feel that we are going to be 
facing technological challenges that we did not anticipate even 
a few years ago.
    And traditional thoughts of what piracy means to us are not 
a road map for the future.
    [The prepared statement of Mr. Tyrrell appears in the 
appendix.]
    Mr. Manzullo. So you come to us for a solution.
    Mr. Tyrrell. Maybe we come to you at this point to say we 
are not an industry that likes to cry ``wolf,'' but we see 
wolves on the horizon, yes.
    Mr. Manzullo. We appreciate your testimony.
    Mr. Tyrrell. Thank you.
    Mr. Manzullo. I have a couple of questions. There was a 
statement made by the prior panel that all copyright revenue or 
market is about $530 billion a year. Does that include written 
material, books, etc.? Does anybody want to jump in with an 
answer?
    I do not know how you can possibly quantify the amount of 
piracy unless the people put out disks like that that have--
could you hold that up again? The other one--yes, that has 
``counterfeit'' stamped on it. I guess that is the only way you 
would know.
    Mr. Krumholtz. We added that.
    Mr. Manzullo. Presumably.
    [Laughter.]
    How can you possibly know how much junk is out there that 
is counterfeited? How do you measure it?
    Mr. Krumholtz. Well, speaking for the software industry and 
the Business Software Alliance, what we do, we take what we 
think is a very conservative approach to estimating the rate of 
piracy in various countries where we have operations, and we 
look at the number of computers, the hardware that is shipped, 
and then we take an average. For each computer we assume that 
there are five software programs that are located on that 
computer, which is very conservative if you have ever purchased 
a computer, increasingly conservative, and through that then we 
compare that number with the number of software programs sold, 
and that is how we reach our estimate for piracy rates.
    Mr. Manzullo. That is pretty good. What about music CDs? 
How would you possibly estimate the impact?
    He sounded pretty scientific.
    Mr. Tyrrell. Right.
    [Laughter.]
    In the case of music, starting in some countries, it is 
fairly simple. We are not operating there, and all of the 
markets and all of the stores are selling our products.
     [Laughter.]
    Moving up the food chain, we do monitor the more mature 
markets. We go into stores, and we buy and we sample and we do 
AB tests. We typically find that in the more mature markets the 
sales are not taking place in the legitimate stores, but they 
will be taking place right next door or right on the corner.
    We do keep track of the factories that are out there. I 
must admit we are now starting to lose track because with the 
introduction of the CDR, it is not--and as I speak of the 
future--it is not these big factories that are fairly easy to 
locate that are going to represent our future. It may be little 
operations in the back of someone's garage where he has 15 or 
20 CDR machines set up and he can custom pirate to order.
    But to spot a pirate CD is not that hard.
    Mr. Manzullo. Let me ask you a question.
    Mr. Tyrrell. Yes.
    Mr. Manzullo. If someone is found, say, in this country 
with a music CD or a business application CD that goes on your 
computer and you determine that the person who has that is 
carrying around or using it illegally, what do you do? What do 
you enforce? What laws are there?
    Mr. Tyrrell. We try to go after the source, not somebody 
with one or two CDs.
    Mr. Manzullo. The same with somebody dealing drugs. It is 
wrong in both cases, but you want to get the dealer out. Then 
how do you go about tracing it?
    Whatever you would like to share with us. I understand this 
is very sensitive when it comes to----
    Mr. Tyrrell. Well, traditionally we have tried to locate 
the factory and shut that down. And also, if somebody has CDs, 
they have bought them. So you go after the person who is 
selling them.
    In the United States right now CD piracy is something that 
is relatively under control compared to other countries of the 
world.
    Mr. Manzullo. Piracy under control.
    Mr. Tyrrell. Relatively.
    Mr. Manzullo. Relatively.
    Mr. Tyrrell. Relatively. It is a constant threat, as I said 
in my remarks.
    Mr. Manzullo. With the next technological breakthrough 
where you may be a business application or a music on something 
that is the size of a fingernail, no one knows how this is 
going to be controlled.
    Mr. Tyrrell. We have it on something smaller than the size 
of a fingernail now, on Napster.
    Mr. Manzullo. OK. Mr. Menendez.
    Mr. Menendez. Thank you both for your testimony.
    Let me start off by saying we support your interests and 
seek to work with you on your concerns. I think that 
intellectual property is incredibly important to use as a 
country. It is important to those who create whatever the 
medium is to create and whether it is here in this country or 
anywhere else in the world, and it needs to be rewarded.
    So I start off with that, but I do want to ask you some 
questions in terms of public policy. What is our ability, and I 
have a greater focus, Mr. Tyrrell, in the industry you 
represent, not because I am not interested in the software 
industry----
    Mr. Tyrrell. Sure.
    Mr. Menendez [continuing]. But some of the questions really 
posed are in part generational, in part questions of 
understanding whether or not the industry in some respects is 
over reacting.
    For example, in my statement I quoted what you said, that 
the private citizen in their home is as, in fact, dangerous and 
damaging to the industry as organized criminal piracy, and in 
principal you are right, but practically and even politically 
speaking, how do you expect the Congress to address that?
    Also, there are those analysts of the industry who say, for 
example, that the industry needs to figure out a way to work 
with Napster and others like it on new bands and albums. They 
say that the record labels might be, quote, a little too busy 
retaliating right now instead of thinking how they could use 
it, in reference to Napster in this case, to their advantage. 
There obviously has been a real lack of understanding the value 
and marketing potential of this type of software.
    And many artists seem to also welcome the increased 
exposure of the Internet. On the RIA Web site, for instance, 
Thomas Dolby writes about his own experience and that of other 
musicals from David Bowie to an amateur folk singer-song writer 
with regard to increased creativity and sales as a result of 
Internet use.
    So in that total, I have given you a lot there, but it is 
also the things that we hear from a lot of our constituencies 
and also questions about what is the role of the government in 
this regard in trying to help you, but in balancing what is 
clearly a continuously evolving set of technological challenges 
that I am sure even your industry has been looking at and 
saying, ``Well, how do we deal with it?''
    But is the analyst wrong? Should you be looking at ways of 
turning what is a negative into a possibly a powerful force for 
yourself, or is it just protective to do so now and say, 
``Well, we are getting hurt badly, and let's go after them''?
    Mr. Tyrrell. Well, first of all, I think one thing that 
Sony Music and Sony cannot be faulted for is being 
technological leaders. We were the original Columbia company 
that introduced the cylinder, the LP, the CD. So we are always 
more than interested. We can to be technological leaders in 
finding new technologies that will allow us to combine new 
technology and our products.
    In terms of--I may not be heeding these questions in 
order--in terms of the Internet's ability to create a wider 
environment for artists who want a wider exposure, we have no 
disagreement with that at all. That is a wonderful feature of 
the Internet.
    An artist who wants his product to be on a Web site or on 
Napster, he has got our complete support. Where we start to 
encounter problems, and this is not negativism on our part, but 
a business model that is built on the assumption that if you do 
not secure any of the rights from the artist or from the song 
writer, you pay nothing for the recording, you pay nothing for 
the marketing, and then you make it available for free; why 
aren't you more open to that business model?
    It starts to sound like, well, if there is a pirate 
duplicating CDs, why don't you find more of a way to deal with 
them?
    When I got on the plane to testify today, I have not even 
read the article myself. ``Mac World. MP-3, say goodbye to your 
CD collection. Napster lets you steal your songs. Free music, 
CD-RIP.''
    Now, maybe Mac World is a little extreme, but----
    Mr. Manzullo. Did you want that made part of the record?
    Mr. Tyrrell. Yes, yes.
    Mr. Manzullo. Or just the article?
    Mr. Tyrrell. It is on all the newsstands.
    Mr. Menendez. Can you explain to me then your answers in 
the context of the USA Today article of this past May.
    Mr. Manzullo. Just 1 minute. It will be just the article.
    Mr. Tyrrell. Yes, yes.
    Mr. Manzullo. Do you have that?
    [The magazine article appears in the appendix.]
    Mr. Menendez. USA Today on May 15 had an article that said 
that despite the recording industry's ``concern that digital 
music would kill the business, music sales rose 8 percent in 
1999, the first full year of the boom in the MP3 digital music 
format used by Napster, from $13.7 billion to $14.6 billion.''
    Mr. Tyrrell. That is a classic case of apples and oranges. 
I am sure you can find very popular department stores who, as 
their year to year performance increases, have had shoplifting, 
I mean, or thefts. It has been our experience, in fact, that in 
areas where Napster has been most prevalent, such as college 
campuses, it is almost like a black hole. You will see 
increased sales, and the closer you get to Napster users.
    But, no, we are in the business of being interested in 
marketing our music. We are not adverse to things that help our 
music, and people who steal our music, while our business may 
be up, to see the cause and effect there is something we have 
missed.
    Mr. Manzullo. OK. Mr. Rothman.
    Mr. Rothman. Thank you.
    Thank you for your testimony, Mr. Tyrrell.
    I do not know. Maybe I am too old for this. Maybe I am a 
fuddy-duddy about this, but there is just something 
fundamentally wrong with the notion that you can take someone 
else's property and not pay for it, and I cannot it has 
anything but a horribly chilling effect on business people, 
those who want to invest their capital in computer software or 
in the record or in the careers of budding young artists. It 
can only be a bad thing.
    And the other part, the fuddy-duddy part is the moralistic 
side of it. I do not think this helps the country in terms of 
our sense of right and wrong if we do not send a clear message 
to young people and old people, whoever is participating in 
this activity, that this is wrong; that there is no positive 
spinoff.
    And in my opening remarks I asked somebody to give me the 
other side. What is good about people stealing someone else's 
work and not paying for it? And I think I would look to you 
folks to help us help you or get the message out to the people 
of our country that this is stealing. This is wrong, No. 1. And 
it has a bad effect on the economy.
    So I welcome that, and again, I welcome your own public 
service announcements, self-interested as they may be, in 
helping educate our young people about this. You know, it just 
takes my breath away when people say, ``Work with the people 
who are stealing your goods.''
    Somebody breaks into your house and steals your most 
valuable possessions, and the cops say, ``We are not going to 
arrest him. Why don't you make a deal with him?''
    I mean it just blows my mind.
    Mr. Tyrrell. The truth is in between.
    Mr. Rothman. So any thoughts about these things?
    Mr. Krumholtz. No, I absolutely agree. I think there is 
tremendous potential in this new channel distribution, but at 
the end of the day, a fundamental cornerstone of electronic 
commerce has got to be copyright protection, protection for 
intellectual property. It has been, you know, a foundation in 
our legal system since the country was founded over 200 years 
ago.
    You know, that does not change in an electronic 
environment. I think we, speaking for the software industry, we 
certainly have embraces this channel of distribution, and as 
Mr. Tyrrell mentioned, I think, you know, the other copyright 
industries are as well, but you need to do that within the 
ambit or within the parameters of the existing laws.
    At the end of the day it is stealing.
    Mr. Rothman. OK. Well, I think what everybody is saying is 
we think it is a bad thing, too. We are worried about it, but 
to some degree we are going to look to you, the most interested 
in this, arguably, for some ideas as to how we can help you, 
how we can do our job enforcing the laws that are so important 
to our nation. So we will look to you and look to law 
enforcement as well.
    But, you know, we are just mostly lawyers up here, and so 
we're going to look for some ideas from you. I think we get it. 
It is a big problem, and I am not romanced by the notion of 
steal this video. Abbie Hoffman used to say, ``Steal this 
book.'' He used to be somebody----
    Mr. Manzullo. Would the gentleman yield?
    It occurred to me that people videotape TV shows to show 
back later on. What is the difference between videotaping the 
TV show and copying the CD?
    Mr. Tyrrell. A perfect example.
    Mr. Manzullo. I did not mean to preempt you.
    Mr. Rothman. No, that is OK.
    Mr. Manzullo. I will give you more time if you want.
    Mr. Tyrrell. I hope I have a great answer.
    The motion picture company, when they make the movie, know 
that, first, there is going to be a front worldwide premier in 
the top theaters for top dollars, and they do not have to worry 
about somebody taping off the air.
    Then it goes to the neighborhood theaters. Then maybe it 
comes out on DVD. Then it goes to video rental. Then maybe it 
is pay per view, and maybe at that point somebody makes a copy 
and watches it later in the day, there are all of these 
multiple opportunities, and for one thing, the decision to put 
that product on the air where it can be taped and watched later 
in the day is 100 percent in the control of the movie company. 
They know even the day it is going to be shown and the time 
because they can contract.
    Nobody is coming in and doing this to them.
    Mr. Rothman. To reclaim the last 30 seconds that I have.
    Mr. Tyrrell. Yes.
    Mr. Rothman. And I am repeating myself, but I am concerned 
about the detrimental effect on the young people who believe 
you can get something for nothing. I mean our Republican 
colleagues will say that----
    Mr. Tyrrell. I agree.
    Mr. Rothman [continuing]. About society in general. Years 
ago the Democrats, we got it. We get it. It would be a real 
step backward if people excused the theft of intellectual 
property as some kind of a cool, romantic way of living.
    It is pure and simple theft, and we have got to get that 
message out there, not just for the economic well-being of the 
country--I sound like a 47-year-old fuddy-duddy--but for the 
moral well-being of the country.
    Mr. Manzullo. Mr. Delahunt.
    Mr. Delahunt. I guess I would, you know, obviously concur 
with the sentiments expressed by Mr. Rothman and others.
    What I find very fascinating is that there is an argument 
that I guess it was Mr. Menendez who was reading from USA Today 
that would appear to be a credible position, and when you pause 
and think that this is a fine newspapers, but putting that 
opinion out there, again, really does go to an erosion, if you 
will, of, for lack of a better term, values.
    Gee, you know, it is really not stealing because look what 
the benefit is. It is enhancing, if you will, creativity and an 
increase, if you will, in terms of commerce.
    But, you know, this is only a piece of a larger picture, 
and I think I would make this observation, I think, more to Mr. 
Krumholtz because he represents the software, if you will, the 
Software Alliance, and what has happened is that we have 
become, and it is picked up in sound bytes, you know. Do not 
regulate the Internet. Freedom, freedom on the Internet, 
unbridled freedom.
    Well, this is part of the public debate today. We are 
having a debate in Congress, and it is interesting because some 
interesting alliances have occurred between very conservative 
and very liberal members in terms of not taxation of the 
Internet, but how do in America today the brick and mortar 
stores that we are accustomed to deal in a commercial world 
where they have to pay a sales tax and remote sellers are free 
from that particular burden, putting them at a competitive 
disadvantage.
    And those of us who have no interest in taxing access to 
the Internet say, ``Gee, we ought to do something about it.''
    Do no regulate the Internet. You know, do not interfere 
with the Internet, and I really think that the high tech. 
community really has to pause and think about what makes sense 
and what is balanced and what is right in terms of public 
policy because this is feeding into exactly that mindset, if 
you will, of value system that Mr. Rothman, myself, and others 
have alluded to.
    So it is a real problem.
    Mr. Krumholtz. Mr. Delahunt, if I could just comment and 
perhaps some of my colleagues in the high tech. community might 
disagree with me on this, but I absolutely think there is a 
role for government in this space, and I think perhaps side 
stepping the issue of taxation and focusing on intellectual 
property, I think the Congress has done a tremendous job in 
providing the authority and raising the threshold in terms of 
copyright protection in a digital environment through the WIPO 
implementing legislation, the Net Act.
    And I think one thing that Congress could do now is make 
sure that the various enforcement agencies have the funding, 
the resources that they need to really adequately enforce those 
statutes.
    Mr. Delahunt. I think one thing that you can do in terms of 
your constituency and whom you represent here today is really, 
you know, go out and lobby and advocate because we are not 
spending the kind of resources that are necessary to do the 
job, and we cannot continue to cut government, on one hand, in 
these agencies and expect and anticipate that we are going to 
enforce or insure compliance with the statutes that we pass.
    On the one hand, we talk about doing something, and then on 
the next, where it is most critical, which is in the 
enforcement end, we said, you know, ``That is government fat.''
    Well, we cannot have it both ways, and it is really the 
business community and the high tech. community that has to 
step up and say, ``You know, it has got to happen. It is a good 
investment. Let's not be penny wise and pound foolish,'' 
because with the additional tax dollars that go into providing 
these resources, we will reap a good return in terms of 
America's investment in the global economy.
    Got to do it.
    Mr. Manzullo. I appreciate that.
    You know, I took a quick look at this article.
    Mr. Tyrrell. Yes.
    Mr. Manzullo. And I find something that is just absolutely 
astounding. It says, ``Tell me why you support Napster.''
    Answer--I do not know. Chuck D, front man for Public Enemy. 
I do not even know who these people are.
    Mr. Tyrrell. Right.
    [Laughter.]
    Mr. Manzullo. You talk about pirates.
    Mr. Rothman. You are a fuddy-duddy.
    Mr. Manzullo. Evidently.
    [Laughter.]
    But the Napster is the radio of the 21st century. That is 
not true because radio stations determine what goes on and they 
pay royalties for it and get licensing from the FCC.
    Mr. Delahunt. The public, the people own the airways in 
that case.
    Mr. Manzullo. But, Bill, what you and Steve were talking 
about is exactly what Jefferson studied at William & Mary. He 
read Coke. Coke was a revolutionary because that was at the 
time when property went from estate tail to absolute fee. In 
other words, the king owned everything, and people would have 
an opportunity to participate in it, but everything was owned 
for the public good.
    And then along came Blackstone with his commentaries that 
really settled the issue that private property is an absolute 
right, including intellectual property. What the mind could 
think was also subject to copyright protection.
    And the whole idea of copyright protection is only about 
250 years old. The fact that what man can think has a right to 
be copyrighted and protected. I find the greatest assault on 
private property occurring in people simply making the 
assumption that just because it is for the public good, it 
overrides private property.
    That sends us back to Marxism, and that wipes out 250 years 
of legal history.
    Mr. Delahunt. If you would yield, Mr. Manzullo, I do not 
think that. The public good here, OK, is to protect copyright 
laws so that creativity, the genius, if you will, of the 
American people continues to flourish and, at the same time, 
allow us to benefit from that creativity in terms of our role 
in the global economy.
    There is no conflict between public good here and copyright 
law. Copyright law and protection is about the public good.
    Mr. Manzullo. Perhaps I could have used the word 
``public.''
    Mr. Delahunt. I mean, what Napster is doing in my judgment 
here is absolutely outrageous.
    Mr. Manzullo. Well, this is very interesting. I do not know 
if we have resolved anything.
    Mr. Tyrrell. And Chuck D, part of his image is that he is 
always out. I mean, the group he performs for is Public Enemy.
    Mr. Manzullo. I used to play in a rock and roll band when I 
was in high school. It was called the Vantrells.
    [Laughter.]
    We had a very small--this is true. We had a very small 
speaker with a Gibson electric guitar. It was one of the first 
Gibson electric basses ever made. It was cherry red. It was 
back in 1960, and we did not----
    Mr. Delahunt. What was it like that far back, Mr. Manzullo?
    [Laughter.]
    Mr. Manzullo. This was a very interesting hearing. I really 
want to take this opportunity to thank you for a very 
enlightening hearing. I do not know if we accomplished anything 
except to show how bad the problem is and to bring it to public 
view, but again, I thank you for coming here.
    I will look forward to working with you. We are obviously 
extremely open to anything that you would have Members of the 
U.S. Congress do to protect the right of private property, 
including those industries that you represent.
    This Subcommittee is adjourned.
    [Whereupon, at 4:13 p.m., the Subcommittee was adjourned.]
      
=======================================================================




                            A P P E N D I X

                             July 19, 2000

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

      
    [GRAPHIC] [TIFF OMITTED] T8958.001
    
    [GRAPHIC] [TIFF OMITTED] T8958.002
    
    [GRAPHIC] [TIFF OMITTED] T8958.003
    
    [GRAPHIC] [TIFF OMITTED] T8958.004
    
    [GRAPHIC] [TIFF OMITTED] T8958.005
    
    [GRAPHIC] [TIFF OMITTED] T8958.006
    
    [GRAPHIC] [TIFF OMITTED] T8958.007
    
    [GRAPHIC] [TIFF OMITTED] T8958.008
    
    [GRAPHIC] [TIFF OMITTED] T8958.009
    
    [GRAPHIC] [TIFF OMITTED] T8958.010
    
    [GRAPHIC] [TIFF OMITTED] T8958.011
    
    [GRAPHIC] [TIFF OMITTED] T8958.012
    
    [GRAPHIC] [TIFF OMITTED] T8958.013
    
    [GRAPHIC] [TIFF OMITTED] T8958.014
    
    [GRAPHIC] [TIFF OMITTED] T8958.015
    
    [GRAPHIC] [TIFF OMITTED] T8958.016
    
    [GRAPHIC] [TIFF OMITTED] T8958.017
    
    [GRAPHIC] [TIFF OMITTED] T8958.018
    
    [GRAPHIC] [TIFF OMITTED] T8958.019
    
    [GRAPHIC] [TIFF OMITTED] T8958.020
    
    [GRAPHIC] [TIFF OMITTED] T8958.021
    
    [GRAPHIC] [TIFF OMITTED] T8958.022
    
    [GRAPHIC] [TIFF OMITTED] T8958.023
    
    [GRAPHIC] [TIFF OMITTED] T8958.024
    
    [GRAPHIC] [TIFF OMITTED] T8958.025
    
    [GRAPHIC] [TIFF OMITTED] T8958.026
    
    [GRAPHIC] [TIFF OMITTED] T8958.027
    
    [GRAPHIC] [TIFF OMITTED] T8958.028
    
    [GRAPHIC] [TIFF OMITTED] T8958.029
    
    [GRAPHIC] [TIFF OMITTED] T8958.030
    
    [GRAPHIC] [TIFF OMITTED] T8958.031
    
    [GRAPHIC] [TIFF OMITTED] T8958.032
    
    [GRAPHIC] [TIFF OMITTED] T8958.033
    
    [GRAPHIC] [TIFF OMITTED] T8958.034
    
    [GRAPHIC] [TIFF OMITTED] T8958.035
    
    [GRAPHIC] [TIFF OMITTED] T8958.036
    
    [GRAPHIC] [TIFF OMITTED] T8958.037
    
    [GRAPHIC] [TIFF OMITTED] T8958.038
    
    [GRAPHIC] [TIFF OMITTED] T8958.039
    
    [GRAPHIC] [TIFF OMITTED] T8958.040
    
    [GRAPHIC] [TIFF OMITTED] T8958.041
    
    [GRAPHIC] [TIFF OMITTED] T8958.042
    
    [GRAPHIC] [TIFF OMITTED] T8958.043
    
    [GRAPHIC] [TIFF OMITTED] T8958.044
    
    [GRAPHIC] [TIFF OMITTED] T8958.045
    
    [GRAPHIC] [TIFF OMITTED] T8958.046
    
    [GRAPHIC] [TIFF OMITTED] T8958.047
    
    [GRAPHIC] [TIFF OMITTED] T8958.048
    
    [GRAPHIC] [TIFF OMITTED] T8958.049
    
    [GRAPHIC] [TIFF OMITTED] T8958.050
    
    [GRAPHIC] [TIFF OMITTED] T8958.051
    
    [GRAPHIC] [TIFF OMITTED] T8958.052
    
    [GRAPHIC] [TIFF OMITTED] T8958.053
    
    [GRAPHIC] [TIFF OMITTED] T8958.054
    
    [GRAPHIC] [TIFF OMITTED] T8958.055
    
    [GRAPHIC] [TIFF OMITTED] T8958.056
    
    [GRAPHIC] [TIFF OMITTED] T8958.057
    
    [GRAPHIC] [TIFF OMITTED] T8958.058
    
