[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
             ENSURING CONTENT PROTECTION IN THE DIGITAL AGE
=======================================================================


                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                             APRIL 25, 2002
                               __________

                           Serial No. 107-95
                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________






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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
    Mississippi                      KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
                                 ------                                

          Subcommittee on Telecommunications and the Internet

                     FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    BART GORDON, Tennessee
CLIFF STEARNS, Florida               BOBBY L. RUSH, Illinois
  Vice Chairman                      ANNA G. ESHOO, California
PAUL E. GILLMOR, Ohio                ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          GENE GREEN, Texas
NATHAN DEAL, Georgia                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           DIANA DeGETTE, Colorado
CHARLES ``CHIP'' PICKERING,          JANE HARMAN, California
    Mississippi                      RICK BOUCHER, Virginia
VITO FOSSELLA, New York              SHERROD BROWN, Ohio
ROY BLUNT, Missouri                  TOM SAWYER, Ohio
TOM DAVIS, Virginia                  JOHN D. DINGELL, Michigan,
ROBERT L. EHRLICH, Jr., Maryland       (Ex Officio)
CHARLES F. BASS, New Hampshire
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)










                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Blanford, Lawrence J., CEO, Philips Consumer Electronics.....    38
    Chernin, Peter, President and Chief Operating Officer, News 
      Corporation................................................    19
    Jacobson, Larry, President and Chief Operating Officer, 
      RealNetworks...............................................    43
    Kraus, Joe, Co-Founder, DigitalConsumer.org..................    54
    Liao, Paul F., Chief Technology Officer, Panasonic/Matsushita 
      Electric Corporation of America............................    31
    Litai, Assaf, Founder and Acting CEO, Vidius.................    50
    Parsons, Richard D., Co-Chief Operating Officer, AOL Time 
      Warner Inc.................................................    27
Material submitted for the record by:
    Association for Competitive Technology, prepared statement of    86
    Griffin, Steve, CEO and Chairman, StreamCast Networks, Inc., 
      prepared statement of......................................    90
    Rosen, Hillary,, President and CEO, Recording Industry 
      Association of America, prepared statement of..............    99
    Shapiro, Gary J., Chairman, The Home Recording Rights 
      Coalition, prepared statement of...........................   102
    Valenti, Jack, President and CEO, Motion Picture Association 
      of America, prepared statement of..........................    92
    Video Software Dealers Association, prepared statement of....    94

                                 (iii)












             ENSURING CONTENT PROTECTION IN THE DIGITAL AGE

                              ----------                              


                        THURSDAY, APRIL 25, 2002

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 12:30 p.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Barton, Stearns, 
Gillmor, Deal, Shimkus, Fossella, Davis, Bass, Terry, Tauzin 
(ex officio), Markey, Eshoo, Engel, Green, McCarthy, Luther, 
Harman, Boucher, and Sawyer.
    Also present: Representative Walden.
    Staff present: Jessica Wallace, majority counsel; Linda 
Bloss-Baum, majority counsel; Will Nordwind, majority counsel; 
Hollyn Kidd, legislative clerk; Andy Levin, minority counsel; 
and Brendan Kelsay, minority professional staff.
    Mr. Upton. Today's hearing is on ensuring content 
protection in the digital age, and while our inquiry starts 
with the important question of how this impacts the transition 
to digital television, our subcommittee's interest is, of 
course, much broader.
    The DTV transition deadline of 2006 is fast approaching. So 
time is of the essence. This hearing follows on the heels of 
several lengthy DTV roundtables which Chairman Tauzin held with 
myself, Mr. Dingell, and Mr. Markey, at which representatives 
of the major, relevant industries discussed, sometimes fiercely 
debated, the obstacles which stand in the way of a successful 
and timely transition to digital television and how we can 
overcome those obstacles.
    Many issues, such as cable compatibility and must carry, 
have been touched upon in our roundtables, but perhaps the one 
issue that has dominated the agenda has been content 
protection. Clearly, this issue needs to be addressed if we are 
to succeed with the transition.
    I truly believe that the best solution is a private sector 
solution. Yet inter-industry agreements have been elusive to 
date. I know, through over 8 hours of roundtables, that these 
issues are complex both legally and technologically. But if we 
can put a man on the moon, then I am optimistic that, with the 
right amount of pressure from Congress, the industries, and 
consumers, which have the best engineers and minds in the 
world, we can do anything that we set our minds to.
    So the questions I have are these. How long can, or should, 
we wait for those deals to be struck in light of the impending 
deadlines on the transition to digital?
    Do the industries have the right processes in place to come 
up with a fair plan to all, including consumers, and one that 
will not stifle technological innovation in the future? And 
what, if any, is the proper role of government?
    We have heard that three content protection issues have 
been identified in apparent order of degree of technical 
difficulty. From easiest to hardest, they are: (1) the 
broadcast flag; (2) the analog hole; and (3) peer-to-peer.
    Earlier I mentioned putting a man on the moon, and I am 
reminded of how our Nation achieved that objective. President 
Kennedy laid out the first challenge. Then the engineers came 
about solving the problem. First, we put chimps into orbit and, 
once that was done, we put men into orbit, and after that we 
finally put a man on the moon. The point is that it was not all 
done in one step. It was done step by step.
    In today's context, the question becomes: If we can get the 
broadcast flag done and maybe the analog hole, will that be 
enough, for the sake of the DTV transition, to unleash the 
content as we continue moving forward on the other content 
protection issues? And will, or should, Congress or the FCC be 
needed to ratify any such deals to ensure consistent compliance 
amongst all manufacturers?
    In all of this, we cannot lose sight of the fact that this 
is about the consumer. The consumer wants to continue enjoying 
great American movies, whether it be ``Saving Private Ryan,'' 
``Lion King,'' ``Band of Brothers,'' but if that content is 
continuously ripped off and illegally transmitted with one 
click to the rest of the world on the Internet, then we will 
see a decline in the studios' ability to make them.
    Consumers also enjoy great home entertainment equipment and 
certain expectations regarding ``fair use'' rights, and we, as 
Members of Congress, must vigilantly guard those rights as we 
make our way through this important debate.
    It is a delicate balancing act, but one which is as old as 
Article I, Section 8 of the Constitution itself. I am confident 
that even Ben Franklin, as he was exploring science with his 
kite and his key in the thunderstorm, never could have dreamed 
of the digital technology, let alone motion pictures, DVDs, the 
Internet, Morpheus, and the like. Hence, fast forwarding to 
today, it is this Congress' burden to help sort out how to 
rationally protect content in the digital age, and that is what 
I hope can be accomplished someday, if not today.
    I look forward to hearing from today's panel of witnesses 
to help us through these issues, and I am excited that our 
subcommittee will be the first to use our committee's latest 
technology to hear from one such witness remotely, Mr. Chernin 
of News Corp all the way from Los Angeles. I tip my hat to 
Chairman Tauzin and Ranking Member Dingell for their foresight 
in bringing our committee room into the 21st century.
    I yield to my friend and colleague, the ranking member of 
the subcommittee, the gentleman from Massachusetts. I am sorry 
we are not going to put up the Orioles-Boston game up here, but 
you can watch the Cubs at some point later on. The gentleman is 
recognized.
    Mr. Markey. I thank the gentleman very much, and that 
digital technology is so sensitive that we actually have to put 
black screen up there so that people know that it is not 
broadcasting some other more sensitive piece of information.
    I want to commend you, Mr. Chairman, for calling this 
hearing today on a variety of issues related to digital rights 
management. Today's hearing will enable the subcommittee to 
explore policy questions related to the digital television 
transition, and will also raise other issues regarding consumer 
rights related to the recording data, transferring data from 
device to device, and whether consumers will have the ability 
to upload information and transmit it on the Internet.
    Both of the general topics to be raised at the hearing 
today are important, and both probably warrant a series of 
hearings on their separate sets of questions, implications and 
possible solutions. Hopefully, by throwing them together today, 
we can get a quick check on the status of various industry 
segments as well as what other broader consumer implications 
exist.
    First, I want to talk about the digital television 
transition. It is readily apparent to even the casual observer 
that the DTV transition remains largely stalled, and even where 
progress is being made, it represents marginal progress at 
best. We are already a number of years into the transition 
with, frankly, little to show for it.
    It is clear that, if we keep up the current pace of 
transition, we are also years and years away from the digital 
denouement of this industrial policy for television, and I 
think that it is a key element of the transition simply 
acknowledging that it is, in fact, industrial policy, whether 
we want to say those words or not.
    We gave the broadcasters' spectrum worth billions of 
dollars for free. We linked the industry an additional six 
megahertz for a transition period, and we set benchmarks for 
when they had to get their stations up and running. After the 
transition, we expect to receive back spectrum from the 
broadcasters.
    Having embarked upon this policy, policymakers have not put 
in place the relevant and necessary rules to ensure that the 
transition is both timely and successful. As important as it is 
to exhort the industry to do more, and as welcome as it is to 
call upon industry leaders for voluntary efforts, such 
hortatory rhetoric is no substitute for real action, because 
voluntary efforts alone will not achieve our important policy 
objectives.
    That is because, at its core, the DTV transition represents 
a government driven policy, not a purely market driven 
phenomenon. Therefore, it is imperative that government do more 
to create the conditions and environment for policy success. 
Failure to do so is unfair to consumers, taxpayers, and to the 
various high tech industries with a stake in the future of 
television.
    With respect to the other half of today's hearing related 
to digital rights management generally, I welcome today's 
glimpse at some of the issues raised by the increased 
digitalization of content and the repercussions raised by the 
success and growth of the Internet. Content creators have not 
only an understandable interest but also a right to the 
protection of their creative works from theft and infringement. 
Our society has long recognized and respected this right.
    In the post-NAFTA, post-GATT economy, we have made an 
economic decision as a country that, as the many low wage, low 
tech manufacturing jobs migrate abroad, we should compete for 
high end, high tech, knowledge based jobs and markets in a 
global economy. Because such products are often ephemeral, we 
must protect such content from piracy, because our economic 
future depends in part upon such protection.
    When content creators and owners are fearful of putting 
content into digital form and distributing it for fear of 
infringement and theft, the marketplace is unnecessarily 
depressed, and consumers either pay far too much for such 
content or can't receive it at all. Reassuring content creators 
and owners that the risk of such illegal conduct is minimal 
will help make such digital content more available.
    We must recognize, however, that not all consumers are 
potential pirates, and not all subsequent use of digital 
content by consumers represents infringements. I think it is 
important to underscore the principle of fair use, and note at 
the outset that it is called fair use, not home use.
    If I have a right to record information consistent with the 
fair use doctrine, I would hope that, for purposes of education 
especially, we ensure that information for the classroom and 
for academic research is not so encoded and locked up that 
libraries or schools cannot utilize such material efficiently 
to educate and enlighten.
    I also hope that, while technologists work on broadcast 
flags or other content protective measures, we anticipate and 
construct a policy that is Internet friendly. If the digital 
era of the future will permit me to record certain content in 
digital form on a digital disk, it will seem quaintly analog to 
tell consumers that they then cannot use the broadband Internet 
to transmit that information instantly to a brother-in-law out 
in Seattle. Instead, they will have to put that disk in a FedEx 
envelope and spend $15 to get it out overnight.
    The broadband Internet of the future should not be 
envisioned solely for commercial downloads. It must be 
interactive, and it must permit law abiding consumers the right 
to speak and communicate digitally as well.
    I understand that current technology may not yet permit 
such a policy, but current discussions should not close the 
door on such Internet friendly, copyright respecting conduct 
and conduit. We must put faith in technology to solve some of 
the problems that technology itself poses.
    I thank the chairman very much for allowing me the 
opportunity at a little extra length to make my opening 
statement.
    Mr. Upton. Recognize the chairman of the full committee, 
Chairman Tauzin.
    Chairman Tauzin. Thank you, Chairman Upton. Let me deeply 
express my appreciation to the witnesses today who will again 
help us to understand the gaps that still need to be closed in 
resolution of the very serious and complex issues of protecting 
digital content in this new age.
    I want to particularly thank Chairman Upton, Mr. Dingell, 
Mr. Markey, and Mr. Boucher who has been participating with us, 
for their assistance in the roundtables. I think it is 
important that I go on the record and explain what we have been 
doing in these roundtables.
    These roundtables have not been an opportunity for people 
to come and tell us what they think we ought to pass into law, 
quite the opposite. The roundtables have been our effort to 
help facilitate a discussion over the many disciplines involved 
in this transition to a digital television age to see if, in 
fact, we can encourage and help frame some of the debate going 
on in the marketplace where the agreements have to be reached 
and the technologies have to be developed and the standards 
have to be agreed upon and the actual industry-to-industry 
conversations need to occur if, in fact, many of these thorny 
issues are going to be settled outside of Congress having to 
mandate technologies and standards.
    The roundtables have been extraordinarily successful, and I 
thought it was time, as did Chairman Upton, that we go on the 
public record to talk about just how much progress has been 
made, how close we are to finding resolutions on some of these 
thorny issues in the marketplace rather than through 
legislation, with the notion that, if agreements can be 
reached, if understandings on content protection and 
simultaneously protecting the right of consumers, who happen to 
be our constituents, in the exercise of their fair use of 
digital products in the same, although the vague way, they 
appreciate their capacity to copy products in the analog world 
and to use them in their home systems, etcetera, and that we 
can reach agreements on interoperability standards and 
agreements on transmission of the new digital signals in a way 
that when consumers buy these products, they are not going to 
wake up to find out that everything has been down-res'ed, which 
is an interesting term meaning intentional degrading of the 
resolution of the signal.
    If consumers can be assured that, when they purchase 
equipment, they can plug it in and play it anywhere in America 
and that it is interoperable, whether it is a satellite system 
or a cable system or a telephone system or wireless broadband 
system that is delivering the signal, and the signal will reach 
them in the same quality form it was being produced--If all 
those agreements can be reached and we are left with the simple 
task of codifying some agreements, where necessary, and/or 
providing enforcement for those agreements so that all the 
players agree to live by the terms of those agreements, that 
will be the ideal best world.
    The worst world will be if progress at these roundtables 
stops and the interdisciplinary, inter-industry discussions end 
without agreement, and we are asked instead to legislate on 
standards and technologies and content protection agreements.
    The roundtables have been successful to date. They have 
been successful, because they have allowed members of industry 
to challenge one another and to do it in front of their own 
peers. They have had to explain why they have yet to reach 
agreement and why they can't come to agreement, and why perhaps 
their agreement is holding up others from making their 
agreements and for this process to work.
    I can tell you two things that are absolutely certain. We 
are determined to stick with our schedule. Congress mandated 
the broadcasters to be in the digital world by the year 2006. 
We are going to do everything in our power to meet that 
schedule. Second, we are going to do everything in our power 
from this committee level, and I know in the Congress, to make 
sure that consumers are the big beneficiaries of this 
transition.
    As we enter this digital world where incredible new 
products are going to be made available, not just through the 
PC modems but through the empowering and enabling the 
television set in our homes to become conduits for this massive 
amount of new information, entertainment, education, commerce, 
even health care and who knows what else, that consumers will 
be the big winners and we take them through this transition in 
a way that doesn't burn them, doesn't unnecessarily cost them. 
We must ensure that they don't have to constantly purchase new 
equipment and new technology because we have suddenly made last 
year's model obsolete by some decisions we made here. That is 
going to be pretty critical.
    The thing I most want to avoid and I suspect all of us on 
this panel most want to avoid, is a situation where those of 
you who have already committed yourselves so well to this 
process, who are beginning to make the big investments, the 
cable companies who are making the investments and upgrading 
their systems, the broadcasters who are putting out the digital 
transmission equipment and beginning to do high definition 
content, the studios that are beginning to do more and more 
high definition, digital content--I want to applaud CBS in 
particular because of the great efforts they have made, and 
urge the others to follow suit in creating and airing quality 
through high definition content.
    I would hate to see those of you who are beginning to do 
that suddenly say that I had better stop, because progress has 
not been made on the other important issues about distributing 
these programs and making sure that technologies and electronic 
equipment are all designed around the agreements made to both 
protect content in a digital age and protect consumers' 
legitimate rights of fair use.
    Those are tricky, thorny questions, but I am delighted you 
have all come to share the progress you have made. I have asked 
Chairman Upton and the members of our committee to make sure 
that this hearing does not drive you further apart but brings 
you closer together, and that everything we do accommodates the 
constant dialog that must occur if all the various elements of 
this tricky transition will come together in a way that 
consumers benefit and we stick to this timetable.
    That is a healthy agenda, but I thank you for coming to 
help us work it out. Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Tauzin. I would note for the 
record that any member that is not here, their statement, if 
they prefer, be entered into the record under unanimous 
consent. I know Mr. Dingell is one of those.
    Recognize for an opening statement Mr. Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman. I 
appreciate your focusing the attention of the subcommittee 
today on the co-equal need to protect copyrighted material 
against piracy and to respect and to reaffirm the time honored 
fair use rights of the consumers of that same material.
    With the arrival of content in digital form and with a deep 
penetration of Internet usage, the striking of a reasonable 
balance between the rights of copyright owners and the rights 
of the users of copyrighted material has become both more 
urgently needed and more difficult to achieve.
    This hearing evolves from our earlier discussions on 
facilitating the digital television transition. An element of 
those discussions was the need to protect from unauthorized 
copying and from uploading to the Internet the digital TV 
transmission of high value programming. It is essential that 
this protection be provided so that program originators will 
release their high value material for digital television 
broadcast.
    The transition to digital television will never be truly 
effective if the most desired programs are not available. So 
copyrighted programs must be protected, but there is a co-equal 
need. The time honored fair use right of the consumers of 
digital material to make recordings for noncommercial personal 
use and for personal convenience must be respected and must be 
specifically affirmed.
    The fair use right of consumers to convey digital material 
they have lawfully acquired among a wide range of digital 
devices in the home setting and beyond the home setting to 
other personal spaces, including the car and the personal 
office and anyplace to which that consumer of digital 
information may travel, must also be respected and observed.
    This committee, Mr. Chairman, is an excellent forum for 
addressing these challenges and striking the essential balance 
between copyright owner rights and user rights that are so 
essential in this digital era. There is a right way and a wrong 
way to protect content in digital TV transmissions.
    The right way is to look to the affected private sector 
entities for a technical solution, and on that front truly 
impressive progress is being made. The Broadcast Protection 
Discussion Group of the broader Copy Protection Technical 
Working Group is comprised of digital equipment manufacturers 
and the major motion picture studios.
    The Group has already developed a standard for the 
protection of digital television signals that arrive in the 
home by means of cable TV or by means of satellite. These 
signals pass through a set top box that can both protect the 
content from unauthorized copying and allow home recording for 
personal use in appropriate, clearly defined circumstances.
    That same Working Group is now very close to agreeing upon 
a standard broadcast flag for the protection of programming 
that is delivered by digital television broadcast over the air 
to be received by antenna or by rabbit ears.
    That standard would also honor the fair use right of 
television viewers to make copies for personal use, and work is 
continuing by another group to address the problem of the so 
called analog hole through which a highly technical and 
cumbersome process can provide an avenue for uploading of 
material to the Internet by means of the digitization of analog 
content. A watermark standard to close the analog hole is in 
development by another working group.
    I want to take the opportunity of this hearing today to 
congratulate the Working Group companies on the impressive 
successes that they are achieving. I also commend them for 
respecting the fair use rights of television viewers as the 
various technical standards have been developed and approved by 
the Group.
    The Working Group approach is the right way to proceed, and 
it is achieving solid results. I will be interested to learn 
from witnesses today and in other future forums the extent to 
which the protection of content delivered over cable and 
satellite, which has been achieved, and the protection of over-
the-air delivered content, which the Group is on the verge of 
achieving, is sufficient to persuade the studios to release 
their highest value content for digital television 
transmission.
    The wrong way to proceed is for Congress to act 
prematurely, and I am concerned by all of the conversation that 
has been directed in the last month to an approach recommended 
in the Senate, which would clearly have the Congress act in a 
premature fashion.
    Legislation has been introduced in the Senate that would 
have the government develop technical content protection 
standards. The fair use rights of consumers would not be 
guaranteed through that measure.
    There is every probability that a government standard would 
impede the functionality of digital receivers, players and 
recorders. This is clearly the wrong approach, and the progress 
being made by the private sector Working Group renders that 
approach not only inappropriate but also clearly unnecessary.
    After private sector standards are developed, there may be 
a role for the government to assure that devices employ the 
standard. At that time, we can be assured that the 
functionality of players, receivers, and recorders will not be 
impeded.
    We can be assured that consumer fair use rights will be 
protected, and that copyrighted material will be safeguarded. 
Mr. Chairman, I suggest that we not act until we have received 
those assurances.Thank you again for conducting this hearing, 
Mr. Chairman, and a warm welcome to all of our witnesses.
    [The prepared statement of Hon. Rick Boucher follows:]
 Prepared Statement of Hon. Rick Boucher, a Representative in Congress 
                       from the State of Virginia
    Thank you, Mr. Chairman for focusing the attention of the 
Subcommittee on the co-equal need to protect copyrighted material 
against piracy and to respect and reaffirm the time honored Fair Use 
Rights of the consumers of the same material.
    With the arrival of content in digital form and with a deep 
penetration of Internet usage, the striking of a reasonable balance 
between copyright owner rights and the rights of the users of 
copyrighted material has become both more urgently needed and a great 
challenge to achieve.
    This hearing evolves from our earlier discussions on facilitating 
the digital television transition. An element of those discussions was 
the need to protect from unauthorized copying and uploading to the 
Internet the digital TV transmissions of high value programming.
    It is essential that this protection be provided so that program 
originators will release their high value material for digital TV 
broadcast. The transition to digital TV will never be effective if the 
most desired programs are not available. And so, copyrighted 
programming must be protected.
    But there is a co-equal need. The time honored Fair Use Right of 
the consumers of digital material to make recordings for non-commercial 
personal use and convenience must be respected and specifically 
affirmed. The Fair Use Right of consumers to convey digital material 
they have lawfully acquired among a wide range of digital devices in 
the home and the extended personal setting including the car, the 
personal office and places to which the person may travel must be 
respected and observed.
    This Committee is an excellent forum for addressing those 
challenges and striking the essential balance between copyright owner 
rights and user rights in the digital era.
    There is a right way and a wrong way to protect content in digital 
TV transmissions.
    The right way is to look to the affected private sector entities 
for a technical solution. And on that front impressive progress is 
being made. The Broadcast Protection Discussion Group of the broader 
Copy Protection Working Group is comprised of digital equipment 
manufacturers and the major motion picture studios.
    The Group has already developed a standard for the protection of 
digital TV signals that arrive in the home by means of cable TV or by 
satellite. These signals pass through a set top box that can both 
protect the content from unauthorized copying and allow home recording 
for personal use in appropriate defined circumstances.
    The same Working Group is now very close to agreeing upon a 
standard broadcast flag for the protection of programming delivered 
over the air to the home for receipt by an antenna or by rabbit ears. 
That standard would also honor the Fair Use Right of TV viewers to make 
copies for personal use.
    And work is continuing by the group to address the problem of the 
so called analog hole which through a highly technical and cumbersome 
process can be an avenue for the uploading of material to the Internet 
by means of the digitization of analog content. A watermark standard to 
close the analog hole is in development by the Working Group.
    I congratulate the Working Group companies on the impressive 
successes they are achieving. I also commend them for respecting the 
Fair Use Rights of TV viewers as the various technical standards are 
approved by the Group.
    The Working Group approach is the right way to proceed and it is 
achieving solid results. I will be interested to learn from our 
witnesses today the extent to which the protection of content delivered 
over cable and satellite which has been achieved and the protection of 
over the air delivered content which the Group is on the verge of 
achieving is sufficient to persuade the studios to release their 
highest value content for digital TV delivery.
    The wrong way to proceed is for Congress to act prematurely. A 
measure has been introduced in the Senate which is premature. It would 
have the government develop technical content protection standards. The 
Fair Use Rights of consumers would not be guaranteed.
    There is every possibility that a government standard would impede 
the functionality of digital receivers, players and recorders.
    This is clearly the wrong approach and the progress being made by 
the private sector Working Group renders it not only inappropriate but 
also unnecessary.
    After private sector standards are developed, there may be a role 
for government to assure that devices employ the standard. At that time 
we can be assured that the functionality of devices will not be 
impaired, that consumer Fair Use Rights will be protected and that 
copyrighted material will be safeguarded. We should not act until we 
have those assurances.

    Mr. Upton. Thank you. Recognize for an opening statement 
Mr. Stearns, the vice chairman.
    Mr. Stearns. Thank you, Mr. Chairman, and I want to 
congratulate you for holding this hearing to examine content 
protection in the digital era.
    Of course, I want to commend Chairman Tauzin for his 
tireless leadership in conducting several TV roundtable groups. 
As he has pointed out, they have been very helpful.
    As we discuss content protection in the digital era, the 
groups with the most to gain and lose from the digital 
transition are copyright holders of digital content and 
manufacturers and information technology companies that 
facilitate such content.
    For instance, the average cost of making and marketing 
films is now about $80 million a film. Collectively, however, 
the copyright industry generates almost $80 billion abroad, and 
such investments certainly need protecting. As such, 
intellectual property laws give creators the incentive and 
protection they need to make their works available to 
consumers.
    Mr. Chairman, in passing the Digital Millennium Copyright 
Act, Congress updated U.S. copyright law for the digital age by 
affording copyright owners protections, while establishing fair 
use for technology in a digital environment. Digital media also 
creates a new opportunity for new forms of copyright 
infringement, and new concerns about fair use of copyrighted 
works and other long established copyright principles.
    A recent article in a Wired magazine, May 2002, highlights 
a man named, ``Lord of the Borrowers.'' He used the Internet 
and peer to peer applications to accumulate nearly 2,500 
movies, video, and software titles, and in turn contributing to 
the illegal transfer of copyrighted works, including 3,000 
songs and movies such as ``Harry Potter'' and ``A Beautiful 
Mind.'' Such actors are no different than those who walk into 
Blockbuster's movie rental and steal merchandise.
    In this article it talks about this man in his home. He has 
music piped into his bathroom, his living room, his kitchen. 
Every corner of his home has music, with a 28-speaker stereo 
system that cycles 3,000 songs ranging from 200 from Elvis 
Presley tunes and all the early Beatles to classical, hip-hop, 
blues and concert, all that he bootlegged, even Axl Rose doing 
``White Christmas.''
    He says, ``I had enough music to run a radio station,'' he 
brags. ``I could let it play for weeks and weeks, and it would 
never run out.'' He hasn't spent a dime, and his only real 
connection comes in the form of a cable modem--``Lord of the 
Borrowers.''
    Mr. Chairman, I would like unanimous consent to put this 
article in the record.
    Mr. Upton. Without objection.
    Mr. Stearns. As a result, the prevention of unauthorized 
copying of digital work has grown in importance in such 
technologies being continually developed and improved upon by 
media and electronic industries. However, there remains several 
outstanding issues regarding technology, technical industrywide 
solutions.
    The parties appear close to reaching agreement pertaining 
to broadcast flags in order to prevent broadcast programs 
exhibited on over-the-air TV stations from being redistributed 
without authorization. Additionally, protecting digital content 
in the analog format, or plugging the analog hole, serves as a 
means of protecting intellectual property.
    While these two issues appear to be imminently resolved--
immediately resolved, the parties seem far from reaching 
consensus on how to treat peer to peer applications which allow 
for distribution of files across the Internet without the need 
of a centralized server.
    Nevertheless, as pointed out by the chairman, we have the 
opportunity to solve these problems, and I think the private 
industry is the best way to solve these at this point, and not 
have mandates from the Federal Government. As so often happens, 
the Federal Government sometimes strangles innovation.
    Finally, Mr. Chairman, while we are quick to protect the 
investment of content owners, we must balance it out to be 
doubly sure we protect the rights of consumers. It is 
imperative that all parties continue to recognize consumers' 
rights to personal, noncommercial use of the legally purchased 
copyrighted materials.
    Additionally, neither Hollywood nor manufacturers would be 
profitable without consumers. As such, we need to respect 
consumers' investment in such technology and ensure that their 
investments are not made obsolete with efforts to protect 
content.
    Mr. Chairman, I again commend you for your hearing.
    Mr. Upton. Ms. Harman.
    Ms. Harman. Thank you, Mr. Chairman. I have a statement for 
the record, but just want to summarize with a few points.
    First of all, the issues we assess today have a huge impact 
on the digital world, and I am trying very hard to wrap my 
aging analog brain around them. Second, this is an excellent 
panel and a stellar group in the first row right behind it, and 
their spectrum of views is most welcome.
    Third, what we do and, just as important, what we do not do 
really matters in this case. We have had a few hearings lately 
that I thought mattered a bit less than this one. This one will 
really make a difference.
    So I would just set out a few principles we ought to think 
about. The first is that government should do no harm. That has 
been said often, but here we are in a position to do a great 
deal of harm if we do the wrong thing.
    The second is that the transition to digital is not just a 
question of supply. It is a question of demand, and the demand 
will not be there if high value content is not there, and high 
value content will not be there if we don't protect 
intellectual property. So we had better get that part right.
    The third point is that the private sector has a great deal 
to offer here. There are market mechanisms and, as we have 
heard, cross-industry mechanisms that can do a lot of the hard 
work, and perhaps do it better than we can do it.
    Fourth, government has a tendency to operate with a sledge 
hammer. In this case, operating with a scalpel is absolutely 
required.
    So I look forward to the testimony today. I have got some 
questions for some of the witnesses. This is going to take hard 
work. We are going to earn our pay getting this thing right, 
and I look forward to being a part of the bipartisan solution 
on this committee. Thank you, Mr. Chairman.
    Mr. Upton. Thank you.
    Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. I know this is a 
tough issue. I am going to listen to the panel. I just remind 
people who have been before this committee before, my first 
experience is with my wife, who is a church organist, when she 
went through the reams of music and took out all the Xeroxed 
copies of music and threw them in the trash can because she 
wanted to respect the intellectual rights of the folks who 
wrote the music.
    It was not a positive thing for the members of the church 
to see, but it was the right thing to do, because those people 
who write the music, who prepare that, need to be compensated 
if we continue to want artists to flourish. But this is a hard 
issue. You all are the experts. We are going to ask a lot of 
questions. We look forward to your testimony.
    I yield back my time. Thank you.
    Mr. Upton. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I want to commend you 
for holding this hearing today, but I want to start out by 
commending Chairman Powell and the FCC for their recent action 
on the HDTV transition. His letter outlining voluntary steps to 
broadcasters, cable companies, and consumer electronics folks 
each need to take--and the steps each need to take was crucial 
to speeding the digital transition.
    The subcommittee, I think, can and will impose a mandatory 
solution to move the digital transition forward, but I hope we 
do not have to go down that path. For all parties interested in 
the DTV transition, I fully support the goals outlined in 
Chairman Powell's letter. Then I want to see the goals 
implemented in a timely manner through good faith and 
cooperation, hopefully, of all the parties. However, if these 
goals cannot be reached on a voluntary basis and there is 
continuing dispute, then I would share in any action initiated 
by Chairman Powell.
    Mr. Chairman, now I want to talk about the public policy 
purposely excluded from the Powell letter. The missing 
component was anything to do with digital rights management or 
DRM. DRM is the protection of digital content that flows to 
computers, high definition TVs, and various home entertainment 
systems.
    Why is DRM important? Because without it, we have no 
protection for copyrighted works. Creative minds should be able 
to profit from their creations through the copyright system. 
Many American consumers, though, feel that digital is free and 
can be obtained through the many peer to peer sites operating 
around the world.
    The idea that this digital content is free or should be 
free will be a difficult mindset to break. However, it now goes 
directly to the heart of the DRM problem. My constituents have 
now placed a value on this type of content, and that value is 
free. Rightly or wrongly, declining music CD sales seem to 
indicate that consumers are no longer willing to pay $12 for a 
CD. So how do we work this consumer preference into the context 
of DRM?
    One approach is the Hollings bill, and I oppose that 
approach. It is overly broad and penalizes consumers who have 
never or will never obtain illegally copied digital content. 
Piracy is a serious issue, and it should be addressed, but I am 
very hesitant for Congress to get too involved.
    My hope is the broadcasters, content providers, and 
consumer electronics folks will move to develop a solution 
among themselves. It must be targeted, and it must only be in 
response to the new content distribution methods from the movie 
and the music industries. The software industry is already 
marketing their products over the Internet with full DRM 
protection, and they should be the model.
    Mr. Chairman, at the end of the day, it is the consumer who 
has to benefit from any changes or agreements on this issue, 
and I hope to support legislation that has broad industry 
support and a tightly defined focus.
    Again, I thank the chairman for this hearing today.
    Mr. Upton. Thank you.
    Mr. Bass.
    Mr. Bass. I thank the chairman for holding this hearing, 
and I also want to make note of the fact, this is actually my 
first hearing on this subcommittee, and it is a real honor to 
be here, especially with my friend from Massachusetts. Now we 
have a chance of really bringing a well deserved recognition to 
the Red Sox and the Celtics and the Bruins and, of course, our 
Super Bowl Patriot champions.
    Indeed, Mr. Chairman----
    Mr. Upton. With a Michigan quarterback, I want you to know.
    Mr. Bass. I am also pleased to be participating in this 
hearing because of its significance. Digital content 
protection, as many have said before, is not a simple issue. It 
is not going to be resolved through a formula or a Federal law 
or regulation that will resolve this issue.
    I think, although it is best that it be left to those who 
have created and those who will employ the digital 
infrastructure, content protection and so forth, and understand 
the complexities best, I also feel that Congress needs to 
ensure that excess consumer costs and unreasonable inhibition 
on personal use are kept to a minimum, as has been said by 
other members of this subcommittee.
    These are very complex, and I am looking forward as the 
newest member of this subcommittee to gaining a better 
understanding and being an active participant in the resolution 
of these issues, and I yield back.
    Mr. Upton. Mr. Luther.
    Mr. Luther. Thank you, Mr. Chairman, and I also want to 
thank you for holding this important hearing. As has been 
mentioned, the crux of the issue before us is really twofold. 
First, do market forces provide adequate incentives for the 
private sector to form constructive partnerships between 
content providers, the information technology industry, and 
electronics manufacturers to develop commercially viable 
encryption technology where the property rights of content 
providers are adequately protected, or do market forces make it 
difficult for all of the relevant industry players to come to 
some sort of meaningful consensus?
    Of course, were market forces sufficient, then 
Congressional action would be largely unwarranted. I am 
interested in reviewing the perspectives of our panelists on 
this issue.
    Second, if in fact market forces are insufficient in 
creating incentives for such technological innovations, the 
next question becomes exactly how forceful of a nudge does the 
private sector require from Congress? In this regard, I think 
we need to better understand to what degree a Congressionally 
mandated technological standard would inhibit the high tech 
community from adapting to a rapidly and ever changing digital 
environment.
    Do the various parties require only strict government 
enforcement of existing copyright law or should the government 
step in and involve itself in determining the actual baseline 
standard by which digital technology must abide?
    It goes without saying that our deliberations today should 
ultimately serve the American consumer. After all, we are 
trying to aid the development and promise of digital television 
and facilitate the application of high speed data services, 
both of which should ultimately benefit the average citizen.
    As long as keep the public in mind and avoid focusing on 
potentially factional disputes, I believe that our committee 
can be helpful in ushering in the promise of the digital age.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Mr. Upton. Mr. Davis.
    Mr. Davis. I am eager to hear the panel. I ask unanimous 
consent my statement go in the record.
    Mr. Upton. All members have that right. Thank you.
    Ms. McCarthy.
    Ms. McCarthy. Thank you very much for holding this hearing, 
Mr. Chairman, and I would ask unanimous consent that my 
statement be placed in the record, so we can get on to the 
substance at hand and the panels that have come before us 
today.
    Mr. Upton. Extra credit. Thank you.
    Mr. Terry.
    Mr. Terry. I will submit my statement, since I have an 
eight o'clock flight.
    Mr. Upton. Tomorrow or today?
    Mr. Sawyer.
    Mr. Sawyer. I will submit mine as well, Mr. chairman.
    Mr. Upton. Ms. Eshoo.
    Ms. Eshoo. I am not leaving until 7:30 tomorrow morning.
    Thank you, Mr. Chairman, and first of all, welcome to our 
very impressive panel that is here today, and most especially 
to Joe Kraus, who is the founder of Excite.com. He is from Palo 
Alto, which is the heart of the most distinguished 
Congressional district in the country, and he has made 
significant contributions to the Internet age through his 
companies and now through the organization that he founded, 
DigitalConsumer.org. Thank you for being here, and we are proud 
that you are a witness.
    This hearing gives our committee the opportunity to discuss 
the status of protection and distribution of digital content. 
Various technology associations have called for a national 
broadband policy with goals of having broadband in 100 million 
homes in 10 years. If we are going to achieve these lofty 
goals, we need to examine what the barriers are that prevent 
consumers from getting the content they prefer.
    At times, the promise of broadband and digital television 
seem really farther off than we would have hoped. I wish myself 
I had at least a quarter for every time we have had a hearing 
here on digital TV and have all the reports from the industry, 
but we can attribute at least part of the lagging pace, in my 
view, to the complexities that are associated with protecting 
content.
    So finding a solution to this problem, in my view, is not 
going to happen quickly, and I think that it really 
necessitates the concentrated efforts of all the affected 
industries. If there was ever a market that would force 
companies to come together and find a solution, I think this is 
it.
    Content creators lose hundreds of thousands of movies to 
illegal downloads over the Internet, and the software industry 
loses $11 billion annually to piracy. So there is one heck of 
an economic incentive in this for people to come together. This 
is a huge problem, and the industries, obviously, have a vested 
interest in solving it.
    The economic impact has resulted in the formation, as 
several of my colleagues have pointed to, of working groups 
that have used the combined expertise of many engineers to find 
methods of protecting digital content. I think the government 
should be monitoring that progress very closely from the 
sidelines, rather than inserting itself into the process.
    Legislation that could result in a single technological 
mandate brings with it numerous problems. First, it will 
stifle, in my view, the progress made by the inter-industry 
working groups by imposing unnecessary bureaucratic procedures 
and injecting the Federal Government into engineering 
decisions. We are not good at that. We don't know how to do 
that.
    Second, once a particular technology is selected through 
this process, it could create a single point of vulnerability, 
making it susceptible to hackers and cumbersome to correct.
    Finally, rather than finding a workable market solution, an 
imprudent mandate could require millions of dollars in 
engineering changes that, in the end, would obviously be passed 
on to consumers.
    So let me say last that I think that Mickey Mouse and 
Silicon Valley have to create a yellow brick road to hold hands 
and walk down together, and I look forward to the testimony 
that we are going to hear today. I think it is going to be 
very, very important for us to, obviously, take into 
consideration as we look to see what policies, if any, the 
Congress should be making in this area. Thank you.
    Mr. Upton. Thank you. That concludes the opening 
statements. You can tell, because of the interest--appearance 
of the members as well as the length of the statements, the 
keen interest on this topic, and we are delighted to now let 
the witnesses speak.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Tom Davis, a Representative in Congress from 
                         the State of Virginia
    There were two salesmen driving around in the country when their 
car broke down. It was late in the evening, so they decided to walk 
over to a nearby farmhouse and ask if they could spend the night. A 
recently widowed woman answered the door. When they told her of their 
plight, she told them it would be inappropriate to let them sleep in 
the house since she had just recently lost her husband. However, she 
did offer to let them sleep in the barn.
    About a year later, the two salesmen were driving in the same 
vicinity when one turned to the other and asked, ``Do you remember the 
time that widow let us sleep in the barn?''
    His partner replied that he did.
    ``Did you sneak up to the house that night?''
    His partner, now blushing, replied that he had.
    ``And did you give her my name?''
    Once again, the other partner confessed his guilt. ``Why do you 
ask?'' he replied.
    ``Well,'' said the first salesman, ``she died last week and left me 
$1 million.''
    The moral of this story: take credit for your work. That is the 
central issue we are discussing today. The creators of music and video 
products are struggling to maintain a system where they receive just 
compensation for their products in a technological environment where 
that task is increasingly difficult. Digital technology has made it 
extremely easy to ``share'' these files via the Internet. I have been 
shown a plethora of peer-to-peer sights on the net where one can go and 
download content for free. Obviously, this poses a severe threat to the 
recording, movie, and broadcasting industries.
    At the same time, digital technology holds great promise for 
consumers. In our efforts to protect content, we must be careful not to 
throw the baby out with the bath water. I will admit my first reaction 
to proposed legislation that would have the government step in with a 
solution was not favorable. However, this is a complex issue, and I 
want to ensure that we maintain an environment as conducive as possible 
to innovation. I do not have the technological answer to the question 
of how to best protect digital content. However, I do not want to take 
steps that prevent those with the ability to create such a solution 
from doing so.
    I am looking forward to the testimony today, and I am thankful to 
Chairman Upton for calling this hearing to give the industry 
stakeholders an opportunity to present their case. This afternoon will 
be an educational experience for us all, and will hopefully guide us in 
the right direction for any necessary legislative action.
                                 ______
                                 
Prepared Statement of Hon. Lee Terry, a Representative in Congress from 
                         the State of Nebraska
    Thank you Mr. Chairman and thank you for holding this hearing 
today.
    It is well understood that as we move forward into the digital age, 
consumers will want the latest and greatest forms of technology and the 
content to go with it. Digital content has become the content demanded 
by consumers. DVD['s are one of the most popular segments of the 
entertainment industry and are considered to be the fastest growing 
consumer electronics product ever. Digital TV and HDTV programming are 
starting to role out and become available to consumers in many markets. 
As consumer demand for Digital TV and HDTV increases, it is imperative 
that their content be protected from piracy. I think this can best be 
done with a type of technology that is not selected by the Government.
    There will always be men and women who feel that all content should 
be free and who will spend their time doing their best to hack the most 
sophisticated encryption programs. I believe that the people who hold 
this belief will never change this view. That is why all the industries 
affected by the need for DRM solutions must come together to sort out 
their problems and find ways to solve them. The revenue lost from 
content piracy is staggering, and losses increase annually. I have 
heard loss figures ranging from $10 Billion to $15 Billion. This is 
money that deserves to be in the hands of those who produce the 
content, not of those who steal it.
    I am a firm believer in free markets and as such I also feel that 
industry experts can make better decisions on how to protect their 
goods from piracy than the Federal Government can. The Government 
should not pick winners and losers. We should not mandate a technology 
that could be obsolete within a year of our mandate.
    Chairman Tauzin, you should be commended for bringing industry 
together for round-table discussions. These discussions are very 
important to finding the solutions to the transmission of free, over-
the-air broadcasting, the analog hole, and peer-to-peer file sharing. 
Through these discussions, the solution to these problems can be found. 
If the Government were to mandate a solution, there could be no 
fruitful discussion that might lead to better ways and different forms 
of technology that would be best to protect the content providers from 
piracy.
    I cannot believe that IT companies or the IT industry would support 
piracy. They have as much to lose as anyone else. Furthermore, I have 
seen these IT companies in action, and have witnessed their desire to 
be at the table to discuss the problems facing each industry and the 
various solutions that can be given to solve their problems.
    There are also a host of companies that are spending their time and 
capital trying to solve the Digital Rights Management problem. Each one 
should be commended for their efforts. Companies like SealedMedia, who 
work to provide Digital Rights Management technology for organizations 
requiring persistent control for digital Internet content. 
SealedMedia's solution is unique, as its DRM technology is being 
developed to support multiple media formats. However, if the Government 
mandates a technology, we might be hindering SealedMedia's ability to 
innovate and come up with solutions that the Government and affected 
industries have not considered. The type of thinking that is needed to 
find a solution to the DRM problem is one that provides a series of 
different solutions in the short term with the capabilities to provide 
additional protections in the future. Any thinking that moves towards 
mandating standards today, while well intentioned, is shortsighted.
    DRM solutions and innovations should not be frozen by Governmental 
mandates. DRM solutions should protect content and the distribution of 
digital media in all forms. In addition, DRM solutions should be 
allowed to flourish in as many forms as necessary to accomplish the end 
goal of ending piracy. The Digital Rights Management issue cannot be 
solved with a one-size-fits-all approach. What works well for 
protecting content on a DVD might not work well for protecting 
broadcast content. These affected industries should be left to solve 
the DRM problem with minimal Governmental intervention. Rather the 
Government should focus on giving the DRM solutions all the enforcement 
protections they might need.
    I thank you Mr. Chairman and I look forward to the testimony from 
our witnesses today.
                                 ______
                                 
Prepared Statement of Hon. Eliot L. Engel, a Representative in Congress 
                       from the State of New York
    Mr. Chairman--I want to thank you and the panelists for holding 
this hearing. It is vital for the Congress to do a better job of 
understanding the nuances involved in technology and the law. Before us 
today is literally what the future of copyright protection should be.
    There has been a great deal of discussion regarding legislation 
introduced by Senator Hollings. Some have said that it specifies a 
standard, but this is not true. I have reviewed the legislation and 
does no such thing. It does authorize a federal agency, the FCC, to do 
so. I'd like that point to be clear, because agencies can change 
regulations far easier than Congress can change laws.
    The need for standards is so important, so evident, and so 
prevalent, that we often do not see it before our very eyes. In 1901 
Congress created the National Bureau of Standards, which today is the 
National Institute of Standards and Technology. One of the very first 
challenges the Bureau of Standards faced dealt directly with health and 
safety of every citizen within the United States. The need for 
standards was dramatized in 1904, when more than 1,500 buildings burned 
down in Baltimore, because of a lack of standard fire-hose couplings. 
When firefighters from Washington and as far away as New York arrived 
to help douse the fire, few of their hoses fit the hydrants. The Bureau 
of Standards had already collected more than 600 sizes and variations 
in fire-hose couplings in a previous investigation and, after the 
Baltimore fire, was a key figure in setting a national standard.
    Today we are concerned about the standards to protect the 
intellectual property of movies and music. This doesn't rise to level 
of importance of universal fire-house couplings, but it is nevertheless 
important. Though a person's life is not endangered by piracy, harm 
nevertheless occurs. What your job--and I speak to the panelists now--
what your job is today is to try and convince us whether or not the 
Congress or Administration needs to intervene.
    I have heard good arguments on both sides and I have heard some bad 
arguments on both sides. So this is your opportunity to educate me and 
influence my opinion.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    The transition to digital television is, without question, one of 
the thorniest issues this Subcommittee has had to deal with. Its 
success hinges on the actions of a disparate group of industry players, 
many of whom historically make their living competing against one 
another. Now these companies must find a way to work together for the 
good of the whole. It is a very tall order, as we've learned from the 
DTV roundtable discussions led by Chairmen Tauzin and Upton, but I 
remain hopeful it can be done.
    Some believe the transition will not succeed unless more high 
value, high definition television programming is produced by the 
broadcast and cable networks. Others say that the key to success lies 
in making sure broadcasters meet the digital TV buildout deadlines. 
Still others say cable and satellite systems must be made to pass 
through high definition content when it is available, and that these 
distribution systems must be compatible with any television display. 
And, of course, there remains a statutory conversion date by which this 
great experiment must be completed.
    In my view, all of these claims have merit. But, in the end, 
success will be measured in terms of whether consumers ultimately enjoy 
a higher value television product than they do today. And I am 
convinced that day will come. It may not happen magically on December 
31, 2006. In fact, consumers may be watching digital television signals 
reconverted to display on their old analog sets for many more years 
beyond that. But eventually, consumers will migrate to digital sets, so 
long as they perceive value in doing so.
    So where does the value come from? I believe you need to look no 
further than the many hearings we've held on this subject over the past 
twenty years. High Definition Television, or HDTV, was part and parcel 
to this digital experiment. That idea didn't originate with me or the 
other Members serving at the time. It was the simple commitment made by 
the broadcast industry when it pitched the idea of receiving a second 
channel. In fact, as recently as 1996, the National Association of 
Broadcasters (NAB) maintained that TV stations ``will use this spectrum 
for HDTV, pure and simple.''
    It is true that the 1996 Telecommunication Act permits flexibility 
to offer ancillary video, data, and other non-high-definition services 
on this digital channel. But my sense is the tide may be turning on 
these plans for a number of reasons. First and foremost, there is a 
glut of digital channels out there, both on satellite TV and digital 
cable. Simply adding more to the mix may not make good sense if few 
people are watching.
    Instead, broadcasters may need to distinguish their programming. 
One way is by telling better stories. But another way is to make their 
content look, sound, and feel superior to other programming available 
to viewers. They certainly have the tools to do the latter, and I hope 
they're beginning to see the wisdom of that. Several networks are 
already putting more and more HDTV on the air, and competition from 
cable networks like HBO, Showtime, HD-Net, and Discovery will only 
increase the competitive pressure to do so.
    Now it is true that more HD programming does not necessarily mean 
the viewer will automatically see it. Cable and satellite companies 
must carry the programming, and do so in a way that is compatible with 
any and all digital television displays.
    But, on this point, broadcasters may hold the keys to the kingdom. 
If they put on more HDTV, differentiating their programming, the signs 
point to tremendous consumer demand, and cable systems will be forced 
to respond. Some have started to negotiate carriage agreements in 
earnest, and the pressure from satellite will be very important as 
well. We're already seeing DirecTV putting more HD programming on its 
system. In fact, I understand they're adding Showtime HD this month at 
no additional cost to subscribers, and that trend will likely continue.
    The hurdle, of course, to putting on more high value, high 
definition digital programming is the very real concern of content 
owners over piracy of their works. We've been down this road many times 
before as technology evolves. And it's pretty clear that the best 
result occurs when competing interests in industry work together to 
find the right solutions. I am not convinced that government has the 
tools or the expertise to make the right judgments on these matters.
    Certainly there are some in the industry who would prefer a 
legislative approach. And I note that Senator Hollings has introduced 
legislation that brings this debate into sharper focus. But the bill as 
drafted is unbalanced, stunting the growth of one industry in order to 
protect the growth of another.
    Imagine if the motion picture industry had won its fight against 
the VCR in the early 1980s. At that time the industry believed VCRs 
would provide the death knell to first run motion pictures. Now, of 
course, sales of VHS tapes actually exceed box office receipts each 
year. But if that notion had prevailed in the Supreme Court, the VCR 
would have been outlawed and the benefits to both the film industry and 
the consumer would never have been realized. As the industry learned 
then, the answer is not to limit technological advances. Rather, it is 
to embrace them and adapt business strategies to exploit their inherent 
value.
    While I believe the industry is best poised to negotiate the 
technical details of digital rights management, the government 
certainly does have an ongoing and important role in protecting 
consumers. That means making sure reasonable consumer expectations are 
met. That goes for recordability and playback on a variety of devices 
throughout the home. But, just as important are reasonable consumer 
expectations about the functionality of the new equipment they already 
have bought. Over $5 billion of high definition equipment has been sold 
to date, and that number is projected to soar to $9 billion by the end 
of this year.
    This equipment was bought with the promise of delivering high 
definition pictures. In my view, the proposals made by some industry 
players to downgrade the resolution of programs delivered to this new 
equipment are unfair, counterproductive to the transition, and possibly 
unlawful. Consumers should not be left holding the bag. Content owners 
and equipment manufacturers should find technological solutions to 
close the analog hole and address ``in the clear'' transmissions--and 
the sooner the better--so the industry's exposure to piracy is limited 
going forward. But to do so in a way that makes obsolete, or even 
degrades the functionality of, existing products should be a 
nonstarter.
    Mr. Chairman, again I commend you for tackling these difficult 
issues today, and I look forward to continuing our work together to 
meet the challenges they present.

    Mr. Upton. This is a first that we are actually going to 
have a video conference in this hearing room, and our first 
witness will be Mr. Peter Chernin, President and CEO of News 
Corporation, who is actually in Los Angeles, to be followed by 
Mr. Richard Parsons, Co-Chief Operating Officer of AOL Time 
Warner, Dr. Paul Liao, Chief Technology Officer of Panasonic/
Matsushita, Mr. Larry Blanford, CEO of Philips Consumer 
Electronics, Mr. Larry Jacobson, President and Chief Operating 
Officer of RealNetworks, Mr. Assaf Litai, Founder and Acting 
CEO of Vidius, and Mr. Joe Kraus, Co-founder of 
DigitalConsumer.org.
    We will start long distance with Mr. Peter Chernin. Peter, 
welcome. Thank you for appearing. All of your statements are 
all made part of the record. If you could also try to abide by 
the 5-minute rule, that would be truly appreciated. Thank you.
    Mr. Chernin.

   STATEMENTS OF PETER CHERNIN, PRESIDENT AND CHIEF OPERATING 
    OFFICER, NEWS CORPORATION; RICHARD D. PARSONS, CO-CHIEF 
 OPERATING OFFICER, AOL TIME WARNER INC.; PAUL F. LIAO, CHIEF 
 TECHNOLOGY OFFICER, PANASONIC/MATSUSHITA ELECTRIC CORPORATION 
    OF AMERICA; LAWRENCE J. BLANFORD, CEO, PHILIPS CONSUMER 
  ELECTRONICS; LARRY JACOBSON, PRESIDENT AND CHIEF OPERATING 
  OFFICER, REALNETWORKS; ASSAF LITAI, FOUNDER AND ACTING CEO, 
     VIDIUS; AND JOE KRAUS, CO-FOUNDER, DIGITALCONSUMER.ORG

    Mr. Chernin. Thank you, sir. Good afternoon, Mr. Chairman, 
Ranking Member Markey and members of the subcommittee. My name 
is Peter Chernin, and I am the President of the News 
Corporation. Thank you, Mr. Chairman and Ranking Member Markey, 
for inviting me to participate in today's hearing by video 
conference.
    I would like to take this opportunity to applaud all of you 
for your leadership in seeking to ensure copyright protection 
for content providers in the digital age.
    First, I would like to point out that, although some 
content providers have been accused of being backward thinking 
and anti-technology, I am proud to be aggressively pioneering 
this committee's brand new video conference technology.
    As an industry, we are in a very exciting but challenging 
time. The rise of the broadband Internet and other digital 
technologies is providing us with tools of unprecedented 
flexibility that we are only beginning to fathom. News 
Corporation is already harnessing these technologies and 
distribution methods on an unprecedented scale.
    For example, over 50 percent of United States television 
households are able to receive Fox programming in digital form, 
including the first ever all digital, wide screen Super Bowl 
earlier this year. We have released hundreds of Fox movies on 
DVD, and will soon be releasing Fox movies in the high 
definition digital DVHS prerecorded format. However, we 
strongly believe that the great promise of broadband Internet 
and other digital technologies can be fully achieved only if 
protections are in place to safeguard our investment in the 
development and distribution of content.
    Recently, we have seen more and more Napster-like programs, 
such as Gnutella and Morpheus, which facilitate the downloading 
of motion pictures and television programming without 
authorization or compensation to the copyright holder.
    With the advent of broadband, it is only a matter of time 
before these file sharing technologies and other emerging 
mechanisms have a serious impact on the economic viability of 
the motion picture and television broadcast industries. 
However, I cannot emphasize enough that it will not be just the 
media companies that will be hurt economically if this piracy 
continues.
    Rampant piracy will hurt all businesses and consumers and 
individuals that make their livelihood from the making, 
redistribution, and licensing of content.
    We are working to solve the piracy problems ourselves by 
distributing our content through media that are reasonably 
secure. For example, pay cable, direct broadcast satellite, and 
DVHS are digital distribution channels to the home that provide 
a basic level of security for digital content.
    In each of these areas we are able to protect our content 
either through contractual arrangements with cable and 
satellite providers or through a licensing process using 
commercially available digital rights management, DRM, 
technology for the Internet. However, I want to focus for a 
moment on the one major digital distribution method that does 
not currently offer adequate protection, digital over the air 
broadcast television or so called DTV.
    Presently, cable and satellite have a competitive advantage 
over DTV due to the closed nature of cable and satellite 
systems that allow for encryption and, thus, for the protection 
of content. DTV, on the other hand, is not encrypted for public 
policy reasons and, therefore, does not enjoy these same 
protections. However, we have identified a technological 
solution that works without encrypting DTV.
    It involves the insertion of a broadcast flag in DTV 
signals that can be detected upon receipt by DTV processing 
equipment. Once detected, the receiving device would protect 
the content from being redistributed on the Internet. However, 
this technology would have no impact on the ability of 
individuals to make personal copies of their favorite 
television shows.
    Mr. Chairman, as you are undoubtedly aware, there has been 
an ongoing effort for the last several years to negotiate the 
protection of all digital audio-visual content delivered to the 
home network, including but not limited to DTV. These 
negotiations, often referred to as the 5C negotiations, have 
made substantial progress with regard to the protection of pre-
recorded and conditional access delivered content such as pay 
per view, video on demand, and pay and basic cable, and we at 
Fox applaud that progress.
    I am also pleased to note, Mr. Chairman, that over the past 
few weeks significant progress has been made between our 
industry and the IT and consumer electronics industries on 
solving the problem of protecting free, over-the-air digital TV 
broadcasts through the use of a broadcast flag.
    I have described in my written testimony the details of the 
status of these negotiations. This positive movement could not 
have occurred without the substantial involvement of this 
subcommittee and other Members of Congress who have put 
pressure on all of us to solve this problem.
    I would also like to praise Mr. Parsons of AOL Time Warner 
and Mr. Barrett of Intel for their joint statement on 
principles on copyright protection that specifically mentioned 
the need to fix the DTV copyright problem.
    Private sector efforts such as these are important toward 
reaching our stated goals, and should be commended. However, 
even if we do reach a private sector agreement, which I am 
confident we will, targeted legislation will still be necessary 
in order to ensure a level playing field for all the parties.
    Just as we are striving to protect our content when 
distributed by DTV, we are confronting two other mechanisms 
that still threaten the security of content. Into the 
foreseeable future, we will still need to deliver content to 
consumers in an analog form. After all, hundreds of millions of 
television sets can only accept content in that form.
    Unfortunately, analog content can be easily converted into 
an unprotected digital form that can in turn be copied or 
redistributed without authorization. This is the so called 
analog hole. We are developing a plan to plug the analog hole. 
It includes harnessing watermark technology that will prevent 
such conversions from being used to avoid content protection 
obligations.
    We hope to secure, again, inter-industry consensus on such 
a proposal, and we welcome your assistance in encouraging all 
relevant parties to make this happen. Once that consensus is 
reached, we would hope to have that solution quickly ratified 
by Congress.
    Finally, we are diligently working on plans to stop the 
unauthorized viewing of content delivered via the Internet. It 
is a very difficult and complex problem to address, because 
there are so many ways unauthorized content can be distributed 
on the Internet. We are mindful of not overcorrecting the 
problem and burdening Internet appliances anymore than 
necessary, but we are confident that the problem can be solved. 
We know it must be.
    It is reported that every day hundreds of thousands of 
copies of movies are being downloaded without compensation to 
their copyright holders, and this number is growing rapidly. 
The competition from pirated and, therefore, free copies of our 
movies and TV shows is the single biggest obstacle to 
developing a viable business model for offering consumers 
authorized versions of movies and TV shows on the web.
    Again, we are optimistic that we can develop the 
technological solution to address this threat in a cost 
effective way, just as we have with DTV and will soon be doing 
with the analog hole. However, it is critical that Congress 
plays an active role in ensuring that the parties reach a 
consensus on how to solve this problem as quickly as it is 
technologically possible.
    This is an Internet problem that needs to be solved at 
Internet speed. We need Congress and your efforts to continue 
to help make that happen. As with the broadcast flag and the 
analog hole solutions, we will need Congress to codify this 
solution to the illegal download problem.
    At the end of the day, Mr. Chairman and members of the 
subcommittee, if we do not find creative solutions to this real 
and growing problem, consumers will be the ultimate losers. 
While some may see a short term gain in obtaining free, 
unauthorized material from the Internet, the long term result 
will be less consumer choice and stunted American technological 
growth and development.
    I thank you for the opportunity to present the views of 
News Corporation from a distance on this important topic, and I 
will be happy, whenever you would like, to answer any 
questions. Thank you.
    [The prepared statement of Peter Chernin follows:]
  Prepared Statement of Peter Chernin, President and Chief Operating 
                       Officer, News Corporation
    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Peter Chernin and I am President and Chief Operating Officer of News 
Corporation. Mr. Chairman, I want to take this opportunity to thank the 
Subcommittee for inviting me to participate in today's hearing, and to 
applaud the Subcommittee's efforts to ensure copyright protection for 
content producers in the digital broadband age.
    First, I would like to point out that, although some content 
providers have been accused of being backward-thinking and anti-
technology, I am proud to be aggressively pioneering this Committee's 
brand-new video conference technology. It is not the first time the 
entertainment industry has pushed technological innovation to new 
levels. I hope that this will not go unnoticed by our detractors.
    You have asked me to cover several topics in my testimony: first, 
to describe industry efforts to ensure that digital television 
content--particularly high-definition content--is protected once the 
transition from analog to digital television is complete; next, to 
identify the goal of the Copy Protection Technology Working Group (or 
``CPTWG'') and its subcommittee, the Broadcast Protection Discussion 
Group (or ``BPDG''). I will also discuss my company's involvement in 
the BPDG's efforts to address the broadcast flag technology solution; 
the process of evaluating alternative technologies capable of keeping 
free, over-the-air television programming from being redistributed on 
the Internet; the impact of content protection technology on consumers' 
ability to enjoy the full panoply of new and exciting digital 
equipment; and, finally, inter-industry efforts to close the ``analog 
hole'' and to resolve the broader, peer-to-peer file sharing problems, 
as well as the proper role of government in determining those 
solutions. I welcome the opportunity to provide you with my company's 
perspective on these important matters.
           1. pre-bpdg efforts to protect digital television
A. The CPTWG and the Identification of the ``DTV Hole''
    I will begin by giving you a few words of background on the CPTWG.
    The CPTWG was founded in the aftermath of unsuccessful discussions 
in the mid-1990's among representatives of the content, consumer 
electronics and information technology industries regarding a 
legislative approach to protecting content in the dawning digital era. 
The CPTWG was created to be a non-exclusive, non-legislative, non-
binding forum that would meet regularly to investigate and seek 
consensus on technological solutions for various content protection 
challenges. I think it's important to recognize that the CPTWG is not a 
standard-setting organization and has no authority to promulgate or 
even recommend particular technologies. Even where consensus on a 
particular technological approach has been reached within the CPTWG, 
implementation is always left to entities outside the forum.
    From the outset of discussions within the CPTWG, there was 
widespread recognition that content delivered to consumers in encrypted 
form was easier to protect, from both a technological and a legal 
perspective, than content that was unencrypted, or ``in-the-clear.'' As 
a result, CPTWG focused its initial efforts almost exclusively on the 
protection of content that could be delivered to the home in encrypted 
form--in other words, physical media like DVDs and cable and satellite 
programming distributed via conditional access. The idea was that once 
encrypted, such content would be continually protected through secure 
links to the recording and transmission technologies of consumer 
electronic and computing devices in people's ``home networks.'' Solid 
achievements grew out of these CPTWG efforts. These include the DVD 
protection technology CSS, the so-called ``5C'' output protection 
technology (known as DTCP) and the so-called ``4C'' technology to 
protect recordings on removable media (known as CPRM).
    The problem is that free, over-the-air, digital television could 
not directly benefit from those advances. Under current FCC 
regulations, digital terrestrial television broadcasts and certain 
basic tier cable video programming are delivered ``in-the-clear,'' or 
in unencrypted form. In other words, unlike encrypted digital media 
such as DVDs, or premium digital cable and satellite video 
transmissions delivered via conditional access, there is no technical 
or legal authorization needed to receive DTV signals. Thus, unprotected 
DTV content can be redistributed, over the Internet or elsewhere, 
without any authorization from copyright holders. The resulting ``gap'' 
in the digital content protection scheme is referred to as the ``DTV 
hole''.
B. The Role of DTV Protection in the 5C Negotiations
    When the question of how to plug this DTV hole arose in 1999, Fox 
and other broadcast-oriented studios realized that the quickest way to 
resolve the problem would be to augment already-developed home 
networking protection technologies like DTCP. The initial idea was to 
require network entry, or ``source,'' devices to detect and respond to 
a ``broadcast'' watermark by directing such content to a protected 
output of the device. However, 5C cited a number of legal and 
commercial reasons for its belief that it could not agree to impose 
such an obligation upon its licensees and as a result the 5C/studio 
negotiations, which involved a number of issues besides DTV, were 
delayed for most of the year 2000.
    Progress from there was gradual. In November 2000, two studios 
elected to sign a Memorandum of Understanding with the 5C (later 
replaced by definitive agreements) that did not include protection for 
DTV. A month later all seven MPAA studios signed a letter to 5C 
supporting the amendment of the 5C license to impose broadcast 
watermark detection and response obligations upon 5C-licensed source 
devices. The DTLA and the other five studios then entered into 
discussions regarding such an amendment, which again proceeded slowly.
    In 2001, two new technology proposals from the studio side 
intensified these negotiations. First, in the Spring, Fox's engineers 
proposed a mechanism for implementing broadcast protection in a less 
complex--and therefore less expensive--way than the original watermark 
proposal. The idea was to include in the technical standards for DTV a 
simple and voluntary ``Redistribution Control'' descriptor 
(colloquially, a ``broadcast flag'') indicating that the copyright 
holder desired to control redistribution of the broadcast signal. (This 
is the same proposal that was formally incorporated into the standards 
of the Advanced Television Standards Committee, or ATSC, earlier this 
month.) Fox also developed and presented to the 5C companies a 
technical proposal whereby this ``broadcast flag,'' when detected in 
ATSC transport streams, would automatically direct the streams to the 
established 5C protection system--while acknowledging that the earlier 
``broadcast watermark'' might continue to be useful as an alternative 
or replacement approach. The ``broadcast flag'' application was 
incorporated in a proposed MOU between the 5S studios and the 5C 
companies that was sent to 5C in July 2001 and discussed for the next 
several months.
    Finally, at a meeting in October 2001, the 5C companies again 
declined to impose the Fox solution through the DTCP license. However, 
the 5C companies suggested that Fox's proposal form the basis for 
constituting a multi-industry group dedicated to protecting DTV against 
unauthorized redistribution. At that time--and later at an FCC staff 
``hoedown'' meeting that November--the 5S studios expressed concern 
that such a multi-industry process might unnecessarily delay the actual 
implementation of DTV protection, but nevertheless agreed to 
participate. At the November 2001 CPTWG meeting, the individual 5C 
companies presented a slightly refined version of the Fox technical 
proposal, and recommended that a group open to all interested parties 
be formed for the purpose of evaluating the revised technical proposal. 
Later that day, 70 representatives of the consumer electronics, 
information technology, motion picture, cable and broadcast industries 
agreed to form the Broadcast Protection Discussion Group (BPDG). They 
have since been joined by representatives of various government bodies, 
public interest groups, academics and other private individuals.
                        2. the work of the bpdg
A. BPDG Problem Statement and Schedule
    A Work Plan for the BPDG was drafted and circulated in mid-December 
2001 that described the problem BPDG was formed to address as follows:
        ``A solution is needed to prevent unauthorized redistribution 
        of unencrypted digital over-the-air broadcast content on a 
        worldwide basis (including unauthorized redistribution over the 
        Internet).''
    The Work Plan also recommended a simultaneous effort to consider 
the policy and legal aspects of implementing the solution as follows:
        ``A parallel discussion also should take place among 
        representatives from the affected companies and industries to 
        consider the policy and legal aspects of the solution, 
        including with respect to what legally enforceable means might 
        be available to mandate the use of the technologies or 
        adherence to implementation requirements recommended by the 
        technical working group''. This effort should be organized 
        promptly, so that work can begin once consensus begins to 
        coalesce around a technical proposal.''
    The Work Plan proposed that the so-called ``Parallel Group'' (since 
renamed the ``Policy Group'') be organized in January 2002, and that 
March 31, 2002, be the proposed deadline for completing the BPDG's 
evaluation of the ``broadcast flag'' proposal.
        For Fox and the other 5S studios, at least, the March 31 
        deadline was a key factor in muting concern about the delay 
        inherent in multi-industry open processes like the BPDG. As 
        such, Fox is greatly disappointed that the March 31 deadline 
        was not adhered to, even though we acknowledge the substantial 
        efforts that were made to do so. We are equally disappointed 
        that the Policy Group has barely begun its work on how to 
        mandate adherence to the requirements developed by the BPDG. 
        Every single day, new and perfectly lawful DTV receiver 
        products are manufactured in the U.S. and around the globe 
        without any built-in protection against unauthorized 
        redistribution. As a result, every single day DTV's exposure to 
        piracy increases. Fox calls on all BPDG participants to do 
        their utmost to ensure that the requirements document is 
        finalized as soon as possible, and that the Policy Group begin 
        work immediately on ideas for implementing it through 
        legislation, regulation and/or private licenses.
            3. the mpaa/5c/cig agreement on bpdg conclusions
A. The BPDG Conclusions
    Like any other multi-industry process featuring participants with 
diverse interests and agendas, the discussions of the BPDG have not 
been without controversy. But that does not mean that key participants 
have been unable to reach agreement. To the contrary, I am pleased to 
report that, thanks to marathon negotiations during the past week, 
representatives of the MPAA studios, the 5C companies and the Computer 
Industry Group (CIG) have reached agreement in principle on a 
comprehensive set of conclusions recommended for adoption by the BPDG. 
(A copy of these conclusions is attached.) The most important of them 
can be summarized as follows:

1. An approach based on a ``broadcast flag'' is technically sufficient 
        for the purpose of signaling protection of all DTV audio-visual 
        content.
2. The specific ``broadcast flag'' used for this purpose should be the 
        ATSC Redistribution Control descriptor now set forth in the 
        ATSC Standard.
3. Protection requirements should begin at the point of demodulation of 
        the incoming ATSC signal.
4. Products covered by the compliance and robustness requirements must 
        handle demodulated content in a ``protected manner'' unless--
        and until--the products screen for the ``broadcast flag'' and 
        determine that it is not present. The parties have agreed on 
        exactly how ``protected manner'' should be defined for various 
        ways in which DTV is and might be transmitted and stored within 
        and between covered products.
5. Where the demodulated DTV content has been screened and the 
        ``broadcast flag'' has been determined not to be present, no 
        further requirements or limitations should be imposed upon the 
        handling or recording of such unmarked content.
6. Unscreened and marked content should be recorded by, or output from, 
        covered products exclusively through the following permitted 
        methods:
    a. Through certain legacy outputs and recording methods, including 
            analog outputs and recording methods;
    b. Through certain non-legacy digital outputs that do not pose 
            undue risk of unauthorized redistribution; and
    c. Through non-legacy digital outputs and recording methods that 
            provide adequate protection against unauthorized 
            redistribution. The parties have agreed on three 
            alternative ``market acceptance''-based criteria and one 
            alternative ``just-as-good-as'' criterion for determining 
            which outputs and recording methods meet the ``adequate 
            protection'' test (as discussed in further detail below). 
            The parties have also agreed on certain recommendations to 
            the Policy Group as to how to handle disputes and the 
            ``hacking'' of authorized output and recording protection 
            technologies.
B. The Impact of the Agreed BPDG Conclusions on Alternative 
        Technologies for Protecting DTV from Unauthorized 
        Redistribution
    These are the pillars of the MPAA/5C/CIG proposal, a proposal that 
carefully balances the rights of content owners, of device 
manufacturers, of the proprietors of technologies currently available 
to protect DTV from unauthorized redistribution, and of the proprietors 
of such technologies that will become available in the future. As I've 
noted, the agreement provides for four alternative methods by which a 
particular protection technology can be proposed for inclusion on the 
list of approved technologies (the so-called ``Table A'') or added 
later. The first method requires agreements with just three content 
providers (of whom only two need be studios) by which such providers 
use or approve the particular technology. The second requires 
agreements with just two studios--as well as 10 device manufacturers. 
The third method is the ``just-as-good-as'' method, by which a 
proprietor of a new technology can get on the list without having had 
to get anyone to adopt the technology, merely by showing a neutral 
arbiter that the technology is ``at least as effective'' as an 
uncompromised technology already on the list. This fourth method 
enables protection technologies linked to technologies already on the 
list to also be added.
    Some participants in the BPDG have argued that technologies should 
be candidates for inclusion on the list just by virtue of the sheer 
volume of content protected, regardless of whether content owners have 
had any say whatsoever in this protection. Such an approach strikes us 
as far too manipulable by device manufacturers and unlikely to ensure 
that only effective technologies be added to the list. Other 
participants have suggested that an array of technical criteria be 
adduced to determine whether a technology is ``good enough'' to be 
added to the list. While such a proposal sounds even-handed, no list of 
technical factors could realistically represent the complex ways those 
factors interact to make an overall system architecture effective (or 
not). Furthermore, no list of factors developed in 2002 could possibly 
anticipate all of the revolutionary ways in which future protection 
technologies might evolve. As such, the ``technical criteria'' approach 
would stifle creative technology development without necessarily 
keeping ineffective technologies off the list.
    By contrast, the ``market acceptance'' criteria outlined in the 
MPAA/5C/CIG proposal serve to screen for ineffective technologies while 
protecting the proprietors of effective technologies against slow 
marketplace acceptance by content providers. Nor do these criteria 
discriminate against innovative and unorthodox approaches. Just to take 
one example, Philips has presented BPDG with a proposal whereby 
unencrypted recordings of broadcast content could be protected by an 
alternative ``flag preserving'' mechanism. Protection in this scheme 
would be derived from ``compliance'' rather than ``self-protection.'' 
Because Philips has not yet specified exactly how this compliance would 
be achieved, its proposal is currently incomplete. However, nothing in 
the agreed criteria will preclude Philips from petitioning to add its 
proposed technology to the list of approved recording protection 
technologies in the future, once it has a complete proposal to submit. 
We look forward to evaluating this proposal, as well as other examples 
of the benefits of innovative thinking we expect to receive in the 
future.
C. The Impact of the Agreed BPDG Conclusions on Consumers' Enjoyment of 
        Digital Technology
    It's equally important to point out that nothing in the proposed 
BPDG requirements will adversely affect consumers' enjoyment of digital 
equipment in all its exciting variety. To the contrary, the emerging 
consensus on how DTV should be protected will accelerate the 
proliferation of such equipment by better informing manufacturers 
exactly what sort of protections to incorporate. Nor will protection 
requirements hinder the operation of new digital equipment. Consumers 
will continue to be enabled to make secure copies of DTV content marked 
with the Broadcast Flag, either on personal video recorders like TiVo 
or ReplayTV or on removable media such as D-VHS tapes or recordable 
DVDs. Similarly, the requirement that non-legacy digital outputs be 
protected will do nothing to hinder the ability of consumers to send 
DTV content across a home digital network with connections to digital 
set top boxes, digital recorders, digital servers and digital display 
devices. Finally, the compliance and robustness requirements will not 
extend to professional broadcast products that are not used to insert 
and carry the Broadcast Flag, or to bona fide academic and commercial 
research and development activities, and so will not hinder such 
activities in any way.
       4. industry efforts to address the ``analog hole'' and p2p
    I have focused most of my testimony on protecting the ``DTV hole'' 
not just because of this Subcommittee's laudable interest in and 
concern for the DTV transition. It is also because the ``DTV Hole'' is 
the gap in the digital content protection scheme for which we have a 
solution that is ready to implement today. This solution is the 
``broadcast flag.'' For the other two dangerous gaps--the so-called 
``analog hole'' and the problem of online theft--solutions are every 
bit as necessary (if not more so), and promising technologies have been 
identified, but finalized solutions are regrettably more elusive.
A. Plugging the ``Analog Hole''
    Long into the foreseeable future, content providers will need to 
deliver content to consumers in an analog form; after all, hundreds of 
millions of TV sets are not digitally equipped. Unfortunately, analog 
content (including protected digital content converted to analog for 
viewing purposes) can easily be converted into an unprotected digital 
form that can in turn be copied or redistributed without authorization. 
This is called the ``analog hole'' in digital content protection 
schemes. The BPDG identified the ``analog hole'' in its Work Plan as a 
subject for further study, but has more recently realized that because 
this issue applies to a range of content far broader than DTV, and 
because the BPDG is already late in finishing its work on the Broadcast 
Flag, the BPDG is not the appropriate forum in which to address it.
    Fox strongly recommends that the multi-industry approach that has 
brought us so far towards achieving protection of DTV broadcasting, 
turn next to developing and implementing a solution for the ``analog 
hole.'' In the meantime, Fox and its industry colleagues are working on 
a plan that includes harnessing watermark technology to close the gap 
in content protection that's created by the digital/analog conversion. 
. We hope to secure inter-industry consensus on such a proposal, and we 
welcome your assistance in encouraging all relevant parties to make 
this happen. Once it does, we would hope to have that solution quickly 
ratified by Congress.
B. Online Theft of Content
    Finally, we are working intensely on a plan to prevent the 
unauthorized viewing of content delivered via the Internet. It is a 
difficult problem to address because there are so many ways 
unauthorized content can be distributed on the Internet. We are also 
mindful of not over-correcting the problem and burdening Internet 
appliances any more than necessary. But we are confident that the 
problem can be solved; we know it must be. It is reported that every 
day, hundreds of thousands of copies of movies are being downloaded 
without compensation to their copyright holders, and this number is 
growing rapidly, in tandem with the increasing speed and proliferation 
of Internet-delivered broadband. The competition from pirated copies of 
our movies and TV shows is the single biggest obstacle to our 
developing a viable business model for marketing movies and TV shows 
legally on the Web. Again, we are optimistic that we can develop a 
technological solution to address this phenomenon in a cost-effective 
way, just as we have with DTV, and as we will soon be doing with the 
``analog hole.''
    However, it is critical that Congress play an active role in 
ensuring that the parties reach a consensus on how to solve this 
problem as quickly as technologically possible. This is an Internet 
problem that needs to be solved at Internet speed. As with the 
broadcast flag and analog hole solutions, we will need Congress to 
codify the solution to the illegal download problem. We at News 
Corporation are working to build the necessary support in the private 
sector, including consumer electronics and computer manufacturers, 
Internet service providers and others in order to come up with 
solutions that would benefit industry and consumers. With our combined 
technological expertise, we have a chance to stop the rampant theft of 
copyrighted works and to provide the business opportunities that will 
drive the development of new and innovative products and services long 
into the future.
    At the end of the day, Mr. Chairman and Members of the 
Subcommittee, if we do not find creative solutions to this real and 
growing problem, consumers will be the ultimate losers. While some 
consumers may see a short-term gain in obtaining free unauthorized 
material from the Internet, the long-term result will be less consumer 
choice, lower quality of content, and the stunted growth of American 
technology and entertainment.
    Thank you for providing me this opportunity to present the views of 
News Corporation. I will be happy to answer questions.

    Mr. Upton. Thank you.
    Mr. Parsons.

                 STATEMENT OF RICHARD D. PARSONS

    Mr. Parsons. Chairman Upton, Chairman Tauzin, Ranking 
Member Markey, and distinguished members of the committee, my 
name is Dick Parsons. I am CEO-Elect of AOL Time Warner, and I 
am grateful for this opportunity to appear before you today.
    Since a full version of my testimony has been submitted to 
the committee, I will touch only on the most salient points. I 
want to begin, however, by thanking the committee, and the 
chairman in particular, for the DTV roundtables you have held, 
as well as for your overall efforts to spur the transition to 
digital distribution. Your understanding of the importance of 
content protection is a linchpin in moving this transition 
along.
    AOL Time Warner has been out front in recognizing the 
landmark significance of digital technology and in bringing its 
benefits to the public. Warner Bros., for instance, pioneered 
the DVD. HBO was the first premium channel to offer nationwide 
high definition digital television, and today it delivers more 
than 60 percent of its programming in that format. Time Warner 
Cable is leading the cable industry's digital transition, while 
AOL encompasses what is, by far, the world's largest online 
community.
    As head of our movie, music and television businesses, I 
have witnessed the profound impact digital media may have on 
the creative process, but no matter how digitized content 
becomes, its power and potential will always depend on the 
unique, idiosyncratic magic of storytelling. It is that magic 
which stands to be hurt most by digital piracy.
    Illicit use of digital technology's unlimited copying 
capacity threatens the economic equation which fuels the 
creative process. Who will invest the time and talent and 
material that can instantly be ripped off? Where will capital 
come from for new studio productions when there is no 
possibility of return on that capital?
    The legal remedies we have pursued to stop digital piracy 
are not sufficient by themselves. To the greatest extent 
possible, content must be made secure at the point of 
distribution in ways that do not impede legitimate consumer 
use.
    With our colleagues in the information technology and 
consumer electronics industries, we are developing efficient 
methods of protection. Among these are: An encryption system to 
secure DVD video; safeguards for content as it moves from 
computers to monitors; and a secure means for making recordings 
for home use that inhibit the potential for digital piracy.
    Our business is dependent on consumers, and we think our 
efforts in copy protection offer them easily available, legal, 
and affordable content. Under the content protection licenses 
we have signed, consumers can make digital copies of over-the-
air broadcasts, basic cable, satellite and premium channels for 
their own use.
    In view of this significant progress, we see no need for a 
broad government mandate regarding design requirements. Such 
sweeping regulatory action would be counterproductive, and 
would seriously hinder the development of new technologies. 
However, since it is impossible to require all manufacturers to 
join the effort, certain gaps cannot be closed solely through 
licensed based, voluntary protection systems.
    These gaps occur when content is either delivered without 
access controls, so called in the clear, or are later converted 
into unprotected formats. Let me talk briefly about the three 
gaps, Mr. Chairman. Now you have identified them. Several of 
the committee members have identified them, and Mr. Chernin 
just spoke about them, the need for a broadcast flag to protect 
content that is broadcast in the clear, the need to close the 
analog hole so that when content that is broadcast in a 
protected format but then is converted into an analog or 
unprotected format, can be captured and then redistributed, and 
then the need to do something about peer-to-peer file sharing.
    I won't go through that again, because I am keeping my eye 
on this clock, but we think that there is in each of those 
three areas possibly an appropriate role for targeted 
legislation to take what the industry is working on, which are 
negotiated among our various industries, standards to either 
implant broadcast flags or watermarks to protect the analog 
hole problem, or yet to be developed technological solutions on 
the peer-to-peer file sharing, and make those uniform across 
the land through some targeted legal requirement.
    That is where we see the role of government being most 
appropriate, but we clearly see the role of the various 
industries involved as being preeminent in terms of taking the 
lead to define how to attach those discrete problems.
    So we have worked together very closely, in particular, 
with our colleagues at Intel, in establishing some principles 
that outline what is the growing consensus among the 
industries, and I am pleased to report that a number of other 
companies, including Mr. Chernin and his company, News Corp, as 
well as Toshiba and others, are coming on board this 
articulation of these principles, and we will file a copy of 
those with our statement for your record. But the fact that we 
are all coming together to design and put in place consumer 
friendly solutions with only limited government involvement is, 
to me, very encouraging.
    It makes me confident that we can work with each other and 
with you to overcome whatever barriers exist to unleashing the 
full potential of the digital economy. Thank you.
    [The prepared statement of Richard D. Parsons follows:]
   Prepared Statement of Richard D. Parsons, CEO-Designate, AOL Time 
                                 Warner
    Mr. chairman, ranking-member markey, and members of the 
subcommittee, I'm grateful for this opportunity to discuss an issue of 
great importance to my company, our entire economy and, above all, 
consumers.
    AOL Time Warner is both the largest producer of information and 
entertainment and a leader in developing innovative digital 
technologies for their delivery. As such, we appreciate the DTV 
roundtables you've held as well as your overall efforts to spur the 
transition to digital distribution.
    I'm here today to answer publicly the questions you've been asking 
many of us privately for some time: Where is AOL Time Warner in its 
efforts to provide consumers the benefits of digital media? And how far 
along are our intra- and inter-industry efforts to develop reliable, 
consumer-friendly digital content-protection technologies?
    Our company has been out front not only in recognizing the landmark 
importance of digital technology, but also in bringing its benefits to 
the public. Warner Bros., for instance, pioneered the DVD. HBO is the 
first premium channel to offer nationwide high-definition digital 
television and today delivers more than 60% of all its programming in 
high definition format. Time Warner Cable offers digital distribution 
in 42 markets--leading the cable industry's digital transition. AOL 
encompasses what is, by far, the world's largest online community.
    At AOL Time Warner we also have the world's finest library of film, 
music and tv programming--content that we're eager to offer consumers 
in new digital formats.
    In my role as head of AOL Time Warner's movie, music and television 
businesses, I Witnessed first-hand the profound impact digital media 
have on the creative process. On the delivery side, more innovations 
will reach the market in the next three to five years, introducing new 
levels of reliability, variety and quality.
    But no matter how digitized content becomes, or how tremendous the 
impact of convergence, the power and potential of the entertainment 
industry will always depend on the unique, idiosyncratic magic of 
storytelling.
    It's that magic which stands to be hurt most by digital piracy. 
Along with breakthrough benefits, digital technology enables users to 
make unlimited perfect copies and, with the click of a mouse, 
distribute them globally.
    The illicit use of this copying capacity threatens the economic 
equation which supports and fuels the entire creative process. What 
artist will invest years of sweat, struggle and talent in developing 
content that can instantly be ripped-off? Where will the capital come 
from for new studio productions when there's little or no return on 
what's been produced?
    When viewers can download an entire season of West Wing from the 
Internet, for free and without commercial advertising, what value does 
syndication have? When Lord of the Rings is available for free on 
Morpheus, how many people will skip the trip to the theater?
    Last year, record sales were down 10%, much of it due to online 
file-stealing on Napster-like services.
    With the spread of peer-to-peer swapping sites encouraging and 
enabling online theft, there's definite urgency to our plight.
    We've vigorously pursued the legal remedies that exist. But 
litigation isn't enough. We need to protect content at the source while 
simultaneously driving the use of digital technologies.
    Over the past six years, we've worked with our colleagues in the 
information technology (IT) and consumer electronics (CE) industries to 
develop efficient methods of content protection. It's been a productive 
partnership, and we've accomplished a great deal in this voluntary 
cross-industry process.
    Among the results are an encryption system to secure DVD video; 
protection for content passed through device-to-device connections in 
home networks; safeguards for content as it moves from computers to 
display on monitors; and a secure means for making recordings for home 
use that inhibit the potential for digital piracy.
    Of course, our business is dependent on providing consumer benefits 
and making consumers happy and we think our efforts in copy protection 
will do just that--making content available easily, legally and at a 
reasonable price.
    We're continuing to work together to meet new challenges. Today 
companies like realnetworks are providing drm solutions that we're 
already using in the marketplace.
    The cornerstone of these cross-industry efforts is the awareness 
that, to the greatest extent possible, digitally delivered copyrighted 
content should be made secure at the point of distribution.
    These new technologies also offer consumers both familiar and new 
ways of using their devices to enjoy content. For instance, under the 
content protection licenses we've signed to date, consumers will be 
able to make digital copies of over-the-air broadcast, basic cable, and 
satellite, and premium channels (such as HBO) to watch at their 
convenience.
    That means a son can copy band of brothers from HBO for his WWII 
veteran father to watch when he comes to visit. Other technology will 
permit a family in the middle of watching Harry Potter via video on 
demand to pause the movie for its own intermission. That's the type of 
convenience we plan to offer consumers through digital technology.
    In view of the significant progress we're making in cross-industry 
content protection, we believe there's no need for a broad government 
mandate of design requirements. That type of sweeping regulatory action 
would be counterproductive, seriously hindering the development of new 
and better technologies.
    However, since it would be impossible to require all manufacturers 
to join the effort, it's clear that certain gaps cannot be closed 
solely through license-based, voluntary protection systems. These gaps 
occur when content is either initially delivered without access 
controls (i.e., ``in the clear''), or later converted into unprotected 
formats.
    Over-the-air broadcasts, for example, are delivered in the clear, 
with no access controls. Work is underway to identify copyrighted 
broadcasts with a ``broadcast-flag,'' indicating they shouldn't be 
redistributed over the Internet. To ensure that devices receiving the 
broadcast signal obey the flag, there must be a legal requirement to 
detect and respond to it.
    Such a requirement can be accomplished by narrowly focused 
government action--possibly through an FCC regulation. Many of our 
partners in the ce and it industries agree that this targeted 
government action is necessary as well as desirable.
    A more critical and systemic problem is known as the ``analog 
hole.'' Even when delivered digitally in a protected manner, video 
content must be converted to an unprotected analog format that allows 
it to be viewed on millions of analog TV sets. Once content is ``in the 
clear'' in analog form, it can be converted back into a digital format 
and is subject to unauthorized copying and redistribution.
    This involves all delivery means for audiovisual content, from DVDs 
to pay per view, to over-the-air broadcasts.
    One way to plug this hole is through watermarking. This embeds 
copyright status and permitted uses within the content. Although not 
perceptible by the consumer, the watermark can be read by devices 
designed to detect and respond to it.
    As with the broadcast flag, efforts are underway to develop and 
select a consensus watermark. But these have been hampered by patent 
disputes. a single watermark must be agreed upon. If private industry 
can't agree, we are likely to turn to the government for guidance and 
assistance.
    Once a watermark is selected, some government action will be needed 
FOR appropriate detection and response. This can be strictly focused on 
the particular devices or parts of devices capable of receiving an 
analog signal and converting it into digital. No broad mandate 
concerning the overall design of computers or consumer electronic 
devices is necessary.
    Implementing the broadcast flag and filling the analog hole with 
watermark technology are goals on which we are making good progress. 
But these solutions won't solve the vexing problem I mentioned earlier 
of piracy on peer-to-peer networks.
    This is the third gap, and the most difficult to close. The popular 
term for trafficking in copyrighted works--``file sharing''--is a 
misnomer. It isn't sharing. It's online shoplifting. Indeed, it's worse 
than shoplifting because it's not simply making a copy for oneself but 
duplicating and distributing multiple copies throughout the world.
    The pace and reach of this illegal activity continues to increase. 
New peer-to-peer services, such as KazAA, Morpheus and Grokster, 
flourish on the Internet. Studies have shown that at any given moment 
500,000 to 1 million people are using one of these services and 
networks to find, reproduce and redistribute files. If Napster is any 
guide, approximately 90% of this activity consists of unauthorized 
trafficking in copyrighted works.
    And we face new peer-to-peer challenges all the time. For example, 
the new replay 4000, among other things, allows users to copy premium 
cable shows and then easily send them to other replay owners who don't 
subscribe to the channels involved. In effect, it creates an internet 
``black box.''
    No single approach--technical, legal, legislative or economic--can 
provide a solution. The active cooperation and committed participation 
of all industry sectors--content, consumer electronics, computer and 
service provider--will be necessary to reach workable solutions.
    The main impetus will come from business, and we're strongly 
committed to working with our colleagues across the relevant 
industries. Yet, it's clear to me--and I believe there's a growing 
consensus across the entertainment, computer and consumer electronics 
industries--that at certain critical points our work must be 
complemented by targeted government action to support private-sector 
solutions.
    In conjunction with Intel, which has led the development of many 
copy-protection technologies, we've worked to establish principles that 
outline this growing consensus. I am pleased to report that 
newscorporation, led by my colleague Peter Chernin, issued a statement 
last week applauding these principles.
    The fact that we are all coming together to design and put in place 
consumer-centric solutions, with only limited government involvement, 
is a very encouraging sign.
    It makes me confident that we can work with each other and with 
Congress to overcome whatever barriers exist to unleashing the full 
potential of the digital economy.
    Thank you.

    Mr. Upton. Thank you.
    Mr. Liao.

                    STATEMENT OF PAUL F. LIAO

    Mr. Liao. Mr. Chairman, Ranking Member Markey and members 
of the subcommittee, thank you for the opportunity to testify 
before you today. I am here today in my capacity as Chief 
Technology Officer of Matsushita Electric Corporation of 
America and President of its Panasonic Technologies Company 
division.
    As a company on the cutting edge of the transition to 
digital television, Panasonic has been deeply involved in 
efforts to ensure that digital content is adequately protected. 
My written testimony summarizes some of the many technological 
developments that Panasonic has been involved in, including the 
development of the CSS encryption system used to protect DVD 
discs, the development by the 5C group of companies of the 
Digital Transmission Content Protection technology that 
protects copyrighted content as it moves digitally from device 
to device in a home network, and the invention of the Content 
Protection for Recordable Media technology to provide secure, 
encrypted recording and storage of authorized copies of 
copyrighted content.
    In participating in these technology development efforts, 
we have been guided by two overarching principles: (1) Ensuring 
that the legitimate interests of consumers, which are the 
bedrock of our business, are preserved in the transition to 
digital technology; and (2) by enabling--We need to enable new 
business opportunities for consumer electronics companies such 
as ourselves, information technology companies, and content 
companies alike.
    Although in my prepared remarks today,I will focus most 
particularly on the experiences of Panasonic, I am here also as 
a representative of the 5C group of companies, and I will be 
happy to answer any questions with respect to those activities 
and initiatives.
    At the onset, I need to express my gratitude to this 
committee and its leadership for your continued focus through 
private meetings, industry roundtables and other means for 
bringing the various stakeholders together to address and 
resolve issues that have been affecting the transition to 
digital television, DTV.
    Although the topic of today's hearing is ensuring content 
protection in the digital age, I believe that the availability 
of robust content protection systems is only one of the 
building blocks necessary to promote the transition to the 
digital world. Really, three C's are necessary to make this 
transition: Carriage, content, and consumer; carriage of DTV 
signals by broadcasters, cable operators and satellite 
services; of course, the availability of compelling content, 
the second C; and obviously, consumer, the consumer awareness 
of digital TV, including the benefits of consumer DTV equipment 
that is appealing and, most importantly, affordable.
    In terms of carriage, good progress has been made with 
respect to ensuring the carriage of DTV, and particularly HDTV, 
by broadcasters, cable operators, and satellite systems alike. 
I think all should be proud of the progress that has been made 
toward DTV availability.
    I believe the transition to DTV could be accelerated even 
further if consumers had access to DTV via cable-ready DTVs and 
a choice at retail of cables, digital set top boxes.
    In terms of consumer awareness, Panasonic promotes consumer 
awareness of DTV opportunities every day through our 
advertising, our joint efforts with retailers and broadcasters, 
for example, by sponsoring and co-financing the production of 
HDTV programs, and through CEA's industry-wide promotion and 
education efforts, as well as by providing a variety of DTV 
products that, we hope, consumers are finding appealing.
    All of the affected industries need to continue these 
efforts to build consumer awareness around DTV and HDTV. 
However, with respect to the issue that is the main focus of 
this hearing, content protection, Panasonic is proud to be part 
of a private sector inter-industry effort to develop 
technologies that protect content from the source to the time 
it is displayed on the consumer's TV or PC, and those 
technologies can continue to provide that protection when an 
authorized recording of the content is made.
    The challenges proposed by the digital environment are 
rapidly evolving. Therefore, all the companies involved in 
these efforts have continued to innovate new solutions and, of 
course, all this has to be done with the interest of consumers 
in mind, because serving our customers, the consumer, is 
Panasonic's most important goal.
    These private industry initiatives have proven to be the 
most effective way to proceed. It is simply not possible for 
government to mandate from above broad design requirements that 
address the myriad of interests and technological challenges as 
effectively as collaborative private sector efforts. We expect, 
nonetheless, that for any solution to be successful, it must 
withstand public scrutiny. Therefore, we welcome, and in fact 
encourage, your continued interest in our efforts to address 
these challenges.
    We have mentioned three key elements: Protection of in-the-
clear broadcast content using the broadcast flag; addressing 
the analog hole; and preventing unauthorized peer-to-peer file 
sharing. In our written comments as well as the comments made 
by Mr. Parsons and Mr. Chernin already, we have reviewed some 
of these progresses in each of these areas.
    I would only like to add that this process is rapidly 
moving to a conclusion with a return to the broadcast flag. In 
fact, the 5C companies, the CIG Computer Industry Group, and 
the MPAA met late last night and reached agreements in a 
proposal that will be recommended to the full group. In fact, 
we expect that to be circulated today.
    The problem of peer-to-peer distribution of copyrighted 
content is very, very difficult to resolve. To my knowledge, no 
concrete proposals concerning how to solve this problem have 
been proposed. In fact, it is quite likely that no single 
solution to this problem will be developed, and that instead a 
variety of technical and legal and business approaches will be 
necessary.
    At the moment, the immediate, admittedly partial solution 
appears to be consumer education efforts and strong enforcement 
of copyright laws.
    I would like to conclude by just saying that we have built 
our business on delivering innovative products to our 
consumers, and we realize that, in order to develop and deliver 
the greatest value to our customers, we must likewise provide 
strong copyright protection to the owners of copyrighted 
content.
    [The prepared statement of Paul F. Liao follows:]
     Prepared Statement of Paul F. Liao, Chief Technology Officer, 
  Matsushita Electric Corporation of America and President, Panasonic 
                          Technologies Company
    Mr. Chairman, Members of the Subcommittee, thank you for the 
opportunity to testify before you today. I am here today in my capacity 
as Chief Technology Officer of Matsushita Electric Corporation of 
America and President of its Panasonic Technologies Company division. 
Our company is the principal U.S. subsidiary of Matsushita Electric 
Industrial Co., Ltd. (``MEI''). Our principal brand, and the name by 
which the companies are commonly known is ``Panasonic.'' Panasonic is 
one of the world's largest producers of innovative electronic and 
electric products for consumer, business and industrial use. Our 
consumer and broadcasting product lines include a broad array of audio, 
video, communications and computing products and components. In the DTV 
realm, for example, we were proud to introduce the first consumer HDTV 
in the United States in the summer of 1998.
    As a company on the cutting edge of the transition to digital 
television, Panasonic has been deeply involved in efforts to ensure 
that digital content is adequately protected. My testimony summarizes 
some of the many technology development efforts Panasonic has been 
involved in, including the development of the CSS encryption system 
used to protect DVD discs, the development by the ``5C'' group of 
companies of the Digital Transmission Content Protection (``DTCP'') 
technology that protects copyrighted content as it moves digitally from 
device to device in a home network, and the invention of the Content 
Protection for Recordable Media (``CPRM'') technology to provide 
secure, encrypted recording and storage of authorized copies of 
copyrighted content.
    In participating in these technology development efforts my company 
has been guided by two overarching principles:

(1) Ensuring that the legitimate interests of consumers--the bedrock of 
        our business--are preserved in the transition to digital 
        technology; and
(2) Enabling new business opportunities for Consumer Electronics 
        (``CE''). Information Technology (``IT'') and content companies 
        alike.
    Although my prepared remarks today focus most particularly on the 
experiences of Panasonic, I am here also as a representative of the 
``5C'' group of companies and would be happy to answer questions with 
respect to 5C activities and initiatives during the question and answer 
portion of the hearing.
    At the outset, I would like to express my gratitude to all of the 
Members of the Committee on Energy and Commerce, including the Ranking 
Members of the full Committee and this Subcommittee, and especially to 
both the Chairman of the full Committee and to you, Mr. Chairman, for 
your continued focus through private meetings, industry roundtables and 
other means on bringing the various stakeholders together to address 
and resolve issues that have been affecting the transition to DTV. 
While the topic of today's hearing is Ensuring Content Protection in 
the Digital Age, I believe that the availability of robust content 
protection systems is only one of the building blocks necessary to 
promote the transition to the digital world. Because this Committee has 
been so dedicated to encouraging the transition to DTV, and because 5C 
has played an important role in advancing the transition to DTV, I will 
use the DTV example to illustrate the role that content protection 
systems can play in the transition to and availability of new digital 
technologies and compelling content for consumers. Our experience has 
shown that careful balancing is necessary to achieve the public policy 
goals articulated by this Committee, and to harmonize the needs of 
consumers and of the various affected industries.
    I believe that three things are necessary to make the DTV 
transition a reality:

 Carriage of DTV signals by broadcasters, cable operators and 
        satellite services;
 Availability of compelling content; and
 Consumer awareness and education about DTV and consumer DTV 
        equipment that is appealing and affordable
    To encourage the development of each of these components, a careful 
balancing of interests is required.

 Compelling content is required to encourage consumers to look 
        into, learn about, and buy in to DTV;
 Adequate security is required before content owners will 
        release compelling content; and
 DTV products must be affordable and must respect legitimate 
        consumer expectations about how consumers will be able to use 
        and enjoy content they rightfully acquire.
    Panasonic--through the 5C and through other private licensing 
initiatives--has been working hard to meet the legitimate interests of 
content companies, broadcasters and consumers. I am pleased to report 
that much progress has been made in each of the three areas I 
mentioned, however significant issues remain that merit the Committee's 
attention.
Carriage of DTV
    Good progress has been made with respect to ensuring carriage of 
DTV by broadcasters, cable operators and satellite systems. I would 
like to extend congratulations, on behalf of Panasonic to the broadcast 
industry which has made great strides towards DTV availability. Over 
300 broadcast DTV stations are already on the air and carrying a 
variety of programming in TV markets that comprise over three-quarters 
of all TV households.
    I would also like to extend congratulations to the cable industry 
which has been offering increasing DTV content over the past few years 
to their digital subscribers. There are many digital and some 
interactive program services already, and several cable operators have 
recently announced plans to provide more on their systems, including 
HDTV programming. Congratulations are also in order to satellite 
service providers, which have carried digital, and to borrow FCC 
Chairman Powell's phrase, ``value-added'' TV content from the time 
satellite services were launched.
    Panasonic has supported the availability of such value-added 
content in a variety of ways. Our company has made direct financial 
contributions to cover program development and HDTV production costs. 
For instance, we provided significant program production equipment 
support for the first HDTV presentation of ``Monday Night Football'', 
and for the past two years we have sponsored CBS's prime-time HDTV 
line-up. We likewise provide digital equipment loans and HDTV 
production support for the efforts of several producers of high-quality 
digital programming, such as nature, natural history, documentary and 
other programs which are being aired on public and commercial 
broadcast, cable and satellite channels. Panasonic is also providing 
professional DTV and HDTV production equipment to producers, program 
makers, and special-venue presenters in order assist in the transition 
to DTV.
    Progress with respect to carriage of content is encouraging, but I 
believe the transition to DTV could be accelerated if consumers had 
access via ``cable ready DTVs'' and a choice at retail of cable set top 
boxes. After all, cable is the largest provider of television service 
to American TV households. A key element of these cable ready DTVs and 
retail set top boxes is the POD-Host Interface technology. We would 
like the license agreement for this technology to include clear rules, 
such as those included in the 5C license for DTCP technology, to ensure 
that the technology cannot be used to undermine consumers' customary 
home recording expectations. I applaud the Committee's efforts to date 
and urge the Committee to keep a keen focus on these issuesContent
    As I mentioned at the outset, CE and IT manufacturers such as the 
5C group of companies involved in developing and licensing the DTCP 
technology, realize that in order for content providers to fully 
embrace DTV and other new digital forms for delivery of content, 
security concerns must be adequately addressed. Panasonic has been at 
the forefront of developing content protection technologies for use 
with both audio and video. We have been directly involved in developing 
and licensing technologies that can protect content from the source to 
the time it is displayed on a consumer's TV or PC. We have likewise 
developed technologies to protect the content from unauthorized copying 
and redistribution if/when it is recorded in the home.
    In participating in these technology development efforts Panasonic 
has been guided by several themes:

 Technologies should be developed through a process of inter-
        industry consultation and collaboration to ensure that they are 
        (a) practical to implement; (b) achieve the legitimate 
        copyright protection goals set forth by the content community; 
        and (c) deliver value to consumers.
 Technology initiatives should be led by the private sector. 
        The objectives should be achieved by voluntary license 
        agreements where possible, and complemented by narrowly-focused 
        government action only where necessary.
 Technology solutions should include rules to preserve 
        consumers' customary recording expectations.
    We realize that both the opportunities and the potential challenges 
posed by the digital environment are ever evolving. Despite the fact 
that the content protection technologies we have been involved in 
developing were each designed to meet specific sets of requirements 
outlined by the content companies, the CE and IT companies involved in 
these efforts have been willing to keep innovating and adding to the 
existing technologies (and creating new ones) to meet unanticipated or 
previously unarticulated goals of the content owners. Of course, this 
has all been done with the interests of consumers in mind, because 
serving our customers is Panasonic's most important goal. In our view 
this is the most effective way to proceed. It is simply not possible 
for the government to mandate from above broad design requirements 
which as effectively address the myriad of interests and technological 
challenges as do collaborative private sector efforts. We expect, 
nevertheless, that for any solution to be successful it must withstand 
public scrutiny. We therefore welcome your continued interest in our 
efforts to address these challenges.
    Some specific examples of our activities with regard to content 
protection are summarized below.
5C--
    Panasonic is one of five companies (sometimes therefore referred to 
as the ``5C''), that developed the Digital Transmission Content 
Protection (``DTCP'') technology used to protect content as it 
traverses the IEEE 1394 home network.

 DTCP was developed and is being licensed by a license 
        administrator established by the five CE and IT companies to 
        address requirements set forth in a request for proposals by 
        the CPTWG, a multi-industry group that included direct 
        participation by the motion picture industry.
 The technology protects content that enters the home via 
        cable, satellite or other means of conditional access 
        technology from being copied or retransmitted beyond the home 
        (e.g., via the Internet) without authorization of copyright 
        holders and will be adapted for use to protect content that 
        enters the home via unencrypted digital broadcast pursuant to 
        the ``broadcast flag'' technology described below.
 DTCP employs encryption and authentication in order to ensure 
        that content is exchanged only among devices which agree to 
        continue to protect the content.
 Since approximately 85% of TV households in the U.S. receive 
        programming through cable or satellite conditional access 
        technologies, the DTCP technology may be applied to this 
        conditional-access protected content to prevent unauthorized 
        Internet retransmission.
 The DTCP technology license incorporates ``encoding rules'' 
        modeled after Sec. 1201(k) of the Digital Millennium Copyright 
        Act (``DMCA'') to preserve customary home recording practices. 
        These rules were developed through manufacturer and Content 
        industry consultation beginning in the early 1990s. Pursuant to 
        these provisions, content companies may use the DTCP technology 
        to protect content according to the following minimum rules--
   Free TV is freely copyable, but may be restricted from 
            redistribution;
   One generation of copies must be permitted for paid 
            programming such as HBO; and
   Copying (other than as part of a ``pause'' function that is 
            periodically deleted) may be prohibited with respect to 
            packaged media, Pay Per View (``PPV'') and Video On Demand 
            (``VOD'') type content.
CSS--
    Together with Toshiba, Panasonic developed the Content Scramble 
System technology used to encrypt pre-recorded DVD discs

 This technology enabled the launch of DVD--the most successful 
        consumer product ever.
 Licensing of CSS has now been turned over to a multi-industry 
        group called the DVD Copy Control Association (``DVDCCA'') 
        which is comprised of representatives of the CE, IT and Motion 
        Picture industries.
 Beyond licensing the encryption technology used on pre-
        recorded DVD discs, DVDCCA is tackling a number of additional 
        projects, including the evaluation of a ``watermark'' to be 
        used in conjunction with pre-recorded DVD content to provide 
        additional security against recording and playback of 
        unauthorized copies of the content.
4C--
    Together with three other companies (sometimes referred to as the 
``4C'', Panasonic developed Content Protection for Prerecorded Media 
(``CPPM'' used e.g., to protect DVD-Audio) and Content Protection for 
Recordable Media (``CPRM'' used for secure recording and storage of 
content)

 The technology was developed and is being licensed by CE/IT 
        companies.
 The technology license incorporates rules that allow for 
        customary consumer copies such as for time-shifting and place-
        shifting of audio content.
Consumer Equipment
    The third and central part of the puzzle in making the DTV 
transition a reality is consumers. Consumer technologies succeed when 
consumers are aware of them and see value in them for their own lives. 
In the national transition to DTV, all involved must be part of the 
effort to alert and educate consumers to the DTV opportunities and 
choices they have. And all must provide enough value for consumers to 
want to ``buy in'' to the DTV revolution. Panasonic tries to do this 
every day with its retail partners, in its advertising, in joint DTV 
``launch parties'' and special events with broadcasters and others, 
through support of CEA's industry-wide promotion and education efforts, 
and, most importantly, by providing a variety of DTV products we hope 
will be appealing to consumers.
    This also means that consumer DTV products must be affordable, easy 
to use, and respect consumer expectations about how the consumer will 
be able to interact with and use content. Panasonic's activities, both 
in the 5C and elsewhere, have been guided by these concerns. Therefore:

 The 5C technology is licensed on a cost-recovery basis so as 
        not to unnecessarily add to the cost of consumer products
 The 5C technology was developed in order to provide effective 
        protection, yet not impose undue burdens on product 
        implementations so as not to compromise product functionality
 The 5C DTCP technology license incorporates ``encoding rules'' 
        aimed at protecting consumer's fair use expectations.
Current Challenges & Future Efforts
    During hearings before the Senate Commerce Committee in February, 
representatives of the motion picture industry advocated the need for a 
government-mandated solution to three specific problems:

 Protection for ``in the clear'' broadcast content to prevent 
        unauthorized redistribution of such content via the Internet,
 Addressing the so-called ``analog hole,'' and
 Preventing unauthorized ``peer to peer'' file sharing of 
        copyrighted content.
    Panasonic agrees that these are serious issues deserving of 
attention. A brief summary of inter-industry efforts to consider these 
challenges follows.
Protection of broadcast content delivered in the clear
    Because digital terrestrial television broadcasts and certain basic 
tier cable video programs are delivered in unencrypted (``in the 
clear'') form, unlike pre-recorded, encrypted, digital media such as 
DVD or digital cable and satellite transmissions delivered via 
conditional access systems, there is no technical or legal 
authorization necessary and no licensing predicate by which to 
establish conditions for the secure handling of such content. As a 
result, unprotected DTV content can, as a technical matter, be 
delivered outside of the home environment, such as over the Internet 
without authorization from copyright holders. In November of 2001, 
representatives of the 5C members described to the Copy Protection 
Technical Working Group (``CPTWG'') a refined version of a proposal, 
originally presented to the 5C members by Fox following on industry 
standards activity in the Advanced Television Standards Committee, 
which would require certain devices which demodulate DTV content to 
respond to a ``Broadcast Flag'' and securely route content which a 
copyright owner has indicated should not be redistributed via the 
Internet, only to protected digital output and recording technologies, 
or to analog outputs. The 5C members recommended that a group be formed 
under the auspices of the CPTWG 1 to evaluate this proposal 
and to determine whether there is sufficient industry and consumer 
organization support for the proposal as a solution to the problem of 
unauthorized redistribution of broadcast content. To date, the group 
formed as a result of this initiative has undertaken considerable 
activity--
---------------------------------------------------------------------------
    \1\ The CPTWG is the open forum of CE, IT, and content companies 
and consumer groups which meets, typically on a monthly or bi-monthly 
basis in Los Angeles, to consider technical copy protection issues.

 The Broadcast Protection Discussion Group (``BPDG'') has met 
        13 times in four months, in person and by phone.
 The participants in these discussions appear to be in 
        fundamental agreement that an approach based on a ``Broadcast 
        Flag'' is technically sufficient for the purpose of signaling 
        protection of DTV content in digital form, beginning at the 
        point of demodulation, against unauthorized redistribution.
 There is likewise substantial agreement as to the particular 
        flag to be used, and that content that is either marked with 
        the flag or has not been screened for the flag may only be 
        recorded or output from covered products by either (a) analog 
        products and recording methods; and (b) digital outputs and 
        recording methods that provide protection against unauthorized 
        redistribution.
 Certain issues currently remain unresolved, including (a) 
        finalization of criteria used to determine whether a particular 
        recording technology or digital output protection method should 
        be deemed ``authorized;'' and (b) whether there is adequate 
        support for an alternative proposal, advanced by Philips, which 
        would allow unencrypted digital-to-digital recordings of 
        broadcast content for at least some period of time.
 The schedule for BPDG now calls for a final report by mid-May, 
        and I believe that this is achievable.
 Since the BPDG was primarily focused on technical matters, a 
        separate, ``parallel group'' has been formed to begin 
        discussing how to enforce the hoped-for technology solution. It 
        is possible that narrowly focused government action will be 
        necessary to support any private sector technology approach.
Plugging the so called ``analog hole''
    Digital content delivered in a protected manner must nevertheless 
be converted to an unprotected analog format in order for it to be 
viewed on the vast majority of HDTV and digital televisions in 
consumers homes. The ``analog hole'' refers to the potential which 
exists for redigitization and subsequent unauthorized redistribution of 
content (via peer to peer networks or otherwise) because of this need 
to convert digital signals to analog form in order for them to be 
viewed. It is currently thought that the most effective means by which 
the so called ``analog hole'' issue can be addressed is by using a 
watermark to indicate how content marked with the watermark can be 
copied and redistributed.
    There are efforts currently underway, under the auspices of the 
DVDCCA, to evaluate ``standard definition'' watermarks which we hope 
will be extensible to ``high definition'' content. This process has 
shown that there are serious business, legal and technical issues that 
need to be resolved before a watermark can be identified for use to 
plug the ``analog hole.'' Further efforts are necessary before it can 
be determined how such a watermark might practically be implemented in 
order to mitigate the analog hole problem. It is possible that 
narrowly-tailored government efforts may be necessary to address this 
problem once an appropriate watermark has been identified, however 
these decisions should await identification of such a watermark.
Preventing unauthorized peer to peer distribution of content
    The problem of unauthorized peer to peer distribution of 
copyrighted content is most difficult to solve. CE and IT companies, 
including the members of 5C, are sympathetic to the concerns of content 
owners, yet it is in the arena of solving the peer to peer problem 
where the legitimate concerns of content owners, the legitimate 
interests of consumers, and the ability of CE and IT manufacturers to 
deliver products that are affordable and innovative may be hardest to 
harmonize. The problem is made even more difficult by the fact that 
digital devices are used to enjoy (and sometimes share) a variety of 
data--some of which are not copyrighted.
    To my knowledge no concrete proposals concerning how to solve the 
peer to peer problem have been proposed by any industry sector. It is 
quite likely that no single solution to this problem will be developed 
and that instead a variety of technical, legal and business approaches 
will be necessary. At the moment the immediate, although admittedly 
partial, solution appears to be consumer education efforts and strong 
enforcement of copyright laws to punish commercial piracy of 
copyrighted content. In the event that inter-industry efforts to 
address the issue are convened, Panasonic stands ready to contribute 
its technical knowledge to find a solution which promotes the 
availability of digital content while promoting the twin goals of 
preserving consumer rights and protecting the intellectual property of 
content owners.
Conclusion
    Panasonic has built its business on delivering innovative products 
to consumers. We realize that in order to deliver the greatest value to 
our customers we must likewise provide strong copyright protection for 
the owners of copyrighted content. For this reason we, together with 
other members of 5C have been at the forefront of developing 
technologies that aid the transition to the digital environment for all 
parties involved. Panasonic will continue to contribute, where it can, 
to help address technical challenges faced by the industries 
represented here today and to promote a rapid and fruitful transition 
to DTV.

    Mr. Upton. Thank you. I note that the House is going to 
have votes in a short time. So my goal is to try to strictly 
adhere to this 5-minute rule so that we can get into some 
questions before the votes start, knowing that we will come 
back.
    Mr. Blanford.

                STATEMENT OF LAWRENCE J. BLANFORD

    Mr. Blanford. Mr. Chairman and members of the subcommittee, 
my name is Larry Blanford. I am president and CEO of Philips 
Consumer Electronics in North America. I do appreciate the 
opportunity to appear before you today, and applaud your 
leadership on this extremely important and complex set of 
content protection issues.
    I am accompanied today by the Managing Director and Senior 
Vice President of Philips Research in New York, Dr. Barry 
Singer.
    Now Philips is a global leader in display, storage and 
connectivity in the digital age. We have nearly a century of 
experience in consumer electronics, research, design, and 
manufacturing, and a proud history of inventing and developing 
consumer electronics products from the audio cassette and the 
compact disc to high definition television.
    We also have a long history of constructive participation 
in content protection activities and in developing content 
protection technologies, from the pioneering serial copy 
management system to what we believe is the leading candidate 
for video watermarking technology now being evaluated.
    Philips has been guided in its development of its consumer 
products and protection technologies by certain principles: 
maintaining ease of use and user friendliness; providing 
backward compatibility with existing devices; preserving the 
opportunity for new, innovative products; respecting 
intellectual property rights; preserving the consumer's fair 
use rights; and, importantly, balancing among the various 
competing rights and interests.
    Philips comes before you today with a call for action, one 
which I believe is important, if collective we are to achieve 
technological solutions that strike the all important proper 
balance of rights in the emerging digital age, those of 
consumers, device manufacturers and content owners.
    I say collectively, because when it comes to setting 
content protection policy and ensuring the balance of interests 
and rights, your role is just as critical as that of the 
private sector. Simply put, the process we are now using to 
pick a technological solution and balance these interests is 
flawed, and we need your help to fix it.
    Today you are reviewing the status of the most recent 
developments in digital age content protection, the need to 
protect digital terrestrial television broadcasts from 
unauthorized retransmission over the Internet. Philips fully 
supports the goal of the Broadcast Protection Discussions Group 
to protect against such retransmission, and we support the 
concept of a flag in the ATS signal to achieve this end.
    We also appreciate much of the progress made by that group. 
However, we along with a growing number of participants are 
deeply concerned about the direction that the group is taking 
with respect to what happens after the broadcast flag is 
identified and how DTV would be constrained inside the home.
    Basically, the only paradigm being considered by BPDG is 
one that would, in most cases, require public broadcast content 
to be encrypted upon receipt in the home and on any copies on 
removable media. You have heard repeatedly that a solution to 
this problem is imminent. We appear here today, however, to say 
that, although we are actively involved in those discussions, 
we do not believe we are anywhere close to a consensus 
solution.
    Philips, along with Thompson, RCA, and Zenith, shared their 
concerns as formal objections to the recent BPDG interim 
report, and raised them with you at the April 9 DTV roundtable 
discussion. Others have expressed similar concerns privately. I 
am here to reiterate those concerns today.
    No. 1, the direction of the current discussions threatens 
to constrain the consumer's fair use rights and expectations. 
For example, if future DVD recorders are obligated to encrypt 
recordings of television broadcasts from digital sources, any 
such recordings made on those recorders would not be usable on 
the 35 million DVD players consumers own today.
    No. 2, the process by which decisions are being reached is 
not fair, reasonable or open, and is not seeking consensus. 
Rather, it is a carefully choreographed drive toward a 
preordained result.
    No. 3, the decisions regarding how products will be allowed 
to handle content and the rights of consumers would reside with 
a few companies through private contractual relationships.
    No. 4, companies interested in making devices that handle 
digital television would be required to sign up to a complex 
web of overreaching contracts. These contracts include 
obligations called compliance rules and robustness rules that 
extend deeply into the design and functionality of each device, 
and dictate what actions the devices may take and what 
consumers can do.
    Put simply, those driving BPDG are rushing the group to 
judgment without a thorough public consideration of how the 
group's approach will diminish the rights of the consumer and 
competition in affected industries.
    At the April 9 DTV roundtable discussion, important 
questions were posed by Chairman Tauzin: Who has control? Who 
makes the final decisions? In this case, no public official, no 
consumer, no licensee, no other interested party has a seat the 
decisionmaking table. Only the licensors of the preferred 
technologies and the content community can set policy and make 
decisions.
    Balancing the rights of consumers and differing business 
interests are a matter of public policy. Consumers' rights must 
not be left in the hands of private interests. We call upon you 
today to establish a forum under government auspices in which 
we can all participate in order to get this right.
    While we do not know the perfect forum of this private-
public partnership to take, we believe the former Advisory 
Committee for Advanced Television Services with its strong and 
effective leadership serves as a useful model. Again, we are 
not recommending that government mandates the solution, but 
provides a governance to a process so that we can get the 
solution correct.
    Philips wants to be part of that solution, and we, as much 
as any company, want this digital transition to flourish and 
flourish quickly. We believe an appropriate public-private 
partnership will move us to that consensus solution more 
rapidly.
    Thank you for this opportunity to share our views and our 
concerns. I would be happy to answer any questions you might 
have.
    [The prepared statement of Lawrence J. Blanford follows:]
Prepared Statement of Lawrence J. Blanford, President and CEO, Philips 
                      Consumer Electronics Company
    Mr. Chairman and Members of the Subcommittee, my name is Larry 
Blanford. I am President and Chief Executive Officer of Philips 
Consumer Electronics Company, a division of Philips Electronics North 
America Corporation, which is the US subsidiary of Philips Electronics 
of the Netherlands. In the United States, Philips employs over 35,000 
people manufacturing and selling over $10 Billion dollars of goods and 
services in the areas of consumer electronics, lighting, medical 
systems and devices, semiconductors, displays and domestic appliances.
    I thank you for the opportunity to appear before you today and 
commend you for conducting this hearing entitled, Ensuring Content 
Protection in the Digital Age at such an important juncture in the 
transition to that new age. Your attention to the Digital Television 
(DTV) transition and to the complex set of issues that remain to be 
addressed is vital to the ultimate success of that transition. You 
rightfully focus today on a key challenge--resolving copy protection 
and digital rights management in a way that is consistent with public 
policy goals of protecting content, allowing technology to thrive and, 
most importantly, preserving the fair use rights and expectations of 
the consumer in this new digital age. The manner in which we proceed 
will dictate the measure of success we attain.
    The combined efforts of the public and private sectors have come a 
long way toward ushering in this new digital age, but I come before you 
today to raise a caution--that the current direction embodied in the 
on-going Broadcast Protection Discussion Group addressing ways to 
prevent Internet Retransmission of digital television broadcasts is not 
in the interest of sound public policy, is not in the best interest of 
the affected industries and is certainly not in the interest of the 
consumer. Mr. Chairman, Philips raised its concerns in the most recent 
DTV Roundtable Discussion on April 9. We are here today because we feel 
it is very important to bring to your attention the fact that the 
chorus you will hear today, as Senators Leahy and Hatch heard at their 
hearing only weeks ago, that a solution to the problem of Internet 
redistribution is imminent misrepresents the current state of affairs 
and the nature of the challenge that still lies ahead.
    Philips, as much as any company in the US wants to see this 
transition to the digital age, and more specifically this transition to 
digital television, move as swiftly as possible. But we also know from 
decades of involvement in the consumer electronics industry that we 
must get this right, meaning that we cannot rush to judgment on 
technological solutions that are not widely accepted as the best 
solution for all parties involved--the CE industry, the Information 
Technology industry, the Content Community and, of course, the 
consumer. Philips calls upon the Congress today to reassert its role in 
this critical public-private partnership by providing an appropriate, 
public forum to continue these industry discussions and to foster 
workable solutions on a timely basis. Further, today we offer to 
provide our complete support to such an effort, including offering 
related Philips technologies to all comers, under open, fair and easily 
available terms. Philips has an extensive technology portfolio, which 
we believe can contribute to the development of solutions every bit as 
robust and effective as those embodied in the current, BPDG direction.
Philips has long history in development of consumer electronics 
        products and technologies
    Philips is no stranger to the world of inventing and developing 
products and technologies in the area of consumer electronics. From the 
Compact Cassette to the Compact Disc to the one chip TV, Philips has 
invented and developed products that have enjoyed widespread acceptance 
in the industry and among consumers. The Compact Disc is the most 
widely implemented digital technology on the face of the earth. Open, 
public standards helped make this so, open, public standards should 
help us select new copy protection schemes.
    Our untiring commitment to the development and implementation of 
advanced television in the United States began in our research labs in 
Briarcliff Manor, New York in 1981. With decades of financial 
investment and enormous scientific effort, we worked to help create and 
commercialize Digital Television. Philips is extremely proud to have 
been instrumental in the development of Digital HDTV, beginning with 
its own system, later as a member of the Advanced Television Research 
Consortium, and finally as a founding member of the ``Grand Alliance,'' 
which produced the DTV standard adopted by the FCC in 1996. This 
unprecedented standards setting process involved numerous private 
companies from each affected industry but just as importantly involved 
an extraordinary public-private collaboration fostered by the Congress 
and the Federal Communications Commission embodied in the Advisory 
Committee for Advanced Television Services (ACATS) chaired by Mr. 
Richard Wiley. The positive result has propelled the United States into 
an historic transition to advanced digital television and related 
services.
Philips has been an active participant in the development of Copy 
        Protection Technologies and Adheres to Basic Principles to 
        Protect the Consumer
    The implementation phase has certainly presented its challenges, 
not the least of which has been the development of copy protection 
technologies. Philips has long developed solutions along with the 
content community that struck the proper balance between the interests 
of the copyright holder and the consumer. Philips invented, and offered 
to the consumer electronics industry for free, the Serial Copy 
Management System, which simply provided the necessary instruction to 
the recording device as to whether a copy was or was not allowed. We 
continue to be equally involved and committed to seeking solutions that 
strike the proper balance. Philips has for years been a constructive 
participant in inter-industry copy protection activities. We have 
dedicated millions of dollars and thousands of hours of effort from our 
best engineers to groups such as the Copy Protection Technical Working 
Group (CPTWG), the Secure Digital Music Initiative (SDMI), and the 
Broadcast Protection Discussion Group (BPDG). Drawing on our expertise 
in digital video we were the lead developer of one of the two watermark 
technologies being considered for the protection of digital video 
content. Philips created and offered to the record labels an innovative 
technology to work with watermarks to address Internet file sharing of 
sound recordings. We have suggested several approaches to the BPDG.
    As these contributions suggest, Philips develops new products and 
technologies with the interest of the consumers'' rights and 
expectations at top of mind:

 Consumers' fair use rights must be preserved in any technical 
        or public policy solutions to digital age challenges
 Backward compatibility has been the backbone of the consumer 
        electronics industries' product designs.
 Consumers react negatively and very strongly when their 
        expectations for fair use and ease of use are not met.
 Ever increasing levels of complexity in consumers' devices 
        will render products increasingly unreliable, more expensive 
        and will constrain consumer activities.
 User Friendliness is a hallmark of CE products.
    Consumers should not bear the costs, in dollar terms and in terms 
of technological complexity, when there are much simpler solutions to 
the agreed upon problem--the prospect of Internet redistribution of 
digital terrestrial broadcasts.
Philips Supports the Goal of Preventing Internet Retransmission of 
        Digital Terrestrial Broadcasts, But Believes the BPDG Process 
        Is Actually Retarding Industry Efforts To Move Forward
    We fully support the goal of BPDG to protect against retransmission 
of digital television over the Internet and the concept of a flag in 
the ATSC signal to achieve this end. We also appreciate the progress 
made by that group, including the general agreement that a flag in the 
ATSC signal can be used to trigger protection, the idea of starting 
protection upon demodulation, and many of the other details that have 
been advanced. However, we, along with a growing number of 
participants, are deeply concerned about the direction that the group 
is taking with respect to what happens AFTER the broadcast flag is 
identified, and how DTV would be constrained inside the home.
    This issue of protecting broadcast content is a complex one that 
merits careful consideration and the evaluation of a variety of 
alternatives.
    Regrettably, in this effort to address Internet retransmission, 
BPDG has been taken over by a small group of companies that are 
pressing a particular approach that would affect ALL retransmission of 
content inside the home. This proposal tramples upon the fair use 
rights of the consumer and introduces unnecessary levels of complexity 
and costs in consumer devices.
    Under the approach proposed by one Studio and a consortium of 
hardware companies called the 5C, digital television content would need 
to be ``protected'' once demodulated. The technologies that could be 
used for this protection, which are generally conceived to be 
encryption technologies, would be under the control of the studios and 
private consortia, such as the 5C. For example, the technologies that 
the studios wish to use as a benchmark for the protection are the 
encryption technologies licensed by the 5C entity (which encrypts 
content on digital links) and the related 4C entity (which encrypts 
content on removable recording media).
    Any party interested in designing and manufacturing devices using 
these technologies to encrypt digital television programs would be 
required to sign up to a Byzantine set of complex, over-reaching 
contracts for these proprietary technologies. These contracts include 
obligations called Compliance Rules and Robustness Rules that extend 
deeply into the design and functionality of each device and dictate 
what actions the devices may take. These Compliance Rules and 
Robustness Rules are in the control of the studios and the private 
consortia and will be created in the first instance, and may be changed 
in the future, wholly in their discretion. The public, consumers, 
licensees, and public officials are, unfortunately, not a part of this 
process. In short, private interests are taking control of consumer 
rights and as a result establishing public policy! A small number of 
our competitors and the studios are put in control of the functionality 
of our products!
    This result is possible because of the licensing construction built 
around the use of these technological solutions. Moreover, the 
technology licenses agreements and associated Rules include obligations 
that extend far beyond that which is necessary and appropriate to 
prevent the Internet retransmission of DTV.
    Even if it were appropriate to cede public policy to private 
interests, the implementation of this most recent proposal is rife with 
unintended consequences for products and for the consumer. The 
obligation to include multiple encryption technologies in each device 
that handles DTV content will burden consumer devices, increase their 
cost and decrease their legitimate functionality.
    Further, the 35+ million DVD players in the market today are unable 
to decrypt any discs recorded in the home using any proposed encryption 
system. If future DVD recorders are obligated to encrypt recordings of 
television broadcasts from digital sources, any such recordings made on 
those recorders will not be useable on any existing DVD player or on 
any DVD player likely to be shipped in the near future. Consumers 
should not be required to purchase a new set of devices or to make 
digital recordings of content of digital content through old fashioned 
analog interfaces simply to do what consumes have always done in their 
homes. To leave matters in this state is to deny the consumer the 
benefits of digital technology. Digital technology's primary advantage 
is to move and copy data without any qualitative loss. Where this is 
appropriate (such as in a consumers home) it is reasonable that the 
consumer not only retain the ability to watch broadcast content at a 
convenient time or to move content from one room to another but also to 
gain additional flexibility to utilize content. To do otherwise is to 
restrain technology solely for the benefit of the copyright holder as a 
mechanism to subdivide content into smaller units, each of which can be 
sold at a premium price.
    The current proposal also would inhibit innovation in television 
products. Under the proposal, any innovative company interested in 
developing and marketing new products that would give consumers more 
control over how and when they view television would be required to 
sign these over-reaching, burdensome licenses for the ``approved'' 
proprietary encryption technologies, pay the applicable license fees, 
and bear the costs of including encryption and decryption capabilities 
in their products. The complexity and cost of these licenses and the 
technologies alone will inhibit start-up companies, which are often the 
most innovative.
The BPDG is not a consensus body and is certainly not a standards body.
    Philips has lost all confidence that the BPDG discussion group as 
currently constituted can achieve meaningful results, or that it will 
allow for serious consideration or adoption of technology solutions of 
equal merit presented by other interested parties. BPDG is not an open, 
consensus standards setting process. BPDG has no process for making 
decisions. In fact, the studios and 5C have made clear their view that 
there need be no process, because BPDG is not a standards body; it 
simply is a forum for discussion and the identification of points of 
agreement and disagreement. Such discussions may have their place, but 
on this matter of such critical importance to the establishment of good 
public policy, this approach is seriously lacking.
    We respectfully believe that the decisions of how DTV content 
broadcast over the public airwaves will be handled in the home and how 
it will be available to consumers raise important public policy issues; 
issues that are far too important to leave to any group of private 
companies no matter how well intentioned. Private industry should be 
given a chance to reach a consensus, but the process should be cleansed 
by the sunlight of government. Further discussion should be held in an 
open forum, with the involvement of those who are entrusted with the 
development of public policy.
    Philips believes the Congress should make clear that there will be 
no toleration of a system in which the private interests control the 
Rules for copy protection technologies that become de facto standards. 
The rules and licenses under which such technologies are used raise key 
public policy issues and must be subject to minimum standards of 
openness, reasonableness, scope and consensus. We have ideas for 
appropriate technologies that we are prepared to share with the 
industry in exactly this manner, as we have attempted in the past.
    Philips, therefore, calls upon the Congress to reassert itself in 
this ongoing endeavor by providing under its auspices or the auspices 
of the Federal Communications Commission, or a suitable standards body 
an organized, open and fair venue to oversee the continuation of 
efforts to develop and implement next generations of copy protection 
technology. In support of such a change, Philips pledges its full, 
continued support and further pledges to do its part to make 
technological solutions available on open, fair and reasonable terms to 
all interested parties. We look forward to this Committee's continued 
leadership in this critical arena.

    Mr. Upton. Thank you.
    Mr. Jacobson.

                   STATEMENT OF LARRY JACOBSON

    Mr. Jacobson. Mr. Chairman and Ranking Member Markey and 
members of the committee, I am delighted to appear before you 
today to discuss the pressing issues facing the media and 
technology industries in our digital era.
    RealNetworks, founded in Seattle, Washington, in 1994, is a 
pioneer in the development of digital media technology and 
services that enable people to create, deliver, discover, and 
play digital audio and video content over the Internet, both 
through downloading and through a method RealNetworks invented 
called ``streaming.'' Most of you probably know our RealPlayer 
or RO-1 player.
    RealNetworks agrees that today's Internet marketplace 
suffers from an unacceptable level of piracy of copyrighted 
works. As a person who has spent most of my career in the 
entertainment and broadcast industry, I understand that 
copyright protection lies at the core of America's ability to 
create and sell entertainment products throughout the global 
marketplace on a variety of distribution platforms.
    Digital copying via the Internet poses fundamental 
challenges for the economics of both the entertainment and 
technology industries, and we need to meet that challenge head 
on in order to realize the potential of this new distribution 
medium.
    The good news is that RealNetworks is building distribution 
channels, business models, and new subscription services that 
will contribute to a robust and legitimate content marketplace 
for digital music, video, and other products. As a fundamental 
part of our digital media platform, RealNetworks has developed 
a robust and sophisticated digital rights management technology 
or DRM to protect content that is delivered to consumers.
    This DRM and our other security technologies are in the 
marketplace today, and currently protect premier content we 
offer, from major record labels, CNN, Fox Sports, ABC News, 
NASCAR, major league baseball and the MBA, among others. 
Already in 18 months since we began offering our premium 
protected subscription services, we currently serve over 
600,000 monthly paid subscribers.
    In crafting legislation regarding the Internet, Congress to 
date has wisely refrained from sweeping regulation, resisting 
the temptation to become in essence the chief technology 
officer for the Internet. We should continue to be guided by 
three core principles: First, that government should only 
intervene in technology markets where there is a clear evidence 
of market failure; second, that private sector competition will 
always create the best technologies, resulting in new revenue, 
new quality jobs, and new consumer benefits; and, third, that 
all solutions must respect consumers' fair use rights to fully 
enjoy digitally delivered content.
    In the spirit of these principles, scores of companies, 
including RealNetworks, are enabling secure content 
distribution through flexible DRMs that are protecting content 
in today's marketplace. Software can be built and adapted to 
accept multiple DRMs and play back content that is encoded in a 
variety of file formats, and we see evidence that market driven 
solutions for security are rapidly evolving on the Internet 
today.
    In contrast to market driven solutions, we don't believe 
that the government should pick a single winner and mandate a 
security standard for the rapidly evolving digital market. This 
approach would politicize the standard process, establish more 
bureaucracy, create a single target for hackers, and ultimately 
not lead to the best technology for security.
    Rather than focusing its energies on creating a new 
regulatory framework for digital media distribution, we believe 
it would be wiser for Congress to eliminate practical barriers 
to the growth of e-commerce and digital media.
    As the Copyright Office recently recommended, existing laws 
should be fine tuned to clarify that payments due for streaming 
and downloading of music content should be put in place. We 
must also address the economic imbalances in the field of 
Internet radio, where new legal regulations have made it harder 
for innovative programming services to compete on a level 
playing field with other content offerings.
    Moreover, Congress must always proceed carefully before 
tampering with our carefully balanced copyright laws. 
Clarifying the status of temporary copies in RAM and server 
copies, for example, would make it easier to lawfully perform 
and download digital content, all in a way designed to 
compensate copyright owners.
    Finally, Congress should clarify how longstanding fair use 
principles peacefully coexist with the anti-circumvention 
provisions of the DMCA. Any marketplace for digital goods must 
preserve longstanding consumer rights to use content they have 
purchased in a variety of ways. We must treat Internet users 
like potential customers and not potential criminals, if we are 
to build a marketplace based on mutual trust.
    In closing, RealNetworks stands ready to work with 
policymakers and all other concerned parties to create a 
digital marketplace that affirms the best principles of 
American innovation, consumer value, and the rule of law.
    Thank you for your attention, and I would be happy to 
answer any questions that you may have.
    [The prepared statement of Larry Jacobson follows:]
  Prepared Statement of Larry Jacobson, President and Chief Operating 
                      Officer, RealNetworks, Inc.
    Mr. Chairman and members of the Committee, I am delighted to appear 
before you today and thank you for the opportunity to come to 
Washington--the ``other Washington'' for those of us with a Seattle 
orientation--to discuss some of the pressing issues facing the media 
and technology industries at this moment.
RealNetworks as a Pioneer in Internet Media Delivery
    RealNetworks, founded in Seattle, Washington in 1994, is a pioneer 
in the development of digital media technology and services that enable 
people to create, deliver, discover, and play digital audio and video 
content over the Internet and within intranets, both through 
downloading and through a method RealNetworks developed called 
``streaming.'' Streaming enables consumers to enjoy uninterrupted, 
real-time broadcasts over the Internet, by compressing digital media 
files and dividing them into packets, that then are delivered to the 
consumer's personal computer.
    RealNetworks developed the first streaming media player and the 
first streaming media server in 1995. RealNetworks has released nine 
versions of the RealPlayer streaming media player. In addition, 
RealNetworks has released two versions of its RealJukebox software, 
which was first introduced in 1999, and which permits consumers to 
manage their music collections on their personal computers. That 
dynamic pace of innovation continues given the rapid adoption and 
increasing use of digital media on the Internet.
    RealNetworks offers a universal platform for end-to-end delivery of 
digital media, from creation to broadcasting to end-user consumption. 
This allows companies to build powerful digital media applications like 
video subscription services on our platform without regard to the 
underlying hardware or the software operating system. RealNetwork's 
business model is based primarily on (1) licensing and selling software 
to create, deliver, play and secure digital media; (2) selling 
subscriptions for access to audio and video content from major content 
providers, including ABC News, CNN, Wall Street Journal, Fox Sports, E! 
Entertainment, Warner Music Group, BMG Records and EMI Music; (3) 
providing professional services, such as hosting others' streaming 
media and technology implementation, and (4) selling advertising and 
promotions via RealPlayer, RealJukebox, and the RealOne Player for our 
RealOne sports, news and entertainment subscription service.
    As a fundamental part of our digital media platform, RealNetworks 
has developed a robust and sophisticated DRM--Digital Rights 
Management--technology to protect content that is delivered in 
streaming or digital download formats. This DRM, called the Real System 
Media Commerce Suite, currently protects digitally downloaded and 
streamed files from major record labels via the MusicNet platform and 
has been licensed to the MovieLink consortium, organized by Sony, 
Universal, Warner Brothers, MGM and Paramount Pictures, to protect the 
digital download of feature films.
    Today, we have licensed our technology to over 270 million unique 
registered users around the world with at least one of our products. 
These consumers have consistently proven their desire to enjoy music 
and video, whether streamed on demand, streamed in a webcast mode, or 
delivered via digital download. As bandwidth increases for connected 
users, music video and long-form video content are proving equally 
popular. In fact, broadband consumers are the heaviest users of our 
technology and as broadband adoption increases we can expect similar 
increases for streaming media technologies.
    As a company with applications on an estimated ninety percent of 
personal computer desktops in the United States and hundreds of 
millions of users around the globe, we are keenly aware of the 
challenges to Internet distribution of music, video and other forms of 
content that require licensing of intellectual property rights.
The Challenge of Secure Digital Distribution at a Critical Time for our 
        Industry
    Mr. Chairman, this hearing comes at a critical time for the 
Internet and specifically for companies that are building the new 
distribution channels for music and video content. We are all aware of 
the explosion of online file-sharing services and their global 
popularity. Countering this trend, both independent and major recording 
companies have licensed their works to subscription online services 
such as MusicNet, PressPlay, and Listen.com's Rhapsody and other online 
ventures. RealNetworks has been one of the driving forces behind the 
creation of legal subscription services. As for the prospect of 
distribution of feature films on a pay-per-view basis, RealNetworks is 
contributing technology to the MovieLink venture and we hope to see 
other pay-per-view and subscription video services roll out in the near 
future. Our technology and subscription services model is designed to 
facilitate just this sort of business.
    For any of these new content distribution channels to succeed, we 
will need to make sure that content is secured, that consumers see 
value in the digital purchases they make, and that the underlying 
business models make sense for all participants in the ``food chain.''
    Security for music and video distribution is essential. Whether 
digital content is produced by a garage band or a global media company, 
content owners need to reach a comfort level with putting that content 
into the digital marketplace.
    We all know that today's Internet marketplace is characterized by 
an unacceptable level of piracy of copyrighted works. The balance of 
copyright--providing authors with a fixed exclusive period of time to 
reap the rewards from creating new works--will be upset if this 
situation prevails. The business leaders testifying alongside me today 
will undoubtedly give a more detailed picture of the dimension of the 
piracy problem and the steps they are taking to address it. Let me 
simply say that RealNetworks does not take widespread Internet piracy 
lightly, both as a creator and licensor of our own intellectual 
property and as a long-standing partner of many content creators.
    RealNetworks was the first company to successfully invoke the anti-
circumvention mechanisms of the DMCA to stop the distribution of 
software that attempted to break the proprietary content protection 
measures within our RealServer and RealPlayer software and we will 
continue to invoke legal mechanisms to prevent piracy.
    As a person who has spent most of my career in the entertainment 
industry, culminating from 1997 to 2000 as President of the Fox 
Television Network, I understand that copyright protection lies at the 
core of America's ability to create and sell entertainment products 
throughout the global marketplace on a variety of distribution 
platforms. Digital copying via the Internet poses fundamental 
challenges for the economics of both the entertainment and technology 
industries and we need to meet that challenge in order to realize the 
potential of this new distribution medium.
    The good news is that RealNetworks is building distribution 
channels, business models and new subscription services that will over 
time create a robust and legitimate content marketplace for digital 
music, video and other products provided that license rights to that 
content can be efficiently and effectively obtained and administered.
    DRM technology is one key ingredient for establishing a legitimate 
digital marketplace. The Real System Media Commerce Suite currently is 
used by technology platforms such as MusicNet to protect tens of 
thousands of valuable sound recordings from major record labels. To 
protect valuable intellectual property with a level of assurance 
required for digital distribution, DRM's must be universal, flexible 
and secure. We design our DRM with the ultimate goal of supporting all 
types of media to all devices. Further, these DRM's must support 
flexible set of business rules that allow the content creator to 
determine payment scenarios ranging from pay per use to permanent 
ownership. Finally, we design our DRM to be native, end-to-end, tamper 
resistant and to be quickly renewable in the event of malicious attack.
    Technology alone will not create the legitimate marketplace for 
online distribution of content. After an era where first advertising 
and then e-commerce was widely expected to carry the new online 
industry to the promised land, we have learned from experience that a 
mix of business models, matched to consumer behaviors, are required for 
our industry to succeed. RealNetworks has led the way with premium 
content services--offering distinct packages of digital downloads, on-
demand streamed content and webcast streamed programming--that reward 
content owners while providing unique value to end users. These 
services are prime examples of RN working in content with using RN 
technology to promote content to deliver it to consumers on a 
subscription basis.
    Baseball fans can't get condensed games of complete baseball 
broadcasts on-demand on network TV, but they will be able to pay for 
this product this season through our RealOne subscription products. In 
parallel efforts, we are working with Fox Sports, CNN, E! 
entertainment, ABC News, NASCAR, the NBA and other world-class media 
companies and sports leagues to bring unique value to the online 
consumer. In this sense, the Internet won't directly compete with 
television or radio, but it will offer programming that is uniquely 
interactive and well-suited to the online digital medium.
    While RealNetworks can build the launching pad for digital 
distribution, our content partners supply the rockets. Simply put, 
there can be no meaningful marketplace for digital goods without 
compelling content. From major media companies, to independent radio 
stations, to non-profits, to individuals seeking an outlet for creative 
expression, the Internet is a vast network of content markets. It is in 
fact a ``super market,'' where great content can reach over 500 million 
globally connected users. Just as other digital products such as the 
compact disc and DVD video disc created new markets for traditional 
content, online digital distribution will enrich content creators and 
serve consumers in new ways. RealNetworks has played a special role in 
inventing the channels for digital streaming and downloading of audio 
and video and our philosophy here is simply to ``Let a Thousand Flowers 
Bloom.''
Building a Competitive Marketplace Absent Government Intervention
    When the history of the first decade of the Internet is written by 
some future historian, he or she will probably focus one salient fact: 
that public policymakers in the United States were wise enough to let 
the infant medium evolve with a minimum of government interference and 
regulation. It is hardly a secret that the United States, spurred by 
companies such as Amazon.com, E-Bay, Cisco and Intel, to name only a 
few, leads the world in innovating the software, infrastructure and 
business models that make the Internet run and that unprecedented 
economic value has been created in a very short span of time. In 
contrast to the European Union, where policymakers have an instinct to 
``regulate first'' then let the market develop, the foresight of 
American public policy in this sphere must not be underestimated. 
Congress has stepped in wisely, to respond to distinct needs to protect 
certain classes of information such as healthcare, financial data, or 
information pertinent to children. Yet Congress has eschewed more 
sweeping regulation, and has resisted any temptation to become, in 
essence, the ``Chief Technology Officer for the Internet.''
    We should continue to be guided by two core principles: First, that 
government should only intervene in technology markets where there is 
clear evidence of market failure. Second, that competition will always 
create the best technologies, resulting in new revenue, new quality 
jobs and new consumer benefits.
    Let me first address the issue of market failure. Recently, we have 
been told that unless a single unitary and open standard is created for 
digital content protection, the digital marketplace will not evolve. 
Concerned companies have sketched a scenario where competing and 
conflicting technologies will create a digital Tower of Babel, where 
consumers are confused by different technical choices and where systems 
fail to interoperate with one another, preventing the build out of an 
end-to-end distribution channel for digital content.
    From our perspective, the Tower of Babel scenario ignores the 
realities of today's marketplace. Scores of companies, including 
RealNetworks, are laying the foundation for secure content distribution 
through flexible DRM's. Software can be built to accept multiple DRM's 
and play back content that is encoded in a variety of file formats. For 
example, RealNetworks supports several different secure file formats, 
including Microsoft's Windows Media DRM. Unlike a hardware environment 
where a media player is permanently ``locked in'' to one DRM or can 
only play content from one source, software media players are designed 
to be rapidly updated to accommodate new file formats and improved 
security schemes. In addition, our player technology supports multiple 
third party DRM solutions. In this manner, a consumer can get content 
secured by a variety of different DRM's in different formats. In 
designing these DRM solutions, we also adhere to a principle of ``ease 
of use'' for consumers, with the digital rights management functions 
occurring through automation that is essentially transparent to the end 
user who simply wants to access interesting and entertaining content 
delivered online.
    To win the business of major media companies, technology companies 
will make sure that their security solutions meet the specifications 
outlined by copyright holders. If we fail to do this, we won't get 
their business. As in the case of the VHS vs. Betamax systems, the 
marketplace will ultimately decide on the most appropriate technology 
for specific consumer and industrial uses. We see evidence that market-
driven solutions for security is rapidly evolving on the Internet today 
and we will continue to design our software players and security 
solutions to be flexible, multi-platform and renewable.
    Market-driven solutions, as has been the case in American industry 
from the Nineteenth Century invention of the telegraph to the 21st 
Century mapping of the human genome, consistently create the most 
enduring economies--economies that reward inventors and consumers with 
products that become a part of the fabric of their daily lives. Only a 
few years ago, the Internet was primarily a text-based medium. Now we 
think of going online in terms of accessing the latest news, sports, 
entertainment, music videos and short films. Ten years from now, we may 
think of the convenience of the Internet like a literal ``home video'' 
store, where we can ``stop by'' to rent the latest films or our 
favorite television shows. This is why we are so excited about playing 
a role in creating these new digital distribution markets by creating 
platforms for rich media content delivered to millions of consumers and 
secured by our DRM solutions.
Government-Mandated Standards will Stifle Innovation and Fail to Reduce 
        Piracy.
    The alternative to market led solutions for digital rights 
management is a scenario where the government picks a winner and 
mandates that this government regulated standard become the ``open 
standard'' for the industry. This scenario is embraced in the Consumer 
Broadband and Digital Television Promotion Act, S 2048, introduced a 
few weeks ago by Senators Hollings and Stevens.
    The Bill mandates that all hardware and software digital media 
devices respect standard security technologies that are approved by the 
FCC. If the undefined ``industry'' fails to develop the specified 
security technologies within a one year period, then the FCC is 
authorized to develop a standard based on the criteria listed in the 
proposed bill.
    The criteria may sound familiar to you, given my description of the 
RealNetworks and other industry developed DRM solutions that are 
already protecting digital content in today's marketplace.
    Standard security technologies, according to the Hollings-Stevens 
legislation, must be: reliable, renewable, resistant to attack, readily 
implemented, modular, applicable to multiple technology platforms, 
extensible, upgradeable, not cost prohibitive and the software portion 
of such standards must be based on open source code.
    Aside from the last requirement, several current DRM's meet the 
proposed legislation's test. The recent advances in the Broadcast 
Protection Discussion Group for digital television affirm that the IT, 
consumer electronics and content industries can work together to 
develop effective security measures outside a framework of government 
bureaucracy and regulation.
    However, S. 2048 not only sets abstract requirements for a 
technical standard, but also poses serious issues for consumer use of 
digital content. We find it very troubling that S. 2048 appears to make 
it a crime for an individual to alter security technology to access 
protected content, unless their behavior fits within a very narrow safe 
harbor. To be precise, the person must be a lawful recipient of a 
personal copy for lawful use in their home and only play back such 
content at a time when ``it is lawfully performed.'' This safe harbor 
is so narrow as to radically rewrite the long-standing Fair Use 
doctrine in our copyright law, which has been applied time and again by 
courts from every Federal Judicial Circuit to ensure that consumers can 
use purchased or public domain content for legitimate purposes.
    For example, S. 2048 could be read to prohibit--indeed 
criminalize--the practice of a consumer taping a digital TV program and 
saving that file for future multiple viewings with extended family and 
friends.
    Mr. Chairman, this proposed ``government mandate'' approach to 
solving the digital piracy problem will create a host of problems for 
the information technology industries, cause a firestorm of protest 
among American consumers, and ultimately do very little to prevent the 
proliferation of pirated digital music and video files. We reach this 
conclusion, based on our track record of developing successful software 
products that are used by millions of consumers to legitimately play 
back and store online content and from our observation of the history 
of government mandated standards. Please allow me to summarize these 
conclusions as seven ``lessons'' based on our experience, which call 
into question whether any government mandated standard would solve the 
piracy problem it is designed to address:

1. Forcing an industry to reach a ``common standard'' inevitably 
        results in lost time to market for effective solutions. This 
        was the case with the effort to protect digital music in the 
        Secure Digital Music Initiative. It is especially true where 
        RealNetworks, IBM, InterTrust, RSA, Microsoft and a host of 
        other leading companies have already deployed DRM's that meet 
        many of the security criteria of S. 2048;
2. Government standards inevitably try to solve ``last year's 
        problem,'' while technology, consumers and the hacker community 
        march on. The FCC, already burdened with a full plate of 
        important regulatory tasks, is unsuited to stay on top of the 
        latest industry developments in encryption, tamper resistance, 
        new formats and online security measures and would be unable to 
        deploy solutions in the matter of hours required to stop 
        system-wide hacks of the government administered standards;
3. Creating a process for the government to pick a winner will 
        politicize the standards process and favor those companies with 
        staying power and political skill, not necessarily the best 
        technologies;
4. A single uniform standard presents a bigger target for hackers;
5. Overbroad laws that mandate content protection for all digital media 
        devices would potentially criminalize widespread lawful and 
        reasonable consumer activity on home networks and common 
        practices of making back-up copies for future use;
6. New laws creating legal uncertainty will result in less investment 
        in new technologies that in any way process digital content, 
        thus slowing the roll-out of digital television and broadband 
        deployment;
7. Finally, we have learned that the adoption of new and confusing Fair 
        Use tests that apply to narrow sets of consumer behavior, such 
        as the safe harbor envisioned in S. 2048, lead to legal 
        confusion, consumer confusion and eventual market paralysis.
The Need for Targeted Legislation to Update Existing Copyright Law to 
        Accommodate New Technologies and Promote Digital Content 
        Services
    Congress must always proceed carefully before tampering with the 
regime of Copyright, Patent and technology laws that maintain the 
balance of copyright between the incentive to create new works and the 
rights of consumers to enjoy those works. S. 2048, as currently 
drafted, would radically alter the copyright balance in ways that 
disrupt the development of a robust marketplace for digital media, and 
therefore would benefit neither content creators, nor distributors, nor 
consumers.
    Only four years ago, Congress created new rights in copyright law 
and new security enforcement mechanisms with the passage of the Digital 
Millennium Copyright Act. Recently, in its Section 104 report, the 
Copyright Office recommended several changes that would update the DMCA 
to better solve the problems of digital distribution. Clarifying the 
status of temporary copies in RAM and server copies, for example, would 
eliminate legal uncertainty in the area of licensing of music for 
online distribution and speed up the legitimate offering of music on a 
subscription basis. Changing notice provisions to copyright owners, 
allowing for blanket notices to license thousands of works at a time, 
would similarly stimulate this music distribution channel--all in a way 
designed to compensate copyright owners.
    We don't need additional new criminal penalties designed to make it 
harder for consumers to access digital works. In fact, the DMCA already 
provides powerful mechanisms to prosecute those who distribute software 
primarily designed to circumvent technical protection measures and, as 
I mentioned above, RealNetworks was the first company to enforce these 
provisions. If pirates reach a level of activity where they begin to 
pose a challenge to secure distribution of content in a given channel, 
the DMCA and current copyright and criminal laws provide the tools to 
go after them and shut down illegal products.
    Rather than focusing its energy on creating a new regulatory 
framework for digital media distribution, we believe it would be wiser 
for Congress to eliminate practical barriers to the current 
marketplace, particularly in areas such as Internet radio where new 
legal regulations have made it harder for innovative programming 
services to compete on a level playing field with other content 
offerings. Several of these measures are already under consideration in 
the House and Senate and RealNetworks would urge policy makers to adopt 
limited legislation designed to impact and resolve the following 
issues:

1. Online Music Licensing--we need to update existing statutory 
        licensing provisions and make it easier, not harder, to pay 
        writers and publishers for use of their works online via music 
        subscription services. To compete effectively with unlicensed 
        music file sharing services, legitimate online services should 
        be legally enabled to offer comprehensive content offerings, 
        such as complete libraries of songs, to end users, without 
        burdensome notice requirements that necessitate thousands of 
        individual licensing transactions before any content can be 
        offered to music consumers;
2. Web Radio--Congress should examine whether the current standard for 
        the performance of sound recordings via web radio has been 
        interpreted to create a burdensome rate structure on an 
        innovative new medium that offers a diversity of content from a 
        wide variety of webcasters to the public;
3. Network Transmission--we need to clarify that copies that are not 
        accessed by the consumer, but simply facilitate the 
        transmission of a final copy to the end user, should not bear 
        separate royalties or taxes;
4. Performances and Reproductions--as recently recommended by the 
        Copyright Office, Congress should distinguish between a 
        performance, such as an on-demand stream, and a permanent 
        reproduction, such as a digital download, for the purpose of 
        computing royalty payments;
5. Copyright Royalty Tribunal--Congress should explore the 
        reestablishment of a permanent judicial panel such as the 
        Copyright Royalty Tribunal--in order to speed up rate-making 
        proceedings and foster new distribution models such as 
        webcasting.
    Mr. Chairman, as set forth in Article I of The Constitution, our 
copyright system is predicated on the balance of consumer rights to 
enjoy content and the limited monopolies granted to creators of content 
in order to incentivize them to create works that promote the progress 
of ``Science and the Useful Arts.'' Yet recent changes in our copyright 
laws threaten this delicate balance and we believe it is time for 
Congress to address the confusion caused by the DMCA regarding the 
status of consumer Fair Use, not in the limited and restrictive manner 
contemplated by S. 2048, but in a way that clarifies that consumers 
have the right to store, archive and time shift purchased and public 
domain content. The simple act of breaking a digital seal should not be 
a crime in this country if the underlying purpose falls within the 
accepted personal use ambit of our long-standing copyright balance. A 
clearer zone of fair use will stimulate the invention of legitimate 
products designed to allow users to enjoy purchased music and video 
that is delivered by new digital services. In turn, this will create 
demand for broadband services and increase investment in new 
technologies.
    Working cooperatively, the content and technology industries will 
create a dynamic marketplace for digital distribution of content. Such 
a market will enrich consumers with new choices and lead to new product 
innovation. Eventually, it will stimulate artists to create new art 
forms unique to the new digital medium.
    RealNetworks has worked in partnership with independent artists and 
leading media companies to build the framework for online distribution 
in a way that respects copyright, pays artists and offers value to 
consumers. We stand ready to work with policymakers, consumer 
electronics companies, broadband providers, media companies and all 
other important actors in this environment to create a digital 
marketplace that affirms the best principles of American innovation and 
the rule of law.
    Thank you for your attention. I'd be happy to answer any questions 
you may have.

    Mr. Upton. Thank you.
    Mr. Assaf Litai.

                    STATEMENT OF ASSAF LITAI

    Mr. Litai. Thank you, Mr. Chairman. I am Assaf Litai, 
founder of Vidius, Incorporated. Vidius is a startup company 
that offers services for use by content owners concerned over 
peer-to-peer distribution of their products. We also offer 
auditing services for use by corporations and other 
institutions who may find that their corporate computers are 
being used without their knowledge or approval for peer-to-peer 
distribution of movies, games, computer software, books, data 
bases and objectionable material.
    Today I will demonstrate a video system called Clearsight 
that is capable of identifying, auditing, and interdicting such 
piracy. I want to emphasize the importance of its auditing 
feature.
    Most of the peer-to-peer services that deliver pirated 
material are owned and controlled by legitimate institutions in 
other lines of endeavor. This should not be a surprise, because 
most symmetrical broadband access today that is high band width 
for uploads as well as downloads is provided to institutions 
rather than private homes.
    This is unlikely to change anytime soon, because even cable 
modems and DSL lines provide for slow upload speeds. Viral 
distribution occurs where both the upload and download are a 
true broadband speed.
    Vidius has applied for over 20 patents on the techniques 
and services that I will demonstrate today, but demand for them 
thus far is limited. Many legitimate institutions, even 
corporations who are themselves major victims of piracy, are 
afraid to learn about their own hosting activity, that this 
could open them to prosecution for willful activity. To 
paraphrase an old song, they are afraid to find out who is 
hosting stuff on their own servers, whether they are out 
selling stuff.
    See, most of the material made available for peer-to-peer 
distribution is not stolen at all. It is licensed copies of 
programs, data bases or publications that employees are quietly 
and illegally publishing to the rest of the world. But these 
servers also offer lots of entertainment content that has 
indeed been stolen.
    What I will show you now is a movie recorded in our office 
of our system at work, not a simulation. It shows a server 
audit as to how many servers are offering a single movie and 
then focuses on a particular corporate server, including the 
number of copies. Our movie then shows us interdicting further 
mass anonymous distribution.
    We show a two-stage process. Stage one is localization, 
searching for and finding the host of the film. This utilizes 
our auditing system. Stage two is interdiction, removing the 
film from mass anonymous distribution.
    The auditing system display shows a navigation tree on the 
left panel and a detailed report of search results on the right 
panel. Using the navigation tree, we can zoom in from 
continents down to countries, down to specific hosts for this 
film. We could select any continent, but let's look more 
closely at the U.S.
    On the left you see a list of very respectable institutions 
at each of which someone is offering one or more copies of this 
film for mass distribution. We could, for example, look at the 
University of California, but let's pick one of the dozens or 
hundreds of companies that the search for this one movie turned 
up.
    Now you see a big list of numbers. Each of these numbers 
represents one machine somewhere in this company that is 
offering for distribution at least one copy of this particular 
movie. We will now take a look at just one of these servers. It 
is offering to the public two copies of Part One of the movie 
and one copy of Part Two.
    Now for the interdiction stage. This movie of our computer 
screens shows the beginning of a download, the entry of a 
command to interdict it, and the distribution of the content 
stopping. This is basically then the Gnutella client 
downloading the film, the search. We know who the host is.
    The information is filled in by the Clearsight system, and 
we start the interdiction. Look at the speed indicate there on 
the top righthand corner of the screen. As you can see, it is 
no longer available to the peer that requested it or to other 
peers.
    I want to emphasize a few points about what you have seen. 
First, our system operates only in data that has been publicly 
displayed to any inquiring computer. This data describes the 
content that has deliberately been made available to the public 
for piratical distribution. If this information was not 
personally delivered to anyone who inquired, the Vidius system 
could not operate.
    Second, our system does not require the identification of 
any one server, PC, home network nor consumer electronic 
product, nor does it interfere in any respect with the 
operation of such products on an institutional or home network.
    Third, our audit system can also be used to help this 
company identify all illegally offered content of all types, 
data, software, games, etcetera, on its computer systems so 
that they can clean it up themselves. Since this material is 
publicly offered, we would not even have to go onto their 
premises to compile a report for them.
    I am not here to denigrate other approaches to dealing with 
peer-to-peer distribution, particularly those favored by our 
potential clients. Our service, and perhaps those of some 
competitors, is designed to be part of a multi-faceted 
approach. I do believe, however, that our own element is least 
intrusive to consumers and corporate employees and most 
productive for those who employ it.
    In summary, Mr. Chairman, I have demonstrated two separate 
approaches to dealing with peer-to-peer piracy, and we think 
both can contribute to dealing with the problem. One is to help 
content providers protect against illegal distribution of 
otherwise unprotected content. The other is to help those who 
unwittingly make such distribution possible to audit and police 
their own premises.
    If major organizations and institutions had incentives to 
clean up their own computer servers, the majority of illegally 
posted movies, books, songs, software, games, data, training 
manuals, and objectionable matter that we find in our audits 
could disappear overnight.
    Thank you, Mr. Chairman, for the opportunity to have 
appeared today.
    [The prepared statement of Assaf Litai follows:]
  Prepared Statement of Assaf Litai, Founder and Interim CEO, Vidius, 
                                  Inc.
    Chairman Upton, Ranking Member Markey, and members of the 
Subcommittee: I am Assaf Litai, Founder of Vidius, Inc. Vidius is a 
start-up company, co-founded by veterans of Israel's underseas and land 
defense forces. It offers technology services and support to those who 
are concerned about the unauthorized, mass distribution of their 
products--movies, music, games, computer software, books, and 
databases--over peer-to-peer networks. Vidius has developed and applied 
for twenty patents on techniques and services, which I will demonstrate 
today, to assist owners of such products in protecting themselves. But 
current law actually provides disincentives for these owners, and for 
legitimate institutions and businesses whose facilities are the 
unwitting hosts for pirate distribution, to take simple and effective 
steps to stop the unauthorized mass distribution of these valuable 
entertainment, computer software, game, and publishing properties.
    Industry and congressional concern over copyright has focused 
increasingly, and now almost exclusively, on the business that Vidius 
is in--addressing mass, unauthorized distribution of content that is 
``hosted'' on servers scattered around the country and the world. These 
servers are of two general types--those that are maintained for other 
purposes by large institutions, and, to a far lesser extent, those 
maintained expressly for this purpose by some individuals. A letter 
recently sent by a group of motion picture CEOs to a group of hi-tech 
industry CEOs said:I22  ``[U]nauthorized peer-to-peer file distribution 
. . . harms existing theatrical, home video and subscription outlets, 
and discourages legitimate on-line services which cannot sell access to 
movies, music and other entertainment content . . . available for free. 
We . . . should all work together in a consensus-based and cooperative 
fashion to find solutions to this problem that is threatening the very 
essence of our business.''
    Indeed, this understates the problem--our research has shown that 
these very same servers also host computer software, books, games, 
etc., responsible for much or most of the piracy in several other 
industries.
    Today I will demonstrate a Vidius system called ClearSite 
TM that is capable of identifying, auditing, and 
interdicting such piracy. I want to emphasize the importance of its 
``auditing'' feature. Most of the ``servers'' for piracy in fact are 
owned and controlled by legitimate institutions in entirely unrelated 
businesses or endeavors, without their knowledge. Let me repeat that--
most of the peer-to-peer servers that deliver pirated material are 
owned and controlled by legitimate institutions in other lines of 
endeavor. This should not be a surprise, because most symmetrical 
broadband access today (hi-bandwidth for both uploads and downloads) is 
still provided through institutions rather than private homes. Real, 
viral distribution occurs when participants have high bandwidth for 
uploads as well as downloads. This is the case today primarily in 
institutional settings, and is unlikely to change any time soon.
    While we know that much of the motion picture material distributed 
on peer-to-peer networks has been obtained, as well as distributed, in 
an unauthorized fashion, many of the items distributed--particularly in 
the area of computer software--were not ``stolen'' at all. Rather, they 
are legitimate, purchased and licensed copies. However, they have been 
illegally made available for mass distribution by employees or others 
at these institutions or companies, many of which themselves have been, 
and are, prominent victims of piratical distribution. To paraphrase the 
song--
        ``Who's hostin' stuff on your own servers
        While you are out sellin' stuff?''
    Before demonstrating ClearSite TM I want to provide some 
assurances as to what the ClearSite TM system is not:

 First, our system does not invade the privacy of any data 
        stored on anyone's server or hard drive. It operates only on 
        data that has been publicly displayed to any inquiring 
        computer. This data describes the content that has deliberately 
        been made available to the public for piratical distribution. 
        If this information were not purposely delivered to anyone who 
        inquired, the Vidius system could not operate.
 Second, our system does not require the modification of 
        anyone's server, PC, home network, or consumer electronics 
        product. Nor does it interfere in any respect with the 
        operation of such products on an institutional or home network.
 Third, the ClearSite TM system cannot operate 
        against the wishes of the ISP that connects the server to the 
        network.
    Now for our demonstration. In our offices we recorded an actual 
instance of finding one product on a server that offered it for mass 
unauthorized distribution. We can collect and audit this information 
either by product or by host. Thus, in a different demonstration from 
today's, we could show how XYZ corporation's peer-to-peer servers--
generally PCs used by its employees--are today hosting a range of 
software, books, games, databases, and audiovisual material for mass 
unauthorized distribution. Today, however, we will focus on tracking 
and addressing the distribution of a particular piece of content--a 
motion picture.
    To track and audit a particular movie, we need not have implanted 
any information in it, or have been given any special knowledge about 
it. We can figure these things out for ourselves, through a process 
known as ``fingerprinting.'' Our demonstration shows our actual survey, 
acquisition, and evaluation of a single case, including a determination 
as to how many copies of the movie are on the server. (This part we 
could have demonstrated in real time, remotely, using any laptop 
computer tied in to our office.) Our movie then shows us interdicting 
further illegal distribution. (This part we can only do from our office 
facilities, which is why we recorded the entire demonstration.) This is 
a demonstration of our actual process at work, not a simulation.
    Our system is sufficiently flexible to be applied only to those 
servers that offer a certain number of illegal copies, or that have 
downloaded a particular movie a certain number of times. That is 
another reason why our audit function is so important.
    I am not here today to denigrate other approaches, particularly 
those favored by our potential clients in various business. We are, 
after all, a startup company building a clientele among the various 
industries that are here before you today. Having listened to the 
debates about other approaches, however, I submit that from the 
standpoint of law-abiding consumers and businesses, ours is the 
approach to stopping piracy that is least intrusive to consumers and 
employees, and most productive for those who employ it.
    I also should note that neither Vidius nor I am opposed to 
distributed computing in general, or peer-to-peer networking in 
particular. To the contrary, I agree with those who have said that 
distributed computing and peer-to-peer networks present many new 
opportunities to the information technology industry. To be kept free 
from regulation, this activity needs the advantage of self-protection. 
Such protection is available to top-down networks through DRMs.
    I said at the outset that existing law provides disincentives to 
such self-protection. I can point to two areas in which the law needs 
to be understood or amended:
    First, there are some who would interpret existing privacy laws, 
originally addressed to intrusive practices such as wiretapping, so as 
to support aggregated civil damages, and even criminal penalties, 
against any touching of a peer-to-peer server--even where it only 
involves the public ``out box,'' and the subject is clear, red-handed, 
repeated piracy. Under such a legal interpretation, the more piracy 
that is tracked from a single server, the greater the number of 
incidents of ``touching'' that might be aggregated, by some court, into 
``damages'' in favor of the pirate, against the owner of the illegally 
distributed property. This is a complicated issue involving both 
Federal and state law. The subject needs to be addressed with care, 
with complete regard for the rights of consumers and technologists. But 
unintended legal consequences cannot and should not persist, in state 
or federal law, as a barrier to self-protection.
    Second, existing law provides a disincentive for legitimate 
institutions--businesses, universities, foundations, even congressional 
offices--to audit and address their own unwitting activity in 
supporting piracy through their own computer systems. The ``NET Act'' 
provides criminal penalties for use of such systems in piracy, but 
rightly provides that the system operator is liable only if 
specifically aware of the activity. But if the law stops there, 
legitimate institutions will continue to have a strong incentive to 
turn a blind eye to their own support of mass, piratical distribution. 
Even companies that can point to millions or even billions of dollars 
in losses as to their own products still have a very strong legal 
disincentive to find out whose products their own employees are 
distributing via their own systems.
    What is needed is to go further--to provide a ``safe harbor'' from 
criminal liability, under the NET Act, for entities that do try to find 
out what is being illegally distributed via their own systems. 
Remember, Mr. Chairman, most broadband exchanges today occur via 
institutional networks. If major organizations and institutions had the 
proper legal incentive to clean up their own computer servers, the 
majority of the illegally posted movies, books, songs, software, games, 
data, training manuals, and pornography that we find in our audits 
could disappear overnight.
    Thank you, Mr. Chairman, for the opportunity to have appeared 
today.

    Mr. Upton. Thank you.
    Mr. Kraus.

                     STATEMENT OF JOE KRAUS

    Mr. Kraus. Thank you, Mr. Chairman. Mr. Chairman, members 
of this committee, good afternoon. My name is Joe Kraus, and I 
am co-founder of a national membership organization dedicated 
to safeguarding citizens' fair use rights to digital media.
    Specifically, we want to be sure that any digital rights 
management solution or legislation protects the rights of 
consumers as well as the rights of the entertainment industry. 
I am here to represent the views of the 35,000 Americans who 
have become members since our formation 6 weeks ago, and on 
their behalf we thank this committee for holding this hearing 
and allowing us to testify.
    Our members are not teenagers swapping songs on the 
Internet. They are ordinary, law abiding citizens who insist 
that Congress protect their historical fair use rights. They 
are people like Gregory Brewsaugh, a self-described Republican 
high school physics teacher in Huntington Beach, California. 
Mr. Brewsaugh has purchased over 400 CDs. He has copied his CDs 
onto his personal computer, which he now uses as a 4,000 song 
personal jukebox to deliver endless varieties of music 
throughout his home. Mr. Brewsaugh simply loves music and 
enjoys his freedom to listen to the content in the manner of 
his choosing.
    DigitalConsumer.org members respect intellectual property. 
We do not condone piracy. However, unlike what media companies 
would like you to believe, not all unauthorized copying is 
piracy. Let me say that again. Not all unauthorized copying is 
piracy.
    For example, we have all made mixed tapes of our favorite 
music. We have all made copies of CDs to take to the gym or 
listen to in the car. We have all recorded a sporting event to 
watch after our child's soccer practice. None of these copies 
were authorized by the media companies. Yet is there anyone on 
this committee who believes that those are acts of piracy? Of 
course not. Although they are unauthorized, they are examples 
of legal, personal, fair use.
    Unfortunately, the entertainment industry has consistently 
denied the existence of consumers' fair use rights. In July of 
2000, Hilary Rosen represented the RIAA before the Senate 
Judiciary Committee. Senator Hatch asked if it was fair use for 
him to copy a CD to take in his car or copy a CD to give to his 
wife. She responded, ``none of those examples is fair use.'' 
Instead, they are examples of what she called, ``tolerance'' on 
the part of the music industry.
    We disagree. Consumers have fair use rights, and they 
expect Congress not to tolerate any erosion of them. Fair use 
is not a set of consumer expectations. Fair use is not a set of 
tolerated behaviors. Fair use is a set of rights, and because 
those rights are being encroached upon, they need to be 
strengthened and affirmed.
    We encourage the content industry to pursue pirates, but 
that pursuit must not sweep so broadly that it also punishes 
law abiding citizens; and, unfortunately, the media industry's 
agenda goes far beyond piracy, and instead intends to create a 
legal system that denies consumers their personal use rights, 
and then charge those consumers additional fees to recoup them.
    Let me give you some examples of the methods the content 
industry is using to erode fair use rights. No. 1 is 
technology. Copy protection technologies in the market today 
have impacts beyond their stated goal of reducing piracy.
    For example, my mother called me to insist her MP3 player 
was broken, because she couldn't copy a recently purchased CD 
to her portable player. She was surprised to learn the CD was 
operating as intended. It was explicitly designed to prevent 
her from making her legally allowed copy.
    Method number 2 is legislation. As we all know, the content 
industry is urging the passage of legislation like the Hollings 
bill in the Senate, which does not fully protect fair use by 
consumers.
    Number 3, commercial exclusion: Ordinary people have 
historically been excluded from decisions that affect how they 
enjoy the media they pay for. For example, consumers had no 
voice in deciding that DVDs could disable the menu button 
during previews, thereby forcing consumers to watch the 
previews.
    A moment on the Broadcast Protection Discussion Group: The 
erosion of fair use rights is occurring in many different 
places. The forum that concerns us today is the Broadcast 
Protection Discussion Group. We see three main problems with 
the process adopted by the BPDG.
    No. 1: No consumers are participating. As in previous 
cases, citizens are not participants in a process that will 
affect the way that they watch, record, and enjoy their 
television.
    No. 2: No provisions for fair use. Fair use is not 
protected by the specification. In fact, it is not even 
mentioned. While the interim progress report to this committee 
briefly discusses some fair uses, the draft of the 
specification ignores it completely. If we all agree that fair 
use is going to be protected, then why haven't the parties to 
the process included it in the specification?
    No. 3: Too much control in industry hands. The charter of 
the BPDG is to prevent the unauthorized retransmission of 
digital broadcast television. That may be the charter, but the 
document produced thus far establishes a technical regime which 
would give a small subgroup of the BPDG members, which, by the 
way, include no consumer representatives, far greater control, 
control over how consumers watch, record, and enjoy their 
digital television.
    For example, the specification would allow the deployment 
of technologies which could give media companies the control 
over when your VCR recordings expired. Imagine recording all 
Sesame Street programs to replay for your child whenever you 
needed to, only to find out your recordings expired after 24 
hours.
    The entertainment industry wants you to ratify a regime 
that gives them usage control without guarantees of fair use. I 
would urge the members of this committee not to approve any 
specification that does not explicitly assert and defend 
consumer fair use rights.
    In conclusion, I urge this committee that stopping piracy--
I urge this committee to recognize that stopping piracy is just 
one goal of copyright law. That goal needs to be balanced 
against the goal of protecting the rights of citizens. Congress 
needs to pass into legislation a positive assertion of 
consumers' fair use rights.
    Your constituents need to rest assured that their historic 
rights are safe. They need to know that no technology, no 
legislation, no commercial exclusion and no industry consortia 
will abridge their rights, and until such a positive assertion 
is passed into law, consumers' rights will continue to be 
eroded. Thank you very much.
    [The prepared statement of Joe Kraus follows:]
    Prepared Statement of Joe Kraus, Co-Founder DigitalConsumer.org
Introduction
    Mr. Chairman and members of this committee, good afternoon.
    My name is Joe Kraus and I am co-founder of DigitalConsumer.org, a 
new consumer advocacy group dedicated to safeguarding citizens' fair-
use rights to digital media. To be more specific, we want to be sure 
that any digital rights management solution or legislation protects the 
digital rights of consumers in addition to protecting the digital 
rights of the entertainment industry.
    I am here to represent the views of the 35,000 Americans who have 
become members since our formation 6 weeks ago. We thank the Committee 
for holding this hearing and for allowing us to testify.
    Our members are not teenagers swapping songs on the Internet. 
They're ordinary, law abiding citizens who insist that Congress protect 
their historical fair-use rights. They are people who respect 
intellectual property but who also believe that their rights should not 
be ``collateral damage''' in the ``war against piracy''. They're people 
like Gregory Brewsaugh, a self-described Republican high school physics 
teacher in Huntington Beach, California. Mr. Brewsaugh has purchased 
over 400 CDs. He has copied his CDs onto his computer which he then 
uses as a 4,000 song personal jukebox to deliver music throughout his 
home. Mr. Brewsaugh simply loves music, loves electronics and enjoys 
the freedom he has to listen to the music he lawfully acquired in a 
manner and form of his choosing.
    DigitalConsumer.org members are proponents of intellectual property 
protection. We do not support or condone piracy. However, unlike what 
media companies would like you believe, copyright does not confer on 
the holder of a copyright the power to control every access, use, or 
copy of a work from cradle to grave. Not all ``unauthorized'' copying 
is piracy and not all consumers are potential criminals.
    We've all made mixed tapes of our favorite music. We've all made 
copies of CDs to take to the gym or listen to in the car. We've all 
recorded a sporting event to watch after our child's soccer practice. 
None of these copies were ``authorized'' by the content companies. Yet, 
is there anyone on this Committee who believes that these are acts of 
piracy? Of course not. Although they are unauthorized, they are all 
examples of legal, personal, fair-use.
    However, the entertainment industry has consistently denied the 
existence of consumers' fair-use rights. In July of 2000, Hilary Rosen 
represented the RIAA before the Senate Judiciary Committee. Senator 
Hatch asked if it was fair-use for him to make a copy of a CD for him 
to listen to in his car, or for him to make a copy of a CD to give to 
his wife. Ms. Rosen responded that ``none of those examples is fair-
use.'' Instead, they are examples of what she called ``tolerance'' on 
the part of the music industry. In other words, the recording industry 
takes the view that these are examples of ``unauthorized'' uses that 
the entertainment industry chooses not to take us to court for having 
committed.
    We disagree. Consumer's have fair-use rights and they expect 
Congress to safeguard them. Congress and the courts have carefully 
crafted a deliberate balance between the rights of copyright holders 
and the rights of citizens. Generally speaking, rights holders have the 
exclusive right to distribute and profit from artistic works. Consumers 
who legally acquire these works are free to use them as they see fit, 
so long as that use is personal and non-commercial.
    We respect the right of the content industry to pursue pirates. 
But, that pursuit must not sweep so broadly that it also punishes law-
abiding citizens. Unfortunately, the media industry's technical and 
legislative agenda does precisely that--it goes far beyond preventing 
piracy to prohibiting legal personal use. Content companies have used 
anti-piracy laws to effectively criminalize what to date have been 
``unauthorized'' but nevertheless legal uses of media. The result? 
Consumers will wind up paying for what they have had previously been 
allowed to do for free.
Erosion of our personal use rights
    Let me give you some examples of the methods the content industry 
is using to erode fair-use rights.
    Method #1. Technological Barriers to Fair-Use. Copy protection 
technologies in the market today have impacts beyond their stated goal 
of reducing piracy. These technologies give content companies an 
unprecedented ability to reduce or even revoke fair-use rights. My 
mother called me to insist that her MP3 player was broken because she 
couldn't copy a recently purchased CD to her portable player. She was 
surprised to learn that the CD was operating as intended--it was 
explicitly designed to prevent her from making her legally allowed 
copies.
    Similarly, my dad called to tell me his DVD player was broken 
because the ``menu'' button wasn't working when the previews were 
playing on his DVD (thereby preventing him from skipping the previews). 
He was surprised to learn that existing law made it illegal to create a 
DVD player that would skip through content that the media companies 
flagged as ``must watch''.
    The irony is that these technical barriers have been more effective 
at preventing my mom from copying her legally bought music to her MP3 
player than at diminishing major commercial piracy operations in China 
and Taiwan. Copy protection isn't breakable by my mother, but it is 
very breakable by computer hackers.
    Method #2. Legislative Barriers to Fair-Use. In 1998 the 
entertainment industry came to Congress with a proposition: give them 
greater copyright protection and they would unleash a tidal wave of 
legal, downloadable digital movies and music for consumers to enjoy. As 
a result, Congress passed the Digital Millennium Copyright Act (DMCA).
    Congress lived up to its end of the bargain but the entertainment 
industry did not. Four years after the passage of the DMCA, consumers 
are still waiting for the flood of legally available content; meanwhile 
the law is being used to diminish or erase consumer's fair-use rights.
    Now, the entertainment industry is back making claims similar to 
those made in 1998: ``Give us more protection and great things will 
happen.'' We have no reason to believe the outcome for consumers will 
be any different this time around.
    Method #3. Commercial Barriers to Fair-Use. Many decisions relevant 
to fair-use are increasingly made by entertainment and consumer 
electronics industry consortia with little or no input from citizens. 
Ordinary people have historically been excluded from many of the 
decisions that affect how they enjoy the media they legally pay for. 
For example, consumers had no voice in deciding that DVDs could disable 
the ``menu'' button during previews. Consumers had no voice when copy 
protection technologies for CDs were developed that denied consumers 
their ability to copy CDs onto their portable music players. Consumers 
were not represented when it was decided that DAT tapes could only be 
copied once (even if the voice on the DAT tape was your own). And no 
members of the press were permitted to observe and report on the most 
recent standards setting consortium--the so-called BPDG. In general, 
consumers have not been allowed to participate in decisions that affect 
their daily lives nor has the press been permitted to observe how these 
decisions are made and report their findings to the public.
The terms of the debate
    Most importantly, fair-use rights are being threatened by the way 
that the entertainment industry is framing this debate. They would have 
you believe that all copying that they have not authorized is piracy, 
even though Congress and the courts have affirmed our rights to make 
personal copies of movies and music. When my mom makes copies of a CD--
one to take to the gym, one to listen to on her computer, one to give 
to her husband--that is not piracy.
    The content industries have gone so far as to make a frontal 
assault on the industries that support consumers' legal rights. They 
have accused Apple, Intel and Gateway of sponsoring piracy simply 
because they give citizens tools to exercise their fair-use rights.
    The content industries complain that the rest of the country has 
been slow to come to consensus on copy protection issues. But a 
compromise will inevitably be difficult when the content industry 
refuses to concede a fundamental fact--fair-use exists.
    I urge Congress to recognize that stopping piracy is just one goal 
of copyright law. That goal needs to be balanced against the goal of 
protecting the rights of citizens. Citizens have been left out of this 
debate even though they stand to be the most affected by the outcome. 
Your constituents expect Congress to safeguard and assert their fair-
use rights.
The Broadcast Protection Discussion Group
    The erosion of fair-use rights is occurring in many different 
places. The forum that concerns us today is the Broadcast Protection 
Discussion Group--a group this committee is very familiar with. We see 
three main problems with the process adopted by the BPDG.
    No consumer participation. Most importantly, the process has 
excluded consumers. As in previous cases, consumers are not 
participants in a process that will affect the way that they watch, 
record and enjoy their television.
    No provisions for fair-use. Second, fair-use is not protected by 
the specification--in fact, it is not even mentioned. While the interim 
progress report to this committee briefly discusses fair-use (section 
2.7), the draft of the specification ignores it completely. If we all 
agree that fair-use is going to be protected, then why haven't the 
parties to the process put it in writing and included it in the 
specification?
    When I attended the most recent BPDG meeting I asked for a positive 
assurance that fair-use rights would not be abridged by any technology 
placed on the contentious ``table A''. Unless the Congress acts to 
insure that fair-use rights will not be abridged by any technology 
implemented pursuant to the BPDG, then how can it be sure that devices 
which enable free time shifting, space shifting, multiple copies, or 
even multimedia homework assignments, won't be prohibited by this 
process?
    Too much control in industry hands. Third, the BPDG members tell 
you their intent is to prevent the unauthorized retransmission of 
content over the Internet. That may be the charter, but the document 
produced thus far establishes a technical regime which would give BPDG 
members far greater control--control over how consumers watched, 
recorded and enjoyed their digital television. Nothing in the 
specification prevents the deployment of technologies which would: 
allow media companies to control when your VCR recordings expired 
(imagine going on a two week vacation only to find out that your 
recordings of your favorite programs expired after a week); stop you 
from taking your home recordings on your laptop to watch on the train 
to work; or prevent you from watching recorded shows during primetime.
    When I raised these issues at the latest BPDG meeting, I was told 
that the technologies deployed would most certainly have ``baggage'' 
that would affect fair-use. While fair-use rights may be ``baggage'' to 
the entertainment industry, those rights are cherished by citizens. And 
citizens expect Congress to act in their defense.
    It is one thing for the entertainment industry to grant their 
blessing to one or more technologies that will erode the rights of 
consumers. If consumers choose to adopt a technology that diminishes 
their rights, that is their decision. However, it is quite another for 
the Congress to give the entertainment industry's preferred 
technologies the force of law. And that is precisely what this entire 
debate is about.
    The members of the BPDG say that Congress should enforce the 
consensus of the content and technology industries or give the FCC the 
power to do so. We believe Congress also has an obligation to safeguard 
the rights of citizens who have not had a voice in this debate. 
Congress should insist that consumer's fair-use rights be explicitly 
asserted and defended in the BPDG specification.
    Legislation to give more rights to copyright holders is not needed.
    The entertainment industry is back in Washington asking for more 
changes to the law. They claim that the marketplace has failed to help 
them develop technologies to protect their intellectual property and 
that therefore the government needs to step in legislate. We believe 
this is the wrong path for Congress to take for several reasons.
    First, Congress should think of this problem in terms of rights, 
not in terms of technological mandates. Define the rights of the 
respective parties (copyright holders and citizens) and let the market 
develop technologies which adjudicate between the two. Copyright 
holders have strong rights while consumers' rights are weak and ill 
defined. Therefore, to help the market to work effectively, the first 
step to solving the piracy problem is not a government mandate, but a 
strong assertion of consumer rights.
    Second, many computer science experts believe that a secure system 
is not possible. Princeton Computer Science Professor Ed Felten, a 
computer security expert, noted in his testimony to the Senate 
Judiciary Committee on March 14, 2002 that ``a standard for copy 
protection is as premature as a standard for teleportation''.
    Further quotation from his testimony illustrates this point. 
``Every copy protection scheme for general purpose computers that has 
undergone serious public scrutiny has been found to be ineffective. 
Consider what will happen if a government mandated protection measure 
turns out not to work. Such a measure would do many things: it would 
inconvenience honest consumers; it would raise the price of media 
players; it would lengthen product development cycles; it would impede 
the development of new and better standards. Everyone would suffer, 
except the pirates. The industry that devised the measure would look 
technically inept, and the government that mandated its use would look 
worse.''
    The solutions that the content industry has advanced to date have 
been more effective at preventing consumers from copying their legally 
bought music to their MP3 players than at diminishing major commercial 
piracy operations. As we all know, copy protection isn't breakable by 
the average citizen, but it is very breakable by software experts.
    A government mandated technology standard will not be any more 
effective at preventing piracy. Instead, the consumer will lose as 
another technology that deprives them of control and flexibility is 
forced upon them.
    Third, putting the government in charge moves the decision from a 
market-based one to a political one. The development of technology 
should be driven by the private sector, not by a government agency.
    Fourth, given the slow speed of a government-driven process, the 
chosen standard will inevitably become outmoded and the process for 
revising it and updating it will be slower than a market-based 
approach.
    Finally, while some in Hollywood claim that a government standard 
is needed to ensure interoperability, legislation has not been needed 
to guarantee other critical types of interoperability: CDs play in all 
CD players, DVDs play in all DVD players, Internet Protocols allow all 
computers to talk to one another. None of these examples required 
government intervention.
A dearth of viable, legal alternatives.
    We believe that one of the causes of the illegal copying of music 
and movies (although not the only one) is the dearth of commercially 
viable legal alternatives. MusicNet and PressPlay (the music industry's 
legal alternatives) have serious flaws: they lack deep catalogs and 
they don't provide consumers with the flexibility they expect from 
their music. For example, in many cases consumers cannot transfer music 
to portable players, or in the case of PressPlay the music ``expires'' 
as soon as users stop paying the subscription fee. Consumers are voting 
with their feet and avoiding these services. I believe this is not 
primarily because the competition is free, but because the competition 
delivers what consumers expect: they can find the music they're looking 
for and once they find it, they can do with it what they expect (i.e. 
take it to the gym, listen to it in their car, etc). As the Economist 
magazine (March 21, 2002) accurately observed, ``the meaner the 
industry is over what people can do with the [content] they pay to 
download, the more the studios' own services will be a second-rate 
alternative to piracy''
    It is instructive to contrast the approach of the media companies 
with the approach of software companies in the digital world. As we've 
heard many times in this debate, media companies claim to lose $3.5B 
per year to piracy. But, software companies claim to lose $12B per 
year. Therefore, one would logically expect the software companies to 
have the same reservations about the digital medium that the media 
companies have. One would expect that the software industry would be 
clamoring for government mandates like the media industry. One would 
expect that the software industry would be shying away from digital 
distribution like the media industry.
    But the software industry does not behave like the content industry 
even though they suffer nearly 4 times the piracy. Unlike their media 
company counterparts, software companies have generally chosen to 
embrace the digital medium. A huge number of software titles are 
available for digital download. Once downloaded, these software 
programs behave just like software bought at the store.
    We believe it's important to ask why the software companies who 
lose so much more to piracy embrace the digital medium while the media 
companies claim that their business will be ruined if they embrace 
digital delivery in its current ``insecure'' state?
    Along those same lines, it's important to ask why the Business 
Software Alliance (an organization dedicated to detecting and stopping 
piracy) does not support government mandated technologies for copy 
protection. I believe the reason is that the software industry has been 
down this path before and has found that it does not work. In the early 
1980s, many major software companies decided to implement strong copy 
protection schemes on their products. They discovered two things. 
First, their schemes did not stop piracy. Dedicated commercial pirates 
circumvented the copy protection. Second, their copy protection 
alienated and infuriated paying customers because the copy protection 
altered the expected behavior of the software. For example, consumers 
could not back up their software, and if a consumer upgraded his 
computer by buying a new one, they could not re-install the software on 
that machine. Software companies discovered that treating all customers 
as potential criminals was bad for business; it didn't stop theft and 
it alienated the people who actually paid for their products.
    Instead of forcing technical solutions that inconvenienced paying 
customers, the Business Software Alliance shifted to a strategy of 
actually pursuing pirates. Today the BSA investigates piracy 
allegations, conducts raids, and assesses large fines on violators. 
Through the enforcement of existing law, the BSA has been extremely 
effective at diminishing piracy in the United States.
    In short, computer security experts believe and software history 
teaches that technical solutions will not solve the problem of piracy. 
The only way to reduce piracy is to engage the market by offering 
viable legal alternatives to consumers and to pursue the pirates, not 
the average consumer.
Conclusion
    Content providers have a right to pursue and prevent piracy. 
However, law abiding consumers cannot have their personal use rights 
swept away in the process. In order to protect consumers' rights from 
further erosion and in order to ensure that any technical solution to 
content protection respects consumer's fair-use rights, the members of 
DigitalConsumer.org urge this Committee to make a positive assertion of 
citizens' personal use rights. The vehicle is a set of principles we 
call the Consumer Technology Bill of Rights and it is a statement of 
fair-use principles grounded in history, legislation and the courts.
    After years of successful litigation and legislative efforts, many 
in the entertainment industry are back in Washington asking for more 
changes to the law. All the while, they have been quietly developing 
services, technologies and products that eliminate fair use for their 
customers, your constituents. Many in the copyright community will not 
admit that there is such a thing as fair use. This denial persists 
despite 30 years of Congressional action and Supreme Court rulings 
affirming consumers' fair use rights. And, while I am not a lawyer, I 
do know this much: consumers believe they have personal use rights and 
they expect Congress to insure that they are safeguarded. Before this 
Committee considers yet another change in the law at the behest of the 
copyright community--a change in law that would make ``unauthorized'' 
copying synonymous with piracy--I would respectfully urge you to insure 
that the rights of consumers are protected and spelled out in the 
legislation.
    Thank you very much for the time to address this committee today.

    Mr. Upton. Thank you all, and we all appreciate the 
testimony and having a chance to review it last night as well.
    I am going to work with Mr. Chernin here for the first 
question. I am going to ask a question of both Mr. Chernin and 
Mr. Parsons. I would like each of you to respond.
    If we can get the broadcast flag done and maybe the analog 
hole, to come pretty close to getting those accomplished, will 
that be enough for the sake of the DTV transition to unleash 
the content as we continue to move toward the other content 
protection measures? For the purpose of that question, notice I 
did not include peer-to-peer. I know we made some progress on 
peer-to-peer but have not yet been able to resolve it. What are 
your thoughts, each of you? Why don't we start with Mr. Chernin 
first.
    Mr. Chernin. Thank you, Mr. Chairman. I think that, 
clearly, the broadcast flag is the single biggest impediment 
for us making any digital--all of our digital content available 
on digital television. So I think that will go a long way 
toward solving our problems. Clearly, we would like to see 
everything solved, but specifically related to the digital 
transition on terrestrial television, I think the broadcast 
flag is the single biggest issue, and I think its, hopefully, 
imminent solution will allow us to rapidly speed up this 
transition.
    Mr. Upton. So you think, just with that, if we are able to 
get that done, that, in fact, we will see the content be able 
to flow?
    Mr. Chernin. I think it is the single biggest current 
impediment, and the removal of that impediment will do more 
than any other single thing for, specifically, the digital 
terrestrial transition. We would still like to struggle with 
the other problems, but they are less related to the digital 
terrestrial transition than the broadcast flag issue.
    Mr. Upton. Mr. Parsons.
    Mr. Parsons. Basically, I agree with Mr. Chernin in terms 
of the way you have framed your question. Will that help speed 
the DTV evolution? Moreover, we don't have a solution yet. I 
mean the industry groups. It is the same group of engineers and 
the same group of both technicians and lawyers who are working 
on this.
    So taking it incrementally, I think, actually makes some 
sense, rather than trying to solve all the problems at once. 
That is not to say, however, that solving the peer-to-peer file 
sharing is not an enormous piece of a larger question, which is 
how you protect intellectual property in the digital age. But 
from the digital television perspective, I agree with Peter, 
that the broadcast flag is probably 80 percent of it, and the 
analog hole is probably 19 percent of that.
    Mr. Upton. Mr. Parsons, in your testimony you are more of 
an Upton/Markey individual: The glass is half-full, root for 
the Cubs and the Red Sox.
    Mr. Parsons. I wouldn't go quite that far, Mr. Chairman.
    Mr. Upton. Well, but you are optimistic, in fact, that 
things are on the right course, and I notice in Mr. Blanford's 
testimony, he was more of a--I don't want to call him a 
realist, but in his statement not anywhere close to getting 
this resolved. Tell me what you think the two differences are, 
and I will have Mr. Blanford respond as well.
    Mr. Parsons. I can simply tell you why I have a sense of 
optimism about it. I do not think we are there yet, but I think 
real progress is being made. If you tick them off, we are 
pretty close to being there, I think, on the broadcast flag 
issue. We've got our arms around----
    Mr. Upton. How close is close? Six months?
    Mr. Parsons. Well, I think--I don't know that I can put it 
in months but, you know, we have got the sort of technology 
down, as I understand where the groups are. What they are doing 
now is trying to formulate a uniform specification.
    I think that not everybody in the industry is pleased with 
where we are on that, but that there is a broad consensus among 
the consumer electronics, information technology, and 
entertainment industry that we have found the right place to 
be. There are some people who have--and I am sure we will hear 
from Mr. Blanford on it. Some people are aggrieved by that, but 
I think within a matter of months----
    Mr. Upton. I know there is a meeting next week, April 29. 
Do you have some hopes on what you are going to be able to 
accomplish at that meeting?
    Mr. Parsons. Well, I think on the broadcast flag issue, 
yes, I think that we are very close to having something that 
most of the industry could get its arms around.
    Mr. Upton. Mr. Blanford, would you like to respond?
    Mr. Blanford. Yes. Thank you. I would say, first of all, 
that we overall are optimistic that these problems can be 
resolved and, certainly, Philips historically has been involved 
in other similar endeavors. I think indeed we see that we will 
get there. However, we are most concerned, as I related in my 
testimony, that the process which we are using right now, 
although some progress has been made, is fundamentally a closed 
process, and that other technologies that could be helpful are 
not being considered.
    More importantly than the selection of the technology, 
although that is important, is the fundamental decisions about 
how that technology will work downstream of the flag. The 
fundamental rules which guide how equipment will work, talk 
with each other, is being controlled fundamentally by this 
small group.
    It is in the decisions and those rules where fundamentally 
the balance of consumer use and content protection which, many 
of the members here have certainly highlighted, is the balance 
we are striving for. It is in the setting of those rules that 
that balance is determined. Our concern is we have a very small 
group setting those rules with not all participants being 
involved.
    That is why our suggestion for a more open process with 
Congress, in one form or another, stepping up and helping to 
provide some governance of the process to ensure it is open, 
that it is transparent, and that that balance can be found.
    Mr. Upton. Thank you. I know my time has expired. Mr. 
Boucher. A series of votes have been called. I think we will 
have time for Mr. Boucher, and then we will break for a time, 
and then we will come back.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
want to express my appreciation to all of these witnesses, 
those who are physically here today and Mr. Chernin who is here 
by means of our video conferencing equipment, for the very 
informative testimony that they have prepared and presented to 
us, which I find to be very enlightening on the subject we are 
addressing.
    The operating principle that we have had for sometime is 
that, as soon as the private sector working group can develop 
the appropriate set of standards for protecting content, while 
also observing home recording rights, that we in the Congress 
would then be called upon to legislate in such a way as to 
assure that all devices, receivers, players, and recorders 
recognize and respond to the agreed upon standards.
    My first question to you is what is the right time for us 
to legislate? To date, there has been an agreement that would 
protect content delivered by cable and by satellite. In fact, 
that agreement has now been in place for a number of months.
    I am told that just last night basic outstanding 
differences were resolved on a means of protecting content 
delivered over the air, and that now the various parties are 
examining the various means by which those outstanding issues 
were resolved, and that potentially, within a matter of days, 
we could have the announcement of a final agreement that would 
create a broadcast flag for protecting the content delivered 
over the air to antennas and to rabbit ears.
    That is truly substantial progress, and I am wondering if 
the time to legislate is upon the conclusion of that agreement. 
If, in fact, you do close that issue within the next several 
days, can we here in this committee expect that you will be 
coming to us with a legislative recommendation that we then 
enshrine those agreements and require that devices respond?
    Let me begin with Mr. Parsons.
    Mr. Parsons. Not being at the table, Congressman, I can't 
tell you exactly what was determined last night, but your 
understanding and mine is about the same, that they have really 
reached closure. The industry working group has reached closure 
around the technological definition of broadcast flag, and now 
they have to move to the next step, which is to design the 
standard which we would then come and ask the Congress to have 
made uniform throughout the land.
    It is the same answer to the chairman's question. I think 
that is not weeks but a couple of months. I do not think it is 
6 months, but I think we are getting very close, and I think 
what we are hearing to some extent from Mr. Blanford, and maybe 
even to a lesser extent from Mr. Kraus, is that there may be 
jots and tittles that can be added to it, but I would remind 
the committee, in this area in particular, the perfect can be 
the enemy of the good.
    If we really want to get moving on DTV, you are going to 
have to do something that constitutes good action, largely 
consensus action, even though there may be on the outlier 
people who feel aggrieved, for one reason or another.
    Mr. Boucher. So you would agree that the proper time to 
legislate is the time at which we do have agreement on 
protecting cable, satellite delivered content, as well as over 
the air content; and when you have done that, it is time for 
Congress to do its part. Would you agree with that?
    Mr. Parsons. I would say it would be the appropriate for 
Congress to take a step, and particularly as relates to the 
issue we are talking about, which is DTV and the broadcast 
flag.
    Mr. Boucher. Mr. Chernin, would you care to comment on that 
question?
    Mr. Chernin. Yes. First of all, I am probably even more 
optimistic than my colleague, Mr. Parsons. I think we should be 
able to come out with a recommendation within, at most, a 
matter of weeks.
    I guess the place where I do most agree with my colleague 
is I do think we should approach this incrementally, and rather 
than wait for everything and wait for government to do one big 
thing, as we are ready to move on satellite and cable, as we 
are ready to move on the broadcast flag, we can pursue limited, 
targeted legislation to codify those solutions and get on with 
the next one.
    So I am quite optimistic that we are within a very short 
time of coming and proposing a solution.
    Mr. Boucher. Thank you. Mr. Liao, as the representative of 
the 5C companies, would you agree with Mr. Parsons and Mr. 
Chernin?
    Mr. Liao. Let me tell you what the official schedule is. 
The schedule is for the----
    Mr. Parsons. You mean, all this time you had a schedule, 
and you let me hang out there?
    Mr. Liao. I am sorry, Dick. The schedule is for an issuance 
of the final report on May 17. Now there are many issues that 
we think are basically resolved, and as you referred to, 
Congressman, last night the MPAA, the computer industry group, 
as well as the 5C, came to some very important agreements on 
how to move forward.
    That does not mean that all members of the BPDG, the 
Broadcast Protection Discussion Group, have agreed yet. In 
fact, the proposal that is coming from these groups of 
companies will be put on the website, I think, today. So that 
it is going to take some more discussion, but we are very 
optimistic that, by the deadline of May 17, in fact, there will 
be an issuance of a final report. We certainly hope that will 
be the case.
    At the same time, the CPWG, which is a technical working 
group--I should emphasize, a technical working group. It 
typically does not deal with policy issues, but because of the 
importance of this one, it has developed a parallel committee 
that is investigating the sort of policy ramifications of this.
    It is probably from that committee that will come sort of a 
recommendation or at least an analysis of what kind of 
legislation might be required, and definitely we are thinking, 
I think everyone agrees, on some very limited legislation that 
might be appropriate for this issue.
    Mr. Boucher. Well, thank you. We will all look forward to 
getting that report. My time has expired. I again want to thank 
these witnesses for assisting us in this inquiry today.
    Mr. Upton. I would note that there is a little less than 
6\1/2\ minutes left in the vote on the floor. So at this point 
we will take a break, and we will come back as soon as the 
votes are over.
    [Brief recess.]
    Mr. Upton. Take our seats, please. We are done voting on 
the House floor for the week. A number of us are going back to 
our districts this weekend as well. I know that Mr. Chernin has 
to leave at 3:30 Eastern time. So we will resume, and we will 
resume with Mr. Barton.
    Mr. Barton. Thank you, Mr. Chairman. I appreciate this 
hearing. I focus, as you know, much more on energy issues as 
chairman of that subcommittee, but I am a member of this 
subcommittee, and I really, really enjoyed the hearing.
    I don't have but one or two questions. I was sitting here 
during the testimony, and we have these little fancy gadgets 
now called blackberries. So I sent a message to one of my 
constituents down in Texas, telling him what I was doing and 
said, do you think you have the right to copy a CD or a video 
that you buy?
    The constituent e-mailed back immediately and said, ``I 
already do with CDs anyway. I can see both sides of this issue, 
but as a consumer I love the fact that I can copy or burn my 
own CDs. In my opinion, the music industry is making a killing, 
and they haven't been smart enough to keep up with today's 
technology. If I was a musician, I would hate it, of course. 
There's my two cents' worth. You are very busy today, aren't 
you?''
    So that kind of puts it in a nutshell. If you are on the 
production side, you can see why we want copyright protection 
that is enforceable, even in the home; and if you are on the 
consumer side, as the gentleman on the end of the panel is, you 
can see why people want to have the ability to at least, as I 
think the buzzword is, have fair use.
    I am more on the fair use side. I think that it should be 
reasonable--that we should have a way technologically to 
reasonably protect copyright, and I am with Mr. Boucher and 
what he said about let's try to let the private sector and the 
industry work it out. But I don't believe we need to go to the 
extremes that some in the production side, some of the studios 
and producers, would have us attempt to go to.
    So I am going to--I would oppose the Hollings bill, if it 
were to come over here, and hope that we can work out a little 
better agreement.
    I also see my good friend, Mr. Valenti, in the audience, 
good Texan, new book out on LBJ, and I am sure you are going to 
be mentioned in it. But I just want to send a message to your 
folks. I went to see a movie not too long ago, and I don't go 
to many movies anymore. But I went to see a movie in which the 
plot was a group of renegade Marines that had assassinated some 
people in El Salvador, and one of the Marines later went AWOL 
and married, and then was tracked down by the FBI. It turned 
out that his boss was the Marine general in charge of 
Congressional affairs for the Congress.
    He is shown wearing the Congressional Medal of Honor. Now 
there is a Marine from my home town of Ennis, Texas, named Jack 
Loomis who died in World War II, one of the few Marines from 
Texas who won the Congressional Medal of Honor. I know we have 
freedom of speech in the First Amendment, but it is a travesty 
to have Hollywood showing a corrupt Marine general, in my 
opinion, wearing the Congressional Medal of Honor, because we 
don't give those away.
    You know, we've got freedom of expression in this country, 
but that really chapped my pants. So if you see some of your 
friends out in Hollywood, remind them what the valor is in the 
Congressional Medal of Honor. It is not just another award that 
you put on somebody's uniform. ``Black Hawk Down'' is supposed 
to be a pretty good movie, but I will get with you on that 
privately, but it really chapped my tail.
    My question: Mr. Liao, you in your testimony talked about 
an agreement, and the staff apparently is not aware of that 
agreement or not very aware of it. Could you enlighten us or 
elaborate a little bit on that agreement?
    Mr. Liao. Yes. First of all, the agreement happened very, 
very late or, I should say, early this morning on the west 
coast. So to be honest, I only learned about that agreement 
today as well. So it is not surprising that your staff did not 
know. I did not know.
    As you know, since the--over the last few months, all of 
the industry participants have been working diligently to solve 
these issues, and the agreement, again, is focused on the 
broadcast flag. So it only addresses that single issue, the 
broadcast flag issue.
    Also as you know, the way that the CPTWG works, it is a 
public, multi-industry forum that even public interest groups 
can and do attend. It is really kind of a venue for companies 
to make proposals, to get feedback, and for the industry or the 
multiple industries to kind of analyze those proposals. Then 
some of these groups may or may not implement them in their 
businesses.
    In this particular case, three groups--so I want to 
distinguish this. This agreement is not a BPDG agreement. This 
is three groups who have in the past and, in fact, will 
continue to make proposals to the CPTWG, either independently 
or together, namely the MPAA, the CIG, the Computer Industry 
Group, and the 5C group of companies.
    They have agreed on some of the criteria by which 
technologies might be deemed as useful for the--to be used in 
conjunction with the broadcast flag.
    Mr. Barton. Thank you. I yield back the balance of my time, 
Mr. Chairman.
    Mr. Upton. Thank you. Ms. Harman.
    Ms. Harman. Thank you, Mr. Chairman. On the way to vote I 
learned that this meeting last night concluded at around 1:30 
in the morning. It is exciting to me to learn that the industry 
keeps the same hours that Congress does.
    I also am impressed that you can bring together the 
disparate interests you describe. Maybe we should turn over the 
Middle East, the problem of the Middle East, to you. My serious 
point is that it would be wonderful to see real progress on 
this issue. We know it is a hard issue, and we know it is 
balancing a to of important interests.
    As I listened to you, at least I heard you say the MPAA, 
the CIG and the 5C group is all in the same place. That covers 
a lot of territory, and I am happy to hear that. What is not in 
the room is, at least if we define interests, maybe there is a 
fourth set of interests, and those might be consumers.
    Now I understand you are all consumers, too, but a separate 
group of consumers. So I want to direct a few questions to Mr. 
Kraus today, because I was interested in his testimony, and 
anyone who can build an organization of 33,000 people in 6 
weeks gets any politician's attention. How did you do this?
    Mr. Kraus. Well, the short answer is there is actually a 
lot of latent interest in the issue of fair use rights, and I 
think people out on just the average consumer is very concerned 
about recent trends. So while I think the average consumer 
understands the notion that piracy is not a good thing, the 
average consumer is concerned that the trends so far seem to be 
overreaching in the other direction. So there is just a lot of 
latent interest.
    Ms. Harman. But who can join your organization? Can I joint 
it?
    Mr. Kraus. Absolutely.
    Ms. Harman. Can Mr. Parsons join it?
    Mr. Kraus. Yes. The organization is open to anyone who 
wants to join, and essentially it is an ability--It is a 
gathering point for consumers who are concerned about fair use 
rights to be able to channel their interests to politicians and 
to people who are making both industry decisions and policy 
decisions regarding fair use.
    Ms. Harman. Who sets your policy? Do your members set your 
policy or does some governing board set your policy?
    Mr. Kraus. We currently have a relatively informal 
structure of an executive committee. We take input from our 
member base, and we essentially use that input to define a set 
of policies that we think our constituency is concerned about.
    We represent that policy back out to our members, and they 
vote with their e-mails and their feedback to us about whether 
they approve of that or not. By signing up as members, this 
group of people essentially are saying this is what I am 
concerned about.
    I have to stress that the membership is really most 
concerned about seeing a positive assertion of their fair use 
rights put into law, because I think the overall concern is 
that, little by little, fair use rights get whittled away 
without a legislative positive assertion of fair use rights. I 
think consumers are worried that their interest will not be 
protected.
    Ms. Harman. Well, I appreciate that. Where are you located?
    Mr. Kraus. We are currently located in Palo Alto, 
California.
    Ms. Harman. And so the goal here is to have, it sounds to 
me like, a democratic organization which will sign up anyone 
who wants to sign up, and which has a kind of interactive 
agenda. So that if people don't like your agenda, they drop off 
or they have a chance to vote no? I mean if they did not like 
your consumer bill of rights, could they say we don't like 
this, change it to that, and would you change it?
    Mr. Kraus. Well, I mean, I think that the key is that there 
is a governing body that essentially takes input from the 
members and makes decisions, and then the consumers who are 
members of those organizations essentially vote with their feet 
and vote with their faxes to the Members of Congress.
    Ms. Harman. Who is the governing body?
    Mr. Kraus. The governing body essentially is a smaller set 
of members and consumers. I myself am included. Graham Spencer, 
also in Silicon Valley, is a member, and we are looking to 
actively grow that executive committee to make sure that it is 
as broad and representative as our members.
    Ms. Harman. So is your model at some point--I realize you 
are 6 weeks old, and it is highly impressively that you have 
done this in 6 weeks.
    Mr. Kraus. Thank you.
    Ms. Harman. Is your model something like the Consumer 
Federation of America or Consumers Union or--I am listening to 
Mr. Markey at the same time--or Common Cause? I mean, what are 
you trying to become, the digital version of one of those 
things?
    Mr. Kraus. Well, not being as familiar as maybe I should be 
with those organizations, and not having actually done this 
kind of organizing before, I don't really have a specific model 
in mind, and I apologize for not being able to liken it to 
anything else.
    Again, I think our general goal is to use--I myself am an 
entrepreneur and involved in the web. Therefore, I am familiar 
with how to use the web as a wonderful organizing tool to 
essentially give disparate consumers who share interests a 
common voice.
    So I don't have any particular model in mind that I can 
point you to, but I can say that what is wonderful about the 
web is that it is able to achieve and able to organize 
consumers with disparate geographies into a common voice and 
allow that voice to be channeled to policymakers and people in 
industry.
    Ms. Harman. Well, my reaction to what you have said is to 
be impressed with your entrepreneurial expertise, but also to 
be a little bit cautious, and I hope you are, too. This engine 
you are creating really needs, as it operates, to represent 
fairly, I would hope, the views of its members and to operate 
fairly in a set of problems where what we really are seeking is 
balance.
    Mr. Kraus. Yes.
    Ms. Harman. You wouldn't argue that fair use is the only 
good here. I am sure you wouldn't.
    Mr. Kraus. No. Let me be very, very clear. 
DigitalConsumer.org does not support, condone in any way 
piracy. I completely recognize--I am a businessman in my 
professional career. I completely recognize the problems that 
Mr. Parsons, Mr. Chernin are facing, absolutely. I understand 
that those are important issues.
    My constituency of DigitalConsumer.org, however, namely, is 
concerned both about the issues that the industry is facing, 
but also want to make sure that their rights are not taken away 
in the process. So, believe me, this is an organization that 
does take a balanced view and understands that there are 
serious issues involved, is not looking to legalize or condone 
piracy in any way, but also wants to defend the fair use rights 
of consumers that, so far, have not actually, in our opinion, 
been adequately represented.
    Ms. Harman. Well, I thank the panel for all that you are 
doing. I am always optimistic, but I am much more optimistic, 
having heard all of you and having heard the progress made last 
night, than I was when I came in here. Thank you very much.
    Mr. Upton. Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman. I would like to 
direct my question to Mr. Litai, if you could. How old is your 
company, Vidius?
    Mr. Litai. Two years old.
    Mr. Stearns. Two years old? How many employees do you have 
now?
    Mr. Litai. About 20 employees.
    Mr. Stearns. Okay. And if your system were in use, would 
protection measures still be necessary to keep content from 
being uploaded to the Internet in the first place?
    Mr. Litai. As I said, the technology that we are discussing 
is part of a comprehensive solution which we think should be 
made, and that should consist of elements to prevent the 
leakage of the content onto the Internet in the first place, 
and then because you cannot prevent all leaks onto the 
Internet, then eventually interdict, search, find, locate and 
interdict those copies which do appear on the Internet.
    Mr. Stearns. So protection measures would not be necessary?
    Mr. Litai. I think that protection measures in some form 
will be recommended. Yes.
    Mr. Stearns. This is to Mr. Chernin in Los Angeles. From 
what you just heard, is that type of DRM enough to adequately 
protect News Corporation content? If not, why not, and what is 
not protected?
    Mr. Chernin. Mr. Stearns, I am not sure I have enough 
knowledge of the Vidius system to judge whether it is enough to 
protect us. You know, my sense of it, just looking at it, was 
that it was, more than anything, a way for companies to monitor 
whether their employees were illegally putting illegal or 
inappropriate video files up on the Internet, but I have no 
basis other than the 2-minute demonstration I just saw.
    I do think, you know, as I said earlier, this is an 
incredibly complicated problem and is going to need careful 
thought and the goodwill and participation of everyone at this 
panel and lots of other people, and is going to involve 
solutions that are technological, that probably will need some 
legislation and, as much as anything, also need public opinion, 
need us all to take an active role saying that, while we 
believe in the fair use of consumers and we have no desire to 
restrict them, we also must stop online digital looting.
    Mr. Stearns. Well, let me ask you this. Is there anything, 
in your opinion, out there right now that provides the 
protection measures?
    Mr. Chernin. No.
    Mr. Stearns. No? Okay.
    Mr. Chernin. I don't think there is. I think we have some 
ideas, and I think some other companies have ideas, and they 
involve some very traditional methods, because a lot of these 
files end up on the Internet, you know, illegally. They are 
stolen out of trucks. They are stolen from movie theaters. They 
are used by camcorders. So we got to do a better job of that, 
but then even once we get there, I think there are some 
watermarking ideas we have.
    I think the key is how do we stop the transmission of 
inappropriate and illegally obtained files, and yet at the same 
time not restrict in any way whatsoever consumers' fair use to 
transmit files that are either legally obtained or transmit 
their son's soccer game or their 1-year-old's birthday party.
    Mr. Stearns. Well, let me ask you this. Are you doing 
online streaming now, and how are you protecting yourself now?
    Mr. Chernin. We are not doing any online streaming right 
now.
    Mr. Stearns. Okay. Mr. Litai, what precisely is the service 
you would sell to a corporation whose equipment may be subject 
to misuse? What happens when peer-to-peer networks evolve? 
Would your system no longer work?
    Mr. Litai. To answer No. 1, what we offer for corporations 
is the reports of the data hosted on their network, along with 
a very comprehensive itemized list of the specific users who 
are hosting content on their machine so that the corporation 
can actually go and remove that peer-to-peer from those 
employees' computers.
    In terms of what happens when the peer-to-peer networks 
evolve, this is the reason that what we offer is basically a 
service. There needs to be an ongoing evaluation of the peer-
to-peer networks as they evolve, and to change basically, or to 
evolve the response system to those new peer-to-peer or to 
these evolving peer-to-peer networks; because, certainly, the 
hackers will continue to evolve their systems. So we will need 
to, as well.
    Mr. Stearns. Can you explain a little bit more about the 
privacy issues associated with your system? What do you mean 
that it, ``operates only on data that has been publicly 
displayed to any inquiring computer,'' and, I guess, what are 
your company's privacy policy regarding information on 
consumers' viewing habits that may be identified by your 
tracking system?
    Mr. Litai. Okay. We do not access anybody's computer. It is 
very important to understand. We do not access anybody's 
computer. What we do is, using the peer-to-peer network, 
basically, we use the peer-to-peer network within the confines 
of the way it is intended for use.
    So what we do is go to the peer-to-peer network and ask it 
who hosts this file. Now we know how to do it in a very robust 
and very efficient manner, but we go and ask the peer-to-peer 
system where this content lies, the content that belongs to the 
content providers.
    What we do is receive these responses from the different 
computers saying I have this over here. This is how we know 
where the content is located, and where it resides. In terms of 
the privacy issues----
    Mr. Stearns. Sort of your privacy policies.
    Mr. Litai. The privacy policies is that the information is 
only made available to the owners of the content or to the 
corporations who ask specifically for those reports.
    Mr. Stearns. But if I was a corporation and you were doing 
this on me, would you notify me that you are doing this?
    Mr. Litai. In terms of--We get information from all over 
the world, not just the U.S., all over the world.
    Mr. Stearns. The specific question is: I am a corporation, 
and you are doing this--you are taking this information that is 
happening on my site. I mean, do I get notified at all? Is that 
a fair question to ask? I mean, am I in the right ballpark 
here? Should I be notified?
    Mr. Litai. The question--because what happens is, when you 
ask a peer-to-peer network,the peer-to-peer network does not 
filter the answers. So as far as we are concerned, we get 
results from computers everywhere, within corporations, outside 
of corporations, on ISPs, and basically aggregate that 
information.
    Mr. Stearns. And it doesn't identify IBM, General Motors or 
anybody like that?
    Mr. Litai. It does, because the IPs in general tell you----
    Mr. Stearns. You have all the IPs, but you never notify the 
people that you are taking all this information?
    Mr. Litai. We are not taking any information.
    Mr. Stearns. Okay. Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Stearns. Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman. Mr. Litai, 
congratulations on Vidius. No one ever heard of Vidius before 
this afternoon, but every person in the room has now written 
down your company's name, and they are going to learn something 
about it in the next week, or someone in their company is going 
to learn about it for them, because they don't know whether it 
is Vidius or invidious. So they are all trying to figure it out 
now, and none of them are quite sure, but you've got 
everybody's attention.
    My concern is on peer-to-peer networks, but just in 
general, you know, a philosophical question, because I know 
that some people see peer-to-peer networks as kind of a 
software access of evil, and I would like to get at the heart 
of the philosophical positions which the people who are sitting 
here.
    The cultural mores of millions of youngsters and certain 
adults have seemingly changed to the extent that they believe 
that all information is free, that music and movies are all 
made of digital data yearning to be free and liberated on the 
Internet.
    Some of the remedies for recalibrating the balance between 
content protection and fair use from the content community 
would simply prohibit home recorded digital data from being 
uploaded or retransmitted on the Internet. I will leave aside 
whether this is possible or not, but assuming it can be done, 
it raises the question of what our policy should be.
    So I think everyone realizes the right and the need for 
content creators to safeguard their products. Digital copies 
are, no doubt, easily copied, and there is a risk that, once 
out in the marketplace, someone could massively distribute that 
movie or TV show illegally, doing great financial harm to the 
content owner.
    Yet not every consumer is a potential thief. If a consumer 
can legally record material in digital form, doesn't it make 
sense, consistent with fair use, that a consumer would share it 
or a portion of it with a friend or use it in school?
    My question is: Is it pro-broadband to push the industries 
to lock in a standard that prohibits all uploading of legally 
copied content on the Internet? How can it be pro-broadband to 
force people to use the U.S. mail or FedEx to deliver legally 
copied, fair use content when the Internet exists to deliver 
that same material? How can we make an Internet friendly 
standard?
    So on the one hand, we are impatient and pushing and 
exhorting the industry to reach an agreement on a standard. On 
the other hand, we may unwittingly lock in a standard that may 
prove difficult to undo and seemingly embrace a policy that may 
prove difficult to change, that limits or thwarts consumer 
ability to use the Internet or fully use their broadband 
connection, which we want to see increase exponentially in its 
use?
    Can any of you take that question and help us to get a 
perspective in terms of this interrelationship between our 
desire to see rapid broadband expansion in terms of use and the 
need from some perspectives to protect copyright almost 
absolutely? Mr. Parsons?
    Mr. Parsons. I think, Mr. Markey, that you've put your 
finger on one of the important balancing acts that not only the 
industry but Congress is going to have to come to. In terms of 
driving broadband, what will drive broadband--You know, what I 
think what has been driving it so far is simply speed, but will 
ultimately drive it and really cause it to be fully penetrated 
throughout our country and indeed the world will be more and 
more entertaining, compelling, rich media uses.
    Those will be driven primarily not by consumers swapping 
things back and forth but by people going to places where 
content is created or aggregated and downloading it.
    For our stake in this, we don't have--and I am talking now 
about AOL Time Warner, but I think I can speak more broadly for 
Mr. Chernin's company and the entertainment industry. No one 
has a real issue with consumers making copies of things for 
their use around their home, and that is using the extended 
definition of home.
    So if you can download something legitimately and make 
numbers of copies so that you can play it in different rooms in 
your house or carry it to the beach in your portable player or 
put it in your car or make a copy for a friend, that has gone 
on for time immemorial and will go on going forward.
    The problem is when you can take a digital copy, upload it, 
and send it not to a friend but send it to anyone in the world 
or, for that matter, to everyone in the world. You know, the 
nub of your question is do you continue to permit that until 
you find some way to differentiate between that individual who 
has a legitimate right to send a distinct copy to a specific 
friend and, in the meantime, let the--In my statement that I 
skipped over because I was running out of time, we are looking 
at now probably--We looked at some of the Napster data about a 
million files being shared every hour.
    About 90 percent of that was of copyrighted material, as 
opposed to material in the clear. So you know that the Internet 
is being used to facilitate kind of broadband piracy of 
protectable material.
    Mr. Markey. Well, let me ask you this then. Is the Internet 
only broadband friendly for the purposes of commercial 
downloads but not for fair use downloads, or at least not yet 
ready for fair use. Help us to just understand where we are or 
where the industry is in terms of your perspective.
    Mr. Parsons. First of all, the Internet, which is sort of a 
network of connected computers, is indifferent to the bits that 
are being moved around it. So it doesn't know whether it is, 
let's call it for these purposes, a legitimate bit or an 
illegitimate bit. What broadband does is it simply enables 
people to move more around on the Internet more rapidly.
    The issue, I think, that the industry is facing, and not 
just the entertainment industry but software and, in fact, the 
whole intellectual property establishment, is that it can 
facilitate the wholesale pirating of material in which people 
have lawful rights. So what we are trying to do is find ways to 
secure those rights at the place of publication, and then to 
make sure that the system honors that security after a 
protectable piece of intellectual property is put out from 
wherever it is being published. That's all.
    Mr. Markey. Mr. Chernin, can you take a shot at that 
question?
    Mr. Chernin. Yes. First of all, I think you are, as Mr. 
Parsons said, getting to the heart of the issue, and it is a 
very complex and difficult issue. I think the first part of 
your question, I think nothing will speed up the adaption of 
broadband and the spread of broadband as much as copyright 
protection, because I think there is no more attractive product 
than sort of high quality, rich media that is produced by 
Hollywood, produced by the sporting leagues, etcetera; and to 
the degree we are protected, I think that consumers will have 
tremendous desire to get broadband in order to get legally 
obtained, high quality product.
    I think, when you get to the issues of fair use, these are 
complex issues that need tremendous debate, that need a lot of 
light shone on them in the new environment. I think guiding 
fundamental principles are that all of us in the media business 
acknowledge that people should have the right and the ability 
to shift content for their own personal use around their home, 
to multiple devices in their home, their cars, etcetera, 
etcetera.
    I think where the common sense and the more complex part 
comes, what happens when they want to send it out of their 
home, and how do you allow them--I think Mr. Parsons is correct 
to say none of us would mind if they sent it to a friend or two 
or three friends. The problem is that, if they do that, how do 
we stop them from sending it to 10,000 friends, 1 million 
friends, 10 million friends, in perfect digital copies?
    Now we do have the right and the ability, or we will have 
the right and the ability to instruct content to do certain 
things. For example, we can sell copyrighted movies to people 
and give them the right to transmit it over the Internet three 
times or for a day or for things like that.
    So I think that working with technology partners, we can 
begin to put sets of instructions on this content which will 
ensure its fair use, which I don't think there is anyone on our 
side who is looking to restrict consumers' fair use, and yet at 
the same time restrict the unlawful, potential massive illegal 
copying.
    I also agree with Mr. Parsons that the issue isn't the 
Internet. The Internet is agnostic and just sends stuff back 
and forth. The issue is how do we instruct content once it 
appears on the Internet for the first time, and how do we 
instruct it so that consumers are allowed to do lawful uses and 
not allowed to do unlawful uses?
    The final thing, if you will indulge me for one more 
moment, is that I think we have to be careful about allowing 
business model arguments to get into this. There are people who 
say our content is too expensive and, therefore, it is right 
for people to steal it. Well, in my opinion, it is never right 
for people to steal and, furthermore, I think those of us 
certainly in the movie and television industry work very hard 
at making our content available in multiple ways.
    You can see a movie for $10 in a movie theater. You can 
rent it for $2 on video. You can see 60 of them a month on HBO 
for a $10 subscription. You can see them for free on broadcast 
networks. So there's lots of ways for consumers to get our 
product and get it at reasonable prices and, even if there 
weren't, there is no pricing that suggests that theft is a 
viable or a legitimate usage.
    Mr. Markey. Let me just conclude. Mr. Chairman, I thank 
you. I appreciate the two of you helping us to analyze the 
issue. We have got a conundrum in our country, on our 
committee. People are not subscribing to broadband. Sixty, 70 
million Americans have access to some form of broadband, but 
only 8-10 percent are subscribing to it, and it is $70 a month, 
you know, $50 more than narrowband. There's got to be something 
there.
    So one of the ways you can deal with it, of course, is to 
have commercial goods on it, but another way is to have a fair 
use policy where, if I want to send something to one friend of 
mine online that I find interesting--I don't have 10 million 
friends--that I would be able to just do that and not have to 
go over to FedEx and pay $15 to mail the same thing to them. 
Otherwise, I should be investing in FedEx stocks, not in 
broadband stocks, because you are not giving me the flexibility 
I need just as an individual to send something to my family, to 
my friend, and just do one thing.
    So we need to telescope the timeframe, in other words, that 
we resolve the issue so that we can give some instructions to 
the American people so that they can use broadband, because 
that is a big part of this puzzle that we have that we have yet 
to solve. Mr. Parsons. I'm sorry, Mr. Chairman.
    Mr. Parsons. Just because I now have a clearer fix on your 
question, people are not not taking up broadband because they 
are limited in their right to send things to other people. They 
are not subscribing to broadband, those who aren't, because 
they don't see the value proposition. They don't see what they 
are going to get out of it.
    What Mr. Chernin just said, I think, is almost irrefutable. 
Until we get to the point where you can get something different 
on broadband than you can get on narrowband--that is to say, 
different programming, media rich program--the mass market is 
not going to be there. The only way you are going to get to 
that point is if people who create content can put it out and 
believe that it is protected.
    Mr. Jacobson. Can I jump in on this, Mr. Markey? Just from 
the technology side and our working in the marketplace with 
content holders, what we are seeing--and we have to realize 
that this industry is really just born in some respects. Yes, 
the numbers are big, but the use of the Internet in a mass way 
to consume media that we all know and love on broadcast and 
cable and satellite is just beginning.
    We are seeing what you are alluding to, which is a 
different experience for rich media in broadband for people to 
subscribe. So everything from your Red Sox game so you can 
watch on a condensed basis after they are played, which doesn't 
interfere with the live signal on broadcast, to Fox sports 
material to CNN is all coming now in a very rich way into the 
broadband market.
    What we are finding is that part of the solution, which I 
have not heard yet today, is a more active approach to creating 
a system wrapped in digital rights management technology for 
people who want to stay on us to have legitimate content 
through broadband, and that is everything from the music to the 
video business.
    I think that the report is that we are getting started here 
and that there are legitimate music services that are 
available. They have problems associated with them which relate 
to things like getting all the music aggregated so that they 
can compete with these pirated sites, and also that the movie 
industry is coalescing and licensing digital rights management 
to release their movies via broadband, we are told by the Movie 
Link organization, hopefully, sometime during the year.
    So we are beginning to find that this mix of broadband 
accessibility from the home matched with technology that 
protects content on an affirmative basis and putting those 
business models into place with the media companies is starting 
to grow.
    Mr. Upton. Congressman Markey, I just want to say we have 
Mr. Chernin, and he has got to leave shortly. I know Mr. Tauzin 
is ready as well. So we have gone long overdue. So we will come 
back to you, if you need. Mr. Tauzin.
    Chairman Tauzin. Thank you very much. Mr. Chernin, I 
particularly want to thank you for appearing in this fashion 
interactively with us. I was noting the technology.
    This is technically a broadband connection, although it is 
not yet the really great broadband connections we are 
eventually going to have in this committee room, but what is 
interesting is it still sort of looks like a Korean movie, you 
know, where your lips are moving and we hear you a little 
later.
    As somebody commented, we can't even tell if you are 
wearing pants over there, you know. But I do appreciate your 
coming in this fashion. I think it is beginning to demonstrate 
the capabilities of the technology, even as we consider issues 
relating to the new technology. So thank you for that.
    I would like your attention and perhaps Mr. Parsons' and 
Dr. Liao's attention to an issue, and I apologize if you may 
have covered it before I returned. I have been on the Senate 
side celebrating prematurely the victory in the Senate for an 
energy bill that this committee is, obviously, very invested 
in.
    I wanted to get to the broadcast flag issue with you very 
quickly. We were told at one of the roundtable discussions that 
there would likely be a resolution and an agreement on the 
broadcast flag issue by March 31. That obviously did not 
happen. Another meeting, we know, is scheduled for April 29. I 
know that you came this close to getting an agreement before 
this hearing, because you wanted to announce it at this 
hearing, and I appreciate all the effort you made to try to do 
that.
    You obviously, are not quite there. But the questions I 
have is, once you do have such an agreement, absent all the 
other agreements that must come, would it be appropriate at 
that point for us to have very specific legislation that would 
enforce that agreement to ensure, in fact, that digital 
receivers would be built with the broadcast flag technology 
built in, so that we could at least begin to move this part of 
the digital transition forward?
    Perhaps anyone of you--Mr. Chernin, you may want to start. 
Are you of a mind that that would be appropriate?
    Mr. Chernin. Yes, Chairman Tauzin. First of all, I suggest 
you study the expression on my face to see whether I am wearing 
pants and draw your own conclusions.
    Chairman Tauzin. I want you to know, I am wearing them, 
too.
    Mr. Chernin. I think we actually covered this briefly. We 
are hoping our schedule to be done by May 17 to be there with a 
full recommendation. I guess my point of view is that we should 
keep legislation as narrowly targeted as possible. We shouldn't 
burden it with trying to solve everything, and to the degree we 
have a viable broadcast flag solution, which I am highly, 
highly optimistic that we are days away from, we should have 
narrowly focused legislation, hopefully, drafted and passed 
quickly. Then we can check that off and get on with putting as 
much rich digital content on broadcast terrestrial television 
and, hopefully, speed up the rollout of digital TV.
    Chairman Tauzin. I am glad you take that view. I will ask 
Mr. Parsons and Mr. Liao the same question, but I want to 
comment quickly. The reason I like that view is that gets the 
content into play, and that gets more broadcaster networks 
interested in doing more and more digital production and, 
obviously, studios doing more digital production as well. I 
think that advances the ball significantly when it comes to 
content. But perhaps, Mr. Parsons, Mr. Liao, you would like to 
also comment.
    Mr. Parsons. Same answer. We think that proceeding 
incrementally here as matters get resolved and issues become 
clarified, taking steps is better than waiting for all the 
issues to be resolved, and it will begin to create some 
momentum here.
    Chairman Tauzin. Mr. Liao. And I will also ask you, Mr. 
Blanford, on behalf of Philips, to give us a similar response. 
Mr. Liao.
    Mr. Liao. I agree with Mr. Parsons and Mr. Chernin that we 
are getting closer, and I am very hopeful that by May 17 that 
we will have a final report that the entire industry--the 
cross-industry groups can agree to.
    My personal opinion is that the government will have a 
role, but we need it to be a very specific role. In general, 
government I see having many--well, has a role in two respects. 
First, sometimes the government needs to step in when there is 
no marketplace mechanism in place that could really enforce 
something of this complexity.
    The second place where government intervention is often 
needed is to assure there is a level playing field. Often in 
that case, it is because of past government mistakes.
    Chairman Tauzin. I follow that, but in this specific case, 
if flag technology is agreed upon, would you support targeted 
legislation to ensure that the technology is built into all 
digital receivers that go out to consumers?
    Mr. Liao. Yes.
    Chairman Tauzin. Thank you. Mr. Blanford, would you comment 
for us?
    Mr. Blanford. Yes. Philips supports the flag. I think the 
question, Congressman, is what happens after the receiving 
equipment sees the flag? That gets into then the whole DRM 
issues that we have been talking about. That is where we are 
struggling.
    Chairman Tauzin. Yes, I understand that. But at least you 
would support the notion of ensuring through legislative 
requirement that the flag technology was in every digital 
receiver, would you not?
    Mr. Blanford. We support the flag technology.
    Chairman Tauzin. Would you support the requirement that it 
be in every digital receiver, once you agree upon flag 
technology?
    Mr. Blanford. I think we would like to see where the 
continued discussion goes with respect to DRM after that flag 
is, in fact, received.
    Chairman Tauzin. So you, of all the four who have 
responded, would take the view that we should not legislate 
until we are prepared to legislate on enforcement of all the 
agreements or at least the agreement on what happens once the 
signal is received with the flag on it? Is that your view?
    Mr. Blanford. Yes. We believe that the--again, what happens 
after the flag is received is critical. I am not confident 
that, without that understanding, we should go forward with the 
flag in a legislative mode. I think we still need the benefit 
of the process to determine what does happen after the 
equipment receives the flag.
    Chairman Tauzin. My time has expired. Obviously, the 
concern I have and the concern we have discussed at some of the 
roundtables was that, if we wait for all the agreements to be 
reached and all the investments and upgrades to be made before 
we begin the process of instituting such things as the 
technology that will embrace the flag, that we again push back 
our capabilities of reaching the 2006 date. We deny digital 
content in the marketplace that could help invigorate 
consumers' desires for these new technologies and products.
    I would urge you to think about that. If I had a confidence 
we could settle all the other issues in the next 3 or 4 or 5 or 
6 months, I would say maybe you are right. We could do it all 
at one time. But if we can't, would you rethink that position?
    Mr. Blanford. I guess I am optimistic that many of those 
other issues can be resolved, and I appreciate your comments 
regarding the speed with respect to moving forward with 
broadband and high definition content.
    This is a decisionmaking process, and every decisionmaking 
process that I am aware of does, though, need to balance speed 
of decision, quality of decision, and the acceptance of the 
decision. I am very fearful that we are moving too quickly. 
Again, I am optimistic that, under the proper forum with 
broader participation, we can resolve many of these issues. I 
again state that we don't believe that there is that proper 
forum, that the BPDG is not a standard setting body and is 
fundamentally closed.
    So I think, again, under the right forum, right principles, 
right leadership, as we have suggested earlier, we can make 
faster progress and meet your needs and do it in a holistic 
way.
    Chairman Tauzin. I know time is up. I would be very 
grateful if you would communicate to us after this hearing what 
might be the minimum conditions under which you would see 
enough progress made on those issues where you would support a 
targeted mandate to get the flag going.
    Thank you, Mr. Chairman.
    Mr. Blanford. I would be happy to do that, Congressman.
    Mr. Upton. Thank you. Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman. This has been a 
wonderfully instructive hearing, and I think all of my 
colleagues would agree with me in stating that. Thank you to 
all of the participants, both interactively and the ones--the 
gentlemen that are at the table.
    First, I would like to just make a quick observation about 
DigitalConsumer.org. There has been kind of an 
interchangeability with the terms customer and consumer. I 
think that the companies have customers and that, in a much 
broader sense, we are here to look after the consumer, and I 
don't think one is right and one is wrong.
    I also think that an organization that can be up and 
running with 35,000 people in 6 weeks is one heck of a 
campaign, and as a politician I really respect that. I think it 
is something that we need to pay attention to.
    I think the whole issue of fair use is one that is 
ultimately going to have to be built into this, and whether it 
is out of respect for that organization that Joe Kraus heads up 
or anyone else. So it simply cannot be left out. So consumer 
rights and consumer protection and the embracing of where the 
companies want to go with their customers--all of those things 
are going to have to be balanced out. I say that with respect 
to all of it. So that is just an observation.
    To Mr. Chernin: Protecting content at the outset is 
something that, I think, we have heard addressed over and over 
again today, and how to do it, and then where the government 
steps in to assure that, I think, we are still grappling with. 
But protecting it at the outset and from the source is very 
important.
    We have heard that content is often copied by an 
individual, and in some cases with a digital camera at a 
theater. Can you tell us what steps you are taking to eliminate 
that?
    Mr. Chernin. There are tremendous efforts----
    Ms. Eshoo. Excuse me. The next time I go to the movies, I 
am going to look around in the dark to see if there is anyone 
there with a camera. But do you have agreements with theaters? 
How do you approach this?
    Mr. Chernin. First of all, we ought to applaud your helping 
us in the policing activities.
    You know, actually, my friend and colleague, Mr. Valenti, 
has helped us take the lead in this thing. I think----
    Ms. Eshoo. He is our friend and colleague, too.
    Mr. Chernin. I think that the MPAA through the member 
motion picture companies spends, I believe, in excess of $20 
million a year trying to fight piracy in all parts of the 
world, and ranging from things like video cameras in movie 
theaters to people stealing our prints to people in other 
countries making illegal disks, etcetera.
    So we do have agreements with theater owners to restrict 
this. We look to law enforcement to help us. There are State 
laws restricting it, and we play a very active and, I might 
add, very expensive role through Mr. Valenti's leadership in 
the MPAA.
    Ms. Eshoo. Thank you. Let me ask--Is it Mr. Litai? Am I 
pronouncing your name correctly? I have an odd name. So I am 
sensitive about mispronunciation.
    I am curious about the answer that you gave earlier to 
Representative Stearns when you were asked does anyone know 
that you are doing this, and you did not give a direct answer. 
My sense is that people don't know. How appropriate is that?
    Mr. Litai. Well, I would like to just make it very----
    Ms. Eshoo. I mean, it sounds a little like a high security 
meeting with Members of Congress where the agency has to inform 
us of the appropriateness of what they are doing. I am not 
casting aspersions, but it really raised a flag with me when 
you didn't answer that directly.
    Mr. Litai. The answer, first of all, is to say that 
everything that we do, we do on public information that is 
offered directly from the networks. We do not in any way, shape 
or form access anybody's computer or anybody's system.
    Regarding have we talked to people regarding this, the 
answer to that is yes. There are people, lots of people, 
companies, who are in this room and others who know what we do 
and have seen this information.
    Also, we make it a point to notify people that they have 
problems regarding these types of situations.
    Ms. Eshoo. So if find what you are looking for, you then 
notify either the party or the company? Have you notified them 
ahead of time that you are looking or do you notify them once 
you have found something or do you report them to someone? How 
does it work?
    Mr. Litai. First of all, we don't look for specific--We 
can't access computers. So we don't look for specific people. I 
can't access anybody's computer, because they are, for example, 
behind the firewall. So I can't go and access anybody's 
computer nor do I want to.
    What we receive is just as if someone would post it on 
their website and say, look, this is my website. I am a 
corporation, this is my website, and over here is a movie. 
Click on this, and download a movie.
    The peer-to-peer is the interface which basically the users 
who put this content on the peer-to-peer network use to turn 
this misinformation into public information which everybody has 
access to, just like a website.
    So there is nothing that we do that actually accesses 
anybody's computer. There is nothing that we do that looks into 
anybody's directories or anybody's information.
    In regard to whether we do anything under any sort of 
hiding it or anything like that, no, we do not.
    Ms. Eshoo. I have two more questions. I appreciate your 
response.
    Is there anyone on the panel that agrees with the Hollings 
approach? Why is this such a stumper?
    Mr. Kraus. Silence is probably no, I would imagine.
    Ms. Eshoo. Is that so? I mean, no one can voice it? Well, I 
think that we heard----
    Mr. Upton. Mr. Chernin has had to leave, but I think he 
might----
    Ms. Eshoo. Yes, I noticed. It would be two, four, six 
against one. So that is a quick poll.
    Let me ask out of curiosity, going back to what I first 
referenced, consumers and customers: You have a working group. 
Is it just industry or do you have representation relative to 
consumers at the table? And if so, great; and if not, why?
    Mr. Jacobson. I am happy to give my perspective and then, 
certainly, expect the perspective of others.
    I attended the last CPTWG and BPDG meeting--lots of 
acronyms. There are really no consumer organizations in the 
room, and it costs $100 if you want to attend. So----
    Ms. Eshoo. Why?
    Mr. Jacobson. Why? Because I imagine--I can't speak for 
why. I imagine it is because they have a meeting room, and they 
need to cover the cost of the meeting room and those sorts of 
things, but it does cost money for anyone to attend.
    The other unfortunate thing, I believe, is I have not seen 
a member of the press attend. So even if consumers are 
prohibited from the $100 fee--let's say that is not something 
that they want to pay in order to express their opinion--my 
concern also is that I have not seen members of the press being 
in those meetings and able to effectively report out whether 
consumers were being represented.
    So consumer representation certainly is a concern of ours, 
when it comes to these kind of inter-industry consortia.
    Mr. Parsons. If I may, Madam Congresswoman, and then Mr. 
Liao is going to speak. First of all, the working group at that 
working group level, the issue is who brings knowledge to bear 
to deal with the technical issues that have to be solved here, 
and that is not necessarily--The purpose of those groups is not 
to sort of mediate and balance the broad public interest versus 
the interests of the industry. That, frankly, is for this body 
to deal with.
    I would just like to say--and in terms of the press, again, 
the purpose of the working group is to try and find technical 
solutions to technical problems and understand how the people 
who have that knowledge and understand the operation of their 
business would work, and then we will come back here, as we 
have indicated, if we think we need a standard that has to be 
enacted into, ``public policy.''
    You made mention earlier about your concern about fair use. 
The only thing I would ask the committee--You know, sometimes 
what you call things can head you down an interesting road, and 
you can lump a lot under it. But actually, the fair use 
doctrine is, in my judgment, fairly named, and the question is 
what uses are fair?
    If you buy a CD or a movie, should you be able to invite 
friends over to see that? Yes, that is pretty fair. Should you 
be able to make a copy of that so that you can have it in your 
car or upstairs in the bedroom and downstairs in the den? Fair. 
Should you be able to make a copy of that so that you can give 
that copy to your brother-in-law so he doesn't have to buy that 
movie? Should you be able to make 100 copies of that so that 
you can give it to your 100 best friends, so none of them have 
to buy the movie?
    I think, you know, we can lump a lot of things under fair 
use, but one needs to think about our system, how it works, 
what the source of its strength is, and how to balance the need 
to protect property rights and allow people to exploit those 
property rights with the legitimate needs of those who buy a 
piece of property and how they can use it for their own 
consumption.
    Ms. Eshoo. It is an eloquent statement, but that is what we 
are trying to figure out how to do. It is like trying to get 
socks on an octopus. I mean, it is a pretty tall order. But I 
appreciate what we have heard from all of you today, and I have 
been enlightened in several areas.
    I hope, more than anything else, that you all work out most 
of it, because I think many times, when you come to the 
Congress asking, you may get something you don't like or didn't 
expect. So I think that there is a real charge to all of the 
stakeholders in this to see what you can come up with, and then 
come back to us and report that. I hope that the steps that the 
Congress takes are smaller steps and not get into the area of 
mandating the standards. I don't think we know how to do it. I 
don't think, even if we hit the nail on the head, it would 
change tomorrow, and we can't pass legislation fast enough to 
keep up with product cycles and technological standards.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Ms. Eshoo. We are going to have just 
a very brief second round, and I know Mr. Chernin had to leave.
    I have a question. A year and a half ago I bought a digital 
TV set. It works terrific. It is hooked up to cable. What is 
going to happen if we sell this broadcast flag issue, if we get 
the agreement made? What is going to happen to those folks who 
have this type of TV with a tower, if they don't live in a 
cable area, with an antenna? Tower and antenna are the same 
thing. What is going to happen with the folks who have that 
type of equipment?
    Mr. Liao. First, the broadcast flag is meant to prevent 
retransmission--or so that the content copyright owner could--
--
    Mr. Upton. I am going to want to get that show. I want to 
watch that.
    Mr. Liao. So there is nothing to prevent you----
    Mr. Upton. The Cubs and the Boston Red Sox will be on 
digital by then.
    Mr. Liao. So there is nor elation. You will get that show.
    Mr. Upton. It will be okay, even with a flag on it?
    Mr. Liao. Yes. The flag is only meant to prevent 
retransmission, sort of republishing of the material over the 
Internet.
    Mr. Upton. Okay. So that will work for existing sets as 
well?
    Mr. Liao. Yes.
    Mr. Blanford. Congressman, there is still an issue, though, 
as to what happens with all of your equipment after that flag 
is received, which is what I was trying to address earlier. For 
instance, if you were to now take that show or game or whatever 
and record it digitally on your DVD recorder and then take that 
DVD out of the recorder in your family room and walk into the 
bedroom and put it in your DVD player, it won't play.
    So it's these issues after the flag is received that really 
get into fundamentally the balance of rights, business rights 
between all of the various industries, as well as consumer 
rights. It is in that balance of rights that we have asked for 
help from Congress or an agency like FCC to ensure transparency 
in the process, not to mandate the solution, just to ensure 
transparency in the process and to ensure that everybody is at 
the table.
    Mr. Upton. Go ahead.
    Mr. Liao. If I may make a comment, I think the salient word 
that Mr. Blanford mentioned is balance, and it is the balance 
of all these different interests. It might be helpful for the 
committee to understand the kind of structure by which this 
protection is achieved, and I think this goes to the heart of 
the issue that Mr. Blanford has been discussing.
    The broadcast flag signals the TV receiver that this 
content should not be retransmitted over the Internet. So sure 
enough, that TV receiver will know this is a no-no, don't do 
that. But there are outputs to the TV receiver. For example, 
with the set top box there needs to be an output that brings it 
to the television.
    Those outputs may be analog in nature. They may be digital 
in nature. If they are analog in nature, actually, the 
agreements of all the industry participants--to my knowledge, 
all the industry participants has been that the broadcast flag, 
no matter what its setting, will permit, continue to permit, 
that analog output to output the signal.
    So for example, today if you have a receiver, it will 
output that thing through the analog output and display it on 
your display, perhaps the high definition display that you have 
recently purchased. No problem. Or you could take that analog 
output and put it into your DVD player or recorder and make a 
very nice DVD recording, probably equivalent to the kind of 
displays you are seeing because, after all, that is the same 
output that you use for your display, and make a recording.
    That recording, if you make it on the right DVD media, will 
be able to play on the legacy players. For example, if you 
bought a Panasonic DVD recorder today and recorded on DVD RME, 
you could record it on that and play it on most of the legacy 
players.
    On the other hand, if it is a digital output, and it is 
really digital protection that we have been talking about in 
the Broadcast Protection Discussion Group, in order to protect 
that digital copy, what we have been talking about is 
encrypting it. Now why should it be encrypted? The reason it is 
being encrypted is that is how you protect it from being 
misappropriated at a later stage in some other part of the 
chain.
    Remember, the whole thing about today's network world is 
that we are talking about going from one box to another through 
all these networks. So in order to maintain that protection in 
the digital world, we have taken the approach of encrypting it. 
It was something that was not easy for all of us to agree to, 
but it provides that kind of a balance between this protection 
of that material and the use of the consumer.
    The consumer can always make the recording and can make as 
many recordings as they want. Those recordings will always play 
in, for example, the recorder that they made it in, because the 
recorder is made to play its own recordings. So there is never 
a problem with playing a recording that he makes on a 
consumer's own recorder--her own recorder. It will play, no 
problem.
    So this is the kind of balance we have had to struggle 
with.
    Mr. Blanford. I don't want to get into point-counterpoint, 
but what was just described, though, locks the consumer to a 
degree, a large degree, in the analog world; because, yes, you 
can see the digital signal on your display, but to record it 
you are not able to use it on the 35 million DVD players that 
are in existence today unless you record it as analog. Then, I 
mean, what is the point? We have locked the consumer in the 
digital world, and we are not able to take advantage of the 
full promise of digital.
    So we are in a point-counterpoint. That is correct, but I 
think, again, it is this fundamental balance that we are 
speaking to in terms of who all should be at the table. The 5C 
only represents four consumer electronics companies. I wish 
that is all I had to compete against. Last I looked, I think it 
is more like 15. So it is a very small group. It does not 
represent the consumer electronic industry nor those other 
constituencies that have not been represented either.
    I think this is just a huge--I mean, we recognize it is 
very complex. It is very huge. I think the consumer at the end 
of the day is going to speak. I think, if we don't get it 
right, your in-boxes are going to be very full.
    Mr. Jacobson. Mr. Chairman, if I may. I applaud the notion 
of a very narrow mandate at the BPDG when it comes to 
preventing the unauthorized retransmission of content over the 
Internet. I understand that. My concern is that, from what I 
have seen of the specifications, and I am on the mailing list 
for those specifications, the power of the specification is 
actually far broader.
    It gives the ability for, as far as I can tell, a small 
group, subgroup, of BPDG to determine what technologies are 
essentially approved, and the scope of those technologies 
doesn't necessarily have to be limited to only retransmission.
    So, for example, a technology could get approved. As I 
mentioned in my testimony, nothing in the specification 
prohibits, I might say--not necessarily that it will happen, 
but nothing prohibits the ability of a technology to get 
deployed which might make my VCR recordings expire. Yes, I 
might be able to make them, but maybe they expire without my 
choosing.
    So what I believe--and there's been questions about when 
should we give this specification the force of law. My interest 
is not so much a question of when, but what. I believe that 
this specification needs to have--and I am heartened by the 
comments of Mr. Parsons and Mr. Chernin on fair use, but I 
believe that the specification gives broad powers to a group of 
people, and before you stamp that into law, I think you need a 
fair use assertion in that document to make sure that none of 
the provisions, none of the technologies that do get approved--
and consumers are not going to be in the room when that gets 
approved. You need to make sure that what you pass, regardless 
of when you pass it, has fair use assertions in that 
specification itself.
    Mr. Upton. Mr. Markey.
    Mr. Markey. I have no further questions. I thank you all 
for your excellent testimony.
    Mr. Upton. Mr. Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman. I will be 
brief, since I am the last person to question this panel, and 
it has been a long afternoon.
    Mr. Blanford, I can't resist the opportunity of your 
presence here today to discuss with you another subject. It is 
also a subject relating to the protection of content in the 
digital era, but from a very different vantage point. That is 
the general matter of the introduction of copy protected CDs 
into the U.S. market.
    Philips, as I recall, was one of the companies that 
developed the original standard for CDs.
    Mr. Blanford. That is correct.
    Mr. Boucher. I think, in fact, you own some intellectual 
property in the brand. I will tell you that I am somewhat 
perplexed by the rationale of those who are introducing the 
copy protected CDs. If you look at the circumstance carefully, 
you readily see that copy protected CDs will do virtually 
nothing to guard against Internet free, peer-to-peer file 
sharing. Someone will crack the code. That someone will put the 
then unprotected CD up on the Internet. Once it goes up, it is 
likely to stay there forever, and it will find its way into the 
free peer-to-peer file sharing services.
    I think that is absolutely inevitable. So copy protecting 
the CD does not really protect against Internet peer-to-peer 
file sharing, and we have heard repeatedly from the recording 
industry that their greatest concern about the escape of their 
digital content and the piracy of that content is with respect 
to Internet peer-to-peer file sharing. Copy protecting doesn't 
guard against that.
    It does guard against the casual making of a CD at home and 
giving that to someone else. Frankly, I don't term that fair 
use, Mr. Parsons. I am a big fair use advocate, but I don't 
think recording a CD at home and giving that to another person 
is fair use. For your own purposes, it is. I mean for your own 
convenience, it is, but once you give it to somebody else, I 
think it is not.
    Really, all copy protecting CDs does is guard against that, 
and historically the record industry has more or less accepted 
that, kind of tolerated that low level of piracy. That is 
rather casual. So I am perplexed by the rationale for this.
    On the other hand, introducing copy protected CDs is 
angering a very large number of the best customers of the 
recording industry who are now frustrated in their ability to 
exercise their fair use right to make a copy at home of music 
they have lawfully acquired, when that music is going to be 
used for their own convenience and personal use in the home 
setting or the extended home setting.
    I suspect eventually millions of people are going to 
express that same concern. Let me ask you as the developer of 
the original format for your view of this general subject 
matter or any concerns that you might have about the 
dysfunctionality that attends the copy protection technology 
that disables CDs from playing perhaps on a personal computer 
or in a DVD drive, and I understand some of the technologies 
have that characteristic.
    Are you concerned that consumers will be confused? Are you 
concerned that some of the blame will be directed toward the 
manufacturers of equipment, potentially your own equipment, and 
do you think that perhaps, assuming there is that confusion and 
that misdirected blame, that the case is made for Congress to 
step in and to require appropriate labeling when CDs are copy 
protected?
    Mr. Blanford. Congressman, I think you articulated the 
issue extraordinarily well, and I am not sure I can add a lot. 
Yes, we are very concerned that consumers will be confused, 
that they will blame their equipment. Indeed as the copy 
protected CDs do hit the market, in many cases they will not 
play on existing equipment, leading to confusion, leading to 
consumers that feel that their equipment is broken, leading to 
calls to our consumer care centers.
    There is already a fairly, I think, sizable revolt going 
on, on the Internet. My own e-mail box is getting swamped with 
letters from consumers who are actually supporting Philips as 
we have been attempting to put the brakes on such copy 
protection, and again making sure that we all understand what 
we are doing as we go forward.
    So it is a very serious area. I think you are also right, 
to the true pirate they are going to find a way around it. So 
it is casual copying that we are talking about, but a very 
serious problem for us right now, and growing.
    Mr. Boucher. Should we legislate to require appropriate 
labeling when the disk is dysfunctional because of the copy 
protection?
    Mr. Blanford. Well, I think, you know, that would be 
certainly--I mean, the ethical thing for the producer of that 
particular disk to do would be to label, and we could legislate 
that. Unfortunately, I think consumers will still be surprised. 
They may not see the label. They are still going to take it 
home, tear open the wrapper, put it in their CD player, and it 
is not going to play.
    So I am not sure if--I would support it, but I am not sure 
that that is going to solve the problem, and it is another area 
where, again, more discussion is needed.
    Mr. Boucher. Well, thank you, Mr. Blanford. I think more 
discussion is needed and, hopefully, this subcommittee will 
take the opportunity to look at this issue at the proper time. 
Thank you again.
    Mr. Blanford. Thank you, Congressman.
    Mr. Upton. Mr. Markey.
    Mr. Markey. Fourteen years ago, we set up a screen in this 
room, and we had the first international broadcast of an HDTV 
signal from Canada into this room. The members on this 
committee, they just fell over wanting to know where they are 
going to be able to get the sets, when they were going to be 
able to see all this programming in HDTV.
    The policy that our country constructed was essentially 6 
megahertz for the broadcasters, and then walk away. Even when 
I, in 1997, had an amendment here that said that all television 
sets sold in the United States that would be digital at least 
have a digital--have an ability to receive a digital signal, 
even if it was an analog set, by 2001, it was rejected like 35 
to 7 here on the committee.
    So just dealing with that one issue, the 6 megahertz, 
doesn't really create a policy, if that is the only role the 
government is going to play, because if you walk away, you wind 
up with chaos. Same thing as here, and after I have heard all 
of the testimony here today.
    We can deal with flags or this or that or the other thing, 
but we just can't deal with any one part of it. We have to deal 
with all of it, and we have to deal with all of it at the same 
time or else any un-dealt-with part of the puzzle has the 
capacity to paralyze all the rest of the resolved issues.
    My own personal experience now 14 years later after 
conducting that hearing--I have been on the committee for 26 
years--was the breath taking response from the committee 
members. I think the same desire is there for a resolution of 
all of these issues. That is the product that is promised to 
the American public, this combination of broadband and content. 
But in order to telescope the timeframe for us to have this 
miracle, this product presented to the American public, in my 
opinion, it is going to require an industrial policy.
    It is going to require the Federal Government to intervene, 
because I do not see any likely near term resolution of any of 
these issues in a way that resolves the big issue of presenting 
something to the consumer anymore than, in the absence of the 
Federal Government intervening, do I see any ultimate 
resolution of the HDTV conundrum; because there are so many 
moving parts, you cannot ultimately rely upon any one industry 
to resolve it. You have to have the Federal Government come in 
and make very difficult decisions.
    That is my recommendation, Mr. Chairman, and it would be 
that this hearing be followed by a whole series of additional 
hearings that can allow us then to go down the list of still 
unresolved questions, because ultimately, I think, left to the 
private sector, we will just have a repetition syndrome of what 
has happened with HDTV, going back to 1988. We will not see the 
full resolution of all of these problems.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Markey. I just want to say that I 
know that your participation in our roundtable meetings has 
been very constructive and productive, as we have all worked 
together. We are looking to have another one next month, and we 
will follow up with additional hearings. That is for sure, as 
the country watches what is going to happen.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 4:23 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
    Prepared Statement of the Association for Competitive Technology
                              introduction
    The Association for Competitive Technology (ACT) submits the 
following views on the subject of protecting digital content. ACT 
represents over 3,000 information technology (IT) companies and 
professionals, including those involved in creating solutions to 
transmit digital content. We strongly believe that the marketplace, 
without the assistance of additional legislation or regulation, is in 
the best position to respond to the demands of consumers and copyright 
holders. Legislative proposals that install government mandates for 
security standards (or DRM) are unnecessary and will be 
counterproductive.
    The potential market for digital content is an estimated $270 
billion, and Digital Rights Management (DRM) technologies and solutions 
are the keys to unlock it. IDC has estimated that the market for 
Digital Rights Management (DRM) software is expected to reach more than 
$3.5 billion in revenue by 2005. Without a doubt, emerging and maturing 
DRM technologies will enable a secure electronic marketplace where 
content providers can be compensated for the use of their digital 
content. Small and mid-size technology companies make up the bulk of 
the DRM developers heeding the call to action.
    Currently, the flow of legitimate online content is a trickle 
compared to what it could be. Content owners are hesitant to release 
content for fear that once a song or movie is lost to digital pirates, 
all value in the investment and commercial opportunities are lost as 
well. The IT industry and entertainment industry seem to agree that 
it's going to take continued development of new technology and new 
business models to provide DRM while expanding consumer distribution, 
convenience, and choice. In other words, a DRM model needs to allow 
consumers to rent, buy, time shift and place shift any piece of 
lawfully acquired digital content. To that end, the industry is already 
devoting billions in R&D to develop these technologies.
                how drm works to protect digital content
    DRM technologies can be grouped into three basic categories: 1) the 
access control with authentication and/or encryption mechanisms; 2) 
usage control according to rules that are set by the content 
distributor, e.g., listen-only rights, where the user is unable to save 
or distribute the music. 3) tracking mechanisms that allow the content 
provider to track subsequent use with watermarking and digital 
footprints.
    DRM technologies offer content owners the aforementioned dynamic 
solutions through passive and active methods. An example of a passive 
DRM technique is consumer identification and trace back to find 
illegally copied content. Methods include: serial numbers, digital 
fingerprints, traitor tracing. In order to ensure the integrity and 
authenticity of digital content, its accompanying metadata and the 
hardware and software components of a DRM system, security features 
such as digital signatures, fragile watermarks, and challenge-response 
protocols are included.
    In terms of active protections, DRM systems have been developed 
that utilize specialized filters and marking techniques such as ``audio 
fingerprinting'' or ``robust hash'' that block unauthorized access to 
pirated content. In addition, fair-exchange protocols ensure 
technically that the consumer receives access to protected content only 
after having paid the appropriate price. If the DRM system detects a 
security breach, it can revoke and disable compromised consumer 
devices.
                      examples of ``applied'' drm
    In order to be successful on the mass-market, DRM technologies must 
continue to be effectively integrated into consumer devices. A positive 
sign is that a number systems for playing digital content currently 
utilize DRM technology. DRM components can be found in pay TV systems, 
DAT and some types of compact disc players. The DVD system employs 
various technological protection measures, including the Content 
Scramble System (CSS). Other DRM standards include the High-bandwidth 
Digital Content Protection (HDCP) for protecting digital video outputs, 
and Content Protection for Recordable and Prerecorded Media (CPRM/
CPPM). DRM solutions are being integrated into new devices and software 
including digital audio and video players, e-book readers, operating 
systems and mobile devices. These solutions all have one thing in 
common; they were created without technology mandates.
    The technology industry remains focused on creating marketable 
solutions. Content owners, device manufactures and IT companies have 
agreed that the successful DRM solutions for digital content should 
have these features:

 DRM software and devices should be so easy to use that they're 
        nearly invisible to the consumer, even as they move digital 
        entertainment content among their own household and personal 
        devices.
 Users should be able to recombine and share any of their own 
        digital content.
 DRM solutions should be inter-operable among devices and 
        distribution channels, and the technology should have 
        consistent enforcement of rights wherever the content goes.
 DRM technology should be flexible enough to adapt to different 
        business models (e.g., charges for a single use or for a 
        specified time period).
 DRM technology and devices should be capable of online updates 
        with new protection software.
 Content providers will need DRM databases and systems to 
        define and manage rights to their content.
 Enterprises such as corporations and educational institutions 
        need DRM systems to manage content and group rights.
    No doubt integrating the above features creates challenges in 
balancing the rights of content owners with the demands of consumers. 
There should also be no doubt that thousands of technology developers 
are racing to deliver solutions that meet those challenges. The 
enormous value of the music market provides a powerful financial 
incentive for DRM innovation, but it's up to content owners, the IT 
industry and consumers to pick the winning solutions.
XrML
    In the attempt to implement these features, one machine-to-machine 
standard has emerged. The extensible rights Markup Language (XrML) 
syntax provides content owners the opportunity to attach data about 
royalty arrangements, ownership, listening limitations, and context 
pricing (e.g., sale or rental) to the content, so it can ``travel'' 
across devices without degrading the copyright. XrML as been embraced 
by Microsoft and is a primary feature of their DRM function. Moreover, 
the number of licensees of XrML's is growing rapidly and is already in 
the thousands. Now that XrML is emerging as the industry standard 
language for digital rights, companies are taking initiatives that will 
keep the DRM marketplace moving.
    As mentioned above, XrML supports trial use, rental and sale 
distribution models. This means that ``old'' models of selling music 
will find ``new'' viability. For example, music content owners, 
utilizing XrML based DRM distribution systems, can provide a consumer 
the opportunity to listen to parts of songs for free, purchase singles 
for a competitive price and purchase albums for download to a digital 
device.
Eliminate the incentive
    Technologists at RSA and Bell Labs have begun addressing the piracy 
problem by developing a practical solution designed to make it less 
economically viable to steal content. Their models are aimed at the 
typical scenario most feared by content owners. The case is which a 
pirate obtains a legitimate, secure copy, potentially alters, and then 
distributes copies in order to make a profit. RSA and Bell Labs have 
offered a solution currently targeted toward software, but applicable 
to digital content, relying on periodic updates. The key is required 
interaction between the owner of the content and the legitimate 
distributor.
Subscriptions
    DRM integrated into a subscription model allows content owners to 
bundle a large number digital content for a fixed price. In a variety 
of circumstances, a multi-product content owner can extract 
substantially higher profits by offering one or more bundles of digital 
media than by offering the same goods separately. At the same time, 
bundling can be used to introduce new songs, movies, documents and 
titles to create a continuous relationship with the consumer. This 
relationship offers a foundation on which content owners can generate 
revenues. The subscription model may represent a mix between indirect 
and direct revenues with the option of consumption combined with 
transparent pricing. Forrester expects additional revenues from digital 
music subscriptions of $3.3 billion. Subscriptions provide flexibility 
that will attract consumers. For example, a premium membership might 
offer a flat rate, eventually combined with services from the second 
scenario, while an advertising-based membership might limit access in 
quantity, time or actuality.
    By utilizing DRM technology to securely encrypt the music with a 
key, the package can be digitally delivered to the consumer's device. 
There, the locally installed trusted tool gains access to the digital 
content with an unlock key which leaves the file locally encrypted and 
streams the digital content into the memory for ``on the fly'' 
decryption. The user, who has agreed to the terms and conditions of 
use, has now the license to access the content. His usage is recorded 
and the transaction is reported to a clearinghouse to initiate payments 
and backup system information. The content owner is being protected and 
the content owner maintains control and determines payment collection.
Companies providing ``applied'' DRM
    There are dozens of companies that are creating and deploying DRM 
solutions for a number of scenarios. The table below lists some 
emerging ones and their area of expertise:

------------------------------------------------------------------------
                  Company                            RM Solution
------------------------------------------------------------------------
Authentica................................  Focused on ``digital rights
                                             management software for
                                             protecting and controlling
                                             valuable business
                                             information shared
                                             internally or across
                                             company boundaries. Product
                                             suite lets users share
                                             valuable digital content--e-
                                             mail, documents, and Web
                                             content--without giving up
                                             the rights to determine
                                             what happens to it, no
                                             matter who has it or where
                                             it's stored.''
e-Vue.....................................  ``e-Vue also integrates
                                             digital rights management
                                             (DRM) tools into its MPEG-4
                                             solutions to provide a
                                             powerful and secure
                                             multimedia content delivery
                                             engine.''
MediaDNA..................................  ``MediaDNA's patented
                                             solutions provide business
                                             enterprises and publishers
                                             of valuable information
                                             with a framework for safely
                                             promoting and controlling
                                             content distributed over
                                             the Internet, intranets,
                                             extranets, and other media
                                             such as CD-ROM. MediaDNA's
                                             approach is unique in that
                                             its comprehensive solutions
                                             not only include proven,
                                             Digital Rights Management
                                             (DRM).''
SealedMedia...............................  ``[P]rovides Digital Rights
                                             Management (DRM) technology
                                             for organizations requiring
                                             persistent control for
                                             digital content delivered
                                             over the Internet. Unique
                                             to SealedMedia is its
                                             support for multiple media
                                             formats, its association of
                                             licenses with people rather
                                             than devices, and the
                                             flexibility of the usage
                                             models it enables.
                                             SealedMedia customers
                                             include ipicturebooks.com
                                             (AOL Time Warner),
                                             Harcourt, Pearson
                                             Education, Congressional
                                             Quarterly and Xansa.''
------------------------------------------------------------------------

 government technology mandates are unnecessary and will do more harm 
                               than good
    History has shown that the market, not government regulators, is 
responsible for bringing copyright protections to bear. The same can be 
said in the digital media context. The DRM solutions in the section 
above demonstrate that there can be any number of ways to address the 
need to protect content owners while providing consumers maximum 
utility. In this regard, the IT industry is currently working 
feverishly to develop and deploy robust rights management technology.
    We share with the content owners, the goal of providing rich 
digital content to consumers at an attractive price. However, 
legislation proposed by some content owners will frustrate our ability 
to achieve this goal. The Consumer Broadband and Digital Television Act 
(CBDTA) proposal is myopic with respect to rights management solutions 
and have the potential of lock out promising technologies. Further, 
CBDTA creates a scenario where companies not involved in digital media 
will inadvertently find themselves in violation of a law never meant to 
be applied to their business model.
    ACT remains steadfastly opposed to government-mandated rights 
management technology standards, for the following reasons:

 The government should not pick winners and losers through its 
        certification process; especially while the IT industry is 
        working to achieve an open DRM standard.
 These standards will ``freeze'' technology by requiring 
        government approval of design changes. Instead of real-time 
        innovation, we could easily end up with a one-size-fits-all 
        standard.
 Publishing standards on government web sites makes it too easy 
        for hackers to circumvent.
 Innovators can't receive government certification if your 
        copyright protection technology isn't ``reasonably priced'' 
        according to a current draft of a legislative proposal.
    CBDTA is out of touch with the realities of the DRM marketplace. 
Not all solutions will have the same features. Currently, companies 
focusing on DRM are able to quickly tailor their solution to the 
evolving need of the content owners. CBDTA requires that content 
owners, IT companies, devices manufactures and consumer groups come up 
with standards for all permutations of digital media distribution in 
one year. The history of DRM shows that there is no such thing as a 
quick fix. Current technologies are years, not months in the making. It 
is absurd to believe that all security standards can be discussed and 
agreed upon in one year. Meanwhile, development of DRM will have to 
slow pending the discussion. If not, the discussions would have to 
continue in perpetuity or risk leaving some standards outside the law. 
The bottom line is that the bill will cut off the development of 
promising technologies.
    Small technology companies, which are the bulk of the DRM 
innovators, will also suffer under the CBDTA. The proposal calls for 
representatives of content owners, IT companies, devices manufactures 
and consumer groups to create security standards. Although the bill 
attempts to bring all interested parties together, the reality is that 
small companies will be shut out. Again, the result will be a cessation 
of innovation. Only the most well funded companies will dare continue 
because they will have the resources to switch gears when the standard 
is announced. The smaller companies risk running afoul of the law by 
putting out illegal software. There is no doubt that venture capital 
and other funding sources will find ``safer'' places to put their 
money. Widespread DRM development will become a distant memory. The net 
effect will be fewer companies able to provide cost effective, targeted 
DRM solutions for content owners.
    Finally, CDBTA is overly broad and invites unintended consequences. 
Its definition of ``digital device manufacturer'' was created to 
capture any type of digital media software and hardware. Such a 
definition must be written broadly lest it create loopholes for digital 
pirates. Its application to ``any'' type of software that can transmit 
digital content captures an array of software (and the companies that 
develop them) that are not intended to transmit content. Companies that 
develop and ship spreadsheets, word processors and e-mail programs 
would be in violation of the law unless they implemented security 
standards. These vendors will face the Hobbesian choice of either 
raising prices to cover the new development costs (which will not sit 
with consumers) or break the law (which doesn't sit well with anyone).
    These problems are inherent within legislative approaches like 
CBTDA are unwarranted and should be avoided. ACT and the IT industry 
are not alone in taking this position. Even content providers such as 
Pressplay (an online music distributor created by music labels), have 
urged Congress to focus on applying existing law to the marketplace 
instead of creating new laws.
                               conclusion
    Development of DRM technology will take two things: continued 
innovation and time. Unfortunately, government technology mandates do 
not encourage either. Given the tremendous opportunity for a digital 
media marketplace, nothing should stand in the way of technologies 
aggressively competing to create solutions that protect the rights of 
content owners while meeting the needs of consumers. The only way this 
will happen is through an unfettered market.
                                 ______
                                 
   Prepared Statement of Steve Griffin, CEO and Chairman, StreamCast 
                             Networks, Inc.
    I would like start out by asking a simple question. What would life 
be like in America today, if you could not go down to the local 
Blockbuster and get a movie on a Friday night?
    Since 1906 when music publishers fought the introduction of the 
player piano to today, content companies have tried to slow down or 
eliminate technologies that they believe threaten their rights and 
their methods of business.
    In the early 1980's the climate surrounding advancements of 
technology was just as confused as it is today. Then it was the call to 
arms by the entertainment industry that VCRS needed to be recalled from 
consumers' homes and banned from sale. We are in the latest chapter of 
a familiar story; one of content companies vs. technology companies.
    I am pleased to have the opportunity to share the story of Morpheus 
and discuss with you today our vision Peer-to-Peer (P2P) communications 
and the role it will play in this universe of Digital Media.
The Fear of Technological Innovation
    As they say, hindsight is 20-20. Today we have the benefit of 
looking back and seeing that the VCR was not the threat the motion 
picture had imagined it to be. Indeed, without the introduction and 
acceptance of the VCR, entire industries would not exist, the 
entertainment industry would not have experienced the powerful and 
profitable growth it has enjoyed, and consumers would have continued to 
be forced to watch media either in a theatre or on TV.
    The ability to enjoy the freedom to go down to your local 
Blockbuster and get a movie if you chose and watch it in your own home 
is provided only by the Supreme Court decision in the Sony Betamax 
case.
    I look forward to the day when we will all look back on the early 
fears of Morpheus and other P2P technologies and recognize them as just 
as misplaced as the fears of the Betamax were.
P2P Allows People to Communicate Directly Like Never Before
    I believe that P2P networks will become as common as the telephone, 
where people can connect directly to one another without having the 
operator listen in on your calls.
    There has been a lot of misunderstanding surrounding P2P Networks 
and products like Morpheus by the press and by the community. A true 
P2P software product, like Morpheus, allows consumers to connect 
directly with each other and to exchange any type of information--
anything--recipes, family photographs, a poem from a budding poet, 
commentary on public issues, anything. Once the consumer has downloaded 
the Morpheus software they choose what electronic information that they 
want to make available to people around the world.
    With Morpheus our business model started with advertising and has 
provided us a revenue platform to achieve profitability. This year we 
will introduce several additional revenue streams as we attempt to be 
responsive to the Morpheus users, potential business partners and new 
marketing strategies. We are passionate about incorporating different 
tools that empower consumers to communicate and exchange information 
while protecting the creators' content.
    When consumers launch the Morpheus software, they join and help 
create a self-organizing, self-sustaining network of users around the 
world. The more users that join the network and share content--the 
richer the experience. It is a true decentralized P2P network since 
StreamCast has no involvement with the consumer as it relates to the 
sharing of information. Consumers can chat using Morpheus just like AOL 
instant messenger. They can post promotional brochures, they 
communicate in multiple languages.
    In short, Morpheus allows consumers to directly connect to each 
other like the Internet was intended to be. In fact, many call 
decentralized P2P ``the New Internet.'' It is a new gateway or 
alternative to the World Wide Web.
    Decentralized P2P offers the most cost effective and efficient 
distribution that exists in the world today. By leveraging millions of 
consumers' computers and their distributed bandwidth, enormous cost of 
goods savings can be realized. With the Morpheus software a file can be 
transferred very rapidly. In fact the more copies of the same file that 
are on the P2P network means a couple of significant things: First the 
file is persistent so any time night or day a person joining the user 
created network can find any information that they want. Second, by 
having a very sophisticated file transfer protocol, parts of a file are 
downloaded from multiple sources. This means that even a 56K modem 
contributes to the richness of the user created network. Our bench 
testing indicates that it only takes approximately 10,000 copies of a 
file for it to achieve persistence around the world. The cost to 
deliver this persistence for a music CD is under $500.
Consumers Have Voted--They Want P2P
    Let me share a few numbers about the Morpheus User Network. Since 
April of last year we have had somewhere around 90 million downloads of 
our software product. It is even been exchanged on other P2P platforms. 
For the past year we have averaged an estimated 6 million new users per 
month who download the software. Over the past year on the Morpheus 
User Network, approximately 3 million unique users use Morpheus each 
day. Furthermore, 24 hours a day, seven days a week the user network 
averages 1 million simultaneous users connected together. An 
independent study just released indicates that 49.7% of Morpheus users 
use broadband. Around 45% of the users are from outside the United 
States.
    The reason that I am so passionate about the technology platform of 
P2P is that this ``New Internet'' is capable of providing a world wide 
societal change. In this new world consumers are no longer receivers of 
information, they are also senders. And it is my belief that consumers 
around the world represent an incredible opportunity to release 
creative expression. They have never had a platform for distribution or 
a chance to monetize their expression. Now they do with Morpheus.
    Today we are in a time of great conflict and great confusion. And 
it is no wonder--marketing messages are inundating the consumer with a 
message of freedom. They hear ``rip it, strip it, and burn it''. 
Manufacturers provide millions of writable CD's to assist in the 
process. Many different companies make software that allows consumers 
to create MP3 files. Millions of media files are attached to emails 
using Microsoft Outlook, and many others attach files to an AOL instant 
message. How is a consumer to figure out what they can do with the 
media companies' approval and what they can't do? Why is it that the 
media industry has not chosen to litigate against the companies that 
make these products?
    StreamCast will continue to support the evolution of the P2P 
platform so that in the near future even consumers will be able to 
create content and securely publish it with micro commerce with any one 
around the world. StreamCast has developed the CintoA technology to 
allow content to be wrapped in a secure Morpheus wrapper so it actually 
becomes a software program. This program allows rules to be generated 
by the content owner. The wrapped content can be freely traded across 
the Morpheus User Network via downloads which eliminates the un-
scalable cost of sales that affects centralized download and streaming 
initiatives. Once downloaded the consumer can listen to, view, and 
review the information. Each wrapper will include a buy button, which 
allows the Morpheus user to complete a Micro payments transaction and 
unwrap and then fully enjoy the content.
Two Buckets of Content and Two Ways to Look at Content
    We believe there are two buckets of content in this brave new 
digital world. Consumer created and commercially created. There are 
also two ways to look at content, today backwards and today forward. 
Today back is the situation we are in today where content has been 
unprotected and today forward is the time when content owners choose to 
protect and wrap content. It is our strong opinion that the concept of 
today backwards and today forwards needs to be understood and different 
compensation models need to be created for each timeframe. The media 
companies are attempting to convince everyone, including Congress, that 
we need a one-bucket solution to a two-bucket problem.
    We believe that a solution for today back is best represented by 
the continued perception of a free model represented by 75 years of 
successful experience in broadcast radio and television. In this model 
content is paid for by advertisers but perceived ``free'' by the 
consumers. The today forwards model most likely will require a pay to 
listen or pay to view. A one price fits all system does not benefit the 
consumer!
    Today, Morpheus, with its 90 million software downloads, along with 
millions of other consumers using other decentralized P2P platforms, 
are being forced into discussion between the value of content companies 
and technology companies. I would argue that consumers are confused and 
wondering what this fight is really all about. Is it about copyright, 
creativity, and growth of science and the human spirit? Or is it about 
control, power, money and maintaining the status quo?
We Must Find Common Ground
    We need to understand that there are two very important issues: one 
of content and technology and how they converge. One that can have a 
dramatic impact on both industries. At StreamCast we believe that P2P 
is an important technology that not only can create important societal 
changes but itself reflects important societal changes that have 
already taken place. Individuals--on their own, unaided by the 
communications giants--are finding their own new ways of connecting, of 
communicating, and of creating and controlling their own communication 
channels. Their will--connected and empowered--will prevail. It is 
prevailing now and we cannot forget them.
    I have no doubt that P2P will become as ubiquitous as the 
telephone. To StreamCast this is not about content. It is not about 
media. It is about recognizing the freedom, and the power, of consumers 
to connect directly with each other and share and exchange information 
and communications. It is about developing an architecture that works 
with individuals, that provides tools that respect individual control 
and empowerment, and that offers pleasing and satisfying opportunities 
for communication and commerce. We must never lose sight of our common 
ground, that this is really all about the consumers and our future 
together with them.
                                 ______
                                 
   Prepared Statement of Jack Valenti, President and Chief Executive 
           Officer, The Motion Picture Association of America
    This document sets forth the goals that the American movie industry 
urges the Congress to seriously examine. The future of these unique 
creative story-telling works is in danger of being shrunk and 
squandered by an increasing thievery on the Internet. We cannot stand 
mute and observe the slow undoing of a formidable American economic and 
creative asset, which would cause terrible injury to the consumers of 
America.
    Broadband (high speed, large pipe entry to the Internet) is an 
OPPORTUNITY to make available to consumers another delivery system for 
transporting visual entertainment to their homes. This means more 
freedom of choices for consumers.
The Economic Worth of the Copyright Industries
    What kind of asset is at stake here and what does it mean to this 
country? The facts are these: The Copyright Industries (movies, TV 
programs, home video music, books and computer software) are America's 
greatest trade export prize. They are responsible for some five percent 
of the GDP of the nation. They gather in more international revenues 
than automobiles and auto parts, more than aircraft, more than 
agriculture. They are creating NEW jobs at three times the rate of the 
rest of the national economy. The movie industry alone has a SURPLUS 
balance of trade with every single country in the world. No other 
American enterprise can make that statement. And all this at a time 
when the country is bleeding from a $400 Billion trade DEFICIT.
    Which is why we come to you with a clear statement of what is 
needed to preserve this extraordinary economic/creative engine of 
growth in a broadband world.
    As you may surmise, producers of visual entertainment are 
enthusiastic, ready and eager to offer their creative works on the Net. 
And to dispatch those works LEGALLY, at a fair and reasonable price to 
those American homes who choose to view them. It should be noted that 
``fair and reasonable'' will be defined by the consumer and no one 
else.
    But there is an obstacle. Consider this: The cost of making and 
marketing movies, for example, has risen to nerve-shattering heights. 
In 2000, the total cost to the major studios for making and marketing 
their films was, on the average, an astounding $82 Million! Only two in 
ten films ever retrieve their total investment from U.S. theatrical 
exhibition. Those films must journey through various marketplace 
sequences: airlines, home video, satellite delivery, premium and basic 
cable, over the air TV stations and internationally. They must make 
that journey to try to break-even or ever make a profit.
    Today as that movie travels its distribution compass course, it is 
exposed to great peril, especially in the digital environment. If that 
movie is ambushed early on in its travels, and then with a click of a 
mouse, and without authorization, sent hurtling at the speed of light 
to every nook and cranny of this planet, its value will be seriously 
demeaned. Who on earth would continue to invest huge sums of private 
risk capital when the chances of redeeming that investment become 
remote, if not impossible?
    Broadband entices and allows piracy of films and TV programs on a 
massive, unprecedented scale. And at this precise moment, movies and 
other visual entertainment works are in ever-multiplying numbers 
swarming illegally throughout so-called file-sharing sites (a more 
accurate description would be ``file-stealing'' sites). And this is in 
an environment where most people's broadband connections are not fast 
enough to enable speedy downloads of these illegally copied files 
(funny how people will wait a long time for something when it is 
free!).
    Thus, the problem will only get worse as the speed of broadband 
increases. University-based piracy provides especially troubling 
evidence of this phenomenon, because university Ethernet systems are 
state-of-the-art, large pipe, highest speed broadband connections. 
These university systems are over-run and heavily burdened by student 
downloading of pirated movies and TV shows. It's easy. It's fast, and 
it's free. It is also illegal.
    Gresham's Law works its will in such a landscape. Just as cheap 
money drives out good money, so we are afraid that pirated movies will 
spoil the market for broadband delivery of high-quality films with 
superior fidelity to sight, sound and color once these high-speed 
connections proliferate. A consulting firm has estimated that more than 
350,000 movies are being illegitimately brought down EVERY DAY. Who 
would choose to pay for movies when you can have them delivered to you 
FREE? It is this infection which corrodes the future of creative works. 
But if through technological measures, producers of visual 
entertainment could defeat the spread of pirated movies populating 
``outlaw'' Net sites, the Net would be cleared of illegal debris and 
able to hospitably welcome legitimate, superior quality entertainment 
in a user-friendly format. The Consumer Electronics and Information 
Technology industries have been working cooperatively with us to find 
methods to deliver our legitimate content in a more secure digital 
environment. The largest beneficiary of such an environment would be 
American consumers.
    The THREE GOALS I outline below are designed to protect valuable 
creative works in visual entertainment, and at the same time expand the 
reach and attraction of broadband in the consumer society.
    How to achieve these GOALS? First and foremost both the House 
Energy and Commerce Committee and the House Judiciary Committee must be 
involved because these goals are umbillically connected to the 
oversight jurisdiction of both Committee.
    Our Three Goals, whose Objective it is to Protect movies, TV 
programs and other visual entertainment on the Net.
    Goal One: to create a ``broadcast flag'' which would prevent 
broadcast programs exhibited on over the air TV stations from being re-
distributed on the Net, which is a form of thievery.
    Because just about all such TV creative material is in ``deficit,'' 
(that is, its production costs are higher than the license fees it 
receives from the network) TV series and other high value broadcast 
material must go to ``syndication'' when they leave the network. 
Syndication means those programs must be licensed to local and 
international TV stations in order to recoup their total investments, 
and hopefully make a profit. If such programs are re-distributed on the 
Net while they are still on the network, it shrinks and decays the 
earning power of that program in the syndication market. As of last 
week, a technology for constructing the ``broadcast flag'' was nearing 
agreement among the Information Technology, Consumer Electronics and 
movie industry companies. We are deeply appreciative of these efforts.
    Action: The parties will need to agree on how to achieve this goal, 
either through narrow congressional or agency action.
    Goal Two: To ``plug'' the ``analog hole.''
    This is technical jargon. Let me sort this out in plain English. 
All digital protection designs can only work in a digital environment, 
which is the environment of the Internet. When a digital signal comes 
down to a TV set in the consumer home, that TV set in 95% or more of 
American homes is an ``analog'' set. This means the digital signal is 
immediately transformed into an analog signal in order for the consumer 
to watch it. If the analog signal is then converted back to digital, it 
cannot be protected by any known protection device. This is called 
``the analog hole.'' One way to ``plug the hole'' could be through a 
``watermark detector.'' The ``watermark'' is an ingenious design, which 
commands the signal converter in the TV set to respond to the 
instructions on the movie. This can be accomplished through a concord 
agreed to by the Information Technology, Consumer Electronics and Movie 
industries.
    Action: To reach this goal, Congressional assistance will be 
necessary.
    Goal Three: To stop the avalanche of movie theft on so-called 
``file-sharing'' Web sites, such as Morpheus, Gnutella, etc. (the more 
accurate name would be ``file-stealing'' sites).
    Unhappily, neither the ``broadcast flag'' nor ``plugging the 
analog'' hole will stop this relentless thievery that is endemic.
    We have not hesitated to spend considerable resources to fight 
these sites and services in the courts. But litigation alone cannot 
possibly provide an adequate solution, particularly as these services 
become increasingly decentralized, fragmented and anonymous. 
Constructive discussions need to take place with the Information 
Technology and Consumer Electronics industries to determine how best to 
develop effective technical solutions to crush online theft of our 
valuable creative works.
    Action: Continuous negotiations must take place to develop 
technical solutions, which may require legislative enforcement.
    There is one truth that sums up the urgency of this request to the 
Congress to enlist in the battle to preserve and protect an American 
economic and artistic asset, which attracts the enjoyment, the 
patronage and a most hospitable reception by every creed, culture and 
country throughout the world.
    That truth is: If you cannot protect what you own, you don't own 
anything.
                                 ______
                                 
      Prepared Statement of the Video Software Dealers Association
    The Video Software Dealers Association (VSDA), the international 
trade association representing the home video industry and video stores 
across the nation,1 submits this statement for the record of 
the hearing on ``Ensuring Content Protection in the Digital Age.''
---------------------------------------------------------------------------
    \1\ Established in 1981, VSDA is a not-for-profit international 
trade association serving the $19 billion home entertainment industry. 
VSDA represents more than 1,700 companies throughout the United States, 
Canada, and a dozen other countries. Membership comprises the full 
spectrum of video retailers (both independents and large chains), as 
well as the home video divisions of major and independent motion 
picture studios, and other related businesses that constitute and 
support the home video entertainment industry.
---------------------------------------------------------------------------
    We respectfully suggest that Congress focus not only on protecting 
digital content from copyright infringement but also on protecting the 
rights of the owners of lawfully made copies of digital works. We are 
concerned that digital rights management constructs are being used not 
only to prevent piracy and to ensure payment for purchases, but also to 
circumvent constitutional and statutory limitations on the copyright 
monopoly.
    For example, digital rights management systems can be used to:

1. Prevent a lawfully purchased, digitally delivered movie from being 
        played more than a certain number of times, or from being 
        played on any machine other than the first computer or player 
        on which it is played (thereby preventing rentals, resales, 
        lending, or gifts of previously viewed movies).
2. Lock out, delete, or disable lawfully made copies of motion pictures 
        residing on a computer hard drive or other storage system.
3. Prevent consumers from privately performing a work over a home 
        network.
4. Lock up material that is not copyrightable or is in the public 
        domain.
5. Effectively expand the term of the copyright monopoly indefinitely.
    This overreaching promises to undermine copyright law and the 
public policies it serves, suppress consumer choice and retail 
competition, and ultimately impede the development of online 
entertainment, to the detriment of consumers, retailers, and copyright 
owners.
                      copyright law and home video
    Having built the world's first home distribution system for motion 
pictures on the strength of the first sale provision of the Copyright 
Act,2 video retailers may have as much at stake in this 
discussion as any other market segment.
---------------------------------------------------------------------------
    \2\ 17 U.S.C. 109(a).
---------------------------------------------------------------------------
    Copyright law provides the legal foundation that has facilitated 
the phenomenal growth of the home video industry over the past two 
decades. The copyright monopoly supplied motion picture copyright 
holders with the economic incentive to develop new markets for their 
motion pictures, which led first to the emergence of videocassettes, 
then digital versatile disks (DVDs), and most recently, Internet-based 
``video on demand.'' These innovations have enhanced the consumer's 
access to motion pictures and created a vibrant, competitive industry.
    When videocassette recorders (VCRs) first emerged as a consumer 
electronics product in the late 1970s, few imagined how ubiquitous they 
would become in America's homes and how popular watching a prerecorded 
video of a motion picture would be. For an overwhelming majority of 
America's 250 million plus consumers, renting and buying prerecorded 
videocassettes and DVDs is an integral component of their entertainment 
options. More than 90% of the households in the U.S. own at least one 
VCR. And although the DVD is a relatively new format, it is projected 
that approximately 24 million U.S. households now own a DVD player. It 
is estimated that almost 3 billion videotapes and DVDs were rented in 
2001. Approximately one-third of all video-equipped households rent a 
videotape or DVD weekly, while 50% rent at least once a month. More 
than 60% of video-equipped homes have a video library of some sort. The 
average videotape library contains 75 titles, while the average DVD 
collection contains 19 titles. Consumer spending on video rentals in 
2001 was a record $8.42 billion. More than $10 billion was spent 
purchasing the most popular videotapes and DVDs in retail 
establishments.
    Essential to the success of the home video industry is the first 
sale doctrine of copyright law, codified at 17 U.S.C. 109(a). By giving 
retailers the right to sell and rent lawfully made videos and video 
games without restriction by the copyright owner, the first sale 
provision benefits society by promoting retail competition and 
maximizing distribution of creative works.
    Although the motion picture studios strenuously resisted the 
emergence of the VCR and the creation of the video rental industry, 
even going so far as petitioning Congress to eliminate the first sale 
doctrine for prerecorded videos of movies, the home video industry 
today is an enormously profitable enterprise for the studios. Over the 
past several years, revenue from home video has accounted for more than 
half of the studios' gross domestic film revenue. Total revenue to the 
studios from domestic video sales and rentals totaled $10.7 billion in 
2000.
    Video retailing, while experiencing some of the consolidation and 
slowing of growth of a maturing industry, remains a vibrant competitive 
enterprise. There are 24,000 video rental specialty stores in the U.S. 
These stores include the major public chains such as Blockbuster, 
Hollywood Video, and Movie Gallery, and a significant number of 
independent retailers. It is estimated that more than 40% of video 
specialty stores currently are single-store operations. Another 4,000 
non-specialists, primarily supermarkets and drugstores, also rent video 
as a regular part of their business, and numerous other retail outlets 
sell prerecorded videos.
    Home video has flourished precisely because copyright holders could 
not control the home video rental and resale market. The freedom to 
rent and resell videos guaranteed by the first sale provision has 
provided consumers with access to a wide variety of affordable, quality 
entertainment from different sources, generated a tremendous revenue 
stream for the copyright holders, and created a thriving industry with 
a high level of competition.
                        the first sale doctrine
    Copyright law maintains a careful balance between protecting the 
intellectual property of copyright holders and promoting the broad 
dissemination and enjoyment of protected works. The Constitution 
provides Congress with the authority to enact copyright laws ``[t]o 
promote the Progress of Science and the useful Arts, by securing for 
limited Times to Authors and Inventors the exclusive Right to their 
respective Writings and Discoveries.'' 3 The intent of this 
provision is to encourage authors to create and to disseminate their 
works. Nevertheless, copyright law carefully limits the scope of the 
copyright monopoly. The copyright holder and the owner of a lawful copy 
of a copyrighted work each have distinct rights under the Copyright 
Act, and the rights of each must be respected.
---------------------------------------------------------------------------
    \3\ U.S. Const., art. I, cl. 8.
---------------------------------------------------------------------------
    One of the essential rights of an owner of a lawful copy is 
embodied in the first sale provision. Section 109(a) provides that, 
notwithstanding a copyright owner's distribution right, the owner of a 
particular copy lawfully made under U.S. copyright law ``is entitled, 
without the authority of the copyright owner, to sell or otherwise 
dispose of the possession of that copy.'' The first sale provision 
applies to ``copies,'' including digital copies fixed in a tangible 
medium,4 without regard to where or how they were made. 
Moreover, the Copyright Act also makes clear that the first sale 
doctrine need not involve a sale. Rather, the pivotal question is 
whether the person asserting the first sale doctrine right is the 
``owner'' of a ``lawfully made'' copy. There is no requirement that the 
tangible medium of expression have been sold by the copyright holder.
---------------------------------------------------------------------------
    \4\ U.S. Copyright Office, ``DMCA Section 104 Report,'' 78 (2001).
---------------------------------------------------------------------------
    Copies can be mass produced at a factory or singularly by the 
consumer at a home computer. The owner of a lawfully made copy may 
assert his or her first sale rights regardless of whether the copy was 
purchased or, after the purchase of a blank medium, ``made'' by 
exercising a license to make a copy.5
---------------------------------------------------------------------------
    \5\ See United States v. Sachs, 801 F.2d 839, 842 (6th Cir. 1986); 
see also United States v. Cohen, 946 F.2d 430, 434 (6th Cir. 1991) 
(``This [first sale] doctrine recognizes that copyright law does not 
forbid an individual from renting or selling a copy of a copyrighted 
work which was lawfully obtained or lawfully manufactured by that 
individual''); M. Nimmer and D. Nimmer, Nimmer on Copyright 
Sec. 8.12[B][3][c].
---------------------------------------------------------------------------
    Thus, a person who lawfully makes a copy of a motion picture 
through a digital download at a retail location or at home is 
authorized, under Section 109(a), to sell it to the highest bidder, 
loan it, trade it, or give it away, and the copyright owner is 
powerless under the Copyright Act to prevent it. Video retailers would 
also be free to rent them for profit, just as is the practice today 
with audiovisual works lawfully reproduced on videocassettes and DVDs.
                          private performances
    The Copyright Act gives copyright holders the exclusive right to 
perform a work ``publicly,'' but reserves to the public the right to 
perform privately copies they own.6 Theater owners need a 
license to show a motion picture, but the person who sneaks into a 
theater without paying infringes no right of the copyright owner. 
Owners of lawful copies need licenses to play them in public for pay, 
but need no one's permission to play them at home for private 
enjoyment. In short, there is no copyright to control or in any way 
limit private performances.7 To limit such performances is 
like preventing parents from reading books to their own children.
---------------------------------------------------------------------------
    \6\ Under 17 U.S.C. 101, ``[t]o perform or display a work 
`publicly' means--(1) to perform or display it at a place open to the 
public or at any place where a substantial number of persons outside or 
a normal circle of a family and its social acquaintances is gathered; 
or (2) to transmit or otherwise communicate a performance or display of 
the work to a place specified by clause (1) or to the public, by means 
of any device or process, whether the members of the public capable of 
receiving the performance or display receive it in the same place or in 
separate places and at the same time or at different times.''
    \7\ Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 155 
(1975).
---------------------------------------------------------------------------
              ``limited downloads'' and ``online rentals''
    Today, technological restraints have been fashioned to give 
copyright holders de facto control over the distribution and use of 
copyrighted works where de jure control has been denied to them. These 
restraints seek to disable the protections that copyright law provides 
to legal owners of lawfully made copies of copyrighted works--and 
expand the limited privileges granted to copyright holders by Congress 
in order to give them control over the lawful distribution and use of 
copyrighted materials, control Congress has expressly denied to them in 
the Copyright Act. They seek this control in order to impose a business 
model under which they can charge for repeated use or multiple users of 
copyrighted works.
    Copyright holders have taken the position that they are free to 
control the distribution and use of digitally delivered copyrighted 
works by reclassifying the transfer of ownership of digitally delivered 
copies of copyright works as ``limited downloads'' or ``online 
rentals.'' The classifications are imposed on the owners of lawfully 
made copies through digitial rights management constructs such as non-
negotiable contracts and access control technology.
    Non-negotiable contracts in the digital environment are most 
commonly presented as ``click-thru end user license agreements.'' These 
contracts of adhesion typically incant that the download does not 
transfer ownership of the copy of the work and declare that there are 
restrictions on the length of time or number of times the purchaser can 
view or listen to the product, the ability to transfer ownership of the 
copy, and/or the number of devices on which the product may be played. 
The restrictions are enforced by ``access control technologies'' that 
automatically disable the copy after a certain amount of time or number 
of plays (``timing out'') and/or prevent the copy from being played on 
any device other than the device on which it was downloaded 
(``tethering'').
    For example, a download from a soon-to-be-launched ``video on 
demand'' online delivery service for motion pictures reportedly will 
have to be watched within 30 days from the date of download and will be 
operable only for 24 hours after the first viewing, after which the 
movie will be rendered as inaccessible code. In addition, the download 
will be tethered to the computer on which it is downloaded. The video 
on demand service is a joint venture of copyright owners.
    The limited download construct is designed to gain the revenue 
stream consumers might be willing to pay for access to public 
performances of these works, while at the same time enjoying the 
control and efficiencies (but not the limitations) of a single digital 
reproduction (the download). It is intended to turn every digital 
player into a pay-for-play video jukebox, where the consumers own the 
copies, but lose their federal right to privately perform them or 
transfer to others the physical medium on which they are lawfully 
recorded without permission from or further compensation to the 
copyright owner.
    In fact, non-negotiable contracts and access control technology can 
be used to restrict the redistribution and use of a copyrighted work 
even after the copyright in the work has expired, effectively extending 
the copyright term in perpetuity.
    Unfortunately, Section 1201 of the Digital Millennium Copyright 
Act, which prohibits circumvention of technological protection measures 
such as access control technologies, is being misinterpreted to apply 
even where the technological protection measure does more than just 
protect the copyright from infringement, but also furthers objectives 
unrelated to copyrights. Under this interpretation, which is contrary 
to Congress' intent,8 technological protection measures 
cannot be circumvented so as to limit their effect to only lawful 
objectives.
---------------------------------------------------------------------------
    \8\ The anticircumvention provisions of the DMCA ``[do] not apply 
to the subsequent actions of a person once he or she has obtained 
authorized access to a copy of the work . . . even if such actions 
involve circumvention of additional forms of technological protection 
measures.'' H. Rpt. No. 105-551, Part 1, at 18 (1998).
---------------------------------------------------------------------------
    Non-negotiable contracts and access control technology are being 
used not only to prevent piracy, but to restrict the legal rights of 
lawful owners to give away, sell, rent, and view the digital copies 
they own. Although technological measures may lawfully be used to 
prevent copyright infringement and to ensure payment for the 
reproduction, they should not be used to permanently control the lawful 
distribution and use of copies once the legal right to do so has been 
exhausted.
    Because the first sale provision furthers the important public 
policies of promoting competition and maximizing dissemination of 
copyrighted works, the rights it confers cannot be extinguished either 
by non-negotiable contracts or technological controls. To conclude 
otherwise would make the rights granted by the first sale doctrine 
merely contingent on the technological prowess or goodwill of copyright 
owners.
                           antitrust concerns
    Non-negotiable end-user license agreements and access control 
technology can be abused to suppress retail competition, to the 
detriment of consumers and retailers. It must be understood that 
entertainment products are not fungible. A consumer that seeks to view 
``Shrek'' will not be fully satisfied by substituting ``Training Day.'' 
Rather, for motion pictures, the retail competition occurs not between 
products, but between retailers, who compete on price, selection, 
terms, location, customer service, and other factors.
    The proliferation of non-negotiable contracts and excessive access 
control technology will deprive consumers of the value and flexibility 
they currently receive from packaged entertainment. It could eliminate 
retail competition and substitute uniform pricing and other uniform 
terms and conditions on the sale of movies, effectively extending the 
carefully delineated rights contained in sections 106 and 106A of the 
Copyright Act into wholesale controls over distribution to the ultimate 
consumer.
    Such technologies are also capable of being used to obliterate the 
lawful secondary market for used entertainment. Consumers could then be 
prevented from loaning movies to a family member or friend, reselling 
them, donating them to charitable organizations, or even, according to 
some of the current business models, bequeathing them in their wills.
    The U.S. Copyright Office recognized the anticompetitive potential 
of these technologies in its DMCA Section 104 Report to Congress. The 
Copyright Office noted that access control technologies that tether 
digital downloads to a single computer and non-negotiable ``click-
thru'' contracts that attempt to override copyright law may negatively 
impact consumer choice and retail competition.9
---------------------------------------------------------------------------
    \9\ U.S. Copyright Office, ``DMCA Section 104 Report,'' 75-76, 164 
(2001). We do take issue, however, with the Copyright Office's 
conclusion that the problems raised by access control technologies and 
non-negotiable contracts are speculative, or premature, or beyond the 
scope of its report. The restrictions on retailers' rights to 
distribute and consumers' rights to transfer and use fully the products 
they lawfully purchase and download are not speculative and 
consideration of their impact is not premature, as evidenced by the 
video on demand joint venture referenced above. These issues also fall 
squarely within the Copyright Office's mandate from Congress. Yet the 
Copyright Office's report makes no mention of the video on demand joint 
venture, despite the fact that it was public knowledge that this 
service was being developed. The problems created by overly restrictive 
access control technology and non-negotiable contracts need to be 
addressed now, not at some indefinite time in the future. To fail to do 
so leaves to the designers of access controls the allocation of rights 
between consumers and copyright owners, a function that previously was 
the exclusive responsibility of Congress.
---------------------------------------------------------------------------
    Competition in the distribution of copyrighted works is largely 
non-existent until the product passes to distributors and retailers. If 
video retailers cannot participate in the distribution of digitally 
downloaded movies, either as a lawful reseller or a rental outlet, the 
neighborhood video store will rapidly fade from the scene. They would 
be replaced by a small number of approved providers, to the exclusion 
of competing retail channels. Consumer choice and competition would be 
further eroded.
                 criteria for digital rights management
    Retailers are firm believers in protecting copyrighted works from 
piracy. In fact, because the retail sector often feels the most 
immediate effects of piracy, it is not unusual for retailers to 
complain that copyright holders are too lax in enforcing their 
copyrights against pirates who compete directly with retailers. Despite 
the strong leadership of retailers in fighting piracy, they are 
unwilling to give carte blanche to copyright holders to control all 
distribution and uses of their works.
    Claims that the digital sky is falling as a result of piracy need 
not lead to a wholesale shift in power to copyright owners. First, 
copyright holders need not take away public rights to protect their 
copyrights. For example, the technology to prevent a motion picture 
from being copied is different from the technology needed to ``lock'' a 
legal copy 24 hours after its first use. In addition, the Supreme Court 
has admonished that the rights of the public as against copyright 
holders are just as important, under the Constitutional framework, as 
the rights of copyright holders against the public.10
---------------------------------------------------------------------------
    \10\ See, e.g., Fogerty v. Fantasy, Inc., 510 U.S. 517, 527 (1994) 
(because of the social value of increased public exposure to a musical 
work, ``a successful defense of a copyright infringement action may 
further the policies of the Copyright Act every bit as much as a 
successful prosecution of an infringement claim by the holder of a 
copyright'').
---------------------------------------------------------------------------
    Accordingly, there should be two criteria for security standards:

1. The degree of security against copyright infringement. As a 
        practical matter, the only rights at issue here are the rights 
        of reproduction (Section 106(1)) and public performance 
        (Sections 106(4) and (6)).
2. The degree of accountability for lawful reproductions and public 
        performances. That is, the extent to which the technology can 
        assure that the copyright owner is being compensated for the 
        number of reproductions or public performances actually 
        licensed and made.
                               conclusion
    Copyright law is a balance between the protection of intellectual 
creations and the promotion of broad public dissemination of these 
creations in a manner that benefits society as a whole. Congress must 
ensure the proper balance is maintained between the rights of copyright 
holders on the one side and consumers and retailers on the other so 
that lawful digital distribution can move forward.
    Security technologies that protect true intellectual property 
rights from infringement are commendable. Video retailers have long 
supported Macrovision encryption of analog copies of motion pictures 
and the CSS system of protecting DVD copies of motion pictures from 
unauthorized reproduction. Such systems derive their legitimacy from 
the fact that they only protect the right of reproduction from 
infringement.
    However, VSDA is deeply concerned about the overreaching that is 
part of some technological controls for online entertainment. For the 
first time in history, copyright holders have the power to control mass 
distribution of their works (at least those in digital form) from the 
point of manufacture all the way to the end consumer and beyond. They 
are now able to distribute copies to millions of people in a matter of 
a few minutes, simultaneously distributing at the wholesale and the 
retail level. At the same time, digital technology gives copyright 
holders the unprecedented power to control and suppress the lawful use, 
resale, and rental of digitally delivered entertainment.
    The issue is indeed quite simple. Copyright holders do not have a 
right of private performance, so they should not be permitted to force 
consumers to pay for private performances. Holders of copyrights in 
audiovisual works do not have a rental right, so they should not be 
permitted to prevent rentals. No copyright holder has the right to 
control redistribution of lawfully made copies, whether made in a 
factory, in a retail store, or at home, so they should not be permitted 
to use technology to prevent redistribution, nor to charge the new 
owner or renter a fee for access.
    Video retailers see tremendous possibilities in digital 
distribution and want to see this market grow. They do not fear a free 
market, and believe that copyright holders should not be able to expand 
the limited privileges granted to them under the Copyright Act to lock 
out or limit retail competition. They ask only for the opportunity to 
compete fairly for consumers in the digital marketplace. They disagree 
with the notion that any single participant in the marketplace should 
be allowed to dictate the winners and losers.
    While it can be argued that, ultimately, business models that rely 
on consumer-unfriendly technology will fail, in the interim some 
retailers may be driven out of business and the development of the 
market for digital delivery will be severely impeded.
    Therefore, public policies for digitally delivered copyrighted 
works must: (1) maintain the balance of rights and limitations of 
copyright; (2) promote competition for consumer allegiance; (3) protect 
consumer rights; and (4) stimulate creativity. Such policies are 
necessary to facilitate artistic, business, and technological 
innovation that benefits society, enhances the quality of life, and 
fuels economic growth.
    Thank you for the opportunity to present our views.
                                 ______
                                 
   Prepared Statement of Hilary Rosen, President and CEO, Recording 
                    Industry Association of America
    I would like to thank the Subcommittee, under the leadership of 
Chairman Upton and Representative Markey, for the opportunity to submit 
written testimony today about the most important issue facing the 
recording industry--rampant digital music piracy and possible 
technological solutions to help control piracy.
The Piracy Problem
    Any discussion concerning the use and protection of copyrighted 
works on the Internet, and certainly any discussion of digital music 
issues, has to begin with an understanding of how large a problem 
piracy is. Put simply, the quantity of digital music piracy is 
staggering. The International Federation of the Phonographic Industry 
(``IFPI'') recently estimated that for every CD purchased legitimately, 
another one is ``burned'' on a computer. This rate of unauthorized 
reproduction--that is, 100% of the legitimate market--is unheard of in 
any industry. Just imagine if half of the automobiles, computers or 
shoes in the market were illegitimate.
    The biggest sources of unauthorized copies of recordings are the 
various ``peer-to-peer file sharing'' systems. I use the term ``peer-
to-peer file sharing'' because everyone does, but I should be clear 
that there is no true sharing involved. Everyone involved in the 
``sharing'' process gets to keep his or her own copy. These services 
are also ``peer-to-peer'' only in the sense that there is no 
centralized storage of our works. That term obscures the fact that they 
are organized networks specifically designed and operated to further 
the unauthorized distribution of copyrighted works. And they accomplish 
their objective with great efficiency. Just one of these peer-to-peer 
services alone is responsible for over 1.8 billion unauthorized 
downloads per month. In fact, it appears that in any month this one 
service provides more infringing downloads than the total number of 
tracks contained on the legitimate products shipped by the entire U.S. 
recording industry.
    These peer-to-peer systems are so widely used that one analyst 
recently estimated that over half of the broadband traffic in the 
United States is attributable to the unauthorized ``file sharing'' of 
copyrighted works. In some places it is worse--one university has found 
that over 80% of its network traffic is dedicated to the use of KaZaA, 
the leading peer-to-peer application.
    Peer-to-peer systems aren't the only problem facing the recording 
industry. CD ``ripping,'' which is the process of converting CD 
recordings into computer files, and ``burning,'' which is the process 
of turning those computer files into CD recordings playable by 
conventional CD players, on a mass scale is also a substantial threat 
to our industry. The hardware and software necessary to rip and burn 
CDs has become standard equipment on personal computers. Indeed, 40% of 
active music consumers now own CD burners--up from 14% in 1999. This 
has led to troubling results:

 77% of active music consumers with CD burners have used their 
        burners to copy music.
 50% of those who have downloaded music for free copy the 
        downloaded music onto a burned CD or a portable MP3 player.
 23% of active music consumers say they did not buy more music 
        last year because they downloaded or copied music for free.
    The piracy problem has reached a level that threatens to cause 
serious damage to those of us who create and market music. Last year, 
record sales in the United States were down 10%. IFPI recently reported 
that record sales were down almost 7% worldwide. Moreover, piracy has 
had particularly significant effects on sales of the top hits that 
provide the profits that allow us to invest in the development of new 
artists and creation of new music. In 2000, the top ten albums sold a 
total of 60 million units. In 2001 the top ten albums sold only 40 
million units--a drop of 33%. These trends hurt all of us who earn our 
livelihoods from the music industry. They also hurt our business 
partners, the legitimate digital music services, which find it hard to 
compete against infringing services that provide consumers all of the 
same content for free.
    It would be difficult to overestimate the long term consequences if 
these trends continue. The creation of new recorded music involves 
enormous levels of cost, amounting to hundreds of millions of dollars. 
Thereafter, the cost of marketing and promotion may amount to many 
hundreds of millions of dollars more in order to create a demand for 
the music. The current levels of piracy will not long allow us to 
sustain this level of investment. That not only will impose economic 
pain on every participant in the digital music value chain, but it also 
will deprive consumers of the rich musical diversity they have come to 
expect from our industry and of the promise the Internet provides for 
legitimate commerce in copyrighted works.
Technological Solutions
    Despite the rather gloomy picture I've just painted for you, I 
truly believe that the music industry has a bright future. Record 
companies look forward to embracing technology in two ways--to curb 
piracy and to form new business models with technology partners and 
licensees to deliver music in new ways at new price points to 
consumers, offering more choices in the legitimate marketplace
    Record companies are looking at and testing various digital rights 
management and copy protection technologies that balance personal use 
with the piracy concerns of both record companies and artists. There 
are technologies available that can offer some useful degree of 
protection against uncontrolled copying of recordings. For example, CDs 
can be copy protected to inhibit ripping. The mere protection of CDs 
alone, however, is not a solution to the piracy problem. It is very 
difficult to maintain the security of valuable intellectual property 
against the relentless incursions of new copying and distribution 
technologies so long as computer products and consumer electronic 
devices provide easy and open opportunities for piracy.
    The solution to the piracy problem, then, lies not in any 
technological silver bullet, but in an ongoing cooperative relationship 
between the music and technology industries. Such a cooperative 
relationship could create robust systems for digital copy protection. 
For example, all commercially released CDs are encoded with certain 
copyright management information for use in those devices that support 
the Serial Copy Management System (``SCMS''), which is the system 
required by the Audio Home Recording Act. CD ripping products have 
access to this copyright management information too, but their 
designers have chosen to ignore it. Why shouldn't there be 
technological solutions that take advantage of this information and 
respect it in devices not covered by the AHRA as well as those that are 
covered by the AHRA? Perhaps these solutions could include ``secure 
ripping,'' whereby CD ripping and burning products would protect the 
resulting copies, or simply refuse to copy, when appropriate given the 
available SCMS information. One could certainly imagine solutions built 
on other copyright management information, such as ``watermarks,'' as 
well.
    Cooperation between the copyright and technology industries also 
could make it possible to close what has been called the ``analog 
hole,'' which is the ready ability of users to circumvent digital 
copyright protections through conversion from digital to analog to 
digital. The ``analog hole'' exists because digital music must be 
converted to analog sound waves to be audible to people--we humans 
can't just listen to 1s and 0s. In this process, a secure piece of 
digital music loses its security at some point in the transmission from 
processor to sound card to speaker. Currently, it is rather simple to 
turn analog signals back into digital copies without regard to the 
security in place on the original and without a significant degradation 
in sound quality. A cooperative relationship might produce technologies 
to close the analog hole, or at least make the process sufficiently 
difficult or result in such poor copies that most people would not 
bother to try to exploit it.
    Similarly, there are possible technical solutions to the problems 
created by peer-to-peer networking. Technologies have been developed to 
recognize the ``fingerprints'' of copyrighted works, or to embed 
watermarks in those works, such that the unauthorized distribution of 
those works over the Internet can be recognized and either slowed or 
halted. Some universities and other Internet access providers are using 
software applications called ``bandwidth shapers'' that recognize peer-
to-peer file sharing and can either stop or slow that activity. We saw 
some evidence of the success with which technologies can be used to 
address peer-to-peer file sharing in our litigation against Napster. 
During the early stages of the case, Napster vehemently protested that 
it would be impossible for it to screen for copyrighted works. Yet 
under the order of a court injunction, Napster blocked a substantial 
part of its former traffic in copyrighted music.
    What is required to develop and implement the potential solutions 
is a commitment from the technology industries to be partners in the 
process of promoting legitimate commerce in copyrighted works by 
restricting the unauthorized distribution of copyrighted content. I am 
excited about the opportunities that the Internet, personal devices and 
other new technologies offer for the distribution and enjoyment of 
music, and by the developing market for digital music. I hope that the 
market for digital music will develop into one of the strongest 
components of the music industry and prove rewarding for artists, 
record labels, technology companies and service providers alike. Thus, 
I believe that both the copyright and technology industries could 
benefit from a cooperative relationship to promote legitimate 
distribution of music and prevent piracy.
    We should be working together to develop technical standards that 
can be implemented in new devices and systems that will be secure and 
foster innovative business models, but avoid confusing or aggravating 
consumers through technical incompatibilities. Such standards could 
spur sales of both technology products and recorded music. At the same 
time, such standards would ensure that software and device 
manufacturers need only build certain technology into their products to 
provide access to works obtained through legitimate channels while 
helping control infringement.
    The recording industry believes that the free market is always the 
best choice for the development of any of these types of technological 
standards, and would never embrace government regulation lightly. 
Congress should analyze, however, and actively monitor, whether the 
marketplace is creating the incentive for technology companies to work 
with copyright owners to protect copyrighted works. The rampant and 
growing digital music piracy has reduced the incentives of technology 
companies to cooperate with copyright owners. Technology companies may 
see little reason to protect content when their products and services 
are already selling, even though those products and services are being 
used to acquire intellectual property illegally. Indeed, the growing 
sales of CD burners and blank CDs may actually provide a disincentive 
for technology companies to engage in constructive efforts to protect 
copyrighted material. Thus, digital piracy is likely to continue to 
flourish. So long as voluntary negotiations of security and digital 
rights management standards are not adequately addressing these 
problems, there may be a role for the government in restoring the 
incentives for the technology and copyright industries to work 
together.
    I again thank the Committee for its time and for the opportunity to 
address you on these important issues.

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