[Senate Hearing 107-283]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-283

ONLINE ENTERTAINMENT AND COPYRIGHT LAW: COMING SOON TO A DIGITAL DEVICE 
                                NEAR YOU

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 3, 2001

                               __________

                           Serial No. J-107-9

                               __________

         Printed for the use of the Committee on the Judiciary

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
77-094                     WASHINGTON : 2002

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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky            RICHARD J. DURBIN, Illinois
                                     MARIA CANTWELL, Washington
                      Sharon Prost, Chief Counsel
                     Makan Delrahim, Staff Director
         Bruce Cohen, Minority Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Cantwell, Hon. Maria, a U.S. Senator from the State of Washington   170
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     3

                               WITNESSES

Barry, Hank, Interim Chief Executive Officer, Napster............    22
Berry, Ken, President and Chief Executive Officer, EMI Recorded 
  Music..........................................................    51
Cannon, Hon. Chris, a Representative in Congress from the State 
  of Utah........................................................    88
Farrace, Mike, Senior Vice President, Digital Business, Tower 
  Records/Books/Videos, MTS, Inc.................................   106
Fish, Edmund, President, MetaTrust Utility Division, InterTrust 
  Technologies...................................................   116
Gottlieb, Steve, President and Founder, TVT Records..............    46
Greenberg, Sally, Senior Product Safety Counsel, Consumers Union.   110
Henley, Don, President, Recording Artists Coalition..............    13
Kearby, Gerald W., President and Chief Executive Officer, Liquid 
  Audio, Inc.....................................................    53
Morissette, Alanis, Recording Artist.............................    17
Murphy, Edward P., President and Chief Executive Officer, 
  National Music Publishers' Association.........................   103
Parsons, Richard D., Co-Chief Operating Officer, AOL Time Warner.     7
Richards, Robin, President, MP3.com, Inc.........................    90
Rosen, Hilary, President and Chief Executive Officer, Recording 
  Industry of America............................................    57
Valenti, Jack, Chairman and Chief Operating Officer, Motion 
  Picture Association of America.................................    10

                         QUESTIONS AND ANSWERS

Responses of the Recording Artists Coalition to questions 
  submitted by the Senate Judiciary Committee....................   125
Responses of Mike Farrace to questions submitted by Senators 
  Hatch, Leahy and Kohl..........................................   129
Responses of Mark Traphagen, on behalf of InterTrust Technologies 
  Corporation, to questions submitted by Senators Hatch, Leahy 
  and Kohl.......................................................   143
Responses of Gerald W. Kearby to questions submitted by Senators 
  Hatch and Leahy................................................   145
Responses of Billy Pitts, Executive Vice President, MP3.com Inc., 
  on behalf of Robin Richards, to questions submitted by Senators 
  Hatch and Leahy................................................   146
Responses of Richard D. Parsons to questions submitted by Senator 
  Hatch..........................................................   150
Responses of Richard D. Parsons to questions submitted by Senator 
  Leahy..........................................................   155
Responses of Hilary Rosen to questions submitted by Senator Hatch   159

                       SUBMISSIONS FOR THE RECORD

American Federation of Musicians of the United States and Canada, 
  Steve Young, President, statement..............................   164
American Federation of Television and Radio Artists, Ann 
  Chaitovitz, Director of Sound Recordings, statement............   165
Boldrin, Michele, Professor of Economics, and David K. Levine, 
  Armen Alchian Professor of Economics, University of Minnesota, 
  letter.........................................................   168
Broadcast Music, Inc., statement.................................   169
CenterSpan Communications Corporation, Frank G. Hausmann, 
  Chairman and CEO, statement....................................   172
Feldman, Lawrence E., Esquire, Jenkintown, PA, statement.........   175
Future of Music Coalition, Jenny Toomey, Executive Director, 
  statement......................................................   177
Griffin, Jim, Founder and CEO, Cherry Lane Digital & OneHouse 
  LLC, article...................................................   182
National Association of Recording Merchandisers, statement.......   192
NWEZ.NET, Gloria Hylton, President, statement....................   197
Video Software Dealers Association, statement....................   203

 
ONLINE ENTERTAINMENT AND COPYRIGHT LAW: COMING SOON TO A DIGITAL DEVICE 
                                NEAR YOU

                              ----------                              


                         TUESDAY, APRIL 3, 2001

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:06 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch, Chairman of the Committee, presiding.
    Present: Senators Hatch, DeWine, Brownback, Leahy, 
Feinstein, Schumer, Durbin, and Cantwell.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Chairman Hatch. Good morning, and welcome to today's 
hearing entitled ``Online Entertainment: Coming Soon to a 
Digital Device Near You.'' That is kind of a long title. There 
have been a number of significant developments since the 
Committee's hearings last year on online entertainment and 
copyright law. Among many, let me mention three:
    First, the Ninth Circuit has ruled that at least as a 
preliminary matter, Napster as we have known it cannot 
continue. For them, as Mr. Henley might say, it has been ``The 
End of the Innocence.'' Even Napster acknowledges that this is 
so. And in its alliance with the forward-thinking Bertelsmann, 
Napster has pledged to reinvent itself so that the technology 
and music fan community it has unleashed can work together in a 
way that respects copyright law and the rights of creators. It 
has been suggested that this new Napster can be online in June, 
or at the latest, July.
    Second, MP3.com has settled its litigation with the large 
record labels and publishers and yet, having paid damages and 
been granted licenses to go forward, still cannot bring its 
service to the public. As Ms. Morissette might question, isn't 
it ``Ironic''?
    And, third, but by no means least, several significant 
market developments have been announced that seem to put us a 
step closer to the ``celestial jukebox.'' One was reported in 
last Friday's Wall Street Journal that two of the five major 
labels, Vivendi-Universal and Sony, were moving toward 
launching a consumer online service called ``Duet'' which will 
bring their joint catalogs to consumers. And the second, and 
even more significant, announcement was yesterday's deal 
between three of the big labels--AOL Time Warner, Bertelsmann, 
and EMI--and the independent music service provider, Real 
networks, to bring a subscription music service to consumers 
over the Internet.
    Pro-competition marketplace solutions that provide for a 
significant online offering of popular music delivered to 
consumers through an entity not controlled by the labels has 
been the type of positive synergy that I have long hoped to 
see. And I hope to learn more about the details of these 
developments and to hear more heartening information on this 
front. This Committee is here today, and will continue in the 
future, to monitor these and related developments in our 
ongoing efforts to ensure that our intellectual property laws 
keep pace with technology.
    Technology has made our lives more convenient, but it has 
also made us more impatient. When a consumer drives up to a gas 
pump, she can insert her credit car, confirm that she has 
adequate funds in her account, her account is debited, and the 
oil company's account is credited, the transaction is 
completed, the consumer is thanked, and the tank is filled. All 
of this occurs within a matter of seconds, and the transfer of 
sensitive financial data is done so securely and with utter 
precision.
    Now, while there are significant additional challenges in 
the context of a product that is delivered wholly online, most 
consumers think similar technological advances should allow 
them access to the music and the movies they love whenever and 
wherever they want it. I believe it can, and that it can do so 
in a way that respects the rights of those who create the works 
we all want to enjoy in this new way. Instant access to an 
infinite offering of perfectly performed creativity on a 
portable device the size of a pen, or a phone, or in the car, 
or wherever I want it, without dragging cases of CDs, is more 
than a new way of delivering the same product. It is a 
transformation of our experience of entertainment and poses a 
revolution in the businesses that have delivered it. And I do 
appreciate the disconcerting panic that the uncertainty of new 
technology might cause established businesses such as the 
record labels.
    But as a music lover, and as one who enjoys the best that 
human creativity offers, I--and fans across this country--
eagerly anticipate these technological transformations the 
future holds. That is why we are here today. As inventor 
Charles Kettering admonished, ``We should all be concerned 
about the future, because we will have to spend the rest of our 
lives there.'' Artists, record labels, and music fans.
    The developments I mentioned have involved primarily 
entertainment companies and technology companies. But as Mr. 
Henley has pointed out, ``there's three sides to every story.'' 
Today, we may find there are even more sides than that. We have 
tried to broaden the discussion beyond just the business 
entities that mediate the primary relationship. We need to keep 
in mind in this process that between the artist and the 
audience. We need to look to see what the future of these 
various industries holds and how technology has and will 
continue to change it.
    When it comes to technology, I must admit, I try to avoid 
making any predictions. Whenever I am tempted, I think back to 
the year 1927, when H.M. Warner of Warner Brothers said, ``who 
the hell wants to hear actors talk?'' Or more recently in 1977, 
when Ken Olsen, the founder of Digital Equipment Corporation, 
said, ``there is no reason anyone would want a computer in 
their home.''
    But what I can safely predict is that we will have no 
choice but to embrace technology, and in order to do this 
properly, especially as policymakers, we need to understand it. 
And that is precisely why I am pleased to have such a large and 
distinguished group here today sharing their thinking with us 
about these matters. As many as are here, many were not able to 
participate because of space and time constraints. We will 
include in the record many statements from a number of artists 
and technology companies and others. Joining us today are 
leaders in the entertainment and technology businesses, as well 
as consumer advocates and some of the most distinguished 
creators of popular music. I look forward to learning from each 
perspective presented today.
    I will conclude by saying that some may feel about the road 
ahead as Woody Allen expressed it: ``We stand at a cross-roads, 
one road leading to despair and hopelessness, and the other 
leading to extinction, and I hope we have the wisdom to choose 
correctly.'' He has a way of putting things.
    Well, I am optimistic that we will be able to choose the 
road that embraces technology, respects the creativity of 
artists, and meets the justifiably impatient demand of 
consumers. With apologies to Ted Nugent, who, unfortunately, 
could not make it today, I do not believe that we are riding a 
``Terminus Eldorado.'' Rather, I like to take the advice of 
Alanis Morissette, with whom I met this morning, who suggested 
on her last album that the appropriate response to experience, 
even to experience we don't particularly want, is a resounding 
``Thank U.'' I believe the road ahead is very exciting. I do 
know some things about this, but I do not know precisely where 
it leads, nor will I predict, but I can see some exciting 
possibilities. And I look forward to exploring them with all of 
you today.
    This is an important hearing. It can help to determine 
where we are going in the future. And we have some of the most 
important people on earth here today with regard to the issues 
involved, the complex issues and the contradictory issues that 
are involved, and we look forward to hearing from all of you.
    Senator Leahy?

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. When I see a crowd 
this size, I wonder whether you must be giving away something 
free.
    [Laughter.]
    Senator Leahy. I will just let that one float out there 
with no editorial comment.
    I am glad to see my friend Don Henley here. The last time 
we were together it was a little bit quieter venue, but I am 
not going to be photographing you here. We have the best 
photographers in the country lined up here. I will let them do 
that.
    Technology changes have become almost exponential in the 
last few years. When I arrived in the Senate 26 years ago, Mr. 
Valenti remembers I not only had hair but it was dark at that 
time. But when I arrived here 26 years ago, I installed what 
was the latest technology--and I was the first Senator in the 
country ever to do this--to make it easier for my constituents 
to contact me. That technology was an 800 telephone line, the 
first Senator ever to have done that. It was the latest and 
best technology.
    Now, look at the difference. I still have the 800 number, 
but I get a lot more e-mails from my constituents than I do 
telephone calls. I get them day and night and so on. In fact, I 
get sometimes more e-mail messages than the antiquated Senate 
computer system is able to handle. And when the computer 
systems here in the Senate are temporarily shut down because of 
too much of a good thing, we realize quickly how dependent we 
are on them.
    Now, this Committee examined the challenges to the music 
industry posed by new online technologies at a hearing almost a 
year ago. I am glad to see back before the Committee some of 
the same witnesses who testified at last year's hearing and to 
welcome the other witnesses Senator Hatch has invited.
    Music has been at the forefront of the online copyright 
battles, but the issue raised by the deployment of new software 
applications and new online services have even broader 
implications for other forms of copyrighted works.
    For the copyright industry, to paraphrase a classic phrase 
from a book I first read back in the third grade, one of my 
favorites, ``It is the best of times, it is the worst of times. 
It is the age of wisdom, it is the age of foolishness.''
    These are certainly good economic times for our copyright 
industries. Computer software, motion pictures, television 
programs, music, publishing, other copyright-based industries 
have proven to be a critical engine for our economy. According 
to one recent study, American copyright industries accounted 
for almost 5 percent of our gross domestic product. To put that 
in actual numbers, that is over $450 billion. And employment in 
this sector grew more than three times as fast as the remainder 
of the fast-growing U.S. economy.
    In the same year, 1999, the U.S. copyright industry led all 
other major industry sectors with over $79 billion in foreign 
sales and exports. That is more than the automobile, the car 
parts, the aircraft, or the agricultural sector. That is a big 
change from when I came to the Senate.
    The growth of these industries has been good for American 
workers. It has been good for our economy. And their continued 
success depends on strong copyright laws and effective 
enforcement of these laws.
    Every year, the copyright industries lose billions of 
dollars in lost revenue to hard goods piracy around the world. 
According to Forester Research, one pirated product is made for 
every three legitimate ones. Think of that. A quarter of the 
products are pirated.
    Now, understandably, especially in a digital age, software 
manufacturers, the record companies, the movie producers, the 
retailers, whose business is selling licensed copies of these 
copyrighted works, are concerned that the losses are going to 
accelerate as digital works are downloaded freely and without 
consideration to the owners of these products.
    Over the past years, Senator Hatch and I and others on the 
Judiciary Committee have worked constructively and productively 
together. We have tried to provide a legal framework to protect 
our country's intellectual property. We have worked hard to 
craft intellectual property legislation that fulfills the 
promise of our Constitution, not simply to secure rights for 
authors and inventors, but do it in a way that promotes the 
progress of science and the useful arts.
    Now, we also strive to ensure that copyright law protects 
fair use and free speech and promotes consumer choice and 
technological innovation.
    Our past history has shown that oftentimes new technologies 
may initially appear to trump intellectual property protection, 
but in the end, they usually open new opportunities for artists 
and new sources of revenue for the copyright owner and new 
choices for consumers. I can understand how artists and writers 
can be worried. I went on to a site--not Napster, I should 
point out--but I downloaded Don Henley, I downloaded 
``Annabel,'' ``Damn It, Rose,'' ``Everything Is Different 
Now,'' ``For My Wedding,'' ``Goodbye to a River,'' ``Inside 
Job,'' ``Miss Ghost,'' ``My Thanksgiving,'' ``Nobody Else in 
the World But You,'' and others. I picked those because they 
are among my favorites. For Ms. Morissette, I saw, again, ones 
I enjoy very much, ``All I Really Want,'' ``Forgiven,'' ``Head 
Over Feet,'' ``Ironic,'' ``Mary Jane,'' ``Perfect,'' ``Wake 
Up,'' ``You Learn.'' I am just looking at the computer here.
    Now, most of those I have at home, the CDs that I bought at 
a store and have enjoyed. I can imagine, though, probably some 
of the calculations that are going on in your mind as I read 
down these. But I am also reminded of the battles in the early 
1980's of the videocassette recorder. As recently documented in 
the new book, Digital Copyright, the motion picture industry 
initially predicted that the invention and marketing of the VCR 
would lead to the destruction of the American television and 
motion picture industries. Indeed, a representative of the 
American Federation of Television and Radio Artists told a 
Congressional Committee back in 1982, that, ``Unless we do 
something to ensure that the creators of the material are not 
exploited by the electronics revolution, that same revolution 
which will make it possible for almost every household to have 
an audio and video recorder will surely undermine, cripple, and 
eventually wash away the very industries on which it feeds and 
which provide employment for thousands of our citizens.''
    As one commentator recently observed, ``Both the motion 
picture and television industries discovered that the 
videocassette recorder generated new markets for prerecorded 
versions of their material.'' In fact, I don't think there is a 
movie--and Mr. Valenti would know this better than all of us--
if there is a movie made today where they don't think what the 
after-sale aspects of video or DVD recording might be.
    I think the VCR's history of success will repeat itself in 
this new era. The copyright industries appear to have learned 
from this history. They are making efforts to develop new 
business models that will flourish in the digital environment. 
We want to hear from entertainment companies and online service 
providers and retailers about what they are doing to provide 
legitimate sources of copyrighted works online and what 
obstacles remain.
    Now, the courts have ruled on the application of copyright 
law to Napster's operation. There are additional court hearings 
in that case next week. And whether I agree or disagree with 
what the court is doing, this is not the place to relitigate 
that case or the MP3.com case.
    At our last hearing, each witness was asked about Congress' 
role here. Each witness then--and some of you are here today--
stated clearly that no Congressional action was wanted or 
needed and that the marketplace was the right place to resolve 
these matters.
    So I am going to be interested in hearing how the 
marketplace is evolving, how we make the best of these times, 
but also how we ensure those people who are such superb artists 
and writers and performers are able to be compensated for their 
work, because as much as I love new technology--I don't think 
anybody else uses new technology any more than I do up here, I 
don't want Don Henley or Alanis Morissette or anybody else to 
not be able to continue to produce because they are not being 
compensated for their work.
    So let's figure out how we do such things. I mean, how do 
we protect the genius of those who do this, but also the genius 
of those who have designed everything from Napster to MP3.com. 
In other words, how do we use the technology and balance the 
rights of all creators of copyrighted works.
    Thank you, Mr. Chairman.
    Chairman Hatch. Thank you, Senator.
    We have a long and distinguished list of witnesses today, 
and in the interest of time, I will give the barest of 
introductions to each witness before they begin each of their 
presentations.
    On the first panel, we will hear first from Richard 
Parsons, who is the co-chief operating officer of AOL Time 
Warner, one of the world's premier entertainment companies.
    Jack Valenti is no stranger to this Committee as Chairman 
and CEO of the Motion Picture Association of America. We 
certainly welcome both of you here and look forward to hearing 
your testimony.
    Don Henley is a leading advocate for artists and is a 
world-renowned writer and artist in his own right. I have a 
great deal of respect for Don Henley, and we are very pleased 
to have you with us.
    Alanis Morissette is similarly one of the most popular 
artists in the music industry and music business today, and it 
was really a pleasure to get acquainted with you, Ms. 
Morissette. We are very appreciative that you would take time 
to be with us.
    Hank Barry, as you all know, is the interim CEO of Napster, 
the music file exchange service, which has been some of the 
cause of this excitement we have had around this over the last 
number of years.
    Steve Gottlieb is president of TVT Records, a large 
independent record label. We are grateful to have both of you 
with us and look forward to your testimony.
    Ken Berry is president and CEO of EMI Recorded Music and 
which, of course, is one of the premier companies in the 
business. We appreciate you taking time to be with us, Mr. 
Berry.
    Gerald Kearby is president and CEO of Liquid Audio, an 
online music delivery and technology company. Mr. Kearby, we 
are very happy to have you here.
    And, finally, no stranger to this Committee and someone who 
has helped us through the years to understand some of these 
issues, Hilary Rosen, who is president and CEO of the Recording 
Industry Association of America. Ms. Rosen, as always, we look 
forward to hearing your testimony.
    We look forward to all of your presentations here today, 
and in the interest of time, we would ask each of you to 
summarize your presentations if you can and do it in as fast a 
summary as you can.
    So we will start with you, Mr. Parsons, and go right across 
the table.

 STATEMENT OF RICHARD D. PARSONS, CO-CHIEF OPERATING OFFICER, 
                        AOL TIME WARNER

    Mr. Parsons. Mr. Chairman and members of the Committee, 
thank you very much and good morning. In view of the long list 
of speakers, I will try to set an example, if not of eloquence 
then at least of brevity. But even in the interest of brevity, 
let me not forget good manners. Let me thank you, Mr. Chairman, 
for inviting us here to speak today. And thank you also for the 
leadership that you and Senator Leahy and the other members of 
this Committee have provided in this area of not only 
superintending the rights of copyright owners, but looking out 
for the interests of consumers as we enter this digital age. We 
appreciate your thoughtful efforts in trying to help shape 
public policy to protect both important interests.
    Also, I would be remiss if I didn't call out--this is a 
distinguished panel, but just join you in expressing 
appreciation for two of the members of the panel in particular: 
Don Henley and Alanis Morissette. In our business it is complex 
and it is growing more so, but we understand that at the core 
of the creative side of our business is the creative genius of 
artists who make it go. It all starts with them, and while on 
occasion--and you may hear some of it today--we have internal 
fusses and feuds and family fights, these are two artists who 
are associated with our labels, and we couldn't be prouder of 
them, and we want to acknowledge that we acknowledge that at 
the end of the day it starts with their creative genius, and 
the rest of us just kind of build on that.
    So, with that, let me say that as co-chief operating 
officer of AOL, I am in charge of what we refer to as our 
``content businesses.'' Behind that somewhat sterile label are 
four of the world's most creatively dynamic enterprises: the 
Warner Music Group, Warner Brothers Studio, New Line Cinema, 
and Time Warner Trade Publishing.
    Together, these businesses produce an extraordinary array 
of movies, music, television programming, and books. Today they 
are also grappling with the effects of digital media in general 
and the Internet in particular, the very stuff which this 
hearing is intended to address.
    Now, I won't try and explore all of the implications of the 
digital revolution for our company or for our industry, both 
because I would be here all day if I tried and, more 
fundamentally, it is a universe still evolving on a minute-to-
minute basis.
    Instead, let me offer three basic observations that I 
believe past and present experience suggests might guide our 
way as we enter the new digital age.
    First, we know that the digital distribution of 
entertainment content is a real business and that it will grow 
exponentially going forward. As my friend and partner in crime 
at AOL Time Warner Bob Pittman puts it, ``How often do you 
launch a business where you know millions of consumers are 
already lined up and waiting for your product?''
    Because we recognize this, we also recognize that the 
digital age presents a tremendous opportunity to our company to 
bring new levels of convenience and choice to consumers, to 
develop new artists, and to expand the market for creative 
content. Those companies that can meet these criteria and meet 
this challenge will succeed in the new digital marketplace. 
Those who can't, won't.
    Second, we know that where there is no effective copyright 
protection, there are no creative enterprises, save those 
directed by wealthy patrons or government. This is as true in 
the digital world as it was in the analog one.
    Quite simply, a vibrant, vital democratic culture can't 
exist without the legal right of individual artists and the 
enterprises that nurture, develop, and distribute their work to 
direct how and where it is to be used and to reap the rewards 
therefrom.
    In the end, I think anyone who wants to be a part of a 
business involving copyrighted material must respect the 
copyrights of others, not merely out of respect for the law, 
but out of the simple requirement of survival.
    If the history of America's economic success has taught the 
world anything, it is the indispensable role of a system of law 
in creating a marketplace where buyers, sellers, and producers 
can be certain of their rights and responsibilities.
    Like free governments, free markets are impossible to 
sustain without the collective willingness to observe and 
enforce the legal safeguards that ensure that the pursuit of 
happiness doesn't descend into mass piracy and anarchy.
    As inconvenient as it may be for some, the legal right and 
moral necessity of intellectual property protection can't be 
conjured out of existence by the wave of a digital wand. Either 
we abide by the rule of law or we end up with chaos.
    Third, when it comes to the shape, substance, and operation 
of the digital marketplace, none of us knows what future format 
it will take.
    Put aside the logical absurdity of trying to write 
regulations for an industry that doesn't even exist yet, and 
consider what is the best way to ensure that consumers get to 
decide in what form and at what price they receive information 
and entertainment on digital networks.
    The answer, I submit, is fairly simple: strong, market-
drive competition. Along with guaranteeing copyright 
protection, our shared focus should be on fostering an 
environment that secures a marketplace in which consumers have 
an optimum array of different and convenient choices for 
quality and value.
    Now, yesterday, as you mentioned, Senator, our companies 
took a big step in that direction with the announcement of an 
agreement to form something called MusicNet, which is a 
collaboration between AOL Time Warner, RealNetworks, EMI, and 
Bertelsmann. It is a breakthrough platform for online music 
subscription services in both a safe, convenient, and lawful 
manner. This agreement ushers in, we believe, the era of 
secure, convenient, interactive mass music distribution that 
consumers demand that we want to provide. By licensing our 
music catalogues to MusicNet, we create new outlets for our 
artists and for their work. By distributing a MusicNet-powered 
subscription service on AOL, we can offer the best interactive 
music experience for our online members, allowing them to 
choose from a broad selection of different labels and artists.
    In conclusion, I would say that amid all the views you will 
hear today, it is my hope we can reach consensus on these three 
facts: digital distribution is here to stay; copyright is key 
to making it fair for consumers and creators alike; and 
competition and consumer choice are the way to ensure a 
continuing supply of high-quality content at affordable prices.
    Thank you very much.
    [The prepared statement of Mr. Parsons follows:]

            Statement of Richard D. Parsons, AOL Time Warner

    Chairman Hatch and the Members of this Committee, I'm Richard 
Parsons, Co-Chief Operating Officer of AOL Time Warner, and I'm 
Grateful for the Chance to appear here today.
    In view of the long list of speakers, I'll try to set an example, 
if not of eloquence, then of brevity.
    As Co-Coo, I'm in charge of what we refer to as our ``Content 
Businesses.'' Behind that somewhat sterile label are four of the 
world's most creatively dynamic enterprises: Warner Music Group, Warner 
Bros. Studio, New line cinema and Time Warner Trade Publishing.
    Together, they produce an extraordinary array of movies, music, 
television programming and books. Today they are also grappling with 
the effects of digital media in general and the internet in particular, 
the very issues this hearing is intended to address.
    The merger of AOL and Time Warner has put the timetable for change 
on hyper-speed. I won't try to explore all the implications for our 
company or industry, both because I'd be here all day and, more 
fundamentally, It's a universe still evolving minute to minute.
    Instead, let me offer three basic observations that, I believe, 
past and present experience tells us to be true.
    First, we know that the digital distribution of entertainment 
content is a real business and will grow exponentially. As my friend 
and partner Bob Pittman puts it, ``How often do you launch a business 
where you know millions of consumers are lined up and waiting for your 
product?''
    This is a tremendous opportunity to bring new levels of convenience 
and choice to consumers, develop new artists and expand the market for 
creative content. Those companies that can meet these criteria will 
succeed in the new digital marketplace; those who can't, won't.
    Second, we know that where there's no effective copyright 
protection, there are no creative enterprises, except those directed by 
wealthy patrons or government. This is as true in the digital world as 
it is in the analog one.
    Quite simply, a vibrant, vital democratic culture can't exist 
without the legal right of individual artists and the enterprises that 
nurture, develop and distribute their work to direct how and where it 
is used, and to reap the rewards.
    In the end, I think, anyone who wants to be part of a business 
involving copyrighted material must respect the copyrights of others, 
not merely out of respect for the law, but out of the simple 
requirement of survival.
    If the history of America's economic success has taught the world 
anything, it's the indispensable role of a system of law in creating a 
marketplace where buyers, sellers and producers can be certain of their 
rights and responsibilities.
    Like free governments, free markets are impossible to sustain 
without this collective willingness to observe and enforce the legal 
safeguards that ensure ``the pursuit of happiness'' doesn't descend 
into mass piracy and anarchy.
    As inconvenient as it may be to some, the legal right and moral 
necessity of intellectual property can't be conjured out of existence 
by the wave of a digital wand. Either we abide by the rule of law or we 
end up with chaos.
    Third, when it comes to the shape, substance and operation of the 
digital marketplace, none of us knows what future forms it will take.
    Put aside the logical absurdity of trying to write regulations for 
an industry that doesn't even exist yet, and consider what's the best 
way of ensuring that consumers get to decide in what format and at what 
price they receive information and entertainment on digital networks.
    The answer is simple: strong market-driven competition.
    Along with guaranteeing copyright protection, our shared focus 
should be fostering an environment that secures a marketplace in which 
consumers have an optimum array of different and convenient choices for 
quality and value.
    Yesterday, we took a big step in that direction with the agreement 
by realnetworks, EMI, Bertelsmann and AOL Time Warner to create 
musicnet, a breakthrough platform for online music subscription 
services.
    This agreement ushers in the era of secure, Convenient, interactive 
mass music distribution that consumers demand and that we want to 
provide. By licensing our music catalogues to musicnet, we create new 
outlets for our artists and their work. By distributing a musicnet-
powered subscription service on AOL, we can offer the best interactive 
music experience for our online members, allowing them to choose from a 
broad selection of different labels and artists.
    Amid all the views you'll hear today, it's my hope we can reach 
consensus on these three facts: digital distribution is 5 here to stay; 
copyright is key to making it fair for consumers and creators alike; 
competition and consumer choice are the way to ensure a continuing 
supply of high-quality content at affordable prices.
    Thank you.

    Chairman Hatch. Thank you.
    Mr. Valenti, we will turn to you.

    STATEMENT OF JACK VALENTI, CHAIRMAN AND CHIEF OPERATING 
         OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA

    Mr. Valenti. Thank you, Mr. Chairman. I brought with me my 
timer so that I can be sure that I am not going to filibuster, 
which is an attitude devoutly to be admired by all.
    Chairman Hatch. We forgot to put ours up, but I have asked 
them to get it. But we are going to give you time.
    Mr. Valenti. Let me start by saying that the copyrights 
industries, which are composed of movies, television, home 
video, music, publishing, and computer software, represent 
America's greatest economic asset, and, I might add, its 
premier export trade prize. We are creating new jobs at three 
times the rate of the remainder of the economy. We bring in 
more international revenues than agriculture, than aircraft, 
than automobiles and auto parts. We have a surplus balance of 
trade with every single countries in the world. No other 
American enterprise can make that statement. That is a 
revelatory statement because last year this country suffered 
over $400 billion in deficit balance of trade. We are an 
economic engine of growth that is the envy of the known world.
    More extraordinary is the reach, the global reach of the 
copyright industries. That creative material is joyously 
received by every country, creed, and culture, and the American 
movie, as anybody who travels abroad would testify, is 
omnipresent. We are hospitably patronized on every continent.
    Now, I want you to know that we believe the Internet 
represents a glorious new potential of a new delivery system so 
that we can bring movies to American homes. I am pleased to 
report to you that within 4 to 6 months, several of the major 
film studios will be online with movies, and the other major 
studios will follow close on their heels. We are using new 
technology to try to protect these movies on their journey from 
cyberspace to American homes, to prevent wholesale reproduction 
as well as retransmission on the Internet. But if that 
protection is not enough and we need more technological 
protection, some of which will require Congressional 
legislation, we will be back to you to ask for your help in 
protecting America's most precious creative prize.
    I think that Congress has to stand guard to preserve, 
protect, and defend copyright, without any question, against 
those who want to erode it or shrivel it or exile it.
    Now, I might add that new technology makes possible through 
the Internet people to illegally download movies today without 
permission of the owner and without any payment.
    Now, creative property is private property. To take it 
without permission and without payment collides with the core 
values of this society, and otherwise rational people, who 
wouldn't dream of stealing a videocassette off the shelf of a 
Blockbuster store, blithely download movies casually, which 
seems to be for many accepted normality of Internet behavior.
    Now, I will tell you again, to repeat, that creative 
property is private property. Right now consultants tell us 
that at least 350,000 movies are being illegally downloaded 
every day right now, with estimates up to 1 million downloads 
illegally within the year. So, again, creative property is 
private property. To take it without permission or payment just 
because technology say it is easy to do so is wrong.
    Now, with all the passion that I can summon--and I am about 
to deplete it right quick--I am asking this Committee and the 
Congress to make sure that copyright is not allowed to decay, 
for if that happens, this Nation will see the slow undoing of 
an enormous creative and economic asset, and we will be 
squandering part of that economic future.
    So I will utter three words that will thrill this 
Committee: In conclusion--that is Goldwyn, ``in conclusion.'' 
Well, forget it, I won't go into that.
    [Laughter.]
    Mr. Valenti. But I want to leave you with this question: 
Who will invest huge sums of private risk capital in the 
production of films if they cannot protect that creative 
material from being stolen on the Internet, or anywhere in 
cyberspace? That is the question I leave with you, and I share 
Mr. Parsons, and I hope some of the other people on this panel, 
of the eternal enduring value of copyright as a great, great 
asset of this country.
    Thank you.
    Chairman Hatch. Well, thank you. I think--
    Mr. Valenti. Mr. Chairman, let me ask you a question. I am 
under 5 minutes. I would like to take 32 seconds--and I mean 32 
seconds--to show you on this screen an actual take-down, an 
illegal take-down that we did in our office of the picture that 
won the Academy Award for Best Picture while it was still 
playing in the theaters. I want you to see this actual take-
down, if one of my experts will come over here. This is where--
    Senator Leahy. I will do it for you, Jack, if you want.
    Mr. Valenti. But I want you to see this. This is the actual 
take-down, Mr. Chairman, of and I am going to spin it for 32 
seconds to show you the watchable quality of ``Gladiator.''
    [Video shown.]
    Mr. Valenti. That is what is happening today. The award-
winning ``Gladiator'' is one of those 350,000 films that are 
being downloaded.
    Senator Leahy. We also thank Allison for getting it 
downloaded.
    Mr. Valenti. Thank you very much.
    [The prepared statement of Mr. Valenti follows:]

    Jack Valenti, Chairman and CEO, Motion Picture Association, 
Washington, D.C.
    When Abraham Lincoln first ran for Congress, he began his first 
campaign speech by saying: ``My politics are short and sweet, like the 
old woman's dance.'' Taking my cue from Abe Lincoln, I say: ``My 
message is short and sweet--and urgent.''
    The Copyright Industries (movies, TV, home video, music, publishing 
and computer software) are America's greatest trade prize. We are 
creating jobs at three times the rate of the rest of the economy. We 
bring in more international revenues than aircraft, more than 
agriculture, more than automobiles and auto parts. What is more 
astonishing and more valuable is that we have a Surplus Balance of 
Trade with every single country in the world, while in 2000 this nation 
suffered an unholy rise to almost $400 Billion in Deficits. No other 
American business enterprise can make that statement, which is why we 
represent an economic engine of growth that is the envy of the known 
world.
    Even more extraordinary is the global reach of the Copyright 
Industries. American creative material is joyously received by every 
country, creed and culture on this planet. The American movie, as 
anyone who travels abroad can testify, is omnipresent all over the 
world, hospitably patronized on every continent.
    We believe the Internet has great potential as a new delivery 
system for movies. Several movie studios will be OnLine with their 
films within four to six months. They will be content encrypted, to 
protect these films on their way to American homes. If it becomes clear 
that more protection is needed, some of which might require 
congressional legislation, we will return to you for help.
    Keep in mind it that the preeminence of the Copyright Industries as 
an American economic and creative prize is the prime reason why the 
Congress must stand guard, to preserve and defend Copyright against 
those who would loosen its protective bindings, or try to shrink it, or 
erode it. New technology makes possible, through the Internet, the 
illegal use of creative material without the permission of the owner 
nor any payment for its use. Creative property is private property. To 
take it without permission, without payment to its owners, collides 
with the core values of this society. Yet that is precisely what is 
happening. Otherwise rational people who would not dream of stealing a 
videocassette off the shelf of a Blockbuster store are using movies 
without permission or payment, which is, for many, the assumed 
normality of current Internet behavior. It is estimated that today some 
370,000 movies are being downloaded, illegitimately, every day. By the 
end of the year it is estimated that one million illegal downloads will 
take place every day.
    To repeat, creative property is private property. It cannot be 
casually pilfered simply because it is easy to do so. Moreover, with 
all the passion I can summon I tell this Committee that if Copyright is 
allowed to decay, then this nation will begin the slow undoing of an 
immense economic asset, which can squander our creative future. The 
question that the Congress must answer is: Who will invest huge amounts 
of private risk capital in the production of films if this creative 
property cannot be protected from theft?

    Chairman Hatch. Well, thank you, Jack. That is a powerful 
statement, and I agree with you on copyright issues, there is 
no question about it, and you as well, Mr. Parsons.
    Mr. Henley, we look forward to your very important comments 
about your industry.

  STATEMENT OF DON HENLEY, ON BEHALF OF THE RECORDING ARTISTS 
                           COALITION

    Mr. Henley. Thank you, Mr. Chairman. I am certainly honored 
to be here today, and I appreciate the opportunity to speak 
today on behalf of recording artists and, more particularly, 
the Recording Artists Coalition, of which I am a co-founder.
    Recording artists have for far too long been insufficiently 
represented here in Washington. I think you would agree with 
that.
    Chairman Hatch. I do.
    Mr. Henley. The RIAA, Recording Industry Association of 
America, does not speak on behalf of recording artists, even 
though they have given the impression at times that they do. 
The RIAA speaks only on behalf of its membership, which is 
solely composed of major and independent record companies.
    Now, over the next several years, Congress and the 
Copyright Office and the record companies and the Internet 
companies will lay the groundwork for intellectual property 
rules and royalty rates for the exploitation of music on the 
Internet. At this point there has been little input from the 
recording artist community. Most, if not all, of the 
discussions have been between the labels and the Internet 
companies.
    I would like to point out that there would be no need for 
these discussions if it were not for artists and their creative 
works, and we must be actively involved in the development of 
this framework or our interests will not be protected. And so 
artists today are simply asking for a place at the table.
    As you know, Mr. Chairman, the Recording Artists Coalition 
was at the forefront of the initiative to repeal the work-for-
hire legislation that was enacted in November 1999. I would 
like to thank you and the other Senators on the Committee for 
repealing that legislation. In the past, copyright law 
amendments have been enacted only after serious and, at times, 
lengthy deliberations. Generally, all of the interested parties 
were afforded an opportunity to present their views to 
Congress. No copyright law amendment has ever passed without 
this type of fair and democratic deliberation, except this most 
recent amendment.
    Before the passage of the amendment adding sound recordings 
to the list of works eligible for work-for-hire status, 
Congress heard only one viewpoint, which was that of the RIAA. 
You were told that the amendment was a technical change when, 
in fact, it was a substantive change, one that would have 
deprived recording artists of the right to pass to their 
families and heirs the lifeblood of their careers: their sound 
recording copyrights. Once you recognize this surreptitious 
manipulation, you set out to right the wrong, and recording 
artists and their families will never forget your courageous 
and principled stand.
    But we are here today to discuss the digital music 
marketplace and what action, if any, Congress must take to meet 
the needs of the creators and consumers. The Recording Artists 
Coalition's position is very simple. We believe that recording 
artists should always be paid for the exploitation of their 
sound recordings on the Internet, unless the recording artist 
makes the decision to provide his or her recordings free of 
charge to listeners.
    Napster has stated in public that it intends to build a 
fee-based service that compensates creators. We look forward to 
the implementation of that service, and services like it. We 
recognize that, whether we like it or not, Napster has changed 
everything. We are listening to our fans. Millions of people 
have begun to experience interactive music services, and they 
have so far been getting these services free of charge. But I 
agree with Napster that, with some improvements, many of its 
users will be willing to pay for this sort of service. In fact, 
according to Mr. Barry, 70 percent of people surveyed said that 
they are willing to pay for this type of service.
    Napster and other locker-type systems have flourished 
because the record industry has failed to be forward-thinking 
and has made it extremely difficult for legitimate companies to 
license rights on an arm's-length basis. The record industry 
has fiddled on the sidelines while the digital revolution went 
on without them. The major labels should have spent their time 
negotiating and implementing a fair and comprehensive licensing 
system, one that addresses the interests of all parties, 
including recording artists. And while we support the copyright 
infringement lawsuits filed by the record industry, the 
lawsuits should not be used to destroy a viable and useful 
independent Internet distribution system. It is in the best 
interests of recording artists, as well as consumers, that 
Congress promotes an atmosphere of independent digital 
distribution of music. The solution resides in the marketplace 
and not in the courtroom. If, however, a resolution cannot be 
reached quickly, compulsory licenses should be considered, but 
only as a last resort.
    Under the Digital Millennium Copyright Act, performers--
that is, recording artists--are now, for the first time ever, 
entitled to a public performance right. Writers of music share 
a public performance right with publishers. The publishers do 
not recoup advances under the writer's share. The writer's 
share is protected by an independent collection society. 
Payment for digital performances should follow this logic. It 
is vitally important that the recording artists receive digital 
performance royalties directly from the source without the 
record company recouping royalties against outstanding 
accounts, or by engaging in unnecessary bureaucratic disputes.
    So long as the major record companies represented by the 
RIAA and the recording artists engage in public battles over 
these issues, as well as others, the RIAA cannot act as an 
objective, independent body.
    This single, digital, public performance royalty that I 
speak of is currently in force, and it applies to very 
specific, non-interactive digital broadcasts only. Recording 
Artists Coalition believes that Congress should examine the 
possibility of expanding artist performance rights to include 
interactive services. Music fans should be able to hear music 
anywhere, anytime, on demand. Many businesses have recognized 
that, in the wake of Napster, the competition is for 
interactivity. The record labels themselves have begun to 
develop interactive music services as well as license their 
catalogues to other companies. My colleagues and I are 
concerned that artists do not have rights to direct 
remuneration for interactive services. Furthermore, Congress 
should ensure that radio stations are not exempt from payment 
of digital royalties for Internet radio broadcasts. It is 
fundamentally unfair that broadcasters have always been exempt 
from paying performers a performance right for analog 
broadcasting, and we don't want to see this inequity extended 
to the Internet.
    In addition to Internet issues, recording artists have 
other serious contractual problems with major labels. A new 
artist agreement is one-sided in favor of the labels. In most 
cases, a new artist has little leverage for negotiate favorable 
terms. Many artists and music attorneys believe that the 
standard industry contract is unconscionable.
    The record company in many instances advances all or part 
of the costs of recording, promotion, and marketing, and then 
recoups the costs from the artist royalty. As a result, a 
typical artist could sell half a million records and not see 
one dollar in royalties. Even if an artist is lucky enough to 
recoup, the label maintains ownership of the masters and the 
copyrights. Just as you have so insightfully observed, Mr. 
Chairman, it is as though you have paid off your mortgage and 
the bank still owns your house. One way to even this playing 
field would be for Congress to consider a Federal 7-year term, 
much like the law that helped movie actors gain free agency in 
California. While the California law is not perfect, it 
provides a good model for Congress to consider.
    I would like to address just one more important issue, if I 
might. While there are many ways that Congress can help the 
recording artist while encouraging a prosperous digital 
marketplace, expanding fair use is not one of them. Fair use is 
a delicate balance that adequately addresses the needs of the 
record companies, the recording artists, and the public.
    No recording artist wants to limit the use of his or her 
music within the traditional parameters of fair use. However, 
by expanding the exception, Congress will effectively 
institutionalize free commercial distribution of music on the 
Internet. This is not why fair use was created. The answer for 
all parties involved and the public's demand for high-quality 
digital services likes in the fair licensing of music.
    I thank you again for this opportunity to discuss these 
important issues with the Committee. Congress must continue to 
hear from the independent voice of recording artists, and the 
Recording Artists Coalition is dedicated to bringing these and 
other issues directly affecting us to your attention and to the 
attention of the public, as well as working with you to resolve 
these problems. Recording artists must always have an 
independent voice as our interests are unique and vital and, at 
times, contrary to the interests of the RIAA and the major 
record companies. The bottom line is that artists create the 
music that fuels these industries and, hence, it would appear 
obvious that our interests and concerns should be seriously 
considered.
    Thank you, sir.
    [The prepared statement of Mr. Henley follows:]

 Statement of Don Henley, on Behalf of the Recording Artists Coalition

    Mr. Chairman and Members of the Committee,
    I am honored to be here and I thank you for the opportunity to 
speak today on behalf of recording artists and the Recording Artists 
Coalition (RAC). Recording artists have for far too long been 
insufficiently represented in Washington DC. The RIAA does not speak on 
behalf of recording artists, even though it gives the impression at 
times that it does. The RIAA speaks only on behalf of its membership, 
which is solely composed of major and independent record companies. 
Over the next several years, the Congress, the Copyright Office, the 
record companies and the Internet companies will lay the groundwork for 
intellectual property rules and royalty rates for the exploitation of 
music on the Internet. At this point, there has been little input from 
the recording artist community. Most, if not all, of the discussions 
have been between the labels and the Internet companies. Yet, the 
artists are the ones who create the content for distribution. There 
would be no need for these discussions if it were not for artists and 
we must be actively involved in the development of the framework, or 
our interests will not be protected. Artists are simply asking for a 
seat at the table.
    As you know Mr. Chairman, RAC was at the forefront of the 
initiative to repeal the ``work for hire'' legislation that was enacted 
in November 1999. I would like to thank you and all the other Senators 
on the Committee for repealing that legislation. In the past, Copyright 
Law amendments have been enacted only after serious, and at times, 
lengthy deliberations. Generally, all interested parties were afforded 
an opportunity to present their views to Congress. No Copyright Law 
amendment has ever passed without this type of fair and democratic 
deliberation, except this most recent amendment.
    Before passage of the amendment adding ``sound recordings'' to the 
list of works eligible for ``work for hire'' status, Congress heard 
only one viewpoint, that of the RIAA. You were told that the amendment 
was a technical change, when in fact it was a substantive change; one 
that would have deprived recording artists of the right to pass to 
their families and heirs the lifeblood of their careers, their sound 
recording copyrights. Once you recognized this surreptitious 
manipulation, you set out to right the wrong, and recording artists and 
their families will never forget your courageous and principled stand.
    We are here today to discuss the digital music marketplace and what 
action, if any, Congress must take to meet the needs of the creators 
and the consumers. RAC's position is very simple. We believe that 
recording artists should always be paid for the exploitation of their 
sound recordings on the Internet, unless the recording artist makes the 
decision to provide his or her sound recordings free of charge to 
listeners.
    Napster has stated in public that it intends to build a fee-based 
service that compensates creators. We look forward to the 
implementation of that service, and services like it. We recognize 
that, whether we like it or not, Napster has changed everything. We are 
listening to our fans. Millions of people have begun to experience 
interactive music services. They have so far been getting these 
services free of charge, but I agree with Napster that, with some 
improvements, many of its users will be willing to pay for this sort of 
service.
    Napster and other ``locker'' systems have flourished because the 
record industry has failed to be forward thinking and has made it 
extremely difficult for legitimate companies to license the rights on 
an arm's length basis. The record industry fiddled on the sidelines 
while the digital revolution went on without them. The major labels 
should have spent their time negotiating and implementing a fair and 
comprehensive licensing system; one that addresses the interests of all 
the parties, including recording artists. While we support the 
copyright infringement lawsuits filed by the record industry, the 
lawsuits should not be used to destroy a viable and useful independent 
Internet distribution system. It is in the best interests of recording 
artists, as well as consumers, that Congress promotes an atmosphere of 
independent digital distribution of music. The solution resides in the 
marketplace and not in the courtroom. If, however, a resolution can not 
be reached quickly, compulsory licenses should be considered--but only 
as a last resort.
    Under the Digital Millenium Copyright Act (DMCA), performers--that 
is, recording artists, are now, for the first time ever, entitled to a 
public performance right. Writers of music share a public performance 
right with publishers. The publishers do not recoup advances against 
the writer's share, as it (the writer's share) is protected by an 
independent collection society. Payment for digital performances should 
follow this logic. It is vitally important that the recording artists 
receive digital performance royalties directly from the source without 
the record company recouping royalties against outstanding accounts, or 
by engaging in unnecessary bureaucratic disputes.
    So long as the major record companies, represented by the RIAA, and 
the recording artists engage in public battles over these issues, as 
well as others, the RIAA can not act as an objective, independent body.
    This single, digital, public performance royalty that is currently 
in force applies to very specific, non-interactive digital broadcasts 
only. RAC believes that Congress should examine the possibility of 
expanding artist performance rights to include interactive services. 
Music fans should be able to hear music anywhere, anytime, on demand. 
Many businesses have recognized that, in the wake of Napster, the 
competition is for interactivity. The record labels themselves have 
begun to develop interactive music services as well as license their 
catalogs to other companies. My colleagues and I are concerned that 
artists do not have rights to direct remuneration for interactive 
services. Furthermore, Congress should ensure that radio stations are 
not exempt from payment of digital royalties for Internet radio 
broadcasts. It is fundamentally unfair that broadcasters have always 
been exempt from paying performers a performance right for analog 
broadcasting; we don't want to see this inequity extended to the 
Internet.
    In addition to Internet issues, recording artists have other 
serious contractual problems with the major labels. A new artist 
agreement is one- sided in favor of the labels. In most cases, a new 
artist has little leverage to negotiate favorable terms. Many artists 
and music attorneys believe that the ``standard industry contract'' is 
unconscionable.
    The record company, in many instances, advances all or part of the 
costs of recording, promotion and marketing, and then recoups the costs 
from the artist royalty. As a result, a typical artist could sell a 
half million records and not see one dollar in royalties. Even if an 
artist is lucky enough to recoup, the label maintains ownership of the 
masters and the copyrights. Just as you have so insightfully observed, 
Mr. Chairman, it is as though you have paid off your mortgage and the 
bank still owns your house. One way to even this playing field would be 
for Congress to consider a federal seven-year term, much like the law 
that helped movie actors gain free agency in California. While the 
California law is not perfect, it provides a good model for Congress to 
consider.
    I would like to address one more important issue. While there are 
many ways Congress can help the recording artist while encouraging a 
prosperous digital marketplace, expanding fair use in not one of them. 
Fair use is a delicate balance the adequately addresses the needs of 
the record companies, the recording artists, and the public.
    No recording artist wants to limit the use of his or her music 
within the traditional parameters of fair use. However, by expanding 
the exception, Congress will effectively institutionalize free 
commercial distribution of music on the Internet. This is not why fair 
use was created. The answer for all parties involved and the public's 
demand for high-quality digital services, lies in the fair licensing of 
the music.
    I thank you again for this opportunity to discuss these important 
issues with the Committee. Congress must continue to hear from the 
independent voice of recording artists. RAC is dedicated to bringing 
these and other issues directly affecting recording artists to your 
attention and to the attention of the public, as well as working with 
Congress to resolve these lingering problems. Recording artists must 
always have an independent voice as our interests are unique, vital, 
and at times contrary to the interests of the RIAA and the major record 
companies. The bottom line is that artists create the music that fuels 
these industries and hence it would appear obvious that our interests 
and concerns should be seriously considered.
    thank you for your time.

    Chairman Hatch. Thank you, Mr. Henley. You have given us a 
lot to think about.
    Ms. Morissette?

        STATEMENT OF ALANIS MORISSETTE, RECORDING ARTIST

    Ms. Morissette. Good morning, and thank you, Chairman 
Hatch, for inviting me to testify at today's hearings. I would 
like to start by letting you know how deeply grateful and 
fortunate I feel for all of the success and opportunities that 
I have in my life. I feel blessed to be able to share my 
expressions the way I do and feel privileged to be able to 
speak on behalf of fellow artists who have encouraged me to do 
so.
    The reality is that for every artist fortunate enough to be 
in my position, there are thousands of other incredibly gifted 
artists whose work may never be heard. It is with this in mind 
that I speak today on behalf of all musical artists who have a 
passionate desire for a direct voice when it comes time to 
discuss the issues that control their future, their 
livelihoods, and their ability to work and create. I believe it 
is vital for us to be an integral part of the solution-creating 
process. I invite other artists to join me, and I honor those 
artists who have already spoken. I now join them in sharing the 
same vision and goal.
    I have come to realize that what we are trying to do is 
develop a solution that satisfies the concerns of three 
separate groups. First, and most importantly, there are the 
people who listen to the music and are in the audience. Second, 
there are the artists and all the members of the creative 
community. And, third, there are the record companies and 
people who have built and who will continue to build businesses 
that connect the first two. An effective solution, as I see it, 
can only culminate if each of these groups have their own voice 
in the solution-creating process.
    Music fans have a voice through elected officials, such as 
you, the Members of Congress. The record companies have always 
had their voices heard through their lobbying organizations, 
such as the RIAA. The reason I am here today is to let you know 
that although these intermediaries claim to represent the 
creators, and while there certainly have been some alignment of 
goals at times, our interests are not always the same.
    There are an ever increasing number of ways in which those 
interests conflict, particularly in the digital age. No matter 
what you may hear from any of these parties, it is artists, and 
artists alone, who I believe to be truly able to accurately 
communicate and represent our unique and fundamental point of 
view. You need look no further for evidence of this than the 
recent bankruptcy and work-for-hire issues which would have 
worked against artists and gone by unnoticed if the artistic 
community had not spoken up.
    As an artist, I have one goal: to continue to create and 
share my creative expressions with as many people and as 
directly as possible. If the intermediaries can help facilitate 
that connection, I welcome their involvement. Where they impede 
that connection, I question it, and I assume I am not alone in 
that concern.
    My only explanation as to the reasons why artists have not 
spoken up in the past, individually or collectively, as often 
as they are beginning to now is this: We are an incredibly 
diverse group of individuals whose energies go into writing, 
recording, and producing our music, and months, if not years, 
of touring on the road. As a result of this diversity and the 
amount of time and energy spent creating and sharing those 
creations, it has been difficult for us to speak with a unified 
voice and to decide who the person or persons would be to speak 
on our behalf. It has, therefore, been easy for others to speak 
up under the guise of doing so on our behalf.
    I also believe that some artists are afraid of tapping into 
or being portrayed as having tapped into the business-minded 
part of themselves, believing that it may somehow compromise 
their artistic integrity, and I understand this, although I 
ultimately believe it is an act of self-care and that they are 
honoring their expressions by allowing themselves to be aware 
of and concerned about their livelihood.
    I also know there has been fear generated in the artistic 
community of speaking in a way that would throw any negative 
light on the relationship between artists and their record 
companies. I choose not to speak specifically about those 
issues here today, as one quote taken out of context could be 
subject to misinterpretation and be deeply misrepresentative of 
my greater view on this issue. History has not been kind to 
artists who have candidly expressed points of views that differ 
from those of their record company. To say the least, to have 
spoken up could potentially have exacerbated an already 
strained relationship. Artists want to continue to share their 
music with as many people as they possibly can. Up until 
recently, their only way of doing this was through traditional 
means. Without any other true option that would allow them to 
pursue their goals, they would understandably, if not 
reticently, accept the status quo.
    We have now clearly evolved into a new and exciting digital 
era in which we are discovering new ways to share our music 
directly and interactively. Though I cannot speak for every 
artist, my initial resistance to the new services created 
online was based on the debate having been framed in terms of 
piracy. Being labeled as such by the record companies, it 
understandably sent a ripple effect of panic throughout the 
artistic community. But what I have since come to realize is 
that for the majority of artists, this so-called piracy may 
have actually been working in their favor. Most recording 
artists never receive royalties past their initial advance due 
to the financial structure of most record company contracts. 
From these artists' viewpoint, their music is free since they 
do not, in the end, receive money from any of the sales. That 
free Internet distribution allows the artist to aggregate an 
audience and create a direct relationship with that audience as 
well as develop a community among the people who love their 
music. This in turn allows that artist to generate compensation 
through other outlets, such as touring and merchandise. For the 
majority of artists, this amounts to making enough money to be 
in survival mode.
    I believe that most artists write and create motivated by 
the goal of expressing themselves and of sharing their 
expressions with as many people as possible and view the 
financial reward as a natural and welcome outcome as opposed to 
it being their singular motivation.
    At this critical juncture in the digital era, there are an 
infinite number of decisions to be made regarding how music use 
will be monitored, where the money generated from such use will 
go, how it will go there, whom it will go through, and how it 
will ultimately be divided up.
    I believe it would be in everyone's best interest to make 
sure that the creators of music and art are duly compensated 
for their work and, most importantly, that they will have a 
direct voice in the process of making these decisions. I also 
believe that the people and companies who invest a lot of time 
and money, working very hard to distribute our music with 
people around the world, are deserving of being compensated for 
their work as well. By embracing the concept of interactive 
music online and by finding the best way we possibly can to 
make sure that we come up with a system that allows artists to 
be compensated for such use online, we are fostering a direct, 
immediate, mutually gratifying, and I think incredibly exciting 
relationship between artists and the people with whom they are 
communicating.
    In the big picture, it will benefit the exact companies who 
have resisted it the most. History has proven time and again 
that a greater variety of formats and distribution 
opportunities lead to more choices for consumers, increased 
awareness of the artists and their music, and ultimately a 
continued and greater reward financially, creatively, and 
personally for everybody involved.
    As with any paradigm shift, there are understandable fears 
and apprehensions to be addressed, and I believe we can arrive 
at a place where all three groups can continue to thrive. 
However, I believe the only way this can happen is if all three 
groups communicate their own distinct points of view to each 
other and if we are all open and honest about our true agendas 
and concerns. I have always believed in the concept of everyone 
winning or there not being a deal to be made. That remains true 
to this day, and yet it would be remiss of me not to notice 
that the longer we wait in the ``no deal'' holding pattern 
while trying to figure this out, we run the risk of missing the 
opportunity to connect directly with people and of driving 
these forward-thinking distribution outlets created by the Web 
underground.
    We are faced with many difficult and complex questions 
during this exciting time in music history. I am here to 
emphasize how important I believe it to be that, as you are 
considering constructing legislation that will govern the 
future of digital music distribution, that I, along with all 
artists, be actively involved in helping to develop what I know 
can be gratifying solutions for all involved.
    Thank you very much for your time.
    [The prepared statement of Ms. Morissette follows:]

                     Statement of Alanis Morissette

    Good morning. Thank you Chairman Hatch for inviting me to testify 
at today's hearings. I would like to let you know how deeply grateful 
and fortunate I feel for all of the success and opportunities that I 
have in my life. I feel blessed to be able to share my expressions the 
way I do and feel privileged to be able to speak on behalf of fellow 
artists who have encouraged me to do so. The reality is that for every 
artist fortunate enough to be in my position, there are thousands of 
other incredibly gifted artists whose work may never be heard. It is 
with this in mind, that I speak today on behalf of all musical artists 
who have a passionate desire for a direct voice when it comes time to 
discuss the issues that control their future, their livelihoods and 
their ability to work and create. I believe it is vital for us to be an 
integral part of the solution creating process. I invite other artists 
to join me and I honor those artists who have already spoken. I now 
join them in sharing the same vision and goal.
    I have come to realize that what we are trying to do is develop a 
solution that satisfies the concerns of three separate groups: First 
and most importantly there are the people who listen to the music and 
are in the audience, secondly, there are the artists and all the 
members of the creative community and thirdly, there are the record 
companies and people who have built and who will continue to build 
businesses that connect the first two. An effective solution, as I see 
it, can only culminate if each of these groups have their own voice in 
the solution creating process.
    Music fans have a voice through elected officials such as 
yourselves, members of the congress. The record companies have always 
had their voices heard through their lobbying organizations such as the 
RIAA. The reason I am here today is to let you know that although these 
intermediaries claim to represent the creators, and while there 
certainly have been some alignment of goals at times, our interests are 
not always the same. There are an ever-increasing number of ways in 
which those interests conflict, particularly in the digital age. No 
matter what you may hear from any of these parties, it is artists and 
artists alone who I believe to be truly able to accurately communicate 
and represent our unique and fundamental point of view. You need look 
no further for evidence of this than the recent bankruptcy and work-
for-hire issues, which would have worked against artists and gone by 
unnoticed if the artistic community had not spoken up.
    As an artist, I have one goal: to continue to create and share my 
creative expressions with as many people and as directly as possible. 
If the intermediaries can help facilitate that connection, I welcome 
their involvement. Where they impede that connection, I question it and 
I assume that I am not alone in this concern.
    My only explanation as to the reasons why artists have not spoken 
up in the past, individually or collectively, as often as they are 
beginning to now is this: We are an incredibly diverse group of 
individuals whose energies go into writing, recording and producing our 
music, and months if not years of touring on the road. As a result of 
this diversity and the amount of time and energy spent creating and 
sharing those creations, it has been difficult for us to speak with a 
unified voice and to decide who the person or persons would be to speak 
on our behalf. It has therefore been easy for others to speak up under 
the guise of doing so on our behalf. I also know that there has been 
fear generated in the artistic community of speaking in a way that 
would throw any negative light on the relationship between the artists 
and record companies. I choose not to speak specifically about those 
issues here today as one quote taken out of context could be subject to 
misinterpretation and be deeply misrepresentative of my greater view on 
this issue. History has not been kind to artists who have candidly 
expressed points of view that differ with those of their record 
company. To say the least, to have spoken up could potentially have 
exacerbated an already strained relationship. Artists want to continue 
to share their music with as many people as they possibly can. Up until 
recently, their only way of doing this was through traditional means. 
Without any other true option that would allow them to pursue their 
goals, they would understandably, if not reticently accept the status 
quo.
    We have now clearly evolved into a new and exciting digital era in 
which we are discovering new ways to share our music directly and 
interactively. Though I cannot speak for every artist, my initial 
resistance to the new services created online was based on the debate 
having been framed in terms of ``piracy''. Being labeled as such by the 
record companies, it understandably sent a ripple effect of panic 
throughout the artistic community. But what I have since come to 
realize is that for the majority of artists, this so-called ``piracy'' 
may have actually been working in their favor. Most recording artists 
never receive royalties past their initial advance due to the financial 
structure of most record company contracts. From these artists' 
viewpoint, their music is free since they do not, in the end, receive 
money from any of the sales. That ``free'' internet distribution allows 
the artist to aggregate an audience and create a direct relationship 
with that audience as well as develop a community among the people who 
love their music. This in turn allows that artist to generate 
compensation through other outlets such as touring and merchandise. For 
the majority of artists, this amounts to making enough money to be in 
survival mode.
    I believe that most artists write and create motivated by the goal 
of sharing their music with as many people as possible and view the 
financial reward as a natural and welcome outcome as opposed to it 
being their singular motivation.
    At this critical juncture in the digital era, there are an infinite 
number of decisions to be made regarding how music use will be 
monitored, where the money generated from such use will go, how it will 
go there, whom it will go through, and how it will ultimately be 
divided up.
    I believe it would be in everyone's best interest to make sure that 
the creators of music and art are duly compensated for their work and 
most importantly, that they will have a direct voice in the process of 
making these decisions. I also believe that the people and companies 
who invest a lot of time and money, working very hard to distribute our 
music with people around the world are deserving of being compensated 
for their work as well. By embracing the concept of interactive music 
online, and by finding the best way we possibly can to make sure that 
we come up with a system that allows artists to be compensated for such 
use online, we are fostering a direct, immediate, mutually gratifying 
and I think incredibly exciting relationship between artists and the 
people with they are communicating.
    In the big picture, it will benefit the exact companies who have 
resisted it the most. History has proven time and again that a greater 
variety of formats and distribution opportunities lead to more choices 
for consumers, increased awareness of the artists and their music and 
ultimately a continued and greater reward financially, creatively and 
personally for everybody involved.
    As with any paradigm shift there are understandable fears and 
apprehensions to be addressed and I believe we can arrive at a place 
where all three groups can continue to thrive. However, I believe the 
only way this can happen is if all three groups communicate their own 
distinct points of view to each other and if we are all open and honest 
about our true agendas and concerns. I have always believed in the 
concept of everyone winning or there not being a deal to be made. That 
remains true to this day and yet it would be remiss of me not to notice 
that the longer we stay in the ``no deal'' holding pattern while trying 
to figure this out, we run the risk of missing the opportunity to 
connect directly with people and of driving these forward thinking 
distribution outlets created by the web underground.
    We are faced with many difficult and complex questions during this 
exciting time in music history. I am here to emphasize how important I 
believe it to be that as you are considering constructing legislation 
that will govern the future of digital music distribution, that I, 
along with all artists be actively involved in helping to develop what 
I know can be gratifying solutions for all involved.
    Thank you very much for your time.

    Chairman Hatch. Thank you very much. We appreciate having 
you here.
    Mr. Barry, we will turn to you.

   STATEMENT OF HANK BARRY, INTERIM CHIEF EXECUTIVE OFFICER, 
                            NAPSTER

    Mr. Barry. Thank you, Senator. Thank you for inviting me to 
appear before you today. I am glad to be here representing the 
more 60 million people who are part of the Napster community.
    As I did the last time I was here, I would like to take a 
moment to acknowledge Shawn Fanning, who is behind me today. He 
was 19 the last time we met. He is 20 now, so he is over the 
hill.
    The question before us today is: What does it take to make 
music on the Internet a fair and profitable business? I think 
it is going to take an act of Congress, a change to the laws to 
provide an industry-wide license for the transmission of music 
over the Internet. The Internet needs a simple and 
comprehensive solution, similar to the one that allowed radio 
to succeed. The Internet does not need another decade of 
litigation.
    I have tried for the last 9 months to make a market-based 
solution. We were able to reach agreement with Bertelsmann on a 
business model and license terms for the sound recordings and 
the musical compositions that they control. Yet I can't today 
report that any other such agreement has been reached with a 
major label or publisher. We were fortunate to make an 
agreement with Mr. Gottlieb here.
    One obstacle may have been a lack of will, but all the 
record and publishing companies represented on the panel today 
now say they want to move forward in this area, and I take them 
at their word. What, then, is the problem? Licensed music 
should now be available over the Internet as it is over the 
radio. I think a large part of the problem is complexity.
    If you take this CD by the Holmes Brothers, it is no simple 
object. There are two separate and distinct copyrighted works 
embodied in each track on this gospel CD. For each track, there 
is the owner of the sound recording, the tape that you make in 
the studio. There is also a separate work, the musical 
composition, the song, the sheet music, the song the artist 
sings. By law, each track of the CD is also considered a 
reproduction of the musical composition, so you are buying two 
works.
    On this single CD, for example, there are 13 sound 
recordings and eight separate music publishers. And that is 
pretty typical. Now, if you multiply that times 3,000 record 
companies in the United States and 25,000 music publishers 
times 27,000 new CDs made ever year, I think you can see that 
separate, individual negotiations for license agreements are 
just not viable. They are not a viable option.
    This situation has led to endless private negotiations and 
litigation. Let me show you sort of a John Madden-style diagram 
of the state of litigation just among those of us who are on 
the panel here today. That is just the people who are here 
today.
    So how can this mess be cleaned up? Well, I think this is 
the center of this issue, and here I find myself in surprising 
agreement with the perceptive, reasoned analysis by the RIAA. 
You may know that Vivendi-Universal recently made musical 
compositions available online without getting the publisher's 
permission. The RIAA has gone to the Copyright Office after the 
fact, arguing for a compulsory license for situations like 
this.
    Let me quote to you from the petition that the RIAA made to 
the Copyright Office. ``The music industry is unique among 
owners and users of copyrighted works in that reproduction and 
distribution of musical works has been subject to a compulsory 
license since 1909. The availability of a compulsory license 
has ensured that necessary rights can be obtained when needed, 
at a known price, and pursuant to established procedures.''
    The RIAA then argues that extending the compulsory license 
to their new digital offers would--and I am now quoting again--
``avoid the need for individual negotiations on a scale that is 
unprecedented in the industry and, thus, facilitate the 
launch'' of these new services.
    This is the official position of the RIAA, and I endorse 
this principle. But I endorse it not just for musical 
compositions but for sound recordings as well.
    Congress has repeatedly used such licenses to advance 
public policy goals in the context of new and frequently 
inefficient marketplaces. These industry-wide licenses for 
defined services, with clear payment structures, have 
encouraged beneficial new technologies and responded 
effectively to particular market failures.
    Music on the radio works because of what is functionally an 
industry-wide license. Cable television, satellite television, 
Web casting--you in the Congress have effectively encouraged 
new technologies through these types of licensing arrangements 
in a way that fostered competition and benefited consumers and 
creators alike.
    Copyright, Senator, is a tool of public policy. It does not 
vindicate a private right. Copyright requires a constant 
balance between the public's interest in promoting creative 
expression and the public's interest in having access to these 
works. This is a balance that has often proven impossible to 
find without the help of Congress.
    Finally, the Napster community says loudly and clearly that 
we want artists and songwriters to be paid. I think that the 
license you create should also include a direct Internet rights 
payment to artists. There is certainly precedent for this, Mr. 
Henley said, in the so-called writer's share of public 
performance--that is, radio and television payments that are 
collected by ASCAP and BMI. You may know that a portion of 
these payments goes directly to the songwriter.
    Senator, this is a moment of tremendous opportunity. For 
many years, our Nation and this Committee heard wonderful 
promises of an emerging Internet music era where people could 
have convenient access to the entire catalogue of recorded 
music over the Internet at the touch of a button. Well, as 
often happens, history arrived ahead of time, and it is a 
uniquely American story. A young man with no standing, no 
credentials, no connections, and no plan for placating the 
powerful, sat down outside Boston and created an entirely new 
system. I think it is meaningful that within 18 months we are 
no longer debating whether there should be music on the 
Internet but, rather, debating the best way to make sure that 
it continues. More than 60 million people have starred on a new 
stage in our National love affair with music. All of us are 
finding new music and music we had forgotten how much we loved.
    The question before this Committee is a matter of policy: 
how to make this new world of Internet music work. The next 
step should not be shutting it down. The Congress has 
effectively promoted new technologies in the past while 
ensuring that creators benefit and are paid. And I believe it 
is essential that we do so again today.
    Thank you.
    [The prepared statement of Mr. Barry follows:]

             Statement of Hank Barry, Interim CEO, Napster

    Mr. Chairman and members of the Committee, thank you for inviting 
me to appear before you today. I am happy to be here on behalf of 
Napster and all the members of the Napster community. As I did last 
time I was here, I would like to take a moment to acknowledge Shawn 
Fanning, the founder of Napster, who is sitting behind me today. He was 
19 then. He is 20 now--and despite his advanced years, he is not yet 
over the hill.
    I think no one in this room--even those with whom we have disagreed 
vigorously would contest that accessing music over the Internet is 
something that tens of millions of people, young and old, love to do. 
Over half of Napster's users are over 25, and they come from all walks 
of life. The question before us today--from all of our very different 
perspectives and responsibilities--is what does it take to make music 
on the Internet a fair and profitable. business.
    To realize this goal, I believe it will take an Act of Congress--a 
change to the laws to provide a compulsory license for the transmission 
of music over the Internet. And today I will tell you why I strongly 
believe such a change is necessary, an important step for the Internet, 
and why it will be good for artists, listeners and businesses.

                          Negotiation History

    When I last testified before this Committee last July, I did not 
believe this issue required a legislative solution. I believed that 
Napster should find a private contractual solution that the rights 
holders and the people who use Napster could all support. We said ``let 
the marketplace work.''
    Since that time the Napster community has continued to grow. We 
then had 20 million members; we have grown to more than 60 million 
members today, even as we aggressively comply with the District Court's 
injunction.
    Since people who use Napster buy more music than others and are 
very willing to pay for music over the Internet, I believed there was a 
basis for making an agreement with the record and music publishing 
companies. We built our business model around this idea: that the 
people using Napster want artists and songwriters to be paid, and that 
peer-to-peer Internet technology is the most efficient and convenient 
way ever devised to make music accessible.
    I have tried for the last 9 months to make an agreement under which 
Napster can get a license from the record companies and the music 
publishers. I believed that any such agreement would serve as a 
precedent for other agreements and could serve as the basis for 
payments by the people using Napster to recording artists and 
songwriters. We were able to reach agreement with Bertelsmann on a 
business model for a new service and license terms for the sound 
recordings and the musical compositions they control. Yet I cannot 
today report that any other such agreement has been reached with a 
major label.
    Perhaps I should not have been surprised at this result. Although 
the World Wide Web portion of the Internet has been around for 7 years, 
and billions of investor dollars have been spent founding and 
attempting to grow technology companies and consumer companies that 
would help all of us access music over the Internet, to this date no 
service has been able to provide a comprehensive offering of music on 
the Internet that is licensed by the major recording and publishing 
companies.
    For the record companies, the promise of music over the Internet 
has always been ``coming real soon now''. Every time this Committee 
holds a hearing on these issues, new promises of imminent progress are 
made. Just last July, Fred Ehrlich from Sony told this Committee ``we 
are in active conversations'' with both eMusic and mp3.com. But, once 
again, these have turned out to be empty statements.
    The DMCA was supposed to solve many of these problems. As Chairman 
Hatch said in the last hearing of this Committee on this issue:
    ``In short, it was believed that a stable, predictable legal 
environment would encourage the deployment of business models which 
would make properly licensed content more widely available. Sadly, this 
has not yet occurred to any great extent in the music industry, and the 
DMCA is nearly two years old.''
    Look at the facts. Where are the Internet businesses with clear and 
complete recording and music publishing licenses? There are none. Where 
are the emerging digital media companies with negotiated agreements 
with all rightsholders? There are none.
    And of course these companies argue that this is Napster's fault. 
That argument might be granted some validity if there were even one 
fully-licensed business with anything approaching a comprehensive 
consumer offer. But there are none.
    We might all well ask--why is this so complicated? Why can't the 
record companies and music publishing companies just issue licenses to 
eMusic, Liquid Audio, Listen.com, Yahoo, MSN and Napster, and everyone 
else, so consumers can pay money and have access to music over the 
Internet, while ensuring that artists and songwriters are paid? Why 
have the record and publishing companies continually said they are 
going to license, and then not followed through?
    Well, one obstacle may have been a lack of will--the record 
companies have stated repeatedly that they believe that licenses of 
sales over the Internet will cut into physical goods sales and 
generally damage, not increase, their business. This fear, of course, 
has not been founded in reality to date. CD sales are stronger than 
other retail, even in the face of uncertain economic times. Internet 
music has increased interest in music as a whole. Like the VCR, the 
cassette, and every other major innovation, Internet music has been 
greeted by a chorus of doom from existing distributors. But let's 
assume that the will is there to license music over the Internet--
certainly all of the record and publishing companies represented on 
this panel now say they want to move forward in this area.
    Even if we assume that everyone agrees that licensing music for the 
Internet would be a good thing, my experience is that it is an almost 
impossibly complicated thing. And unfortunately I have to explain how 
complicated it is by going over the rights structure in this industry. 
So if you will let me do that. . .

                           Industry Overview

    This background description here is for those of you who are not 
copyright lawyers. Bob Kohn of eMusic wrote a great book on this if you 
want further information.
    As the members of this Committee know, when you buy a CD or tape, 
you are really getting copies of two separate works. The first is the 
sound recording that the artist and producers and musicians made in the 
studio. The second is the musical composition, the song that is being 
played. By law, each copy of the CD is also considered a reproduction 
of that musical composition. The complex part about this is that the 
sound recording and the musical composition that is sung on the sound 
recording (the ``song''--the music) are almost always owned by 
different companies, even where, as in many cases, the recording artist 
is the same person who wrote the song.
    Now if you are trying to make music available to the public on the 
Internet, whether for download or streaming or even for broadcast, and 
if you need a private contractual agreement to do that, then you have 
to negotiate with both sets of rightsholders--the record companies and 
the music publishers. First you have to go to the record companies (and 
if you want the good stuff, like polkas and Lithuanian folk songs, you 
have to go to many record companies--there are over 3,000 record 
companies in the US alone).
    And when you have negotiated each of those 3,000 separate 
agreements, you are only half way there--because then you have to go 
and negotiate with all of the music publishers--and there are over 
25,000 independent music publishers in the US alone. Mr. Murphy's 
organization represents many of them, but I believe Mr. Roberts from 
MP3.com would tell you that anything less than an overall comprehensive 
license to all compositions doesn't do you much good, because the 
likelihood is that rights you have and the rights you need will not 
match at all. And even one failure to match can bring down the whole 
structure.
    This is further complicated by the fact that several of the largest 
music publishers, controlling millions of songs, are owned by the 
record labels, but the music publishing catalogs they control bear no 
relation to the sound recordings they control--they are not the same 
songs. For a final complication--the music publishers have two separate 
rights, the right to make a mechanical copy of the song and the public 
performance right, that may both be implicated in this type of 
licensing. And each of those rights is administered for them by a 
different rights organization.
    Now, as you know Senator, that is a simplified statement of the 
rights structures in this industry.

                          Compulsory Licenses

    So, what can Congress do to simplify this in a way that will work?
    Well, here--at the center of the matter--I find myself in 
surprising agreement with a perceptive recent analysis by the RIAA.
    Vivendi Universal and the National Association of Music Publishers 
are in a dispute based on the fact that Universal made musical 
compositions available online without getting the publishers' 
permission. The RIAA has gone to the Copyright Office seeking guidance 
as to whether Section 115 of the Copyright Act applies in such 
circumstances. The RIAA articulates a compelling case for the need for 
compulsory licenses. The RIAA says that two fundamental problems limit 
access to music on the Internet: first, that independent sequential 
negotiations with all rights holders (like those I described a minute 
ago) are practically impossible in any reasonable time frame. Second, 
they say that the laws regarding rights are unclear.
    It's an argument I would like to examine with you in some detail.
    So let me quote now from the RIAA's Petition. I have attached the 
entire Petition to my testimony.
    The RIAA said: ``To the extent that On-Demand streams and Limited 
Downloads make use of musical works, it is right and proper that 
songwriters and music publishers receive a reasonable royalty, as 
appropriate and as provided under existing law. RIAA's member companies 
are ready and willing to pay reasonable applicable royalties for the 
services they operate or authorize.''
    [so far so good]
    A few paragraphs down, they continue.
    ``To be compelling to consumers, it is believed that a service must 
offer tens or hundreds of thousands of songs, in which rights may be 
owned by hundreds or thousands of publishers. No service provider is 
eager to embark on individual negotiations with all those publishers 
unless it is necessary.''
    [well--that's my experience too. Continuing. . .]
    ``The music industry is unique among owners and users of 
copyrighted works in that reproduction and distribution of musical 
works has been subject to a compulsory license since 1909. In the 
nearly a century that the mechanical compulsory license has existed, it 
has become the foundation of business practices that are deeply 
ingrained in the industry and have been embraced by the copyright 
owners whose works are subject to it.''
    ``. . . the availability of a compulsory license has ensured that 
necessary rights can be obtained, when needed, at a known price, and 
pursuant to established procedures. Recognizing that the business 
practices founded upon the compulsory license extend to On-Demand 
streams would avoid the need for individual negotiations on a scale 
that is unprecedented in the industry and thus facilitate the launch of 
On-Demand Streaming services. . .''
    ``The lack of clarity as to the issues described above has become 
the primary obstacle to the launch of digital services designed to meet 
ever-increasing consumer demand . . . . Representatives of the RIAA and 
its members have negotiated with representatives of music publishers 
concerning the licensing of services that would offer On Demand Streams 
and Limited Downloads. However, in large part because of the 
uncertainty as to the fundamental questions of law addressed above, 
these negotiations have not yet successfully resolved the matter.''
    In short, the RIAA's position is that Internet music is a mess 
because everyone involved asserts complex and varying rights, that 
there are too many potential licensors for ``independent sequential 
negotiations'', and that the best way for the market to move forward 
quickly and fairly may be a compulsory license for musical 
compositions.
    That is the official position of the RIAA--and I endorse this 
principle. But I endorse it not just for musical compositions -but for 
sound recordings as well. Not just for music publishers, but also for 
record companies.

             Do they Work? Examples of Compulsory Licenses

    As the RIAA says, compulsory licenses have a long history of 
success, allowing for the widespread implementation of a new technology 
while ensuring that rights holders are compensated. Congress has 
repeatedly used such licenses as a way of advancing public policy goals 
in the context of new and frequently inefficient marketplaces. 
Compulsory licenses have encouraged beneficial new technologies, and 
responded effectively to particular market failures--including 
excessive contracting costs and anticompetitive market structures.
    Let's look at some examples:
    In 1909, Congress created a right against the reproduction of 
musical compositions in mechanical forms (i.e., piano rolls), but 
limited this right through the creation of a mechanical compulsory 
license for musical works. The legislative history behind the 
mechanical compulsory license reveals that Congress enacted this 
provision, not only to compensate composers, but to prevent the Aeolian 
Company, which had acquired mechanical reproduction rights from all of 
the nation's leading music publishers, from limiting the dissemination 
of the music to the public through the creation of a monopolistic 
environment. Thanks to this, once a song has been recorded by anybody, 
it may be recorded by anyone else, without a further license from the 
music publisher, if the person making the new recording notifies the 
publisher and pays a statutorily mandated royalty based on the number 
of copes made. That's where ``cover'' songs come from--and only those 
of us who have heard different versions of ``Louie Louie'' can 
appreciate what that compulsory license has meant for American music.
    Years later, Congress again enacted several additional compulsory 
license, this time related to consumers' ability to access broadcast 
transmissions via cable and satellite systems. In 1976, Congress passed 
a compulsory license for cable television systems that retransmit 
copyrighted works. Pursuant to the compulsory license provision, 
copyright owners are entitled to be paid prescribed royalty fees for a 
cable television company's secondary transmission of the copyrighted 
work embodied in television and radio broadcasts.
    Then, in 1988, Congress passed the Satellite Home Viewer Act of 
1988 (SHVA), which created a compulsory license system for satellite 
carriers that retransmit television broadcasts that operates similar to 
the cable compulsory license. Congress acted again in 1999 when it 
expanded the SHVA's scope to include local-into-local retransmission.
    Congress recognized the ability of these then cutting edge 
technologies to further disseminate to the public television and radio 
content, and the need to ensure that rights holders remained adequately 
compensated. Congress understood, however, the inefficiencies inherent 
in forcing cable or satellite providers to negotiate individual 
licensing agreements, thereby resulting in the use of a compulsory 
license system.
    Interestingly enough, considering the current controversy, 
Congress' next foray into compulsory licenses applied specifically to 
music. The Digital Performance Rights in Sound Recordings Act of 1995 
created a limited performance right for sound recordings, subject to a 
compulsory license for certain digital audio deliveries of sound 
recordings. The compulsory license originally applied, in general, to 
non-interactive satellite and cable audio digital deliveries. The 
Digital Millennium Copyright Act amended the original law to explicitly 
include non-interactive webcasting of sound recordings within the 
compulsory license's scope.
    At the time, Congress reasoned that these new technologies promised 
to encourage the widespread dissemination of this music to the public. 
Once again, Congress enacted the compulsory license mechanism as a 
means to ensure that artists and other rights holders were compensated, 
while not hindering the continued development and deployment of these 
digital delivery systems.
    Finally, I think we can all agree that AM and FM radio have been 
good for recorded music. The benefits of radio have flowed from the 
effective compulsory license created by performing rights societies, 
such as ASCAP and BMI. They enforce songwriters' and music publishers' 
performance rights through a court created process that removes the 
need to negotiate with individual rights holders. While Congress did 
not create this procedure, it has implicitly endorsed it by recognizing 
these performing rights societies in recent legislation. Further, 
Congress repeatedly has refused requests to outlaw the use of these 
blanket licenses.
    In all of these cases of compulsory licensing, creators benefit 
from, but do not completely control, the distribution of their product. 
A balance is struck--a balance that is at the heart of all intellectual 
property law. Remember, intellectual property is not the same as real 
property or personal property--copyright is a limited right. Copyright 
is not based on a private right of the individual, it is a creation of 
and a tool of public policy. It requires a constant balance between the 
public's interest in promoting creative expression and the public's 
interest having access to those works. This is a balance that has often 
proven impossible to find without the help of the Congress.

     Important Elements of Any Licensing Regime for Internet Music

    Let me offer a few specific elements that I think are important for 
a fair and equitable compulsory license law.
    Any such solution has to apply to the entire catalog of the 
applicable rightsowner, whether record company or music publisher. Too 
often companies have entered into licensing arrangements that contain a 
clause saying that the subject matter of the license will be decided 
``later, when the rightsholders can determine what rights the 
rightsholder owns and can license.'' This process, which is generally 
know a ``rights clearances'' is often used to transform what looks like 
a real license into an empty shell.
    Any such solution should also offer licensees both the sound 
recording rights and the musical composition rights. As we have seen 
above, it makes no sense for a licensee to have a sound recording 
license, and then have to begin negotiating with all the publishers.
    Any technology requirements for copyright management and security 
have to be general enough so that they are capable of being fulfilled 
by many vendors. Private licensing regimes have been recently reported 
which would violate this basic principle of neutrality, by linking 
access to rights to the use of particular software--even as there are 
interlocking financial arrangements between the rightsholders and the 
software companies. ASCAP cannot tell a radio station what brand of 
transmitter to use; and no such new technological extensions of market 
power should be a part of any new licensing.
    The licensing terms under any compulsory licensing system must be 
the same for all. I am particularly concerned here about a point 
Senator Hatch made at our hearing last July, that he was concerned that 
the major record companies would make cross-licensing arrangements 
among each other that would have economic terms that would ensure that 
the Internet services the record companies operate would have greater 
profits than any other licensed services.

                        Benefits to All Artists

    We must be careful to construct a structure that will allow all 
recording artists, songwriters, record companies and publishers, not 
just the few large entities, to participate and profit from music on 
the Internet. I believe that the great strength of American music is as 
much in choral, gospel and inspirational music bands, as it is in the 
latest Top 40 hits. Certainly a 10 minute walk through the shared files 
of Napster users suggests the same. We all listen to everything. And so 
all independent labels and publishers should participate as well.
    Finally, I think we should adopt a direct Internet rights payment 
to artists. There is certainly precedent for this in the so-called 
``writer's share'' of public performance (radio and television) 
payments that are made by ASCAP and BMI. As you know, a portion of 
those payments goes directly to the songwriter. We can do the same and 
give artists a direct benefit from these new technologies.

                               Conclusion

    Senator, this is a moment of tremendous opportunity. For many 
years, our nation and this Committee heard wonderful promises of an 
emerging digital music era, where people could have convenient access 
to the entire catalog of recorded music over the Internet at the touch 
of a button.
    Well, as often happens, history arrived ahead of time.
    And it is a uniquely American story.
    A young man with no standing, no credentials, no connections, and 
no plan for placating the powerful, sat down outside Boston and created 
an entirely new system.
    Within 18 months, we were no longer debating whether there would be 
music on the Internet, but debating the best way to make sure that it 
continues. More than 60 million users have started a new stage in our 
national love affair with music. Napster users are nearly 50% more 
likely to say they are listening to more music now than six months ago, 
compared to others on line. All of us are finding new music--and music 
we'd forgotten how much we loved.
    The question before this Committee is a matter of policy. How to 
make this new world of Internet music work. The next step should not be 
shutting it down, but making it work for everyone. The Congress has 
effectively promoted new technologies in the past, while ensuring that 
creators benefit; it is essential that we do so again today.
    Thank you.

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    Chairman Hatch. Thank you, Mr. Barry.
    Mr. Gottlieb, we look forward to your testimony.

STATEMENT OF STEVE GOTTLIEB, PRESIDENT AND FOUNDER, TVT RECORDS

    Mr. Gottlieb. Mr. Chairman and distinguished members of the 
Committee, good morning, and thank you for inviting me to 
participate. I am both honored and humbled to be here among 
such highly celebrated business colleagues and legendary 
recording artists. My purpose in appearing before you today is 
to share our concern that copyright remain a tool to 
incentivize creators and not a means to enlarge or enhance 
market power.
    By way of introduction, I am president and founder of TVT 
Records, one of the largest, free-standing, independent record 
companies in America. By free standing, I mean we are neither 
owned or funded or distributed by or otherwise aligned with any 
of the five multinational music companies.
    Like many independents, ours is a story of most unlikely 
success. Armed with almost no capital and less experience, my 
company sprang from an odd collection of old TV themes. Back 
then, independents were considered a low-rent farm club. The 
major companies owned the charts, and the notion of an 
independent having a hit without the help of a major label was 
most unlikely. Happily, times have changed and today 
independent records grace the top of the charts every day.
    As an independent, TVT is part of a community of thousands 
of entrepreneurs and artists responsible for one of the most 
vital segments of the U.S. music industry. Collectively, our 
market share is some 17 percent of domestic retail sales, a 
market share greater than four of the multinational music 
companies and second only to that of Universal.
    Beyond our collective market power, the independent 
community plays a unique role as the principal spawning ground 
for new artists and new music movements. It is by virtue of the 
independent community's constant prodding and rejuvenation of 
the music scene that we as Americans enjoy such a diverse 
choice of music and such a productive and profitable music 
industry.
    Independent entrepreneurs, artists, and society are 
beneficiaries today of what is essentially a level playing 
field with regard to music marketing and distribution. This 
allows consumers to hear a broad array of music on the radio, 
to find it at their record stores, and to embrace it as they so 
choose. And they do so with unpredictable results that no 
record company, no matter how well capitalized, can sit idly 
by, comforted with the notion that their past success is a 
predictor of future outcomes.
    This level playing field also allows copyright creators, 
the artists upon whose gifts and talents we so depend, to 
create with the knowledge that, beyond themselves, the ultimate 
arbiter of taste will be the public. The hallmark of the music 
business is the public listens to songs and artists, not record 
companies. Ideally, those songs and artists compete with one 
another in a marketplace of musical ideas.
    With the advent of the digital age, the greatest threat to 
the composition of the music industry, its vibrancy and 
independent spirit, is the emergence of new barriers between 
music providers and the market discipline exerted by public 
demand. Some years ago, decidedly without the authority of 
rights to do so, Shawn Fanning introduced the world to a 
profound new notion. What this notion depended on, aside from 
the misappropriation of music copyrights, to which I will 
return, is unfettered access on an even-handed basis to the 
idealized infinite jukebox. It is, I would argue, this freedom 
to choose from everything in existence that has so ignited the 
passion of Napster users. It is the freedom to choose which has 
so inspired and renewed people's love of music online and the 
freedom to choose that underlies the digital music revolution. 
It is freedom, and not free-ness or the absence of cost. For, 
surely, while copyright owners may not have been recompensed 
through Napster's infancy, clearly many others have been able 
to monetize the consumer's passion for digital music.
    As the advertisements for a wide array of hardware makers 
currently attests to, enjoyment of online music has been a 
major driver of computer sales and has helped fuel 
extraordinary growth for ISPs and infrastructure providers 
alike. Music file sharing has earned itself recognition as the 
killer Nap.
    Once security issues are addressed--and security must be 
addressed--the question becomes: What will this new digital 
world look like? The genius of Napster is that all music is 
available on an equal footing and that the consumer's choice 
prevails. Our concern is that, without Congressional scrutiny, 
any service such as Napster that requires consent of all 
copyright owners may be unfairly dominated by the few owners of 
the most content. The result would be a two-class system of 
copyrights where the copyrights that are owned and aggregated 
by multinational corporations are treated one way and the 
copyrights of everyone else another.
    We have already begun to experience that firsthand, and 
right now our lawyers are in New York in front of a Federal 
judge and jury defending our copyrights against a company that 
has taken the viewpoint that, while the major labels were 
entitled to substantial damages and licensees with regard to 
their copyrights, independent labels were not.
    Such a two-class system of copyright, one that places 
copyright value based on who owns it and what market they can 
exert, would be a tremendous setback to our fertile 
entertainment economy.
    The various announcements of entities being fostered by the 
major record labels, all are consistent in their failure to 
acknowledge the necessity of a scheme whereby all content 
creators are treated equally. None of these vehicles to date, 
as far as I can tell, have made it clear that the creation of a 
level playing field is one of their organizing principles. 
Indeed, the very opposite seems to have been expressed, that 
is, by all these vehicles, with the exception of Napster.
    I should point out that TVT, while in a lawsuit with some 
online companies, has been not slow to offer its content on the 
Internet. Since 1999, our entire catalogue has been made 
available free to the consumer on a timed-out and secure basis. 
And we remain No. 1 in the number of secure downloads provided 
to consumers.
    More recently, we were the first label to recognize that 
once Napster had expressed its willingness to acknowledge 
copyright and to establish a scheme to compensate all rights 
holders, that we had indeed reached the goal of our litigation 
with them. Thus, we became the first label to withdraw all of 
our claims against Napster and entered into a license agreement 
with them for their anticipated new secure music subscription 
service.
    Amongst all entities vying to provide music online in a 
responsible and secure manner, Napster alone has promised to 
create a platform on which all rights holders may compete on 
the basis of quality and appeal of their content. This 
commitment to equal access and opportunity may never come to 
fruition if Napster is not successful in persuading the major 
content owners to grant it rights.
    Under such a circumstances the question arises: Can a 
marketplace in which a few entities control so much content 
produce a universal delivery system in which equal access and 
equal opportunity, financial and otherwise, is provided to all? 
The question is one that I believe the Committee must consider 
to be an issue of importance. If the largest aggregators of 
content are able to leverage their market power to gain undue 
advantage, then they will be allowed to transform a mechanism 
intended to incent creation into a mechanism that perpetuates 
the current marketplace status quo. Such a distortion of 
copyright policy would institutionalize current content owners' 
positions of dominance in the marketplace and shift the benefit 
of copyright law from creators to the largest of aggregators.
    The unique nature of the phenomenon introduced to us all by 
Shawn Fanning has the potential to open up a whole new horizon 
to all content owners and consumers alike. I welcome the 
Committee's scrutiny of the marketplace as it works through 
these many new and interesting challenges and hope the 
Committee's continued interest in the matter will assist 
motivating our industry's leaders to indeed lead us toward a 
fair and equitable market solution, one that will neither limit 
consumer choice or create inequities among content owners.
    Chairman Hatch. Thank you, Mr. Gottlieb.
    [The prepared statement of Mr. Gottlieb follows:]

    Statement of Steve Gottlieb, President and Founder, TVT Records

    Mr. Chairman and distinguished members of the Committee, good 
morning and thank you for inviting me to participate in this hearing. I 
am both honored and humbled to be here among such highly celebrated 
business colleagues and legendary recording artists. My purpose in 
appearing before you today is to address how in this digital age, 
copyright remains a tool to incent creators and not a mechanism to 
enlarge market power.
    By way of introduction I am Steve Gottlieb president and founder of 
TVT Records, the largest freestanding independent record company in 
America. By freestanding I mean we are neither owned by; funded by; 
distributed by; nor otherwise aligned with any of the five major 
multinational music companies. Like many independent labels ours is the 
story of the most unlikely success. Fresh from school with degrees from 
Yale and Harvard under my belt, I foolishly undertook to license 
Americas best-loved and appreciated music, namely our TV themes, and 
assemble them in a compilation called Televisions Greatest Hits. The 
resulting vinyl LP, for alas that was the poor state of our music 
technology at that time, became a worldwide success. From those humble 
beginnings, armed with almost no capital and even less experience, I 
began my assault on what was then a music establishment of 6 major 
record companies. Back in those days independents were considered to be 
a low rent farm club at best. The major record companies owned the 
charts and the notion of an independent having a hit record without the 
``help'' of a major most unlikely. Happily times have changed and 
albums from independents regularly grace the top of the bestseller 
charts. So to has TVT changed.
    From a one-man shop in 1985, TVT now employs well over 100 people 
and enjoyed sales in excess of 50 million dollars last year. Our roster 
now extends well beyond TV themes running the musical gamut from hard 
rock to pop to hip-hop to R&B to alternative. Through TVT SoundTrax, 
our label is also a force in motion picture soundtrack albums including 
releases from such top films as Steven Soderburgh's Oscar nominated 
``Traffic''--a film I am proud to be associated with as, I hope, Sen. 
Hatch is as well
    As an independent, TVT is a member of a community of thousands of 
entrepreneurs and artists responsible for one of the most vital 
segments of the US music industry. Collectively our market share is 
some 17% of domestic retail sales, a market share greater than four of 
the multinational music companies, and second only to that of 
Universal. This figure perhaps understates the size of the 
independents' share of music that most engages the public's interest. 
To wit, in the major labels' own filings against Napster they have 
acknowledged that a full 27% of the music files shared were non-major 
titles. Beyond our collective market power, the independent community 
plays a unique role as the principle spawning ground for new artists 
and new music movements. It is by virtue of the independent community's 
constant prodding and rejuvenation of the music scene that we as 
Americans enjoy such a diverse choice of music and such a productive 
and profitable music industry.
    Fellow entrepreneurs, artists, and society are all beneficiaries 
what today is an essentially level playing field with regard to music 
marketing and distribution. This level playing field allows consumers 
to hear a broad array of music on radio, to find it at record stores 
and to embrace it as they choose. And embrace it they do--with such 
unpredictable results that no record company, no matter how well 
capitalized, can sit idly by comforted by the notion that their most 
recent success will have any bearing on their ability to identify, 
attract, and support tomorrow's most popular artist. As the marketplace 
continually reminds us, picking tomorrow's stars is, at best, a low 
percentage game.
    The hallmark of the music business is that the public listens to 
songs and artists--not record companies. Ideally, those songs and 
artists compete against one another in a marketplace of musical ideas. 
This competitive framework has evolved from and depends upon a 
combination of laws, regulations, judicial rulings and market forces. 
For example, laws against both Payola and concentrated radio station 
ownership, combined with the discipline of market forces, insure that 
radio stations are always searching for what excites the listener. 
Failure to do so would only create opportunity for competitors to gain 
an advantage in the marketplace. Similarly retailers, who can ill 
afford to drive a customer across the street, are forced by the 
marketplace to stock whatever consumers demand. This proximity to 
public yields an essentially open marketplace.
    Where there is a lack of marketplace competition--wherein parties 
are isolated from the discipline of public demand--as in the area of 
music video television, the results are informative. There, the majors 
have demonstrated both the desire and ability to exploit their market 
dominance so as to deprive independents from gaining an amount of 
airtime devoted to their artist that is anywhere near commensurate with 
their marketshare.
    Moving beyond these examples to our current dilemma, the advent of 
the digital age brings the greatest threat yet to the vibrant 
composition and independent competitive spirit of the music industry. 
This threat is the emergence of new barriers between music providers 
and the market discipline exerted by public demand.
    Some years ago, decidedly without the authority or rights to do so, 
Shawn Fanning introduced the world to a profound new notion and tapped 
directly into this market demand. His notion of having immediate access 
to the entire world of music without limitation has allowed a wholly 
new and unique way of interacting with music as transformative, 
different, and disruptive an innovation as the radio. This powerful 
concept was instantly understood and embraced by the public in an 
unprecedented manner as something with no real world equivalent. What 
this innovation depended on (aside from the misappropriation of music 
copyrights to which I will return) is unfettered access on a democratic 
and evenhanded basis to the idealized infinite jukebox. It is, I would 
argue, this freedom to choose from everything in existence that has so 
ignited the passion of Napster users; it is this freedom to choose 
which has so inspired and renewed people's love of music online; and it 
is this freedom to choose that fuels the digital music revolution. It 
is freedom--not freeness or absence of cost. For surely while copyright 
owners may not have been recompensed through Napster's unauthorized 
infancy, clearly many others have been able to monetize the consumer's 
passion for digital music. As the advertisements for a wide array of 
hardware and software makers currently attests to, enjoyment of online 
music has been major driver of computer sales and has helped fuel 
extraordinary growth for ISP's and infrastructure providers. Music file 
sharing has earned itself recognition as the killer ``Napp''. And peer 
to peer sharing will certainly be an application that will grow to 
accommodate and encompass other forms of intellectual property.
    Once security issues are addressed, as they must be, the question 
becomes what will this new digital world look like? The genius of 
Napster is that all music is available on an equal footing and that the 
consumer's choice ultimately prevails. If this is something we all 
value, if this free choice is as important to us as the underlying free 
expression itself, how can we preserve it? In my opinion, Napster and 
the overwhelming public support it has received, attest to the fact 
that a service such as they have envisioned by opening up universal 
desktop access to all music on some limited, controlled, and licensed 
basis deserves careful consideration as something quite possibly in the 
public interest.
    Our concern is that without Congressional scrutiny, any service, 
such as Napster, that requires consent of all copyright owners may be 
unfairly dominated by the few owners of the most content. The result 
would be a 2-class system of copyrights wherein the copyrights owned 
and aggregated by multinational corporations and represented by 
professional trade associations are treated one way--and the copyrights 
of everyone else another. In this potential future what becomes 
significant about the economic reward accorded to copyright is not so 
much the nature of the copyrighted content but rather the nature, or 
more specifically the market share of its owner. We have already begun 
to experience that firsthand. Right now, TVT's lawyers are in New York 
in front of a Federal Judge and jury, defending the copyrights of our 
artists against a company, MP3.com, that has taken the peculiar 
viewpoint that while major labels were entitled to substantial damages 
and license fees with regard to their copyrights, independent labels 
are not.
    Such a 2-class system of copyrights that places copyright value 
based on who the owner is and what market power they can exert would be 
a tremendous setback to our fertile entertainment economy. Similarly, 
the various announcements of entities being fostered by the major 
record labels have all been consistent in their failure to acknowledge 
the necessity of a scheme where by all content creators are treated in 
an even-handed fashion. A lack of equal treatment serves to, in effect, 
shift the benefits and protections conferred by copyright away from 
creators whom copyright law is meant to reward and to the largest 
aggregators of such copyrighted content. This shifting landscape 
undermines the level playing field on which creators have historically 
enjoyed a fair expectation that they will be able to compete. None of 
these vehicles to date, as far as I can tell, have made it clear that 
the creation of a level playing field is one of their organizing 
principles. Indeed, the very opposite seems to have been expressed--
that is by all these vehicles with the exception of Napster.
    I should point out that TVT, while in a lawsuit with MP3.com, has 
not been slow to offer its content on the Internet. We are particularly 
proud as a label to have a history of ``firsts'' on the Internet. We 
were the first label to invest in Reciprocal, a major digital rights 
management security firm. We were the first label to adopt Microsoft's 
Secure Windows Media format with regards to our label's musical output 
and believe we remain to this day the label to have delivered the 
largest number of secure music files via download to the consumer. In 
November of 1999 we put our entire catalog online free to the consumer 
on a timed-out and secure basis. More recently, we were the first label 
to recognize that once Napster had expressed its willingness to 
acknowledge copyrights and to establish a scheme to compensate all 
rights holders, that we had indeed reached the goal of our litigation 
with them. Thus, in January of this year, we became the first label to 
withdraw all of our claims against Napster and entered into a license 
agreement with them for their anticipated new secure music service.
    Amongst all entities vying to provide music online in a responsible 
and secure manner, Napster alone has promised to establish a system 
that acknowledges rights of all content owners and recognized the 
central importance of creating a platform on which all rights holders 
may compete--compete on the basis of the quality and appeal on their 
content. This commitment to equal access and opportunity may never come 
to fruition if Napster is not successful in persuading the major 
content owners to grant it rights. Under such a circumstance the 
question arises: Can a marketplace in which so few entities control so 
much product, produce a universal delivery system in which equal access 
and equal opportunity, financial or otherwise, is provided to all 
content owners?
    The question is one that I believe this Committee must consider to 
be an issue of importance. It is my opinion that rewarding copyright 
aggregators at the expense of copyright creators is antithetical to the 
spirit of the law. If the largest aggregators of content are able to 
leverage their market power to gain undue advantage over smaller 
copyright owners in the exploitation of copyright, then they will be 
allowed to transform a mechanism intended to invent creation into a 
mechanism that perpetuates the current marketplace status quo. Such a 
distortion of copyright policy would institutionalize current content 
owners positions of dominance in the marketplace and shift the benefit 
of copyright law from individual creators to the largest of 
aggregators.
    The unique nature of phenomena introduced to us all by Sean Fanning 
has the potential to open up a whole new horizon to all content owners 
and consumers alike. While, in my opinion, intervention may currently 
be premature, I do welcome the Committee's continued scrutiny of the 
marketplace as it works through these many new and interesting 
challenges and sincerely hope the Committee's ongoing interest in the 
matter will assist in motivating our industry's leaders to indeed lead 
us toward a fair and equitable market solution--one that will neither 
limit consumer choice or create inequities amongst content owners.
    Thank you.

    Chairman Hatch. Mr. Berry, we are honored to have you with 
us. We look forward to hearing from you.

STATEMENT OF KEN BERRY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
                       EMI RECORDED MUSIC

    Mr. Berry. Mr. Chairman, Senator Leahy, and members of the 
Committee, my name is Ken Berry. I am president and CEO of EMI 
Recorded Music, and I have been in the music business for 
nearly 30 years. EMI is the world's third largest recorded 
music company and the world's largest music publisher. Over the 
years, we have been home to artists such as Frank Sinatra, the 
Beach Boys, the Beatles, Garth Brooks, and Janet Jackson.
    EMI Recorded Music develops, promotes, markets, and 
distributes music to fans, and we embrace any technology that 
makes music more accessible and enjoyable for the consumer. The 
Internet is the most exciting and revolutionary technology to 
impact our industry ever. It is also much more than a new 
medium for promotion and distribution. It is a transforming 
one, for fans, artists, and record companies alike.
    My message to this Committee is simple: EMI is embracing 
this medium. We are working to create a legitimate digital 
marketplace, to make our music easier to access for consumers. 
In order to achieve this, we are making significant investments 
in our company to adapt to the digital marketplace. EMI alone 
has signed three dozen deals in the past 2 years to make music 
available online from North America to Europe to Australia and 
the Pacific Rim.
    Name a new business model, from direct-to-consumer to 
business-to-business, and chances are we have embraced it. Name 
a mode of digital delivery, and recordings in the EMI library 
are probably online in it already, or will be very soon. We are 
opening kiosks, portals, digital downloads, customized CDs, and 
music videos on demand.
    Just yesterday, as you heard from Dick Parsons, we 
announced EMI's participation in MusicNet with two other record 
companies and real networks to create a technology platform and 
music clearinghouse to license on a non-exclusive basis 
companies seeking to sell subscription services. All of our 
deals have a common goal: to expand the availability of our 
music in a manner that protects our and our artists' rights.
    We are proud of the progress we have made at EMI, and we 
are excited still about the possibilities that lie ahead. A 
critical obstacle stands in the way of these possibilities. 
Some of the companies to whom we have licensed our rights are 
finding it difficult to build viable businesses in an 
environment dominated by the unlawful downloading of our entire 
catalogue for free.
    Mr. Chairman, it is impossible for legitimate innovators to 
compete with those who say the rules should not apply to them. 
At EMI we are excited at the prospect of this great digital 
transformation. The opportunities that the Internet brings to 
the music community are limitless, and the biggest winners are 
the fans, who will have faster, more convenient access to our 
global music catalogues.
    Like all of my employees, I am in this business because I 
love music, and I have had the good fortune to work with many 
outstanding artists. I want to thank the members of this 
Committee for your long-standing support for intellectual 
property rights, and I would be happy to answer some questions 
later on.
    [The prepared statement of Mr. Berry follows:]

     Statement of Ken Berry, President and CEO, EMI Recorded Music

    Mr. Chairman, Senator Leahy, Members of the Committee, my name is 
Ken Berry and I am President and CEO of EMI Recorded Music. I have been 
in the music business for nearly 30 years.
    EMI is the world's third largest recorded music company and the 
world's largest music publisher. Over the years we have been home to 
artists such as Frank Sinatra, The Beach Boys, The Beatles, Garth 
Brooks and Janet Jackson.
    EMI Recorded Music develops, promotes, markets, and distributes 
music to fans and we embrace any technology that makes music more 
accessible and enjoyable for the consumer.
    The Internet is the most exciting and revolutionary technology to 
impact our industry ever--but it is also much more than a new medium 
for promotion and distribution. It is a transforming one--for fans, 
artists and record companies alike.
    My message to this committee is simple: EMI is embracing this 
medium. We are working to create a legitimate digital marketplace--to 
make our music easier to access for consumers.
    In order to achieve this, we are making significant investments in 
our company to adapt to the digital marketplace.
    EMI alone has signed three dozen deals in the past two years to 
make music available online from North America to Europe to Australia 
to the Pacific Rim. Name a business model--from direct-to-consumer to 
business-to-business--and chances are we've embraced it. Name a mode of 
digital delivery, and recordings in the EMI library are probably online 
in it right now or on their way soon. Kiosks. Portals. Digital 
downloads. Customized CD's. Music videos on demand.
    Just yesterday we announced EMI's participation in MusicNet, a 
partnership with two other major record companies and RealNetworks to 
create a technology platform and music clearing house to license, on a 
nonexclusive basis, companies seeking to sell subscription services. 
All of these deals have a common goal--to expand the availability of 
our music in a manner that protects our and our artists rights.
    While we are proud of the progress we have made at EMI, we are more 
excited about the possibilities that still lie ahead.
    A critical obstacle stands in the way of those possibilities. Some 
of the companies to whom we have licensed our rights are finding it 
difficult to build viable businesses in an environment dominated by the 
unlawful free downloading of our entire catalogue. Mr. Chairman, it is 
impossible for legitimate innovators to compete with those who say the 
rules shouldn't apply to them.
    At EMI, we are excited at the prospect of this great digital 
transformation. The opportunities that the Internet beings to the music 
community are limitless. And the biggest winners are the fans who will 
have faster, more convenient access to our global music catalogues.
    Like all of my employees, I am in this business because I love 
music and have had the good fortune to work with many brilliant 
artists. I want to thank the Members of this Committee for your 
longstanding support of intellectual property rights and would be happy 
to answer any questions.
    Thank you.

    Chairman Hatch. Thank you, Mr. Berry.
    Mr. Kearby, we will take your testimony now.

   STATEMENT OF GERALD KEARBY, PRESIDENT AND CHIEF EXECUTIVE 
                  OFFICER, LIQUID AUDIO, INC.

    Mr. Kearby. Good morning, Mr. Chairman and distinguished 
members of the Committee. I would like to thank Senator Hatch 
and Senator Leahy and the other members of the Committee for 
the opportunity to be here today.
    My name is Gerry Kearby. I am the co-founder of Liquid 
Audio. I began my career 30 years ago here in Washington, D.C., 
where I played music for the Marines down at Marine Barracks 
and 8th and I. In the early 1980's, I developed technology for 
rock and roll bands in the Bay Area like the Grateful Dead and 
the Jefferson Starship. In the mid-1980's, I developed 
technology for LucasFilm that became the first digital audio 
editing tool for film and audio production. My partners and I 
formed Liquid Audio to provide a secure environment for digital 
delivery of music. My job here today is to tell you that the 
ability to secure and distribute music is not a roadblock. The 
technology exists right now.
    We founded the company in 1996, and we founded it as an 
end-to-end security system to distribute copyrighted material 
on the Internet. There was a lot of technology involved: 
encoding and hosting and digital rights management, which is 
known as the DRM business now, retail integration, 
distribution, consumer fulfillment, reporting services, and 
payment of copyright royalties.
    Our DRM is one of the most widely used systems to protect 
music copyrights today. We have over 13,000 artists from more 
than 1,200 record labels that use our technology to sell their 
music today. In addition to the liquid format, we also 
distribute in Windows media format for Microsoft, and Microsoft 
named Liquid Audio as the key distribution channel for Windows 
media content.
    So beyond the encoding of music, distribution of music is 
very important. We have built a channel of over 1,000 
retailers, everybody from Amazon and Best Buy, Billboard, 
CDNOW, Tower Records, and Yahoo!, to 200 radio stations. We 
connect major record labels and independent record labels to 
1,100 music program directors around the country in order for 
these record companies to get their music quickly to radio as 
it breaks.
    Our consumer software enables millions of consumers to 
enjoy music, to download it, where the rules apply, to burn it 
to CDs or put it out to a portable device.
    We have developed an open platform that is compatible with 
many formats, including MP3, RealNetworks, AOL's WinAmp, 
Microsoft Windows Media, and Sony's Open Magic Gate.
    We have been providing security since 1997 when we 
partnered with Capitol Records actually to sell a download from 
a major artists. The challenge here is the balance of security 
with the consumer's need for the ease of use. Consumers will be 
driven to illegitimate channels as long as the technology 
provides overly strict kind of controls and as long as they 
can't find all the music they want.
    Since 1997, we have worked closely with artists and record 
labels, retailers and consumers to improve the secure download 
experience. We have been successful at doing it, and this 
technology exists today.
    I would like to quote Mr. Barry here. The system has been 
accepted and approved by major record labels, Mr. Barry said. 
We have elected to include Liquid Audio's digital download 
format because it allows us to offer our music securely and at 
a very high quality, using an easy online purchase process.
    So security is not a barrier to providing the music that 
the consumers want on the Net. Liquid Audio provides a proven 
security system that is used by major labels and independent 
labels, by many thousands of music retailers and consumer 
product companies.
    So why, then, are there tens of millions of consumers 
turning to unauthorized sites to obtain digital music? The 
answer is simple. The music most people want is not available 
for purchase through legitimate channels. The good news is that 
millions and millions of consumers are excited about digital 
music, but those consumers must be attracted to legitimate 
sites.
    We are optimistic that the current marketplace can be 
changed, and now it is incumbent upon all of us to demonstrate 
that copyrights can be respected and that music can be 
accessible in every format, every car, and every portable 
device.
    We don't believe that all or even the vast majority of 
users of the illegitimate music-sharing systems are cyber 
shoplifters at heart. We believe that consumers will embrace 
and pay for systems that are legitimate, easy to use, and 
reasonably priced.
    But that can't happen unless all the music consumers want 
is made available, including access to all the rich and varied 
catalogues owned by the majors and the independent record 
labels.
    With the assistance of this Committee, encouraging record 
labels and content owners to work with all participants who add 
value to the music industry, fans will remain loyal and the 
music economy will grow for all legitimate participants.
    The problem before us does not involve a failure of the 
copyright system or of technology, but a failure in the 
marketplace. It is time to address this failure before the 
damage is irreversible. We look forward to further 
encouragement from this Committee and other Members of Congress 
to make the dream of widespread music delivery a reality. This 
effort will help the entire industry and satisfy the millions 
of fans who are excited about digital delivery of music.
    Thank you very much for the opportunity to testify.
    [The prepared statement of Mr. Kearby follows:]

 Statement of Gerald W. Kearby, President and Chief Executive Officer, 
                           Liquid Audio, Inc.

                            I. Introduction

    Good morning Mr. Chairman and distinguished members of the 
Committee. My name is Gerry Kearby and I am the Chief Executive Officer 
of Liquid Audio. I would like to thank Chairman Hatch, Senator Leahy 
and the other members of the Judiciary Committee for the opportunity to 
appear before you today to speak about an important topic: Online 
Entertainment and Copyright Law. I am a co-founder of Liquid Audio and 
have spent my working life in the music business. I began my 25-year 
music industry career playing in the United States Marine Corps band. 
After that I was a sound engineer for bands such as the Grateful Dead, 
Diana Ross and the Jefferson Starship. I was one of the first pioneers 
in the digital music industry when I built components for the first 
digital audio editing tools for LucasFilm Limited. My partners and I 
formed Liquid Audio to provide a secure environment for the delivery of 
digital music over the Internet.

                            II. Liquid Audio

    Founded in 1996, Liquid Audio created and deployed the first, and 
most widely adopted solution for the secure delivery of digital music 
over the Internet. Liquid Audio provides a complete end-to-end 
infrastructure to use the Internet as a low-cost environment to 
distribute copyrighted music. This includes encoding, hosting, digital 
rights management (known as DRM), distribution, retail integration, 
consumer fulfillment, reporting services and payment of copyright 
royalties.
    Liquid Audio has been first in every key area of digital music 
delivery. Some major record labels use Liquid Audio for a limited 
amount of music released thus far--a few hundred titles. The majority 
of EMI online retailers have chosen Liquid Audio as their digital 
service provider. The Liquid Audio DRM is one of the most widely used 
systems to protect music copyrights. The Liquid Catalog of 150,000 
independent record label tracks is the largest collection of secure 
independent music. Finally, Microsoft named Liquid Audio ``the key 
distribution channel for Windows Media content.''
    Liquid Audio has a proven its secure distribution system for the 
Internet marketplace that enables musicians, record labels and 
retailers to publish, and securely distribute digital music to online 
consumers. Highlights of the Liquid Audio system include:
 1,200 Record Labels--Liquid Audio's secure distribution 
        solution enables more than 13,000 artists from 1,200 
        independent record labels to securely distribute their digital 
        music.
 Network of 1,000 Music Retailers--Liquid Audio's retail 
        integration solution enables more than 1,000 retailer's Web 
        sites, including Amazon, Best Buy, Billboard, CDNOW, Tower 
        Records and Yahoo!, to promote and sell digital music to 
        consumers.
 Over 200 Radio Stations--Liquid Audio's radio promotion 
        network coordinates the promotion and distribution of new 
        record releases, and through our joint effort with R&R Music 
        Meeting, extends this reach to thousands of radio stations 
        across the United States.
 Millions of Consumers--Liquid Audio's consumer software 
        enables the millions of consumers visiting the 1,000 sites in 
        our network to download and enjoy digital music.
    Liquid's solution enables content owners to promote and sell their 
music in a variety of formats. Our Retail Integration and Fulfillment 
Systems (RIFFS) enables retail Web sites to sell music downloads from 
the 150,000 track Liquid Catalog. Liquid also provides a state-of-the-
art consumer software application enabling users to preview, purchase, 
download, organize and export digital music in a secure environment. 
Finally, Liquid Audio's distribution platform is open and compatible 
with many formats and technologies including MP3, RealNetworks, AOL 
WinAmp, Microsoft Windows Media, Liquid Audio, Sony ATRAC3, AAC and 
Dolby Digital AC-3.
    Thus, Liquid Audio's digital music distribution system is a 
comprehensive, secure platform that is delivering music in a 
legitimate, user-friendly environment to millions of customers today. 
Because it is open and scalable, Liquid's system is capable of serving 
all of the needs of its existing users as well as millions of more 
users to access the music they demand while satisfying the needs of 
artists and labels to provide for security and compensation.
    Knowing we could not build an industry alone, in 1998 Liquid Audio 
became a founding Board member of the Digital Media Association (DIMA), 
a trade organization of more than seventy member companies that provide 
legitimate, copyright-compliant music and audio-visual services for 
consumers, creators and business partners.

                      III. Digital Music Security

    The primary challenge is balancing security with ease of use. 
Consumers will be driven to illegitimate channels by overly strict 
controls and complicated procedures. Since our founding, we have 
listened to and worked closely with artists, writers, publishers, 
record labels, retailers and consumers. Liquid Audio has been 
successful in developing a user-friendly system. Our four-part digital 
music security solution protects music on the Internet today. Those 
four parts are:
 Copy Control.--Liquid Audio's system enforces usage rules set 
        by content owners that mandate how consumers can use their 
        content, including rules on the number of secure copies, 
        exports to devices and time-outs.
 Distribution Management.--Secure protocols protect all parts 
        of the Liquid Audio distribution system to prevent unauthorized 
        acquisition of content as it moves from publishing through 
        Internet distribution, downloading and reporting. Liquid Audio 
        has developed a territory management system that ensures 
        compliance with international licensing obligations.
 Usage Tracking.--Liquid Audio is able to uniquely identify 
        each piece of music. Liquid Audio can embed indelible and 
        inaudible DRM information into the audio waveform as a 
        watermark or in digital files as an encrypted header. The 
        embedded information identifies and tracks audio usage and 
        cannot be removed without destroying the recorded music.
 Royalty Payments.--Liquid Audio's reporting system allows for 
        timely and accurate accounting for music use and distribution 
        of the corresponding royalties to creators and content owners.
    Liquid Audio's digital music security system is flexible. It allows 
artists and labels a variety of security options when delivering music, 
and it allows users a variety of options when consuming the music.
    Liquid's digital music security system has been tested and 
approved--as demonstrated by use today by thousands of companies. EMI 
Recorded Music's CEO, Ken Berry said: ``We have elected to include 
Liquid Audio's digital download format and software in our trial 
because it allows us to offer our music securely and at a very high 
quality, using an easy online purchasing process.
    In addition to our retail network, some 1,200 record labels from 
majors to independents including Atlantic, Artemis, Capital, MCA, Zomba 
and edel AG labels, and artists such as Lenny Kravitz, Dave Matthews 
Band, Don Henley and Aimee Mann use the Liquid digital music security 
system. Finally, Liquid's security systems are embedded in consumer 
products.
    Security is not a barrier to supplying all the music consumers want 
on the Internet. Today, Liquid Audio provides a proven digital music 
security system in use by major labels, many independent labels, music 
retailers and consumer product companies.

                   IV. The Internet Music ``Problem''

    Over the last several months I have been dismayed and frustrated by 
the extraordinary traction in the marketplace and public attention 
awarded to companies that do not respect the law, or do not respect the 
copyrights of creators and producers. I am dismayed because it is 
difficult to compete with companies that have seemingly unlimited 
resources combined with disrespect for the law. But I am as frustrated 
with the response of the copyright owners to litigate rather than 
compete. That response has been detrimental to themselves, to the 
recording artists and to otherwise trusted partners such as Liquid 
Audio.
    As a result of Napster, tens of millions of consumers who otherwise 
would have been willing to pay a fair price for quality online music 
have been conditioned to obtaining music for free. Creators and 
producers of music and other entertainment products have been forced to 
expend enormous resources to defend their copyrights. This has diverted 
their attention and resources away from legitimate partners like Liquid 
Audio that can help develop the ultimate marketplace weapon--
competitive alternatives.
    It is hard to blame millions of consumers for obtaining compelling 
music that is easily accessible and free. Some may find their actions 
unlawful, but the judicial system would be overwhelmed and artists' 
fans would become their enemies if creators used the law as their only 
weapon. As noted below, Liquid Audio proposes a competitive marketplace 
solution. Napster has proven there is a market. Now the rest of us must 
work collaboratively to compete. In addition to litigating where 
appropriate, creators and record labels must turn to their trusted 
partners for assistance--not just Liquid Audio but several trusted 
partners, including our technology company competitors.

              V. The Internet Music Solution--The Content

    Liquid Audio's digital music distribution system not only respects 
the copyright rules and protects the content, it provides an attractive 
environment for Internet users to legitimately experience and acquire 
music. As I noted earlier, although Liquid was the first, there are a 
number of other companies not present here today that are fully 
prepared to provide these secure services and have devoted themselves 
to the same effort. The stage is set for a competitive marketplace that 
will serve the needs of music fans, artists and their record companies.
    Why then are tens of millions of users turning to unauthorized 
sites on the Internet to obtain digital music? The answer is simple. 
The music most people want is not available for purchase through 
legitimate Web sites. The good news is that millions and millions of 
consumers are excited about digital music. But those consumers must be 
attracted to legitimate Web sites.
    Liquid Audio is optimistic that the current marketplace can be 
changed. Now, it is incumbent upon all of us to demonstrate that 
copyright can be respected and music can be accessible in every format, 
in every home, in every car and on every portable device. We do not 
believe that all or even the vast majority of the users of illegitimate 
music download systems are ``cybershoplifters'' at heart. We believe 
consumers will embrace and pay for services that are legitimate, 
reasonably priced and easy to use. Online resellers using a secure 
online system, such as Liquid Audio's, will be able to add value to 
attract consumers to their sites and will provide a legitimate Internet 
digital music experience.
    This cannot happen unless all the music that the consumers want is 
made available, including access to all the rich and varied catalogs 
owned by the major and independent record labels. Defining price points 
and business models in an open and competitive marketplace is never 
easy, and there will always be Napster progeny that promote taking 
rather than purchasing. But with the assistance of this Committee, by 
encouraging record labels and content owners to work with all 
participants who add value to the music industry, fans will remain 
loyal and the music economy will grow for all legitimate participants.

                             VI. Conclusion

    Liquid Audio is optimistic that the current unfortunate state of 
affairs can be reversed. The Ninth Circuit has ruled. Now we must show 
our fellow citizens they can respect copyright yet still acquire the 
music they want, when they want it, where they want it, and how they 
want it. Liquid Audio stands ready to provide those services. But we 
can only provide the music consumers want if all music, and not just a 
token sample, is made available by the copyright owners on reasonable 
licensing terms.
    We appreciate the efforts of the members of this Committee, and 
their encouraging remarks that record labels and content owners should 
work with all of the legitimate participants in the online music 
community to create a secure and competitive marketplace.
    The problem before us does not involve a failure of the copyright 
system, but a failure in the marketplace. It is time to address this 
failure before the damage is irreversible. We look forward to further 
encouragement from this Committee and other members of Congress to make 
the dream of widespread legitimate online delivery of digital music a 
reality. This effort will help the entire music industry. It will also 
satisfy the innumerable music fans who are excited about the digital 
delivery of music but have not been able to find a broad and deep 
online music experience that offers them legitimacy and value.
    Thank you for this opportunity to testify today.

    Chairman Hatch. Thank you, Mr. Kearby.
    Ms. Rosen, we look forward to your testimony.

   STATEMENT OF HILARY ROSEN, PRESIDENT AND CHIEF EXECUTIVE 
       OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA

    Ms. Rosen. Thank you, Mr. Chairman.
    I listened eagerly at the outset to the opening statements, 
Mr. Chairman, of you and Senator Leahy, and I heard the words 
that people were concerned about piracy. For me, this hearing 
is not about piracy. It is about opportunity.
    While it is tempting to respond to a lot of what I have 
already heard this morning, I think you have an idea, at least, 
of what it has been like for record companies trying to get 
into this space with a lot of thoughtful additional opinions 
about how we get there.
    Napster was exciting, but giving away someone else's music, 
frankly, without their permission is yesterday's news. On the 
screen before you are samples of dozens of Web sites with whom 
record companies have signed licensing agreements and on which 
fans can find digital music right now.
    I am going to keep talking as this is playing, but the 
story is about plans to bring new services that will offer even 
more variety, better audio quality, and new features to the 
marketplace as soon as possible.
    Mr. Parsons and Mr. Berry have already talked about the 
announcements from their companies, about their partnerships 
with RealNetworks. Other companies, like Sony and Universal, 
have formed ventures to offer subscription services which they 
are going to launch later this year. Many independent record 
companies have also signed such deals.
    On the other side of these efforts lies a new frontier for 
music fans. Today's hearing and the many participants on this 
panel are evidence that there are several moving parts to this 
issue. There is a host of technology-related issues from 
identifying partners and finding technologies, like Gerry 
Kearby's company. We are actually one of his many competitors. 
The systems and business models that have a chance of 
succeeding with consumers have to be thought through. This 
whole grand experiment is about the consumer and the music fan 
and how to create even more passion for music and its delivery.
    Of course, the music starts with the artist, musicians and 
songwriters. Without their talent, without their passion, there 
would be no consumer demand and no music industry to fulfill 
that demand. Record companies have already started to consult 
with their artists in individual discussions to assure that 
these new business models offer fair returns for everybody. 
More needs to be done.
    Negotiations are underway with music publishers and 
songwriters, for they also must be fairly compensated, and I am 
confident that those negotiations will succeed.
    Has our start been too slow? Perhaps. But measured against 
the scope of the challenges, we have moved at an extraordinary 
pace, and I have no doubt that the current efforts underway are 
immense and determined. The marketplace is moving correctly and 
it is moving quickly, and we can provide and protect the 
incentive to create along the way.
    We all know that what is done in this space for music has 
great import for all entertainment products and for all 
domestic policy--the legal precedents, the public policy 
responses, and the marketplace acceptance by consumers. We are 
grateful to this Committee for the opportunity to discuss these 
issues and, indeed, America's record labels are proud to be in 
the forefront of this amazing period of change, and we are 
confident that the outcomes will be wonderful for creators and 
music fans alike.
    Thank you.
    [The prepared statement of Ms. Rosen follows:]

   Statement of Hilary Rosen, President and CEO, Recording Industry 
                         Association of America

    Mr. Chairman, Senator Leahy and members of the Committee, thank you 
for the opportunity to appear before you today.
    The title of this hearing is ``Online Entertainment and Copyright 
Law: Coming Soon to a Digital Device Near You.''
    It's an apt title, Mr. Chairman. But if you'll excuse me for 
borrowing the senatorial parlance, I have an amendment to offer. 
Because online entertainment isn't coming soon. It's here . . . and 
it's getting better everyday.
    Napster was exciting. But giving away someone else's music without 
their permission is yesterday's news.
    The story now is the music industry's efforts to alert fans and 
consumers to the huge amounts of legitimately licensed music that is 
currently available on-line. And the story is about our plans to bring 
new services that will offer even more variety, better audio quality 
and new features to the marketplace as soon as possible.
    The goal is to have several different kinds of systems and business 
models for music fans to choose from, available in as many locations 
on-line as possible, on a nonexclusive basis to encourage competition--
and to make these services and products compatible with new hand held 
devices and other technologies that are emerging around the corner. To 
achieve this goal, America's record labels are licensing innovatively, 
constantly and aggressively and they are in some cases putting 
finishing touches on systems that they have built themselves.
    Flashing on the screen before you are samples of the dozens of web 
sites with whom RIAA member companies have signed licensing agreements 
and on which fans can find digital music right now. And these are in 
addition to the hundreds of statutory licenses already in place for 
webcasting.
    Just yesterday, three companies with major record companies, AOL 
Time Warner, EMI and Bertelsmann announced a partnership with Real 
Networks' to create MusicNet, a technology provider and a music 
clearinghouse to license its platform to companies seeking to sell 
subscription services under their own brands. It has been widely 
reported that two others, Sony Music and Universal Music have formed a 
venture to offer subscription services which will launch this year. 
Many independent record companies have signed similar licenses and are 
using their catalog in innovative ways to bring music to the consumer. 
Portals and web sites will combine these services to offer aggregated 
music services to consumers.
    Building entirely new businesses is a complex endeavor. But we're 
approaching this challenge the same way we know any member of this 
committee would handle a piece of legislation--sorting through the 
issues as quickly but as thoroughly as you can, and doing all you can 
to bring the diverse interests involved together.
    Is it easy? Of course not. Is it worth it? Absolutely.
    Because on the other side of our effort lies a new frontier for 
music--one in which garage bands have a global audience, songwriters 
can compose with their brethren an ocean away and fans have unlimited 
choices and record labels have unparalleled opportunities.
    Like any new frontier, when it comes to exploring this one, taking 
short cuts would short-change the people and possibilities we are 
trying to reach.

  Today's Hearing Validates the Complex Issues Record Companies Have 
                                 Faced

    The make up of today's hearing panel symbolizes the complex issues 
record companies are facing as they work to coordinate the diverse 
interests involved in bringing music online.

                           TECHNOLOGY ISSUES

    Finding the right technologies and the right technology partners to 
help build systems is a key first step. Gerry Kearby and his company 
Liquid Audio have been in this space from the start tweaking their 
technology several times as the marketplace evolved. I can only imagine 
the frustration he has felt when at each stop along the way another 
technology company has joined the fray as a competitor; and sometimes 
as soon as a decision is made, a new advance is made technologically.
    There are systems issues like determining compatibility for the 
multiple devices that are currently on the market and those that might 
be developed in the future. What interfaces are required for consumer 
use? Should the system be adaptable to multiple kinds of business 
models or will separate systems be built for each service? Is the music 
database digitized in the proper formats to give flexibility to develop 
new services?
    And there are many others: Which technology do you use to compress 
and decompress content? What combinations of encryption and 
watermarking should be used to protect the content? What levels of 
protections should be associated with each different business model? 
The consumer is always in the forefront of this discussion. How do you 
devise a system that's as easy to use as placing a CD in a CD player? 
Then there is the so called ``back room'' operation. You need customer 
service for when the downloads or streams fail to materialize and you 
need to fashion transaction systems that work with multiple outlets. 
You need clearinghouses to assure that royalties are paid to the right 
people for the right activity.
    All of these questions are important and they are being answered 
every day. And not just for the United States, for these are global 
issues. For if there is one thing this Committee well knows, the 
Internet is a global distribution system and it must be treated as 
such. You simply can't have a long-term successful business if you are 
not thinking about multiple territories.

                        ARTISTS AND SONGWRITERS

    Don Henley and Alanis Morrisette personify what we all know--that 
artists and songwriters and musicians are the soul of the music 
business--that the Internet represents an extraordinary opportunity for 
them--and for record companies to succeed, they must succeed. A 
relationship between artists and labels must be defined that works for 
the Digital Age.
    Artists have historically had a one-to-one contractual relationship 
with the record company that relies on the sale of individual albums. 
Yet some of the new distribution systems rely on consumer access to 
multiple artist's works for fixed prices in a subscription based model. 
It is important that individual artists are compensated fairly and 
these discussions take time. In any business, contract discussions can 
be messy and sometimes lengthy. But this is a very important issue to 
the record companies and there is a strong commitment on their part to 
comprehensively addressing it in the work on new distribution systems. 
Progress has been made on this front but more needs to be done.
    And artists need access to information to do their own distribution 
if they aren't signed to a record label. These artist's ability to 
protect their own copyrights and enforce their rights against pirates 
are as important to them as it is to the record companies.
    We also need licenses from songwriters and music publishers, Le.: 
NMPA's constituency as well as ASCAP, BMI and SESAC--to do our 
business. We have arrangements in place for simple downloading of full 
songs, but new models such as subscriptions are being discussed right 
now. Coming up with a standardized royalty rate for all manners of 
business models--most of which haven't even been invented yet--is a 
daunting task, but we're committed to getting it done.

                               RETAILERS

    As Mike Farrace here from Tower Records On-line will tell you, 97 
percent of music sales are still brick-and-mortar transactions--and we 
have to ensure that online distribution enhances rather than undermines 
the commercial viability of our retail partners. In addition, retailers 
have valuable customer relationships with both the sales of physical 
goods as well as downloads. Those relationships are important and is 
certainly the subject of many discussions between retailers and record 
companies.
    These are all exceptional challenges. Measured against their scope, 
we have moved at an extraordinary pace. Clocked in Internet speed, I 
think it has been too slow. We all do. But I have no doubt of the 
intensity of the effort currently being made and the determination to 
be successful. The marketplace is working and we do not need additional 
legislation to assure progress.
    I am amused by those who suggest that record companies don't want 
to be on-line with legitimate music--that we don't want to serve our 
customers. It is a ridiculous notion that should be given no credence 
by this Committee or this Congress. We are a huge industry trapped 
inside a small physical package. Our freedom from selling only physical 
CDs or cassettes means a huge expansion worldwide in the artists we can 
support, the diversity of music we can offer and the commercial 
potential we can unleash. We understand that better than anyone else 
and we are taking the most active steps to embrace the opportunity.

                   The Consequences of On-line Piracy

    There is one way to overcome every one of the challenges mentioned 
above--to accelerate online music to real-time speed--to cause every 
legal or technical complication magically to disappear.
    And that's to break the law.
    Because once you conclude that piracy is permissible and 
intellectual property is worthless, licensing is a snap. Technical 
protection becomes a breeze. And royalties are no great shakes either.
    I don't believe that anyone on this Committee or in this Congress 
supports piracy--in physical form or in the on-line arena. And over the 
last few years, the courts have gone a long way to define exactly what 
constitutes on-line piracy. We are pleased with these court decisions. 
The courts have confirmed that piracy exists both when there is obvious 
mal-intent but it also occurs when seemingly well-intentioned people 
launch business services using copyrighted work without first securing 
licenses. The notion that the latter type of piracy is morally or 
economically permissible in the guise of technical innovation has been 
resoundingly rejected by the courts and should be by this Committee.
    We look forward to Napster complying fully with the requirements 
the court has imposed. To date they certainly have not--but I remain 
optimistic and am committed to working productively with them in this 
regard. Indeed, several of our member companies who are plaintiffs in 
this case have committed to licensing Napster once they have a legal 
service to bring music online in a manner that takes advantage of peer-
to-peer technology while respecting intellectual property. One of our 
member companies, Bertelsmann, is even funding their entry into this 
legitimate marketplace.
    I believe that disputes are best avoided when ground rules are most 
clear. Innovation is produced most quickly when intellectual property 
is protected most rigorously.
    We stand ready to defend those principles--not just for ourselves 
but for all of the partners in the chain of a legitimate digital music 
business. All of those companies you have just seen me flash though 
deserve the benefit of a lawful marketplace. They can't compete 
otherwise.

       The Future is Bright and the Map will be Drawn for Others

    The frontier of online music isn't in courtrooms. It's on 
computers. It isn't in disputes. It's in digital devices. And above 
all, it isn't in litigation. It's in innovation.
    The challenges involved in building a legitimate market for online 
music are daunting. Were the opportunity any less immense, they might 
not be worth the cost.
    But the opportunity is that immense. The frontier of digital 
music--is that thrilling. To be sure, the legitimate road may be a bit 
longer--but taking a short cut would shortchange the music fans on whom 
our industry depends.
    We are doing this right--and we are moving quickly--and we can 
protect the incentive for innovation along the way. Indeed, America's 
record labels are proud to be in the forefront of this amazing period 
of change and we are confident that the outcomes will be wonderful for 
music fans and creators alike.
    Thank you.

    Chairman Hatch. Thank you, Ms. Rosen.
    This has been a really interesting panel, and we are sorry 
that we have to have so many witnesses, but you are all 
critical to our understanding. We have had a wide variety of 
interesting comments here today that were very thoughtful, 
reflective, and very much consternation to us on what to do and 
what needs to be done.
    Mr. Parsons and Mr. Berry, Ken Berry, let me ask you this 
question to begin. I have been encouraged by the reports of the 
record labels' taking significant steps into the online 
distribution space, as Ms. Rosen has helped us to understand, 
especially the announcement of the alliance of Warner Music, 
EMI, and Bertelsmann with RealNetworks to form MusicNet. 
Nevertheless, some concerns remain.
    What assurances can you give us that this alliance will 
foster open competition among online music distributors and 
retailers, allowing diverse companies like Tower Records On-
line, for instance, or Liquid Audio or the new Napster and so 
on to use their own music players and digital rights management 
systems to keep their own customer information to compete with 
America OnLine, for example, as a music service provider? Let's 
start with you, Mr. Parsons.
    Mr. Parsons. Thank you, Mr. Chairman. First of all, a word 
about MusicNet in terms of what it is and why we think it 
expands opportunity for everybody. MusicNet is going to be, in 
essence, a B-to-B platform that aggregates the music initially 
of the three companies you just identified, namely, Warner, 
EMI, and Bertelsmann, and hopefully, going forward, all of the 
music available. In other words, we will be seeking to get 
licenses from the other majors and the independents, aggregate 
all that music, and make a service available to other 
distributor platforms that are looking to create relationships 
with consumers, so that MusicNet will not have a direct 
relationship with the end-user consumer but will have 
relationships with affiliated or syndicated platforms, like 
AOL, like RealNetworks, or like any of the platforms you just 
mentioned. All of those we will try and deploy this service as 
widely across as many different distribution platforms as 
possible.
    So the key to this thing is that MusicNet, using the real 
technology, will have a secure, convenient, easy-to-access, in 
essence, turnkey product to distribute to other platforms that 
have relationships with consumers. It is non-exclusive so, in 
other words, it doesn't detract in any way from the existing 
competitive landscape. What it does is it adds a powerful new 
alternative for distributors to go to for, in essence, the 
turnkey solution to get access to deep and rich music content.
    Chairman Hatch. Mr. Berry, do you care to comment?
    Mr. Berry. Mr. Chairman, as Mr. Parsons has already said, 
the arrangements we are entering are non-exclusive, and it is 
intended to accelerate the process of getting music into the 
Internet space and make it easier for consumers to find a broad 
aggregation of music. But it is not our sole access to the 
consumer, nor is it the exclusive way in which we intend to 
exploit our music in the Internet space.
    We have entered into, as I said earlier, many licenses and 
will continue to enter into new licenses in the future in order 
to accelerate this process of getting music out there in the 
Internet arena. We have even said, as you probably know, in the 
press comment yesterday that when Napster has their viable new 
business model which respects the rights of artists and record 
companies, we will be prepared to talk about entering into a 
license there with that new model.
    Chairman Hatch. Thank you.
    Mr. Parsons. In fact, if I just might add?
    Chairman Hatch. Mr. Parsons?
    Mr. Parsons. Ken makes a good point that neither side of 
this relationship that the music companies have created with 
MusicNet is exclusive. MusicNet will be offering this service 
to a range of distribution platforms, and all of the music 
companies are not exclusive to MusicNet. They will also be 
entering into, in the fullness of time, their own relationships 
with other aggregators of their content. So this is just one 
new way to go.
    And we did, in fact, not only agree to consider licensing 
Napster, but in the agreement itself, it provides that MusicNet 
service will offer an affiliation and a relationship to Napster 
provided that Napster simply meet certain conditions of 
security and legal operation that were set forth in the 
agreement. So that is done.
    Chairman Hatch. Thank you.
    Mr. Valenti, I think you summed up the importance of the 
totality of these industries as well as anybody has ever done 
so before this Committee. And I think you have done a great 
deal of service in helping us all to understand how important 
not just movies but music and everything else is.
    Having made that statement, I would like to ask Mr. Henley 
and Ms. Morissette a question. Digital distribution systems 
like the Internet allow the artist and the music fans to 
connect in a new way. It offers a more transparent mechanism 
for accounting to artists for the use of their works. And it 
might even create some cost savings for music fans.
    What could intermediaries like the record labels and 
technology companies do, and what reforms might Congress make 
to most significantly harness the opportunities offered to 
artists, especially niche artists, and their fans? And I would 
welcome responses from anybody on the panel, but let's start 
with you, Mr. Henley, and then go to Ms. Morissette.
    Mr. Henley. Well, Congress can help by fostering an 
atmosphere of openness and communications between the record 
companies and the artists. We are very concerned about fair 
compensation, not only just getting paid for music on the 
Internet but how much we get paid and what kind of licensing 
system there will be. We are concerned about who is going to 
collect these digital royalties and how they will be disbursed 
to recording artists.
    Chairman Hatch. Do you have any doubt that what Mr. Ken 
Berry and Mr. Parsons have described will also include the 
artists and the writers, the creative people in the royalty 
distribution?
    Mr. Henley. Well, I would certainly hope so. As I said in 
my testimony, up until now the dialog has only been between the 
record companies and the Internet companies, and we have been 
excluded basically from that dialog. And we would like to be a 
part of it in the future certainly.
    Chairman Hatch. Mr. Parsons, did you want to answer that 
question?
    Mr. Parsons. To be sure, Senator, the artists, as I said in 
my opening statement, it all starts with the artists. We have 
no intention of excluding them, frankly, either from the 
discussion, the ongoing discussion of how the business should 
roll out in the online world and most particularly from their 
fair share of the proceeds from this. In essence, each of the 
record companies that are signed up to this have obligations to 
their artists and to the publishers, which we fully intend to 
honor on a go-forward basis.
    Chairman Hatch. And to the writers as well? In other words, 
you are including them with the artists as well?
    Mr. Parsons. Absolutely. And I think the first bridge that 
we had to build, however, had to be to kind of create a model 
in the marketplace that, if you will, was different than the 
Napster model; in other words, a model that enabled someone to 
have a digital rights management system that you could capture 
revenues around the use of this copyrighted material, and then 
the allocation of it will be determined either in accordance 
with pre-existing contractual relationships or, frankly, in 
many instances, we will have to go back to artists, writers, 
and publishers and negotiate new terms.
    Chairman Hatch. Ms. Morissette, would you care to comment?
    Ms. Morissette. I am in support of dialoguing and focusing 
on the present and going forward with this new digital era. 
There have been dynamics in the past that have not been in 
favor of artists, to say the least. And I think that artists 
are more open to dialog, I think, now more than ever. So I am 
open to dialoguing about it, and I am open to creating new 
forms of, you know, transparency, really, of where the money is 
coming from and who it is going through, and ultimately how it 
is divided up, as I said earlier.
    So I think at this point in time, artists more than ever 
are open to being included in those dialogs and being part of 
that creation of the solution.
    Chairman Hatch. Thank you.
    Mr. Henley?
    Mr. Henley. It is important to remember what I said in my 
testimony earlier, that recording artists do not at this time 
have protection in terms of a public performance right for 
interactive services. That has to be created.
    Another concern is the issue of recoupment. As I also 
pointed out earlier, the publishers do not recoup advances 
against the writer's share of royalties. And if some sort of 
collection agency is created by the record companies, such as 
Sound Exchange, we would like to hear the record companies say 
that they will not use that collection agency as simply another 
pool from which they can recoup advances for tour support, for 
promotion, things of that nature.
    So there are a lot of excruciating details that need to be 
worked out in this new world.
    Ms. Rosen. Mr. Chairman, can I just make a comment on that?
    Chairman Hatch. Yes.
    Ms. Rosen. I don't want the Committee to be under the 
impression that there is not a copyright for certain uses. I 
think the issue that Mr. Henley is referring to is that in 
certain limited instances there is a statutory license that is 
administered collectively for radio-like Web-casting. 
Interactive services are more akin to the direct distribution 
rights of record companies, of book publishers, of film 
companies. Those are administered on a contract-by-contract 
basis. So there is no collective licensing of those rights and, 
therefore, no fear for artists about a collective body 
diverting those rights. Those rights are administered 
individually by copyright owners by contract, the same way that 
physical record sales are administered.
    So I think that there are a host of issues for individual 
record companies and their individual artists to talk about in 
terms of whether or not their contracts provide for those 
services, but the right clearly exists and it is important.
    Chairman Hatch. My time is up, but I would like to ask just 
one other question to you, Mr. Barry, and Mr. Kearby as well. 
Do the recent announcements like the ones made about MusicNet 
give you more hope that your companies will be licensed by the 
record labels?
    Mr. Barry. Well, Senator, when I heard the announcement 
yesterday, my first thought was that we ought to have a hearing 
like this every week because I think it does move things 
forward a bit. But I think there are--
    Chairman Hatch. I am game, but--
    [Laughter.]
    Mr. Barry. Permanent oversight might be a good idea.
    Senator Leahy. We will do a compulsory licensing hearing 
next week.
    Chairman Hatch. Compulsory hearings.
    Mr. Barry. I think yes, and the questions really that are 
still out there are the ones I raised in my testimony. In order 
to enable this Internet music, we are going to have to have 
rights to the entire catalogues. We are going to have to have 
rights to musical compositions as well as sound recordings. And 
I would ask Mr. Parsons and Mr. Berry whether rights to musical 
compositions are included within the licenses they are giving 
to MusicNet, for example.
    I also say that--there was a discussion about technical 
requirements, security requirements. I think those are 
absolutely appropriate. They need to be established and 
administered in a very open and even-handed basis and not to 
require technology from any particular vendor but rather be 
open standards.
    I think that, as Mr. Gottlieb said, we should have the same 
terms for all. There shouldn't be cross-licensing, as you, 
Senator, were concerned about last year, that it be an even 
playing field, as Steve said, so that, for example, the deals 
that are made between AOL and EMI are no different than the 
deals that are made generally for MusicNet.
    Then, finally, I think it is really important that we allow 
people other than the major labels to participate in these 
industry-wide structures.
    Chairman Hatch. Thank you.
    Do you care to comment, Mr. Kearby?
    Mr. Kearby. Yes, sir. I think we are encouraged by the 
announcement of MusicNet. We are concerned that unless all of 
the content is available from all of the record labels, we 
won't have a wide enough audience for this, and people will be 
stuck in a Beta and VHS land where one technology supports one 
set of record labels and another technology supports another.
    I can and should state that we are dismayed, really, to 
consider that the record labels would go and directly discuss 
with Napster licensing. We think that rewards years of illegal 
behavior, and we think that companies like Liquid Audio and 
many of our competitors who have lived by the rules for the 
last 5 years shouldn't be disadvantaged by a company that 
aggregated so many millions of consumers by providing 
intellectual property for free.
    Chairman Hatch. Thank you.
    Mr. Valenti, I am going to come back to you. I just have to 
ask this question. You know, I can see the many conflicts and 
problems here. There is no question about it. Without the 
artists, without the writers, you wouldn't have the product. 
Without the consumers, you wouldn't have any buying of it. 
Without AOL, EMI, et cetera, et cetera, you wouldn't be able 
to--artists wouldn't have a chance to get their stuff out there 
and have the funding to make things work.
    Mr. Valenti, I can't tell you how much your remarks 
impressed me here today because of what the totality of the 
entertainment industry means to our balance of trade and the 
enjoyment that people have all over the world and how America 
is the No. 1 leader throughout the world. You make that case 
very well.
    But I have been sitting here thinking that maybe there are 
some other solutions as well. If you go to compulsory 
licensing, you are talking about violations of the GATT Treaty. 
So it is not a simple thing to do. It is a very complex thing 
to do, and it is the last thing anybody really should want to 
do, in my opinion, unless, like Mr. Henley says, it is the last 
resort to resolve this.
    But I remember a number of years ago I came up with the 
idea to do an orphan drug bill. Now, you might think, what has 
that got to do with music, movies, entertainment, et cetera? 
But at the time they were developing three or four orphan drugs 
a year in the pharmaceutical industry. But we put a very small 
incentive, a tax incentive, into orphan drugs, and today there 
are well over 200 orphan drugs. And these are orphan drugs to 
help populations of 200,000 or less.
    I am wondering if there isn't some way that we could maybe 
even put some incentive into this system so that you don't have 
some of these conflicts, so that there may be a way of 
resolving all of these problems. I can see Mr. Hank Barry's 
position that if you are going to do a deal with RealNetworks 
and it is non-exclusive, why can't you do the same deal with 
him or with Mr. Gottlieb or anybody else, for that matter? If 
you do that deal, why can't the artists and the writers be 
paid, and why can't their royalties be secure? Why is there 
this conflict and this feeling?
    I think RIAA is very, very important in this whole thing. 
No question about it. You do a great service. Without you the 
industry wouldn't be as solvent or as strong as it is. So every 
one of you plays a very important role.
    I would like you all to think about this. Maybe something 
like the orphan drug incentives that created a mass of orphan 
drugs that have benefited people who would never have had those 
pharmaceuticals had it not been for us having some minor, but 
yet important, incentive.
    Now, think about it, because that may be an answer that 
might help all of you. It may be just another lame-brain Hatch 
idea. You never know. But I will do my best to try and help the 
industry.
    I don't have any axe to grind here. I want to see it work. 
I want to see it really--Senator Leahy particularly liked the 
``lame-brain Hatch idea'' phrase.
    Senator Leahy. When did this ever happen?
    [Laughter.]
    Chairman Hatch. But just think about it, would you? Then 
help this Committee, because we don't know what to do. We know 
we are going into a new age. We know that music is going to be 
disseminated in far different manners than it has ever been 
disseminated before. We know that the idea of gold records and 
platinum records is going to be a thing of the past. We know 
that online is where people are going to get most of their 
music. We know that the whole business plan or various business 
plans have got to be revised and revamped. We know that artists 
are very upset and concerned. We know that writers are very 
upset and concerned. We have seen a lot of writers who have 
discontinued their contracts because the industry is concerned. 
There are a lot of really talented people who have no chance 
whatsoever, because we can't come up with the solutions to 
these problems and provide the incentives to really help far 
more people, not just artists and writers and consumers but the 
businesses themselves.
    This is an area that I really love to consider, an area I 
really love to work on. I would really love to help all of you. 
You can see the conflicts and the disparities. Your comments on 
that, and then I will quit.
    Mr. Parsons. May I, Mr. Chairman?
    Chairman Hatch. Yes.
    Mr. Parsons. It does seem to me you have pointed out the 
tip of the iceberg of complexity around these issues. They are 
enormously complex.
    Chairman Hatch. They really are.
    Mr. Parsons. And the interests are competing at various 
levels. But I do think, back to what I was saying in my 
comments, you know, you have to have some faith in the 
marketplace in terms of working through these issues. And if 
your Committee fails to see progress, it seems to me that is 
when the yellow flags go up.
    But I submit to you that progress is being made. Progress 
is being made because--
    Chairman Hatch. It seems to be, but it also seems to be 
very slow in the making. And, you know, one of the things that 
bothers me is that music can be on the radio and royalties are 
paid and people are taken care of. It is kind of just accepted. 
Why is that not possible on the Internet?
    Mr. Parsons. I think--
    Chairman Hatch. I understand every company wants to have 
its own Web page, its own distribution system, its own right to 
control some product. But, still, it's not that way on radio.
    Mr. Parsons. I just think it takes time for those 
conflicting and competing and complex interests to work their 
way out. But the great incentive here is--frankly, we are all 
in business to make money now, I grant you. The artists are in 
business, as Don Henley and Alanis say--
    Chairman Hatch. And you are all critical to--
    Mr. Parsons.--first and foremost to create, you know, an 
artistic vision or expression. But there is a little bit of 
money underlying that as well. And we will figure it out, and I 
think we are figuring it out. And I think the MusicNet 
transaction is--
    Chairman Hatch. But do I have to hold a hearing every week 
to get this figured out?
    Senator Leahy. Well, it actually worked. You got AOL Time 
Warner and EMI to announce the Bertelsmann RealNetworks, the 
MusicNet Sounds. I mean, Lord knows what we get next week.
    Mr. Parsons. I assure you, we didn't just go to work on 
that last week.
    [Laughter.]
    Senator Leahy. I understand that the timing is great. I am 
going to have a question on--
    Chairman Hatch. Senator Leahy, I have taken way too much 
time. I apologize. But I have to say that this Committee is 
very concerned about all these issues. I don't want any of you 
to feel like this Committee is not considering your thoughts. 
But as you can see, there are a lot of different ideas here, a 
lot of different conflicts, a lot of different problems. There 
is no simple way of solving it. But I have thrown out this idea 
of perhaps some sort of an incentive that might bring you all 
together. I don't know. But I know we couldn't do anything in 
orphan drugs until we wrote this simple bill, and today there 
are millions of people being helped, small groups of people who 
never would have been helped before, and from those orphan 
drugs we have had major blockbuster drugs developed as 
extensions of them.
    So there may be some way we could do this. I hope you will 
help us.
    Mr. Barry, you look like you want to comment on this.
    Mr. Barry. Senator, I would just echo your comments. I 
think that we have a marketplace here that is extraordinarily 
slow to mature, and we have seen in the past with respect to 
the Satellite Home Viewer Act, the Digital Performance Rights 
Sound Recording Act, the Copyright Act modifications with 
respect to cable television that every once in a while Congress 
has to step in and enable these new marketplaces.
    I will just give you a quote from September 1997: ``The 
Internet presents the recording industry with tremendous 
opportunities, and already some companies are experimenting 
with the online delivery of music directly to consumers on 
demand.'' I mean, this has been--this is Carrie Sherman from 
the RIAA.
    This is a long-standing issue, and I really believe--I 
think that there is good faith on both sides here--in fact, on 
all sides. And there are many sides. But I think that this 
question of all these varying rights, the complexity of the 
rights situation is really the issue. And I know the music 
publishers are here today. I think that they are absolutely key 
to this discussion as well.
    Chairman Hatch. Mr. Henley, you have indicated you wanted 
to say something.
    Mr. Henley. Yes. Thank you, sir.
    Most of this discussion here today has been about 
distribution of music on the Internet and the digital 
revolution. I would just like to point out--and I know we don't 
have time to go into it here today, but perhaps we could come 
back another time and discuss some of these other issues. There 
are historic issues concerning problems between the artists and 
the recording industry, including copyright ownership, as 
manifested in the work-for-hire issue that has still not been 
worked out, despite a directive from the Congressional 
Committee where we had the hearing last May. So there are still 
serious issues regarding work for hire that need to be 
addressed. There are issues regarding the nature of the 
standard recording contract. There are issues such as the 7-
year statute in California, which is the crux of the Courtney 
Love lawsuit.
    All these issues need to be scrutinized by Congress so that 
the playing field can be leveled. It will be nice to work out 
the digital revolution, but we have some things going back 50 
years that we would like to come and talk about at some point.
    Chairman Hatch. We would be glad to listen.
    Senator Leahy, sorry.
    Senator Leahy. Thank you. No, I find it interesting because 
you speak of the orphan drugs and the others, but there are 
also some in the Senate--and the House, for that matter--who 
feel that we don't want to build the technology, nor could we, 
or the business model, nor could we, that we may jump-start 
everything through compulsory licensing. I am not suggesting 
that is what this Committee would do by any means, but I would 
not want anybody to leave not realizing that there are some in 
the House and Senate who feel that way. Probably one of the 
important things about having a hearing like this is to get all 
sides heard.
    Mr. Parsons, you mentioned earlier and were making the 
comment that, of course, MusicNet did not get put together 
overnight in time for this hearing, and as one of the witnesses 
said, ``Isn't it ironic?'' the announcement was made just 
before the hearing.
    My question is: When will this become real? I realize we 
had the announcement before the hearing, but when will we 
actually have MusicNet?
    Mr. Parsons. Well, good question, Senator. I think that, 
just to take a step back for a moment, these companies have 
been working toward this objective for quite some time. If 
there was a seminal event or catalytic event, I will call it, I 
would refer more to the decision of the Ninth Circuit in the 
Napster case that sort of said, look, these are the rules of 
the road going forward, now stop living in a dreamland of hope 
that somehow you can avoid the copyright laws and their 
application to the online world, and get about the business of 
creating legal models. And that is what I think put a little 
bit more fire on the efforts, because I would remind the 
Senator that we at Warner Music Group have been associated with 
RealNetworks on MusicNet for over a year, we brought the other 
guys in.
    But when will it be real? It is real now. The licenses that 
were granted to MusicNet as a result of this agreement exist. 
The terms exist. The licenses for distribution between MusicNet 
and AOL and Real exist and were signed. What still is in beta 
testing is the actual technology, the digital rights management 
technology that is going to make all of this work. Real and 
MusicNet are in their beta testing. I think they will actually 
be out in the market probably the middle of this month with 
that test, and we at AOL are looking to be marketing the 
service late summer, early fall.
    Senator Leahy. The reason I ask, somebody mentioned the 
1996 Communications Act. I remember us being told just go ahead 
and leave us as much flexibility as possible, cable rates, for 
example, will come down. They didn't. They went up. We will 
offer a lot more services. Service didn't get a heck of a lot 
better in most of the cable systems, certainly not Fairfax 
County where it is somewhere in the 50's or 60's in its quality 
and ability. I only mention that because I am familiar with 
that one as a user. I can usually get a better picture off my 
rabbit ears. But that is for some of us older people who 
remember that expression. Younger folks here won't. But I also 
think of the optimism we had about the satellite home viewer 
Act, but we are still waiting for many of the access in some of 
the rural areas, and I worry about this.
    But let me ask both you and Mr. Ken Berry, I understand you 
are going to license your music to MusicNet on a non-exclusive 
basis. Am I correct in that?
    Mr. Berry. That is correct.
    Senator Leahy. I think that is going to be good news to the 
music retailers. They have sold your music for years in brick-
and-mortar shops as well as online. They obviously don't want 
to be cutoff from your music catalogue.
    How do you respond to Mr. Farrace's concern that you may 
use your power to ``steal our customers'' and ``all retailers 
just want a level playing field and let them decide how to 
market and sell music''?
    Mr. Berry. Well, EMI Music's policy has been for many years 
to try and make our music ubiquitous. We would like the 
consumer to encounter our music in as many environments as we 
can possibly get it to. We don't assume that the consumer will 
come to us. We need to go and find them.
    To that end, we have worked closely with a lot of 
retailers, and we were amongst the first to do it, to build 
relationships so that if we were in the world of digital 
downloads, for example, we did it through retail sites.
    Now, clearly, new media does bring for the first time the 
ability for record companies to deal directly with individual 
consumers, but my expectation is that there will be many 
services offering music to the consumer, and we will need to 
service a number of different intermediaries between us and 
that consumer, some of which may indeed be retail 
organizations.
    Senator Leahy. Let me follow a little bit up on that. Ms. 
Rosen has testified that the RIAA member companies have 
licensed dozens of Web sites--we saw some here earlier--to 
provide music for downloads and for streaming, in addition, I 
think, to hundreds of statutory licenses for Web-casting. And I 
think that is a great step forward. I have said for some time 
that litigation against unlicensed sites is only a partial 
answer. You can't just say, well, we are going to close down 
sites and not provide legitimate alternatives to obtain digital 
music. People want to be able to obtain digital music, the 
beauty of having every copy exactly the same and exactly the 
same quality.
    Liquid Audio and Tower have licenses to deliver some music 
online. But Mr. Kearby from Liquid Audio and Mr. Farrace from 
Tower have expressed concern that the music most people want is 
not available through legitimate sites. Mr. Farrace says only a 
small percentage of the millions of songs available in CD are 
authorized for digital sale. And right now actually Napster may 
have the biggest offering, which I suspect is one of the 
explanations of its popularity.
    Mr. Hank Barry said, ``To this date, no service has been 
able to provide a comprehensive offering of music on the 
Internet that is licensed by the major recording and publishing 
companies.''
    So, Mr. Parsons and Mr. Ken Berry and Ms. Rosen, why isn't 
there something like the equivalent, the digital equivalent of 
Tower Records up and running, first off? And--well, let's take 
that first off.
    Ms. Rosen. Senator Leahy, I think it is important to sort 
of put this issue in perspective about the nature of the 
offerings and the timetables under which they have occurred.
    At the outset, the expectation was that people wanted a 
singles-driven online business, because that is what they 
couldn't get currently from albums. So everybody wanted to be 
able to buy singles. Gerry Kearby invented a great system--he 
has some competitors in this system--to sort of sell downloaded 
singles. All of the record companies provided those 
downloadable songs, some through aggregated partners and also 
through individual sites.
    What happened then was that Napster created a scenario 
where it was essentially everything you wanted all at once, in 
essence, kind of an ``all you can eat'' approach. The consumer 
liked that idea, you know, as other people today have said. 
They liked the idea of being able to think up any song, going 
up to Napster, and pulling it down. So the business model 
thinking has completely evolved since that time.
    But Napster a year ago said that they wanted a legitimate 
service. They still haven't been able to build one. They have 
$50 million from one of my companies. They still haven't been 
able to build a legitimate legal service. This is not easy to 
do.
    What the record companies did when the Napster phenomenon 
came on was said: This is an interesting thing and we are going 
to learn from this, because we understand how our consumers 
have started to think and started to consume music. So we have 
got to prepare our back rooms, our technology service 
providers, we have got to find legitimate partners in the space 
to help us build subscription-based services, the so-called 
``all you can eat'' services.
    That essentially started last year. That takes a lot of 
time. Hank Barry hasn't been able to get it done either. So the 
only reason he has got all the music is because he doesn't 
license any of it.
    So it has got to be very clear to this Committee and to the 
public that the evolution of the music offerings on the 
Internet have been quite thoughtful, quite deliberate, and 
really have changed with the consumer mind-set.
    The other thing that I think is worth pointing out is that 
there is not a single industry making any money on the 
Internet, except the sex business. You know, they are the only 
ones who have figured out how to actually sell products through 
the Internet. And so the fact--
    Senator Leahy. Are they on the Internet?
    Ms. Rosen. I have heard. I have heard.
    [Laughter.]
    Ms. Rosen. Although I am sure no one around here would 
actually have been a customer.
    The fact is that there is a lot of legitimate companies 
like Mr. Kearby's, like all of those ones I have showed, that 
are actually trying to compete in the marketplace, attract more 
investment capital, get more funding, and get more attention to 
their sites. It is very hard to do that in an environment where 
Napster continues to operate, No. 1. And, No. 2, as you are 
following the consumers' wants and needs, the technology and 
the assets required to back that up are enormous. I think you 
have heard these companies are committed to providing that, but 
this has not been sort of a slow process. This has been an 
evolution of consumer demand.
    Senator Leahy. You don't have any question that you 
envision a future where there will be a profitable sale or can 
be a profitable--
    Ms. Rosen. I don't have any question about it.
    Senator Leahy.--sale of music on the Internet.
    Ms. Rosen. And, to be honest, I resent Mr. Barry's 
suggesting that it is too slow when he himself hasn't been able 
to do it legitimately.
    Mr. Parsons. Before we--
    Senator Leahy. Let me get Mr. Parsons and Mr. Ken Berry, 
and then I have a question for Mr. Hank Barry who might follow 
up on this.
    Mr. Parsons. Let me just say the vision you just outlined 
is exactly what the MusicNet model is all about. Essentially, 
we, EMI, BMG--and I would point out that EMI and Warner Music 
Group are the largest publishing entities; we own the greatest 
number of copyrights out here in terms of a deep catalogue--
have essentially licensed that catalogue so that for the first 
time you now have companies with deep, rich catalogues, 
licensed catalogues, to the MusicNet service to be made 
available.
    Now, one of the reasons I said we are going to actually not 
be in the marketplace with the product is not just technology, 
but we have to clear the rights. I mean, we have gone through a 
sample, I think, of about 70,000 songs that we would put on day 
one to see with respect to that sampling--and as I have said, 
we have got over a million copyrights. So we took a sample of 
70,000. We went through to see where we have the full 
complement of rights, not just from the music companies but 
from the artists, from the writers, from all of those 
constituencies Senator Hatch mentioned a moment ago.
    We have got to clear those rights and make sure that 
whatever we turn over to be available for downloading we have 
got the rights to do that, and then the money will follow back 
to the rights owners.
    It is a much simpler task if you basically disregard or 
ignore everybody's rights. But I wanted to leave this on a 
hopeful note. The MusicNet service that we announced is exactly 
what the Senator has in mind in terms of a place you can go and 
get everything.
    Senator Leahy. Well, and keep in mind what I have said 
probably a dozen times in hearings like this and a hundred 
times elsewhere, I want the artists, the performers, those who 
have invested in them, to get a return on their investment. I 
don't want Mr. Henley or Ms. Morissette to go out and see their 
songs that they have worked hard on, that are popular because 
of their unique contribution to it, to be available free--
    Mr. Parsons. That is what takes some of the time.
    Senator Leahy. Mr. Ken Berry, you wanted to say something, 
did you, before I go to Mr. Hank Barry?
    Mr. Berry. Just to repeat a little bit what Dick Parsons 
said a moment ago, we have had to build systems in our 
respective music companies that can, first of all, digitize the 
content wherein so it can be manipulated and, furthermore, 
build systems that will track the revenue bank so the artists 
actually do get paid, which are not issues with these free 
services where our content is being given away. It is a very 
significant investment, and it clearly has taken some time.
    Of course, we do invest an awful lot in our artists' 
careers. It is not just a question of signing them. We are 
making big investments all the time, particularly in this new 
digital era, to make sure that we are set up to actually 
provide the full service through to the consumer. And clearing 
rights, as has been mentioned before by people here, is 
complicated, but we are in the process of doing it and we are 
getting the answers to this particular obstacle right now.
    Senator Leahy. Mr. Hank Barry, I believe you want to run a 
legitimate business. I don't mean that in a condescending way 
at all. I mean it very sincerely, and I have talked to you 
before. You have a brand name that can be very valuable, 
something as well-known as Coca-Cola, at least among those who 
are going to be using it, or we think of brands like Ben and 
Jerry's, coming from Vermont.
    But I also believe the record companies want to share the 
benefits of the marketplace that you happen to build, which is 
a tremendous one, provided you make your system secure, No. 1, 
and, second, compensate the artists and the copyright owners. I 
am not going into the court cases. Those are pretty clear.
    But I went back this weekend, and I went on your Web site, 
and I just wanted to check some of the things that are 
available. You can find the Lenny Kravitz song ``Again'' by 
typing Lenny Kravitz in the artist line and ``Again'' in the 
title line. You are not using any misspelled words or anything 
else. And there is a song that I believe is on Billboard's Top 
10 right now. You can find a song I like, ``Hotel California'' 
by the Eagles. You simply type these words in the appropriate 
lines. Marvin Gaye's song ``I Heard It Through the Grapevine'' 
is there. Now, that is a song that has been licensed for 
various commercial uses as well.
    Now, all those songs are copyrighted. I suspect there is 
not permission to have them there. What do you say about this? 
I mean, what do you do? Because, on the one hand, I see what 
you are trying to do. You are trying to put together an easily 
downloadable business. You agree, as I understand, with me that 
artists should be compensated. But what do we do in a situation 
like this?
    Mr. Barry. I appreciate the chance to respond to that 
because it is something that people have made a lot of 
contentions about.
    This is the matter that is before the district court right 
now. As you know, the Ninth Circuit entered an order and the 
district court fashioned an injunction to implement that order. 
We are complying with that district court order, I think in an 
objectively measurable way. We have detailed the actions that 
we have taken in three separate compliance reports to the 
district court, one of which we are submitting today.
    Since March the 5th, the total number of files available 
through the service--remember, it goes from the hard drive of 
one user to the hard drive of another--has dropped from 375 
million to under 100 million. We have blocked over 300,000 
separate songs with 1.6 million individual file names. We have 
pulled together 100,000 additional title variants, and we have 
licensed Grace Notes data base. We have also changed Napster's 
terms of use so that we are going to bar participation of 
people who attempt to bypass this filtering system.
    Now, is that enough? No. As we have seen, some songs get 
through. Is it harder to find a song? Yes. The Ninth Circuit 
said--and I think it is true--this is not an exact science, and 
we are working to make it better.
    Those are the facts. But we are not asking this Committee 
and we are not asking the court of the plaintiffs to take our 
word for it. We asked the judge to appoint an independent 
technical evaluator--and she did so last Friday--to make sure 
that we are doing everything that is possible to comply with 
the injunction. She has appointed that independent technical 
advisor, and that person is going to help to find whether we 
are acting correctly and whether the plaintiffs are acting 
correctly under the injunction. So we look forward to working 
with that independent advisor and working harder to address the 
issues that you raised.
    Senator Leahy. I have other questions for the record, but 
one last question for Mr. Valenti, because every time I mention 
compulsory licenses, I see Mr. Valenti's hair stand up on end, 
and I can't do that anymore. Because some have called upon 
Congress to step in to control the licensing for music and 
other forms of entertainment in the online space, which in the 
digital world involves your industry, Mr. Valenti, how do you 
feel about that?
    Mr. Valenti. How do I feel about--
    Senator Leahy. Compulsory licensing.
    Mr. Valenti. Well, I think we have to understand, I am not 
talking about music now because that is--
    Senator Leahy. No, I am talking about for the movies.
    Mr. Valenti. Movies alone. I think we have to understand 
that the difference between the analog world, in which we 
mostly exist today, and the binary number world, the digital 
world, in which we will exist tomorrow, is the difference 
between lightning and the lightning bug. Totally different. And 
the reason why a compulsory license won't work, will be totally 
unworkable with movies, four quick points:
    One, a compulsory license today for cable and satellite is 
defined by limited viewing areas. The cable system in 
Washington, D.C., doesn't go to Philadelphia. And if you have a 
satellite, it has to be within the footprint of the satellite. 
On the other hand, the Internet is global. It is instant at 
186,000 miles per second and it is global. And I know there is 
supposed to be technology out there to contain it, but guess 
what? It doesn't work and it is mainly, I think, what I call 
the dot-com hype.
    Second, I think that the independent producer would be 
devastated. When the independents go out to make a movie, they 
have to finance it themselves. They go outside the studio 
system. And they pre-sell their movie to various territories, 
to France, to Germany, to Japan, to Argentina. And if you had a 
compulsory license, they would be out of business. They 
couldn't pre-sell because there is no limitation on that reach.
    Third, government price-fixing never works. I was present 
in the 1976 Copyright Act, and I personally negotiated with 
your predecessor, Mr. Chairman, John McClellan. And in those 
days, I don't know how it works today, but he didn't fool 
around with Subcommittees and Committee members. He had all the 
power and, by jingo, he used it. I am sure that is the same 
way--
    Senator Leahy. Orrin does it exactly the same way.
    [Laughter.]
    Senator Leahy. Never mind, you know, being bipartisan and 
everything. He still does it the same way. I come in and I have 
to go to his office and schmooze each morning.
    [Laughter.]
    Chairman Hatch. I wish. I just wish.
    Mr. Valenti. And as a result, we started out with about 7 
percent of a cable system's revenues, and then it got down to 6 
and then 5 and 4. And every morning when you got to John 
McClellan's office, he had a new lower rate. And, finally, when 
it got to about 1 percent, I ran up the white flag because I 
thought that the Senator was going to go down to zero before we 
were done.
    As a result, today a cable system with $9 to $10 million in 
revenues pays 1.89 percent of its revenues for its compulsory 
license. On a satellite, a satellite pays 19 cents per 
subscriber for all the programming of a single broadcasting 
station for 1 month. Now, if ever I saw a thing that was 
totally out of balance, that is it.
    And the fourth thing is I think that--keep in mind that if 
you set a rate on a compulsory license for movies, you would 
have to set that rate as the potential to cover the entire 
world because that is what the Internet does, which means that 
American consumers would be subsidizing the viewing of European 
and Latin American and Asian citizens. They would be paying the 
rate so that somebody else abroad could get it free. It just 
won't work and doesn't need to work, because the movie industry 
around the world has been operating for about 70 years, 80 
years, back to 1913 when ``The Squaw Man'' came out, and it 
works in a negotiated basis around the world.
    I might add, finally, that if you look at a cable system 
today, the marketplace works. For example, MTV--
    Senator Leahy. Be careful on that. They are monopolies, 
they give lousy service, and they don't--but go ahead.
    [Laughter.]
    Mr. Valenti. I must say--
    Senator Leahy. You pay to have at least 20 preachers 
wearing bad hairpieces who sit on there and tell you if you 
will send money just to their company, you have salvation.
    Ms. Rosen. You are going to get letters, Senator Leahy.
    Mr. Valenti. Senator, I have learned one thing in my long 
and some would say checkered career. I never debate with a 
Senator.
    Senator Leahy. Of course you do, but that is OK.
    Mr. Valenti. Having said that--
    [Laughter.]
    Chairman Hatch. What do you mean?
    Mr. Valenti. Shall we move along? All of the programs, 
mostly on cable, like HBO, Showtime, USA, Lifetime, Discovery, 
TNT Movie Classics, these are all negotiated in the 
marketplace. There is no compulsory license there. All 
negotiated. So I can't speak about music or anything else, but 
in the movie business, the idea of a compulsory license is an 
idea whose time has not and should not come.
    Senator Leahy. Thank you.
    Chairman Hatch. Thank you.
    Senator Feinstein?
    Ms. Rosen. Senator Leahy, could I just add one thing on 
that with respect to music?
    Senator Leahy. Yes.
    Ms. Rosen. Sorry. A quick question. Everything that Jack 
said about the Internet being global and once it is licensed 
applies for music as well. But people should remember that 
there has actually never been a compulsory license that goes to 
the core distribution right. Any compulsory licenses that have 
ever been considered have always been in very limited areas of 
public performance, which for most--for copyrighted works are 
secondary or tertiary markets. When you talk about the 
compulsory license in this instance or the one that Mr. Barry 
or some others have suggested, you are talking about the core 
distribution right of a reproduction, and that would be a 
disaster.
    Senator Leahy. Thank you.
    Chairman Hatch. We are going to keep the record open for 
questions by members of the Committee through Friday. But we 
are running out of time.
    Senator Feinstein?
    Senator Feinstein. Well, thanks very much, Mr. Chairman.
    I think Mr. Valenti's opening remarks really in a sense 
were a tribute to copyright and intellectual property laws, 
which have really allowed this industry, all of it--its many 
complex parts--to grow and prosper and really in a sense to 
become the envy of the world.
    For my State, California, Napster was in my backyard--well, 
I guess San Mateo County--the movie industry is premier, and 
much of the foundation of intellectual property industries 
emerge in California. So obviously their protection is very 
important to me.
    It is also important that consumers are able to utilize new 
technology and do it in a way that protects these copyright 
laws.
    Now, since our last hearing, Mr. Barry, you went through a 
court case. The world is different today than it was at our 
last hearing. And I want to ask this question: I think you 
still do advocate for compulsory licenses. Is that correct?
    Mr. Barry. I think that whenever there is a feeling in the 
marketplace--and that is my contention, that there is a feeling 
in the marketplace here--then Congress has to look at it. And 
that is one of the options, I believe, yes.
    Senator Feinstein. Well, have you formulated a pricing 
structure that would adequately compensate artists, record 
labels, et cetera?
    Mr. Barry. What we are trying to do here today, Senator, is 
identify through all the varying views that are here on the 
panel and some that are in the room but not here on the panel, 
such as the publishers--
    Senator Feinstein. Could you move your mike closer?
    Mr. Barry. Oh, sorry.
    Senator Feinstein. I want to hear the fine points.
    Mr. Barry. What we are trying to do here, Senator--and 
obviously we are at the very early stages of trying to figure 
out whether this marketplace is working--is to define some of 
the rights that are involved when one goes to have a full 
catalogue of music available.
    I will give you an example. MP3.com, which is also a 
company that is located in California, in San Diego, has paid 
over $160 million in settlement fees with respect to sound 
recordings with the major labels, and yet the service 
associated with that is not available now. And that is because 
they don't have publishing rights. They don't have publishing 
rights to the catalogue that is associated with the sound 
recordings.
    And I think that if I had to name one place where there is 
really an issue in the marketplace, it is with respect to this 
complexity of licensing. I asked earlier--and I don't believe I 
have had an answer yet--whether music publishing rights are 
included within the rights that MusicNet is going to provide. 
And I would suggest to you, Senator, that getting a license 
from MusicNet without publishing rights is not going to enable 
anyone to actually have the kind of service that we are all 
saying the consumer should have. And so Mr. Parsons might have 
an answer to that right now.
    Senator Feinstein. Mr. Parsons, do you want to respond to 
that?
    Mr. Parsons. Well, yes. As I indicated earlier, on the 
MusicNet, the full complement of rights to enable the streaming 
or downloading of our catalogues--EMI's, Warner Music, BMG's--
is included in the license that we gave to MusicNet. But, 
Senator, I just think--you know, my colleague Mr. Valenti 
started this hearing off by saying, you know, intellectual 
property rights are private property rights. And when one 
thinks about a compulsory license, the hurdle that one should 
have to clear to say that I am going to abrogate the rights of 
an owner of property to determine how that property is used 
because there is some broader, overriding public interest 
applied to this space, yes, it is complicated--not that it 
can't be done because we just did it. It is complicated to sort 
through the maze of rights and to make sure the property owners 
are appropriately contacted and consented and paid.
    But it certainly doesn't rise to the level of, you know, 
U.S. Congress intervention to say that it is so important that 
people have access to the music in this fashion that we are 
going to override the rights of the copyright owners, whoever 
they may be, and provide it on some compulsory basis.
    That is why I was saying to Senator Hatch earlier, let the 
marketplace work. It is working and we are getting there, but 
the theory of Napster--and I heard the answer to Senator Leahy. 
It sounded to me like, you know, a thief who gets caught and 
then tells the judge, well, look, I am prepared to go straight 
and I will go to a trade school or whatever, but in the 
meantime, I need to continue to steal because it is all I know. 
I don't think that is a legitimate approach to this. I think 
the approach has to be to respect the rights of the people who 
own the property and to work through the complexities. I mean, 
that is what we are trying to do, and that is what we said, if 
Napster can do it that way, they, too, will be entitled to a 
license from MusicNet, which, as I say, is the full complement 
of rights that you need to stream and download the music that 
our companies offer.
    Senator Feinstein. Thank you. I would like to ask--
    Mr. Barry. Senator, I--
    Senator Feinstein. Would you like to respond to that, Mr. 
Barry?
    Mr. Barry. Well, you had asked me the question about 
whether we had a pricing mechanism in place.
    Senator Feinstein. Correct.
    Mr. Barry. And the answer is that I think that we are just 
raising the issue. This is clearly something that nobody here 
favors in the sense of we all would like the marketplace to 
work. We are all committed to that.
    But as Mr. Henley said, as a last resort we have to look at 
this. And you can look around the Internet today, and there 
isn't any service that has a comprehensive license to both 
sound recording and publishing to make that available to 
consumers. There is no Internet equivalent of ASCAP. There is 
no Internet equivalent of any clearance organization. And so 
that is the point I am raising.
    Senator Feinstein. Yes. I guess what Mr. Parsons is saying 
is, if you believe that this is private property, then it is up 
to you to work out the individual agreements to be able to put 
up that private property.
    I would like to ask Ken Berry a question, if I could. 
Napster has said many times that no one will talk to them about 
licensing, and they publicly stated that they would offer $1 
billion over 5 years to the record labels if they could get 
licenses.
    I would like to ask you: Are you willing to give Napster a 
license?
    Mr. Berry. First of all, we have had conversations, as Hank 
knows, about the prospect of having a license in the future 
when the legitimate business model is established. And, of 
course, it has not been at this time and is not expected in the 
immediate future. So we await the outcome of the new commercial 
model, and we will definitely enter into serious conversations 
about a license at that time.
    But in the offer of the $1 billion, which was a very large 
number in most people's terms understand, we believe our 
business is migrating to the Internet, and that is where our 
music will be sold. And our investments in music come to many 
billions of dollars, just as EMI, let alone my competitors, 
whether they are independents or other majors in this industry, 
and to try and take a license to basically take over the music 
space on the Internet, the amount of money involved is very, 
very significant to compensate the music companies, which is 
why there is such a negative response to it.
    But we are interested in talking about a license, as I 
heard already my colleague on the left, but a lot of companies 
have, as you say, gone straight and actually offered legitimate 
services and not tried to offer our content for free. And there 
is an issue about the fact that Napster is clearly offering our 
content for free even now, as was identified, Lenny Kravitz 
being one of our recordings. And this is a very serious problem 
for us, and we think it is very unfair on the people running 
legitimate models right now, trying to make a business. How can 
they do so in this climate where music is being given away for 
free?
    Senator Feinstein. Would Napster like to respond to that, 
Mr. Barry?
    Mr. Barry. Just one footnote, Senator. In the press 
briefing where we described our economic offer and the various 
economic offers we have been making over the last 9 months to 
the labels, we made it very clear that in the new Napster 
service there will not be the ability to export a file from a 
person's PC. So there will be limitations on burning. There 
will be limitations on exporting to a Rio device. And we told 
all of the record labels that there would be fidelity 
limitations. So you would have a media limitation and a 
fidelity limitation. So I just want to make clear for the 
record that was the context in which that offer was made.
    And I would say further that, with respect to a possible 
industry-wide licensing arrangement, we would continue to make 
those sorts of limitations, because we actually believe that 
Napster is a promotional service. Most people use it to listen 
to, sample music before they go out and buy it. And so, 
therefore, these limitations on burning and limitations on 
export were things that we clearly stated publicly at the same 
time--the same day, actually, that we made that offer.
    Chairman Hatch. Senator, could we turn to Senator Schumer 
at this time?
    Senator Feinstein. Thank you, Mr. Chairman.
    Chairman Hatch. We are running out of time, and I don't 
want to completely shortchange the second panel.
    Senator Schumer. Well, thank you, Mr. Chairman. I want to 
thank you and all of our diverse witnesses. Every time we have 
a hearing, we realize how complicated all of this is. I just 
want to say I start out from two places that a year ago I 
thought might be contradictory. I don't think they are now. One 
is that copyright must be protected. You just can't take 
people's stuff and give it away for free, no matter what your 
rationale is. Everyone would like to have for free. That is not 
how we work. And it is not fair, it is not right. And if we 
started doing that here, we could start--you know, it is music, 
it is an intangible good, but you might want to do the same 
thing in so many other places. But, second--and, again, I don't 
think these are contradictory--that digital music has to be 
made widely available on the Internet, because the Internet has 
brought so many new possibilities that it is exciting. And the 
question is how you protect the intellectual property, the 
copyright, and still use technology to give all these new 
advantages that people have.
    For me, it comes down sort of personally. Being from New 
York, we have lots of people who are artists, who are would-be 
artists--I guess no one thinks they are a would-be artist--
undiscovered artists, and lots of companies that do a great job 
distributing music. I am proud that New York is the music 
capital.
    On the other hand, you know, my 16-year-old daughter banged 
on my door one morning and said, ``Dad, you got to pass a 
constitutional amendment to protect Napster.'' The first 
political statement out of her mouth after all these years.
    [Laughter.]
    Senator Schumer. And basically what she did for me, she 
gave me the best birthday gift I ever received, which was she 
asked me my 16 favorite songs, she put them on one CD--this is 
a year ago so it was OK then, I guess--including songs that I 
had been in search of. When I was a kid, I had a crush on Rene 
Strasberg and the song ``Don't Walk Away Renee'' came out by 
the Left Banke, and I have been trying for 20 years to get that 
song on my--
    Senator Leahy. Well, there is a well-known song if there 
ever was one.
    Senator Schumer. It is a great song.
    [Laughter.]
    Senator Schumer. I won't sing it for you, Mr. Chairman.
    Chairman Hatch. Let's not knock our artists.
    Senator Schumer. I then went and asked my daughter to ask 
her friends--Mr. Henley is saying that was a junkie song, I 
think, to Ms. Morissette there.
    Mr. Henley. No. With all due respect, Senator, the word 
``Don't'' is not in the title of that song.
    Senator Schumer. Oh, ``Walk Away Renee.''
    Mr. Henley. Thank you.
    [Laughter.]
    Senator Schumer. Well, let me say this to you, sir--
    Senator Leahy. That ruins the whole story.
    Senator Schumer. I didn't want Renee to walk away, but she 
did.
    [Laughter.]
    Senator Schumer. She was only going out with college guys, 
you know.
    In any case--enough of this. In any case, I went and asked 
my daughter, I asked her, ``Would you''--I tried to ask her 
about the issue of intellectual property, which I believe in. 
And I said, ``Would you be willing to pay for this?'' I would 
be willing to pay $50 for that album, which is more than 
probably anyone would envision me being charged for it. And she 
said yes.
    And then she on her own went and asked 15 of her friends in 
high school would they be willing to pay for all of this, and 
they said yes.
    So intellectually we are no longer at a conundrum here. I 
think everybody sort of agrees that intellectual property must 
be kept and protected, and at the same time the new 
technologies must be expanded. And I think after hearing from 
Mr. Kearby and others, Mr. Parsons, Mr. Barry and Mr. Berry, 
that technology is there.
    And so the question is: How do we get there? And I am not 
sure, being a novice at this, that what we are not hearing here 
is everyone agrees to the place we ought to get, but everyone 
is sort of standing in line, elbowing, they want to be the one 
to get there first. And that is probably true of every person 
at this table.
    And, I don't know, it is hard for us who are not the 
technological experts to figure out who is right and who is 
wrong in all of that. And so I have a few specific questions, 
but I would ask the witnesses to think about this general 
question. Am I wrong in that assumption? Am I wrong in the 
assumption that we all want to get to the same place and each 
of us has a different way?
    And then you have two conflicting things here. The record 
companies, whether the big ones like Mr. Parsons and Mr. Berry 
come from, or the littler ones like Mr. Gottlieb comes from, 
have something that all the rest of you folks need. They have 
the right to do with the music what they want.
    You have the other folks, the technological people have 
copyrights and patents on their technology, but my guess is 
that there are other people who will come up with other patents 
on that, whereas nobody else will have the copyright on ``Don't 
Walk Away Renee'' and other--I mean, ``Walk Away Renee'' and 
other greater songs. So that is a conundrum as well.
    So I guess my general question to everybody here--and then 
I have three specific ones that I am going to ask, too, so I 
can get answers to those. But my general question I would ask 
to anyone to respond to, do we all think we will end up in the 
same place? And is this just a discussion as to who is doing 
it? Or is it beyond that?
    And then my specifics are as follows: one to Mr. Barry of 
Napster, and that is, you know, you want people to make deals 
with you, and yet it seems to, I guess, somebody who is trying 
to be as objective about this that you are still allowing 
people to download copyright-protected materials from Napster 
despite court orders, despite everything else. And that would 
say to me, if I were lining up to make a deal with you, I don't 
think I should. And so I would like you to answer that 
specifically. I would like to know how many people have been 
knocked off the system compared to how many people who are 
still on the system. Because if you do believe in intellectual 
property, that is a sine qua non, and I don't think you would 
have the right--I would like to see the technology that you 
have started prevail. But if you are doing that, maybe you 
shouldn't be the one sitting at the table making the deal.
    Mr. Barry. I understand, Senator.
    Senator Schumer. And the second question, a specific--and 
then I will let everybody answer all of these in the interest 
of time--is to Mr. Parsons and Mr. Berry. I think the model 
that you guys have put together is very interesting and could 
work. Two of your friendly competitors have a different model. 
How do those come together? And then, second, what do you do in 
terms of contracts with smaller companies like Mr. Gottlieb's? 
Do they get the same terms if they have produced and put the 
sweat and equity into getting a song out as the larger 
companies, or are they going to get a different type of deal 
that is not as advisable? Because I think that is important as 
well.
    In other words, let's assume the Big Five, it is, come 
together. What happens to the 17 percent of the music that is--
was it 17? Or some nice, significant percentage--that is not 
one of the big companies in terms of how they relate to this 
new technology that is going to do the music.
    So with that I would ask Mr. Hank Barry to answer my first 
question, Mr. Parsons and Mr. Berry to answer my second 
question, and then all of you to answer the general question 
that I asked, or anyone who wants to. Mr. Barry?
    Thank you for your indulgence, Mr. Chairman.
    Mr. Barry. I will start with the general question, which is 
I do think that we all see the tremendous benefit of this and 
we are all going to the same place. For me, the fundamental 
question is whether the marketplace is going to function 
efficiently to get us there. And in my remarks earlier, I gave 
some reasons why I thought it was not. Obviously other people 
have a different view. But that is my answer to the first 
question.
    With respect to the second question--and I detailed our 
compliance efforts earlier, Senator; you might not have been 
here. But let me say generally that you have to think about how 
the Napster architecture works. We don't host any files. You 
can't download a file from Napster. You download a file from 
another person who is using the system at the same time. 
Napster is a directory, an index, with community around it with 
respect to the other uses who are on the system at the same 
time you are logged on. So it is essentially a real-time search 
engine. And the challenge there--which is recognized by the 
Ninth Circuit Court. They said this is not an exact science. 
The challenge that we have in complying with the district 
court's injunction is to identify all the files as people are 
logging them in, block the ones that should be blocked, and in 
general, as I said earlier, when people are not acting 
appropriately with respect to the rules of the system, removing 
those people from the system.
    Under our previous notices, we blocked over 750,000 people 
from participating on the system under our DMCA notice regime. 
And as I said earlier, we have blocked 1.6 million files, which 
represent about 300,000 individual songs. And I did say 
earlier, Senator, that I don't think it is good enough. It is 
an iterative process, and we are working on it every day to 
make it better.
    Senator Schumer. Has it interfered with the functioning of 
Napster on the street?
    Mr. Barry. It has slowed down performance--
    Senator Schumer. I don't hear that it has.
    Mr. Barry. Well, our testing says that it has.
    Senator Schumer. Does anyone disagree with that?
    Mr. Barry. Well, people can disagree. The fundamental point 
that you make, though, is that things are still available 
through the service that shouldn't be there, and I agree with 
that. And certainly the court anticipated that when it 
appointed last week this independent technical advisor who is 
going to advise the court about whether we are doing all the 
things that are possible in order to comply with the 
injunction.
    So I think we are in agreement on the goal. The question is 
what is the way to get there.
    Senator Schumer. Does any single person want to just answer 
what Mr. Barry said? Ms. Rosen?
    Ms. Rosen. I don't think I have to get into it much, except 
that my best analogy that came immediately to mind when he said 
that was when my son is hitting my daughter and she is crying, 
and then I tell him to stop, he says, ``But, Mom, I'm not 
hitting her as hard anymore, so I don't want to stop.''
    It is sort of irrelevant, the degrees of compliance. You 
are either compliant or you are not.
    Mr. Barry. Yes, I think that is true, and if I could just 
point to a chart for a moment here with respect to our activity 
and blocking files on the system over the last 4 weeks, people 
can see that we have gone from a regime where people had access 
to about 375 million files to a regime where they have access 
to approximately 100 million. Now, that may not seem a lot, and 
if you can find the file that you want, it doesn't matter to 
you. And we understand that. And so we are going to do a better 
job, and I take Ms. Rosen's point.
    Senator Schumer. The second question to Mr. Parsons and Mr. 
Berry.
    Mr. Parsons. Very quickly, because I am aware of time, 
also. All of us in the business believe that in order for a 
legitimate service to find real success in the consumer 
marketplace, you have to have access to all the music, so that 
eventually I am sure there will be two, four--I don't know how 
many--six services up that everyone licenses, but that have 
different personalities and different other features but have 
access to all the music. But because this is America and 
because willing buyers and willing sellers in the normal course 
of commerce find each other and negotiate the terms under which 
they will do business, it just takes some time to assemble all 
that music in one place.
    So we started MusicNet with three of the majors. There are 
obviously two majors who are not in yet, and a bunch of 
independents, but our objective is to get them all into the 
boat on this platform. There will be others. Universal and Sony 
are working now on something called Duet. They haven't quite 
launched it yet, but that will be a different technological 
platform. And their objective will be to get everybody in that 
boat so that we can have competition around presenting music 
online to consumers in an easy, affordable, value-added way; 
i.e., you come to one place, you can get anything you want.
    With respect to your second question, clearly I indicated 
earlier that MusicNet will be out seeking to license not only 
the two majors but the independents. The terms of those 
licenses, however, will be negotiated in traditional, free-
market, American commerce fashion; i.e., you have got something 
I want, I have got something you want, let's sit down and talk 
about how we come together around that.
    Chairman Hatch. OK. With that, I am going to have to cut it 
off, because we have one more questioner, and then we are going 
to have to go to last panel. We are really out of time.
    Senator Cantwell. Thank you, Chairman Hatch and Senator 
Leahy, for calling this important hearing. Obviously the 
delivery of online music is testing how the marketplace and law 
can work together to bring new entertainment services to the 
many people who are here listening today.
    Obviously this whole industry is quite young, and there is 
not a lot of history guiding us in this process. We can learn 
from the past when new mediums were developed, like radio or 
television, that oftentimes those industries were rocked and 
ultimately revolutionized. And I think that is what we are 
seeing today.
    Legitimate, secure online music services are good from the 
consumer, and they are good for the economy. And the testimony 
that you have had today has tried to explain each of your 
vision on how we get there. Obviously artists, as Mr. Henley 
talked about, want more flexibility in the current business 
models. The music industry execs who have put time and energy 
into the marketing of those products want to make sure that 
investment is ultimately protected. The security solution 
providers, as Mr. Kearby is one of, have put time and energy 
into new technology and think that the technology is there and 
ready and want to see that technology is used to delivery those 
new services. And consumers rightly should benefit from not 
only the new technology, but new business models.
    So my question is, as you all now have been thrown into 
this online music sandbox and are being required to play 
together, if you will, our choices seem to be: one, as the 
somewhat supervising adults, to go back and say work it out; 
the Chairman articulated a second alternative, which would be 
to have, you know, this Committee continue to be an oversight 
and pressure point on this discussion; I don't know if I quite 
heard him right, but I think he mentioned weekly or every 
couple weeks a hearing, which seems quite extraordinary; or the 
possibility of legislation.
    Now, by comparison, I would have to say to my colleagues, 
when I think about the other new economy challenges of 
protecting personal privacy, e-commerce taxation, I would 
actually say that by comparison to those, there has been a lot 
of progress here. Now, maybe the demand for music is more 
incentive than the unknowing consumer whose personal privacy 
has been eroded. But the issues seem to me to be those three 
choices.
    So I would like to ask at least a couple of the panelists, 
others if they want to join in: How should we measure this 
progress in a real timeline? Is it possible in the next 6 
months to see full catalogues online in a business model that 
consumers would accept? And I guess what I would like to do is 
ask Mr. Henley and Mr. Hank Barry and Mr. Kearby and Ms. Rosen 
specifically to respond to this. Is that the bottom line that 
we are negotiating? Mr. Henley, you may say not--even if we get 
full catalogues online, the existing model isn't flexible 
enough for us. I mean, artists would like to have the 
opportunity to have their music in certain--or, Ms. Morissette, 
you have obviously done this already, so you have seen the 
benefit of having some music out there even in a timed-out 
version or what have you. That is good for your overall 
promotion.
    So are we going to see something in the next 6 months that 
will satisfy the consumers and the business? Are we talking 
about a model that is in the very, very near term going to 
provide that kind of benefit to consumers and the industry? Or 
are we talking about one of the other two choices of continued 
hearings or possible legislation?
    Mr. Kearby. Well, I would like to start. From Liquid 
Audio's perspective, when Chairman Hatch asked earlier, Does 
MusicNet help or hurt?, I guess the real answer to that 
question--and I hadn't thought of it at the time--was, well, I 
guess it depends on the licensing terms. And is the playing 
field level for distributor vis-a-vis MusicNet? Are we going to 
get the same pricing, therefore, be able to offer that pricing 
to our channels that MusicNet gets and offers to its channels?
    Presuming that the answer is yes and presuming that the 
publishing issues are taken care of, then my answer is yes, we 
can have a system up and running in 6 months. We always say we 
are the tool makers, not the rulemakers. We will find out what 
the rules are relative to output to portable devices and CDs. 
But, yes, a system can be put into play in 6 months that 
protects property and has a subscription service. The real 
issue is: What are the pricing concerns and what, if any, will 
the consumers, you know, require of the marketplace relative to 
those pricing terms?
    Ms. Rosen. You know, I am an optimist but I am also a free-
marketeer, and I think that the question that you ask is a good 
one. But it is also what test will this be measured by. I don't 
think that this Congress or this Committee wants to be in a 
position where people are essentially forced to go into 
businesses that are not going to be profitable, that are going 
to be money-losing, that are going to be cannibalizing. I think 
people are trying to be thoughtful about that.
    As we have said before, people are having a lot of trouble 
making successful business models on the Internet and other 
industries. So these are somewhat time-consuming.
    I think the test has already actually been passed. There 
have been a lot of market trials and a lot of experimentation, 
and the intent is serious. I am optimistic that we have long 
passed the time in the music business where people thought that 
this was a ``what if'' proposition as opposed to a ``when'' 
proposition. This is happening, if only because a more 
ubiquitous environment of legitimate music available, not 
succeeding, cedes the territory to the pirates, and we are not 
willing to do that because there is no upside to anybody to do 
that. We want to sell music. That is why we take risks on 
artists. That is our business. And so this is a place where we 
are going to do that.
    Senator Cantwell. Mr. Henley or Mr. Barry?
    Mr. Henley. Well, I hate to keep going back to this, but 
the last 15 or 20 speakers have crystallized my point about the 
artist being left out of this equation. As Alanis and I sit 
here, there is a ping-pong game going back and forth across our 
heads about business models on the Internet, when, in fact, we 
don't know how our intellectual property is going to be 
protected. We are already in disputes with record companies 
about abuses of our copyrights and our intellectual property, 
and the Internet gives a whole new array of ways in which our 
copyrights and our intellectual property can be exploited. So 
we need some statutory protection. We need some explanations. 
We need some answers about how we are going to get fairly 
compensated in this new Internet world from all the other 
people who are sitting here.
    Senator Cantwell. But I also heard you say flexibility. In 
some instances, you said you would be willing to forego those 
royalties at your own discretion. You are after flexibility--
    Mr. Henley. I didn't say I would be willing to do that. I 
said if--
    [Laughter.]
    Mr. Henley. If an artist so chooses. There are many people 
on Napster right now who want them to distribute their music 
free of charge, and that is their prerogative. Having been in 
this business about 38 years, I don't see it that way. I don't 
need the promotion. I am not a new artist. If other people want 
to do that, that is fine with me. But I don't necessarily want 
to do that. But, you know, people are free to do what--if they 
want to give their music away, that is their prerogative, but I 
don't--I didn't mean to imply that I was willing to do that.
    Senator Cantwell. So if the security solution and the 
labels are saying in 6 months we think we will have catalogues 
available, we think there will be business models that 
consumers can access--because there is a lot, obviously, online 
now. You are still saying you have concerns about the artist 
compensation that you wish this Committee would address.
    Mr. Henley. Six months sounds like a very short time to me, 
and we still don't know how this money is going to be collected 
and how it is going to be distributed to artists. And, again, 
we are unprotected.
    Mary Beth Peters, who is the head of the U.S. Copyright 
Office, has said that in the world of copyright, American 
artists are the most unprotected on the planet. And so we have 
grave concerns about how we are going to be compensated fairly 
in this brave new world of Internet. And we are not getting 
answers to those questions.
    Ms. Morissette. And I believe in the building of the new 
models is where we want to have our voices heard, because there 
is no question that not only are the new models going to be 
needed to be established, which I am hoping is going to be done 
with the three groups that I talked about earlier, but also it 
would be remiss of us not to reference, if nothing else, what 
the past models have looked like. And, you know, the dawn of 
this new digital era has shone light on all of it, which is 
part of what is exciting.
    Chairman Hatch. Well, let me interrupt here. I have to say 
that I am challenging all of you that we are going to have a 
lot more hearings if your interests aren't served, because 
without you, without the creators and the artists, we wouldn't 
have anything. Without the consumers, we wouldn't have 
anything. Without the distribution channels, we wouldn't have 
anything. And without the publishers, we wouldn't have 
anything.
    Every one of you is critical, so I am just suggesting to 
those of you who make and build these business plans that you 
make sure that everybody here is considered. And between you 
and me, I would like it to be done without the almighty hand of 
the Federal Government. I think it can be done. I agree with 
you, Mr. Parsons, that it ought to be done on a business basis. 
It does take time, but I hope that you can get it done more 
quickly.
    Let me just say before we let you all go--and I apologize 
to you for being so long--we will keep the record open for 
questions. We hope you will answer these questions because this 
is an important hearing, and the questions that we ask are 
going to be very, very important with regard to what happens in 
the future.
    I want to add that over the years I have heard from record 
companies, research companies, artists, and technology 
companies, and I want to see if there is anything we can do in 
Congress to help all of these parties in solving some of these 
problems, especially a number of important policy issues that, 
of course, have been raised by all of you. I think they are 
worthy, and they are ripe for consideration for this Committee.
    Many of these center on enhanced protections for copyright 
while improving the respect we have for artists. Now, the 
issues that I think both Senator Leahy and I would like to 
throw out to you as a consideration for you to help us with are 
as follows--or at least these are some of them:
    Number one, the public policy of limiting artists' personal 
service contracts. This is the issue raised in the Courtney 
Love litigation under California law.
    Number two, how we can ensure that the current fair-use 
rights we enjoy, such as making personal copies of a CD on your 
own hard drive or in your home, could co-exist with digital 
rights protection technologies.
    Number three, how we can provide for enhanced technological 
protections such as the recognition of watermark technology 
used by copyright owners when they provide their works over the 
Internet.
    Number four, how we can resolve these work-for-hire 
problems and issues that have been raised here today before we 
get to acrimonious litigation between the artists and the 
record labels.
    Number five, the collection and accounting of digital 
royalty rights, which appears to be a big problem here. We have 
to resolve that.
    Number six, one issue of fairness that I have heard lots 
about, which involves the ownership of Internet domain names 
that correspond to the personal names of artists. Why should 
people steal artists' names and then want to charge you to use 
your own name? That is ridiculous, as far as I am concerned, 
but I would like your advice on that. I would like to hear from 
all the interested parties how we can help resolve some of 
these issues and further the creativity of our society.
    Well, let me just say this has been a marvelous panel, and 
I know a lot of you have really sacrificed to be here. It means 
a lot to us, and I personally apologize for going so long, and 
I apologize to the next panel for it going so long. But it has 
been important, and we will continue to hold hearings that may 
elucidate what needs to be talked about in these areas.
    With that, we will recess--
    Senator Leahy. May I just--
    Chairman Hatch. Senator Leahy?
    Senator Leahy. I just want to say, Mr. Chairman, there are 
a number of these important issues. I think what Mr. Kearby 
said struck me. He wants to make the tools, not the rules, to 
paraphrase what he said. And I am not sure any of us on this 
panel would be prepared to, even if we could pass all the laws 
we wanted today in a fast-changing world like this, who knows 
just what to do. I don't have any doubt that when you speak 
about the tools, these can be done. Whatever kind of business 
model you want, any way of distribution you can do. And I 
suspect that we are going to find more and more consumer uses 
of that, whether it is down to something like this monitor and 
this mouse carrying all your records and everything else.
    But Mr. Henley points out, I think very well, that it is 
one thing if you have a starting artist who wants to give away 
as a promotion music, that is fine. They do it in a lot of 
things. They do it with ice cream. Ben and Jerry's did it when 
they first started out. But then they became a multi-million-
dollar business once people got used to it. Even well-
established artists, Mr. Henley and Ms. Morissette, if they 
have a new album out, maybe they want to direct market it, 
assuming they don't have contractual obligations; otherwise, 
they may want to give it away. Well, that should be their 
choice. But otherwise they should always be compensated. I 
mean, that is the thing we have to find out.
    I think there is great genius in Napster and MP3 and all 
the other technical applications for the Internet that have 
been done.
    As one who feels very strongly about our copyright laws, as 
one who looks even back to the beginning of this country and 
the Constitution when we talk about such issues, I want to make 
sure artists are protected. Otherwise, we are not going to have 
anything in the future. My friend from Utah has raised some 
points that are going to open up in some ways a Pandora's box, 
but I think it is not all that bad that we open it.
    Chairman Hatch. Thank you, Senator.
    With that, we want to thank you. We are going to take a 
five minute-recess. We would like to come out and shake hands 
with you while we set up the other panel.
    [The Committee stood in recess from 12:55 p.m. to 1:06 
p.m.]
    Chairman Hatch. We are privileged on this next panel to 
have Congressman Chris Cannon, my dear colleague from Utah who 
is very familiar with Internet matters.
    Then we will hear from Robin Richards, who is President of 
MP3.com, a leading Internet music distributor.
    Ed Murphy is President and CEO of the National Music 
Publishers' Association.
    Mike Farrace is Senior Vice President at Tower Records, a 
leading online and brick-and-mortar music retailer.
    Sally Greenberg is Senior Product Counsel of Consumers 
Union.
    Finally, Edmund Fish is President of the MetaTrust Utility 
Division of InterTrust Technologies, a provider of 
technological protections for copyright content online.
    We look forward to your presentations today. We are really 
out of time, and I don't want to short-change you, but I would 
like you to summarize as best you can. If you can do it in less 
than 5 minutes, we would appreciate it.
    We are going to reserve questions on the part of the 
Committee so that we can submit those in writing to you because 
this panel, in particular, should give us the best you can in 
writing as to what should be done about some of these issues.
    So with that, we will turn to you, Mr. Cannon, and we 
appreciate your patience in waiting. We appreciate all of you 
for being patient in waiting this long.

 STATEMENTS OF HON. CHRIS CANNON, A REPRESENTATIVE IN CONGRESS 
                     FROM THE STATE OF UTAH

    Representative Cannon. Mr. Chairman and Senator Leahy. I 
thank you for the opportunity to offer some thoughts on the 
issue of digital music and copyright.
    Let me start off by saying that, as a conservative, I 
believe in and respect property rights, whether the property in 
question is physical, personal, or intellectual. Around the 
globe, people read books written by American authors, watch 
movies created by American directors, and listen to songs 
performed by American artists, all because we as a Nation 
respect creativity and provide a legal framework that 
encourages it.
    As such, I cannot and will not support anyone who profits 
off other people's creativity or innovation and fails to 
compensate the creator. However, facilitating public access to 
creative works is also a key goal, one that in no way is 
inconsistent with Congress providing incentives for creativity. 
With that thought in mind, I would like to specifically address 
the the marketplace for digital music distribution.
    As you know, I have experience as a venture capitalist, 
starting more than a decade ago with Utah-based Geneva Steel. 
As e-commerce has taken hold, I have moved the focus of my 
efforts to technology. Like most venture capitalists, I have 
watched companies such as musicmaker.com and others that had 
hoped to distribute music via the Internet go out of business.
    To be sure, the failure of online music distribution to 
take hold is in part rooted in the immaturity of the 
marketplace and the lack of residential broadband access. But 
there are also troubling signs that the recording industry may 
have intentionally chosen not to license music to new entrants 
to the marketplace.
    It has been suggested by a number of observers that the 
industry may be manipulating copyright law to deprive the 
digital music market of competitive forces. If that charge is 
proven, the copyright model that the recording labels have come 
to rely upon will almost certainly require adjustment.
    Any system of distribution that increases cost to 
consumers, decreases choices, or distorts the market should be 
thoroughly examined, particularly when that system exists only 
as an outgrowth of rights to intellectual property conferred by 
Congress.
    We all know that Congress' historical approach to copyright 
law has not been static. Copyright protection is not a black-
and-white issue. From player pianos to satellite television, we 
have been willing to modify copyright to meet blockages in the 
marketplace.
    Whether the problem of digital music requires modification 
has yet to be determined. But I would hope Congress would not 
shy away from an examination of the issues merely because the 
same copyright stakeholders who sought from us the sweeping 
changes of the Digital Millennium Copyright Act 2 years ago now 
demand the absolute rigidity of the status quo.
    Clearly, everyone here would prefer a market-driven 
solution to the issue. Yesterday's announcement regarding the 
industry's new deal with RealNetworks is a step in the right 
direction. However, the fact that the new distribution service 
will be 60-percent owned by recording labels highlights the 
potential dangers of vertical integration in the marketplace. 
If anti-competitive practices are taking place, we must be 
prepared to shift our paradigm regarding copyright licensing to 
ensure a vibrant and competitive market for online music.
    The Internet continues to bring us wonderful, new 
developments, from entertainment to telemedicine. My hope is 
that as a result of vigorous competition among digital media 
companies, we will see a decline in the cost of digital music 
and other information, and with it more options for artists and 
consumers.
    Mr. Chairman, thank you for holding this hearing. I look 
forward to working with you and other members of this chamber 
and my colleagues in the House to ensure an appropriate balance 
between protection of intellectual property rights and the need 
for efficient distribution of information in the digital world.
    Thank you.
    Chairman Hatch. Well, thank you, Mr. Cannon. We will excuse 
you because we know you have other duties, but we appreciate 
having the benefit of your experience.
    Representative Cannon. Thank you.
    Chairman Hatch. Mr. Richards, we will turn to you.

     STATEMENT OF ROBIN RICHARDS, PRESIDENT, MP3.COM, INC.

    Mr. Richards. Good afternoon, Mr. Chairman and Mr. Leahy. 
Thank you for having me here today to testify.
    I heard a lot of compelling issues, I heard a lot of 
confusing issues. Some folks needed licenses and some folks 
wanted better security. Artists wanted to be paid for their 
works, as they rightfully should when they go on the Net, and 
consumers want their music in digital formats.
    I hear the new service that is coming; keyword: it is 
coming. I look at MP3.com and I look at where we have been. I 
am here to request your help because we have licenses. We have 
security that the publishing companies and record companies 
have approved. We have collection and accounting systems where 
we can account for all of the listens. We have 28 million 
users, according to Media Metric's newest survey. We pay 
artists and writers every time somebody listens to their songs.
    But the law is holding us back, and I am here to request 
your help in clarifying existing copyright law to ensure that 
the millions of Americans who have purchased CDs--and we need 
to make sure we talk about purchased CDs versus free music on 
the Internet or not purchased CDs--Americans who have purchased 
CDs be allowed to access them online whenever and wherever they 
want.
    Last September, our company's CEO appeared before this 
Committee and described our innovative online music service and 
the disputes we found ourselves in with the music industry over 
the virtual music lockers we had created for consumers so that 
they could use the Internet to play back the CDs that they buy 
from the brick-and-mortar and online retail establishments.
    Since that time, MP3.com has paid tens of millions of 
dollars to the five major record labels in the Harry Fox 
Agency, which claims to represent over 25,000 music publishers. 
Yet, after trying for nearly 6 months, we still aren't able to 
provide our listeners with access to the nearly two-thirds of 
the songs on CDs that they have purchased in the locker system.
    So what is causing this problem and what can be done about 
it? The problem we are facing in giving consumers access to 
music online--and it is a problem that will be faced by every 
Internet music provider, AOL Time Warner and Real, as well; we 
are just a little bit ahead of them--is that there is no 
practical way for us to get licenses from all the music 
publishers with copyright ownership claims on the more than 
900,000 songs in our digital library.
    Dealing with this problem will require Congressional 
action. But while Congress considers that action, we need a 
more immediate fix--the establishment of a safe harbor under 
the auspices of the Copyright Office that will allow businesses 
like ours to begin bringing music consumers the benefits that 
online technology offers, while protecting the interests of 
copyright owners. There is no contractual dispute between Ed 
and me; we are doing fine.
    Obtaining licenses for every song would be a monumental 
task even if the publishing information were readily available, 
but it is not. Even for brand new CDs, it can take up to 2 
months to track down who the publishers are. Mr. Murphy doesn't 
have that information.
    More importantly, because the Harry Fox Agency doesn't 
represent every music publisher--the last estimate was 70 
percent--and because many songs have several different 
publishers--some of our new music, hip-hop and rap, can have 10 
publishers on one song claiming a share of the rights there--it 
appears that there is no practical way for us to get the 
clearances we need through the marketplace.
    Nobody wants to buy a CD with 15 songs and find out that 
they can only listen to 4 or 5 of them, but that is the 
situation we find ourselves in. The good news is that the 
reproduction and distribution rights we need to get from the 
publishers already are subject to statutory compulsory license 
under Section 115 of the Copyright Act. It is here already.
    The bad news is that its statutory licensing mechanism 
which dates back nearly 100 years is badly out of date. Even 
though Section 115 was amended in 1995 to extend it to certain 
online activities, the Copyright Office has never established 
royalty rates for a service like ours.
    Moreover, the procedures that the Office traditionally has 
used in granting statutory licenses are cumbersome, time-
consuming, and expensive. We actually would have to manually 
search the Copyright Office's records for the names and 
addresses of the copyright owners of each of the hundreds of 
thousands of song titles on the CDs that our consumers have 
purchased and stored online. And we would have to submit a 
separate application to the Copyright Office for each song 
whose current owners could not be located. That is thousands of 
folks we can't find. Using this antiquated system for obtaining 
licenses in a digital era would completely overwhelm the 
Copyright Office, which typically handles only a few hundred 
statutory license applications in a single year under 115.
    In short, our problem in getting licenses isn't contractual 
nature, and the free market can't help. Our problem is that the 
marketplace and statutory licensing mechanisms that were 
developed in the pre-digital era simply cannot handle the 
demands of the Internet-fueled digital music economy.
    People don't want to use the Internet to store and listen 
to some of their music purchases. They want all of the music 
they own to be available online to them, and this makes sense 
and seems right. We have built a system that can allow people 
to get the added value from their music purchases that the 
Internet promises. We and other innovators who will follow 
surely in our footsteps can make it possible for your children 
to leave their CD collections safely at home when they go off 
to college, or for you to listen to any of your CDs in your car 
or on a hand-held device without toting around suitcases full 
of silver discs.
    To do these things, we need your help. Consumers need to 
know exactly what they can do with their music purchases, not 
just what they can't do. And we need Congress to reform and 
modernize the Section 115 compulsory license. We urge you to 
look to the model of the satellite and cable compulsory 
licenses which permit copyright users to submit periodic 
royalty payments into a pool that is then distributed among 
copyright owner claimants. This model gives the users of 
copyrighted works assurance that they have the protection of a 
compulsory license even if they cannot identify in advance 
every person who might claim an ownership interest in the works 
being used.
    But most importantly, we need for Congress to encourage the 
Copyright Office to create an immediate safe harbor that will 
allow companies like ours to have the protection of a 
compulsory license while waiting for Congress and the Office to 
establish rates and update the procedures for getting those 
licenses.
    We have shown that we are willing to pay copyright owners 
for licenses. We ask your assistance in overcoming the 
inadequacies of the current law and the system and marketplace 
and the statutory mechanisms for obtaining those licenses so 
that true competition can exist and music online can finally 
emerge.
    I thank you for your time.
    [The prepared statement of Mr. Richards follows:]

         Statement of Robin Richards, President, MP3.COM, INC.

    Thank you for this opportunity to appear before you this morning. 
My goal today is to describe to you some of the hurdles faced by the 
developers of on-line music technologies in obtaining all of the 
licenses that the record labels and music publishers insist are 
necessary before consumers can take advantage of those technologies--
even technologies that simply allow consumers to listen to the CDs that 
they purchase from brick and mortar and on-line retail establishments. 
In particular, I want to focus on the problems that Internet-music 
services such as ours face in meeting the music publishers' insistence 
that we obtain licenses covering the incidental reproductions that are 
inherent in enabling consumers to listen to their CDs in MP3 format. 
And, finally, I will describe an easily implemented ``safe harbor'' 
proposal that would allow the purchasers of recorded music to begin 
taking immediate advantage of some of the benefits that on-line music 
technology offers them while government and industry attempt to resolve 
larger questions regarding the application of the copyright law in the 
digital environment.
    I appear before you as part of a new industry--an industry that 
represents a new economy in the throws of tumultuous transition. I 
don't think it is an exaggeration to say its future--the jobs it 
generates, the consumers it serves and the value it brings to artists 
and creators--is greatly dependent upon your actions.
    The Internet music industry is at a critical juncture. The Wall 
Street Journal just three weeks ago put the problem in perspective. The 
Journal said, and I quote: ``The music labels are asking lawmakers to 
stay out of the digital-music fight while they roll out their own 
competing online services, and, so far, it is working.'' The article 
went on to say that Congress is not ready to intervene. ``Instead,'' 
the article said, ``lawmakers plan to keep a spotlight on the issue by 
holding hearings and publicly urging the labels to move ahead quickly 
on their own services.''
    If this, indeed, is the position of Congress, then Congress is 
doing what it has seldom done, taking the side of one segment of an 
industry against another. This is not merely a matter of Congress 
allowing the marketplace to work out its problems. The stark reality is 
that Congress is taking the side of Goliaths against David. 
Congressional inaction will, in fact, give the music industry 
conglomerates that control both the sound recording copyright and the 
copyright in the individual songs on those recordings time to snuff out 
the competing small businesses attempting to emerge in the on-line 
music service sector. There will be no competition, except among these 
conglomerates themselves, who eventually will effectively control the 
music industry from one end of the spectrum to the other.
    If that sounds alarmist, it should. Let me explain why.
    We are a premier, worldwide, Internet music service provider. We 
give up-andcoming musicians access to a market and marketing that would 
otherwise be closed to them. We assist new entrepreneurs to use the 
management tools we've developed and refined to create their own 
services and businesses. We team with radio stations to bring the music 
of their local artists to on-line listeners. We provide unique music 
and management services to retailers. We sell CDs, recommend and assist 
with hardware and software, and provide free musical greeting cards. We 
have a children's channel, too.
    I want to focus on just one of our services. In January 2000, we 
launched a service called My.MP3.com. My.MP3.com is a digital music 
storage ``locker'' service that uses MP3 compression technology to 
enable people to use Internet connected devices to listen to the CDs 
that they purchase at their local record store or from on-line 
retailers such as junglejeff.com and, in the near future, 
towerrecords.com. Today, the primary playback device for My.MP3.com 
users is their personal computer. But in the not too distant future, 
consumers will be able to use My.MP3.com to access their purchased CD 
collections using hand-held Internet-enabled devices and Internet-
connected devices installed in their cars.
    The way the My.MP3.com service works is as follows: with respect to 
a CD that a consumer already has purchased, the consumer takes the CD 
and places it in the CDROM tray of his or her computer; our ``Beam-It'' 
software then ``reads'' the CD and, having established that it is a 
real, legitimate CD release, adds the CD to a secure, personalized 
``locker'' which can be accessed by that consumer--and only by that 
consumer. With respect to CDs purchased on-line from one of our retail 
partners, the consumer can use our ``Instant Listening'' software to 
add a CD in MP3 format to his or her personal locker at the same time 
the consumer pays one of our on-line retail partners for the CD, 
thereby allowing access to the songs on the CD even before the disc is 
physically delivered.
    I want to emphasize that My.MP3.com differs from music file-sharing 
or ``swapping'' services that allow users to download, save, and trade 
music that they have not purchased. CDs can be accessed on My.MP3.com 
only for a real-time listening experience, not for downloading and 
copying. And before any CD can be accessed on our service that CD will 
have been purchased twice: once by the listener and, as discussed 
below, once by us.
    As you know, not long after launching the My.MP3.com service, we 
were sued for copyright infringement both by the major record labels 
and by certain music publishers. The problem that we faced in trying to 
defend ourselves against these lawsuits is that the Copyright Act never 
anticipated the development of a technology such as My.MP3.com. While 
Congress has made certain changes to the Copyright Act in effort to 
address the use of digital transmission technology to deliver music to 
consumers, these changes rightfully focused on concerns that ``on-
demand'' services that allowed consumers to choose what music they 
received over the Internet could lead to the widespread production and 
distribution of perfect ``pirate'' copies of sound recordings. Congress 
never foresaw--or addressed--the development of an ``on-demand'' 
service such as My.MP3.com--a service that poses no piracy threat since 
users can only ``demand'' music that they already have purchased and 
only for the purpose of receiving what essentially is a ``private'' 
performance via real-time, streaming audio, without the ability to 
duplicate, save, or share the transmissions.
    Because Congress never foresaw the development of a personal 
purchased music ``locker'' service like My.MP3.com, the door was left 
open for record labels and music publishers to argue that My.MP3.com 
was infringing their copyrights by allowing consumers to access their 
purchased CDs in MP3 format. In particular, the copyright owners cited 
the fact that instead of developing a system that requires consumers to 
convert their own CDs into the MP3 format, My.MP3.com went out into the 
marketplace and bought those same CDs and converted them for the 
consumer. According to the record labels and music publishers, the act 
of converting these CDs to MP3 format, so that consumers who had 
separately purchased those same CDs could listen them to in that 
format, constituted an act of infringement. In addition, the music 
publishers took note of the fact that when a consumer listens to a song 
from his or her My.MP3.com locker, that song is delivered to the 
consumer by means of a ``streaming'' audio technology that 
automatically makes a temporary or ``buffer'' copy of a portion of the 
song as a necessary and integral part of the transmission process. 
Although this buffer copy lasts only a few seconds and is eliminated 
once the playback of the song begins, the music publishers asserted 
that, in order to use this technology to playback a CD to a consumer 
who has purchased that CD, My.MP3.com needed a separate license to make 
and distribute copies of the song.
    In response to these lawsuits, we voluntarily ``shut down'' the 
My.MP3.com service and entered into settlement negotiations with 
various copyright owners and their representatives. Shutting down our 
service deprived consumers of the ability to access the music that they 
had purchased and stored in their on-line lockers. There is a certain 
irony in the fact that by forcing us to shut down our site, the record 
labels and music publishers undoubtedly drove many of our customers to 
services such as Napster, where they not only could find and play the 
CDs that they already had bought, but also could (and probably did) 
obtain access to a vast array of music selections without ever having 
to purchase them.
    In any event, although we disagreed with the interpretation of the 
copyright law put forward by the record labels and publishers, our 
desire to get our service back up and running led us to enter into very 
costly agreements covering all of their claims. We have agreed to pay 
for converting the CDs that we purchase into MP3 format. We have agreed 
to pay for performing both the sound recordings and the songs contained 
on those CDs.
    And we even have agreed to pay the publishers for the temporary, 
momentary ``buffer'' copy that automatically is made (and deleted) each 
time someone listens to their own music out of their My.MP3.com locker. 
Yet, today, nearly six months after signing the last of these 
agreements, we haven't been able to obtain all of the licenses that the 
copyright owners insist we must have before we can fully relaunch the 
My.MP3.com service.
    Despite what you may hear from some of the copyright owners, our 
inability to obtain the necessary licenses is not merely a contractual 
problem that can and will be solved by the marketplace. Rather, it is a 
reflection of the fact that the existing marketplace and statutory 
music licensing mechanisms--mechanisms that developed nearly 100 years 
ago--simply do not work in the digital environment. As a matter of 
public policy, it is incumbent on government to address the failure of 
these marketplace and statutory mechanisms, both through immediate 
remedial action and through a comprehensive reassessment of the 
application of the copyright law to digital music technologies.
    The particular marketplace and statutory failure that is currently 
frustrating our ability to provide the My.MP3.com service to consumers 
involves the licensing of the right to reproduce and distribute musical 
compositions, by means of streaming MP3 transmissions, to consumers who 
have bought the CDs on which those compositions appear. As I have 
indicated, we do not agree that the essentially ``private'' 
performances facilitated by our technology should trigger any 
additional copyright payments (over and above the compensation received 
by copyright owners as a result of the purchase of their works by us 
and by users of our service). Nonetheless, faced with a threatened 
onslaught of litigation, we agreed to pay the music publishers for 
making an ``incidental digital phonorecord delivery'' each time someone 
uses the My.MP3.com service to listen to one of their own CDs.
    Incidental digital phonorecord deliveries--IDPDs for short--are a 
type of ``mechanical'' reproduction and distribution requiring licenses 
from the owners of the publishing rights in the songs contained on a 
CD. Our licensing agreement was made with the Harry Fox Agency (``HFA 
''), an arm of the National Music Publishers Association that, for 
nearly 75 years, has served as the music publishing industry's 
principal clearinghouse for the administration of mechanical rights 
licenses. According to its website, HFA issues licenses, collects and 
distributes royalty payments, and audits the books and records of 
licensees on behalf of more than 25,000 music publishers who, in turn, 
represent the interests of over 150,000 songwriters.
    When MP3.com and HFA announced their licensing agreement last 
October, the joint press release proclaimed that the deal was intended 
to give us licenses for over a million songs. And, in fact, we 
immediately provided HFA with a list of over 900,000 song titles, along 
with information identifying the CD on which each song appeared and the 
name of the artist performing the song, exactly as was requested by 
HFA. Six months later, however, HFA still has not been able to issue 
licenses to us for nearly two-thirds of these songs.
    We are not suggesting that HFA hasn't tried to clear the rights to 
more songs. Rather, the problem appears to be that HFA's system for 
issuing mechanical rights licenses for its publisher members simply 
cannot handle the demands of the digital marketplace. In order for us 
to obtain a license for a particular song from HFA, we not only have to 
provide them with the song title, CD and artist, but we also have to 
know who owns the publishing rights for the song. This information is 
not readily available to the public and, to date, HFA has been unable 
or unwilling to match our list of song titles with their database of 
the songs published by their publisher-clients or to otherwise make 
available to us the information that they insist be provided on each 
license request.
    Nor is this problem limited to the songs on ``older'' CDs. Making 
newly released CDs available to consumers through the ``Instant 
Listening'' option is one of the key attractions of the My.MP3.com 
service--and is something that helps promote the sale of music. (For 
example, before we shut down the My.MP3.com service, participating 
retailers who offered their customers our Instant Listening option saw 
their sales of new releases as much as double.) But even after settling 
with the labels and publishers, we have been stymied in obtaining 
licenses for the songs on newly issued CDs.
    A good illustration (reflected in the attached Exhibit 1) is our 
experience with the new Jennifer Lopez CD, ``J-Lo.'' Shortly after 
Epic/Sony records released this CD, we attempted to make it available 
on My.MP3.com. We had obtained the necessary rights from the record 
labels with respect to the sound recording copyright and we had 
agreements with ASCAP and BMI giving us the right to ``publicly 
perform'' the songs on the CD. However, we couldn't get HFA to give us 
the required (by them) license for any of the songs. When we asked HFA 
why the songs on this new CD were not in their database and, thus, 
licensable, we were told that HFA would be able to issue licenses 
covering some--but not necessarily all--of the songs, but that it would 
take 6-8 weeks after receipt of a license request for HFA to locate the 
publishers associated with each song and get clearance. That's 6 to 8 
weeks for just one CD. Consequently, we have been unable to offer 
consumers who buy the J-Lo CD from one of our on-line retail partners 
the opportunity to use ``Instant Listening'' to begin listening to 
their purchase while waiting for the physical disc to be shipped to 
their homes. Similarly, even after the customer has the actual CD in 
hand, he or she cannot use the Beam It software to add the songs on the 
CD to his or her My.MP3.com locker.
    Apart from the problem of obtaining information matching up the 
songs we want to play with the songs owned by publishers represented by 
HFA, the difficulties we face in getting the My.MP3.com service back up 
and running are exacerbated by the fact that HFA does not represent 
every publisher and by the fact that the publishing rights in many, if 
not most song titles are held by multiple owners in varying 
percentages. For example, if you look at the liner notes of a ``rap'' 
CD--one of the most popular genres of music on-line, you will see as 
many as ten publishers on any given song. Many of these publishers may 
be impossible to locate or are otherwise unreachable.
    Thus, even if HFA granted us licenses to the song catalogs of all 
of the publishers that they represent, there will be songs in 
My.MP3.com lockers for which we do not have clearance, or for which we 
have only a partial clearance. Indeed, we have already encountered the 
situation where, after activating a song in reliance on an HFA-issued 
license, we received notice from a non-HFA affiliated publisher 
claiming a partial ownership interest in the song and objecting to its 
being made available on our service.
    In short, there is no marketplace mechanism that will allow us to 
fully relaunch My.MP3.com--thereby giving consumers access to all of 
the songs on all of the CDs that they have purchased and stored on 
their My.MP3.com lockers--without running a significant risk that we 
will be sued by unknown publishers claiming ownership rights in some of 
those songs.
    Given the potential unavailability of marketplace licenses for any 
number of songs, the obvious solution is the establishment of a 
statutory licensing mechanism. And, in fact, nearly a hundred years 
ago, Congress addressed concerns that the withholding of music licenses 
could lead to the emergence of ``a great music monopoly'' by 
establishing a statutory compulsory copyright license for anyone who 
wants to reproduce and distribute copies of a previously license--which 
originally applied to the reproduction and distributionof songs in 
mechanical formats such as piano rolls--to cover the digital delivery 
of reporductions of songs (including IDPDs), neither the statutory 
procedures for invoking the compulsory license, nor the Copyright 
Office's implementing regulations, have been adopted to meet the 
demands of the on-line music environment.
    A more detailed synopsis of the workings of the statutory 
mechanical copyright license (currently codified in Section 115 of the 
Copyright Act) is attached as Exhibit 2 to this testimony. Suffice it 
to say here that before MP3.com could claim protection under the 
statutory license, we would have to manually search the Copyright 
Office's records for the names and addresses of the copyright owners of 
every one of the nearly one million songs on the My.MP3.com service--a 
task that in and of itself is economically and practically infeasible. 
Moreover, for any song that does not have current ownership information 
on file, MP3.com (or any other on-linemusic provider seeking a 
comulsory license to a wide spectrum of musical works) would have to 
file a separate compulsory license application. This means that if 
current information is not available for merely a third of the million 
songs searched--a not improbable result given the songwriters and 
publishers are not required to notify the Copyright Office about 
changes in the ownership of a son's publishing rights, or even to 
register the copyright in the song in the first place--over 300,000 
separate filings would have to be made at the Copyright Office. To put 
the burden that this would create in some perspective, last year the 
Copyright Office processed roughly 350 Section 115 license 
applications.
    Congree cannot stand idly by and simply hope that the gridlock 
currently frustrating the relaunch of MY.MP3.com (which will frustrate 
the introduction of other services as well) will resolve itself. Many 
of you probably have seen the ad on television in which a weary 
traveler stops at a remote establishment and is offered a choice of 
every song ever recorded in every format. We are supposed to be shocked 
at this unimaginable concept. But, given the advances in digital 
technology, the idea that every piece of recorded music could be 
available at the click of a mouse is not unimaginable at all. What does 
remain unimaginable, however, is that anyone could ever track down all 
of the copyright owners in every single song and get them to agree to 
license terms. If the ``science fiction'' depicted in that ad is to 
become ``science fact,'' government must deal decisively--and quickly--
with some fundamental questions regarding the on-line use of music.
    For example, the rights implicated by the use of streaming audio 
technology must be clarified. If streaming audio is being used simply 
to perform a musical work, should the owners of the copyright in that 
work have additional rights because the transmitting entity, in order 
to render this performance, must first convert the work to MP3 format 
and because the creation of temporary ``buffer'' copies are an inherent 
part of the streaming process? We note that the Copyright Office has 
initiated an inquiry to address this issue in response to petitions 
filed by our company and by the RIAA. We hope the Office is able to 
offer some much needed guidance. But if the Office is unable or 
unwilling to do so, we urge Congress to step in and address these 
matters in a prompt and timely fashion.
    Once the scope of the rights implicated by the use of streaming 
audio technology are clarified, Congress must ensure that there is a 
practicable means of licensing those rights. In particular, if it is 
determined that the right to convert DCs to MP3 format and/or to make 
``buffer'' copies requires a license from the music publishers, 
Congress must reform the Section 115 compulsory license so that it can 
be utilized in the digital environment. We urge Congress to look to the 
model of the satellite and cable compulsory licenses, which permit 
copyright users to submit periodic royalty payments into a pool that is 
then distributed amongst copyright owning claimants. This model gives 
the users of copyrighted works assurance that they have the protection 
of a compulsory license even if they cannot identify and locate every 
person who might claim a copyright interest in the works begin used.
    Finally, Congress needs to address the rights of music purchasers. 
The public, quite frankly, is confused. At every turn the courts, 
applying statutory provisions that never contemplated the services to 
which they are being addressed, are telling consumers what they cannot 
do. It is time for government to step in and clarify what someone who 
purchases a CD can do. Specifically, Congress needs to address the 
following questions:
    (1) Can and should consumers be able to listen to their own 
purchased CDs on any digital device? In 1992, Congress enacted the 
Audio Home Recording Act, which gave consumers the right to copy CDs to 
tapes. Now questions abound about consumers' use of the next generation 
of technology, such as personal computers and MP3 players. Each new 
device or format raises a new the issue of what the law allows 
consumers to do with the music that they purchase.
    It shouldn't take a separate act of Congress to permit consumers to 
use a new gadget to listen to their music. Let's clarify copyright law 
once and for all and give consumers the explicit right to convert their 
music CDs into other digital formats for the purpose of enjoying their 
purchases on any Internet-enabled device.
    (2) Can and should music buyers be allowed to store their music in 
places where they can most easily access it? One of the benefits 
offered by digital technology is that it can make music fully portable. 
No more lugging around CDs in order to have your music collection at 
your fingertips. Imagine being able to access all of your music 
purchases from your PDA, phone, car or wherever you happen to be. This 
is becoming more of a reality every day as the world around us goes on-
line.
    Unfortunately, the drafters of the Copyright Act never contemplated 
this situation so it's subject to extensive legal debate. Music buyers 
should be rewarded with the maximum use of the music that they purchase 
with their hard-earned dollars. Let's ensure that they have the rights 
to house their music purchases in places where they can best access it. 
And let's encourage companies that build technologies to help them to 
do this faster or better.
    (3) Should CD buyers be subject to additional fees when they store 
and playback their purchased music collections? If you buy a Ford, do 
you expect you can drive it anywhere without having to pay Ford more 
money? If you buy a paperback best seller, would you be surprised to be 
billed more money based on where you read it? Can you think of any 
product you purchase outright, only to be surprised with additional 
charges in the future? In some instances, there could be fraud charges 
for selling something and then hitting the unsuspecting purchaser with 
more charges.
    Yet this seems to be where we are headed with music CDs. Consumers 
believe they are buying CDs, but copyright owners argue that, under 
current law, payments can be imposed on a consumer's use of on-line 
technologies that allow them to store and playback the music that they 
have already bought. Is a consumer truly buying a CD or is it just a 
lease they'll have to continue paying on forever? Music buyers have the 
right to demand clarity in this area. Either CDs should be properly 
labeled as a lease and future payments defined in advance, or consumers 
should be only charged once no matter how or where they listen to their 
music. This is essential for them to make informed buying choices.
    Last year we supported a bill, the Music Owners' Listening Rights 
Act, which addressed many of the questions posed above. We believe that 
the approach taken in that legislation offered an appropriate 
resolution of the rights of consumer with respect to the on-line 
storage and playback of their purchased CDs. However, we are not wedded 
to a single approach and look forward to working with Congress, the 
Copyright Office, and the music industry to clarify and confirm the 
rights of music consumers in the digital environment.
    While we believe that there is a pressing need for quick action to 
clarify and reform the process by which on-line uses of music are 
licensed (to the extent licensing is necessary), we are not naive. We 
recognize that the questions that we have posed will not be answered 
overnight. Fortunately, there is a short-term solution available that 
will give My.MP3.com and other similar on-line digital music providers 
a ``safe harbor'' from infringement claims while protecting the music 
publishers' interests. Although Congress extended the Section 115 
compulsory license to ``IDPDs'' in 1995, the Copyright Office has never 
adopted rules setting the rates or terms for invoking that license. In 
fact, the Office has expressly adopted a rule ``the adoption of such 
rates and terms.
    It is simply not right for the benefits of a statutory compulsory 
license enacted by Congress to be denied to on-line music providers 
because no rates or terms have been established for its use. We urge 
that you support our efforts to get the Copyright Office to establish a 
safe harbor mechanism whereby on-line music users can, by filing 
informational statements at the Copyright Office, obtain the protection 
from liability that compulsory licensing is intended to give. These 
statements would include the names of the songs for which protection is 
sought, together with information regarding the name of the CD on which 
the song appears, the artist performing the song, and the number of 
times that the song has been ``delivered'' to consumers. Once rates and 
terms have been established, royalty payments covering the activities 
described can be made.
    This safe harbor approach, if implemented, will immediately solve 
the problem faced by MY.MP3.com and other on-line music providers: the 
risk of being sued for using songs owned by publishers who cannot be 
identified through the existing marketplace and statutory licensing 
mechanisms. More importantly, it will allow consumers to take advantage 
of innovative technologies that increase the value of their purchased 
CDs through on-line storage and playback. Put simply, as soon as this 
safe harbor approach is implemented, we will provide the required 
information and by the next day we will be in a position to ``unlock'' 
all of the purchased music that users of the MY.MP3.com service have 
stored on-line.
    In conclusion, I would like to return to my opening comments. I 
hope that the implication in the Wall Street Journal article was not 
correct. I hope that it is no Congress' intention to allow the major 
record labels and mu8sic publishing companies to buy time until they 
drive others and us from this market, a market we created, a market we 
nurtured, a market we served. Such inaction would have catastrophic 
consequences, create an unholy alliance between government and the 
conglomerates, and set a very bad precedent.
    The confusion and uncertainty surrounding the application of 
current copyright law to new digital music services helps only the 
established music industry, which is seeking through vertical 
integration to control not only the publishing and sound recording 
rights, but also the avenues of music distribution. Innovative new 
companies such as ours languish in regulatory limbo, while the 
international music conglomerates have free reign and the time they 
need to duplicate services that we invented, we innovated, we financed, 
we marketed and we brought on line, with some of the technology we 
revolutionized.
    The real losers will be consumers, who will be denied competitive 
choices they have every right to expect. Also lost to them will be the 
spirit of innovation, invention and entrepreneurship that brought them 
this new technology and new services in the first place. It is that 
spirit that has served as the backbone of the American economy since 
the days of our founding. Small business drives our economy, not any 
looming international conglomerates that seek to control it.
    I am grateful to the Committee for scheduling this hearing and 
offering me the opportunity to describe the difficulties that we face 
in bringing the benefits and value of on-line digital music storage and 
playback to the purchasers of recorded music. I hope this hearing is 
not a placeholder. I hope it does not end with Congress believing this 
is enough while the others take advantage of our situation. I hope you 
will use this hearing as a springboard to action and find the necessary 
balance between the rights of copyright owners and the rights of 
consumers.
    Thank you.

       INTERNET MUSIC AND THE SECTION 115 ``MECHANICAL'' LICENSE

               I. THE SECTION 115 ``MECHANICAL'' LICENSE:

    What is the ``mechanical'' license? The ``mechanical'' license, 
which was first enacted in 1909 to address concerns about the possible 
emergence of a ``great music monopoly,'' and which now can be found in 
Section 115 of the Copyright Act, is a ``compulsory'' copyright license 
that allows anyone to record and distribute their own ``cover'' version 
of a previously published copyrighted ``nondramatic musical work'' 
(i.e., a song) without having to negotiate with the copyright owner for 
the right to do so. The Section 115 license also applies when copies 
are made and distributed of a pre-existing recording of a song; 
however, in order to reproduce and distribute copies of a pre-existing 
recording, an additional license (referred to as a ``master recording 
license '') must be obtained from the record label that owns the 
copyright in the pre-existing recording. The rate for the mechanical 
license was initially set by Congress and is subject to periodic 
revision by a Copyright Arbitration Royalty Panel.
    How do you obtain a ``mechanical'' license? Section 115 provides 
that, if the name and address of the copyright owner of a particular 
song can be identified from the Copyright Office's records, anyone 
wishing to exercise the statutory ``mechanical'' license to make and 
distribute copies of that song must serve a ``notice of intent'' on the 
copyright owner prior to distributing any copies; failure to serve this 
notice before distributing copies bars reliance on the mechanical 
license. The statute also requires the compulsory licensee to make 
monthly royalty payments to the copyright owner (based on the number of 
copies distributed) and to provide the copyright owner with CPA-
certified annual statements of account. The statute directs the 
Copyright Office to prescribe, by regulation, the form, content, and 
other requirements regarding service and certification of the initial 
notice of intent and the monthly and annual statements.
    If the name and/or address of the copyright owner cannot be 
ascertained from the registration or other public records of the 
Copyright Office, the notice of intent must be filed directly with the 
Office; in such cases, however, no royalties will be due until such 
time as the copyright owner has identified itself in the Office's 
public records.
    The Copyright Office has declined to promulgate ``official'' forms 
for either the notice of intent or the royalty statements. Instead, the 
Office has prescribed a set of rather detailed and burdensome filing 
requirements. The most burdensome requirement is that a separate notice 
of intent must be filed for each song for which the license is claimed. 
In addition to information about the song itself, each notice must be 
signed by an officer of the licensee, must contain detailed information 
about the licensee (e.g., the names of all of the officers and 
directors of any entity with a greater than 25% beneficial ownership 
interest in the licensee), and must be served on the copyright owner by 
registered or certified mail. For each notice that is filed with the 
Copyright Office (because the name/address of the copyright owner is 
not available), a $12 filing fee must be paid; another $8 fee must be 
paid if the licensee wants to receive an acknowledgement of the filing 
from the Office.
    The role of the Harry Fox Agency. In practice, the statutory 
mechanical license process is rarely, if ever, utilized. Instead, 
mechanical rights licenses are granted (at the statutory royalty rate) 
by the Harry Fox Agency (``HFA ''). According to its website (http://
www.nmpa.org/hfa.html), HFA represents more than 22,000 U.S. music 
publishers. Songwriters (who are the original copyright owners of the 
songs they compose) typically assign their copyright interests to 
publishing companies. The process of applying to HFA for a mechanical 
license requires a separate application for each song; the information 
required by the application form includes the name(s) of the publishers 
who hold an interest in the song for which the license is being sought 
and the percentage ownership interest held by each publisher. The HFA 
website indicates that it takes 4-8 weeks for a license to be granted 
if the application is submitted manually. When a song is released for 
the first time on CD, the labels and/or publishers don't always tell 
HFA; consequently, when an application for a mechanical license is 
filed for a new song, HFA may have to go back to the publisher for 
authorization to grant the statutory license:

     II. THE PROBLEM OF LICENSING THE ON-LINE DISTRIBUTION OF MUSIC

    In 1995, Congress sought to clarify the application of the 
``mechanical'' compulsory license to the on-line distribution of music 
by amending Section 115 to specify that it covered digital transmission 
services that make ``digital phonorecord deliveries.'' Notwithstanding 
this amendment, the ability of consumers to utilize Internet-based 
tools to enjoy recorded music continues to be frustrated by legal 
uncertainty over the scope of the Section 115 compulsory license and by 
the practical unmanageability of the current Section 115 process in an 
Internet environment. Furthermore, when it comes to the distribution of 
music on-line, neither the Harry Fox Agency nor the record labels can 
be relied upon as a surrogate for the statutory licensing process.
    Legal uncertainty. The 1995 amendments to Section 115 provided for 
the establishment of royalty rates not only for ``digital phonorecord 
deliveries,'' but also for ``incidental digital phonorecord 
deliveries'' (``IDPDs ''). Unfortunately, the neither the Copyright Act 
nor the Copyright Office's rules define what constitutes an ``IDPD.'' 
The music publishers argue that the temporary ``buffer'' or ``RAM'' 
copies typically made on a web-user's computer in order to receive a 
``streamed'' real-time Internet performance of a song constitute IDPDs 
for which the transmitting entity must obtain mechanical licenses--
separate from the licenses are needed to perform the song. Not 
surprisingly, streaming audio services, including digital locker 
services such as My.MP3.com disagree.
    In addition to legal uncertainty as to what constitutes an IDPD, 
there is legal uncertainty as how the Section 115 license is to be 
applied with respect to IDPDs. The 1995 amendments directed the 
Copyright Office to conduct a rulemaking to establish such rates and 
terms; however, upon request of the songwriters and record companies, 
the Office ``deferred'' the adoption of IDPDs rates and terms--a 
decision that remains in effect today. The Office has never explained 
the meaning of its ``deferral'' decision. For example, if during the 
deferral period a transmission service does not file a ``notice of 
intent'' before making IDPDs of a particular song, does the service 
lose any right to rely on the mechanical compulsory license after the 
deferral is lifted? Are transmission services immune from liability for 
IDPDs made during the deferral period or will the rates adopted when 
the deferral is lifted apply retroactively?
    Practical unmanageability. Even if there was no uncertainty as to 
what constitutes an IDPD or as to the significance of the Copyright 
Office's deferral of IDPD rates, the Copyright Act and the Copyright 
Office's rules erect insurmountable practical obstacles to the use of 
the license by Internet-based music providers who are deemed to be 
making IDPDs. The problem is that an on-line digital locker service 
such as My.MP3.com, which allows consumers to access streamed 
performances of their personal music collections on any Internet-
enabled device, needs clearance for literally hundreds of thousands of 
song titles.
 As a prerequisite to obtaining a compulsory mechanical license 
        under Section 115, MP3.com would have to manually search the 
        Copyright Office's records for the name and address of the 
        copyright owner for hundreds of thousands of song titles (or 
        pay someone to conduct such a search).
 The Copyright Office currently charges $65.00/hour to search 
        its records (with an estimated time to conduct a search of 
        between 8 and 12 weeks)
 It is likely that, for a substantial number of song titles 
        (totally in the tens, if not hundreds, of thousands), the 
        Copyright Office records will not reveal the name and/or 
        address of the copyright owner. For each of these titles, 
        MP3.com would have to submit to the Office a separately 
        prepared and signed ``notice of intent'' along with a $12 
        filing fee per notice.
 Even where the Office's records identify the name and address 
        of the copyright owner, it is a virtual certainty that the 
        records for thousands of songs will be out-of-date and that 
        notices sent to the listed address will be returned as 
        undeliverable; in such cases, MP3.com will have to file with 
        the Copyright Office each returned notice, along with evidence 
        of the attempted service.
 And, finally, as for the songs for which accurate addresses 
        can be obtained, MP3.com will have to prepare and serve, via 
        registered or certified mail, separate notices for each title, 
        and will have to submit monthly payments and CPA-certified 
        annual accounting statements for each title.
 In short, compliance with the current Section 115 procedures 
        is not feasible, either practically or economically. And if 
        MP3.com did try to follow the existing procedures, the 
        Copyright Office would end up being buried in an avalanche of 
        paper that it could never process.
    On-line music distributors cannot rely on The Harry Fox Agency and/
or the record labels as an alternative to the Section 115 compulsory 
license process. As noted above, distributors of recorded music 
traditionally have obtained mechanical licenses through the Harry Fox 
Agency rather than through the statutory processes established by 
Section 115 and the Copyright Office's rules. However, when it comes to 
on-line distribution of recorded music, neither the Harry Fox Agency, 
nor the record labels can be relied upon to provide a workable 
alternative to statutory licensing.
    In October 2000, MP3.com, which had been accused of making unlawful 
digital phonorecord deliveries by certain music publishers, entered 
into a widely publicized settlement with those publishers and with the 
Harry Fox Agency. In the joint press release announcing the settlement, 
the publishers characterized the agreement as a ``landmark proposal'' 
that the Harry Fox Agency could ``refer to the music publishing and 
songwriting community with confidence and enthusiasm.''
    More than five months later, the Harry Fox Agency has been able to 
give MP3.com mechanical licenses for only a fraction of the nearly one 
million song titles owned by its publisher-principals. Nor has MP3.com 
been able to obtain publishing information or clearances from the 
publishing subsidiaries of the major record labels, despite having 
entered into separate settlements with each of those labels.

                               CONCLUSION

    Given the unwillingness and/or inability of the publishers and the 
record labels to provide Internet music distributors with the 
mechanical rights that allegedly are necessary to operate their 
businesses--rights that are supposed to be subject to ``compulsory'' 
licensing--and given the practical impossibility of complying with the 
prerequisites for that ``compulsory'' license, it is clear that 
Congress must seriously consider major reform to Section 115 in order 
to ensure that the public is able to enjoy the benefits of innovative, 
on-line music technologies such as My.MP3.com.

[GRAPHIC] [TIFF OMITTED] T7094.018

[GRAPHIC] [TIFF OMITTED] T7094.017


    Chairman Hatch. Thank you, Mr. Richards.
    Mr. Murphy, we are glad to have you here.

 STATEMENT OF EDWARD P. MURPHY, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, NATIONAL MUSIC PUBLISHERS' ASSOCIATION, INC.

    Mr. Murphy. Thank you, Mr. Chairman, and thank you for your 
ongoing participation in efforts to help the creative community 
and the songwriters and publishers.
    Mr. Chairman, you have asked whether online entertainment 
will be coming soon to a digital device near you. For music, 
the question is not whether it is coming; the music is here. 
Our members have licensed more than 30 enterprises, most of 
them fledgling businesses less than 5 years old, to distribute 
recordings of music over the Internet. Among them are eMusic, 
MP3.com, and MusicBank. These companies have chosen to respect 
the rules laid down by Congress by obtaining licenses and 
paying compensation to the copyright owners.
    These licenses demonstrate that the music publishers are 
committed to licensing their music on the Internet, and confirm 
that Congress has provided us with sufficient flexibility to 
license new and innovative music services. In this connection, 
I understand that MP3.com has said here today that music 
publishers have not issued licenses under their settlement 
agreement. This is not totally correct. HFA has deemed MP3.com 
to hold interim licenses for virtually every song in our 
publishers' repertoire. This amounts to more than 600,000 songs 
that are available right now to be used by My.MP3.
    NMPA and HFA have also agreed to extend these interim 
licensing agreements, and promised not to support any lawsuits 
against MP3.com while the parties hammer out the final details 
of processing individual license requests for each song that 
MP3.com wishes to make available on its service.
    We are committed to devoting whatever resources are 
necessary to help MP3.com support proper licensing requests. 
The challenge is to put Humpty Dumpty back together again after 
the fact because, as you know, MP3.com did not follow the usual 
process of requesting licenses before making our songs 
available. MP3.com submitted more than 600,000 license requests 
at one time, and HFA typically processes about 250,000 licenses 
per year on behalf of the entire recording community. But this 
can be done and we are doing it.
    Music publishers believe that users of music must compete 
in the marketplace on a level playing field by following the 
rules of the road. Congress clarified the rules of the road on 
the Internet by confirming in the Digital Performance Right in 
Sound Recordings Act of 1995 that songwriters and music 
publishers had exclusive rights to make digital phono 
deliveries. In doing so, Congress gave us the flexibility to 
license business models that no one could have anticipated 6 
years ago.
    Unfortunately, many Internet music services, most notably 
Napster and its imitators, are flaunting the rules established 
by Congress. By refusing to obtain licenses to pay copyright 
owners required by Congress, Napster and its imitators are 
placing our licensees at a potential fatal competitive 
disadvantage. Many of our licensees are feeling the squeeze and 
are under intense financial pressure from Napster.
    Mr. Chairman, the situation is frankly really outrageous. 
Businesses that respect the rules of the road should not be 
penalized because a few irresponsible parties ignore the speed 
limit. The music publishers' lawsuit against Napster is all 
about restoring a level playing field. We do not object to 
peer-to-peer technology, as such. However, our members do 
object to Napster's business practices.
    Napster built services on the premise that music creators 
should provide content for free. It is teaching an entire 
generation that music has no value on the Internet. Two Federal 
courts have now concluded that Napster is facilitating 
copyright infringement on a scale that is without precedent.
    While Napster has acted disreputably, those who seek to 
imitate Napster truly have no excuse. Now, Napster wants music 
creators and copyright owners to bear the expense of monitoring 
the Napster service. While many are quick to jump on the 
Napster bandwagon, if copyright owners are no longer to be 
compensated for their creative efforts, they must not bear such 
a burden. In the long run, far fewer songs will be written, and 
obviously we will all be the lesser for that.
    Finally, in the wake of the Ninth Circuit decision, Napster 
here today suddenly sees compulsory licensing, whether 
established by Congress or the courts, as a solution. 
Compulsory licenses, however, were available to Napster for our 
members' songs before it launched its service. Napster simply 
did not avail itself of them. With due respect, Napster is 
being, I think, very disingenuous.
    We remain cautiously optimistic that Napster will comply 
with the district court order. We look forward to working with 
Napster in this regard, and with MP3.com. It is conceivable 
that Napster will choose to comply with its obligations and 
obtain licenses, but we are not there yet.
    In sum, Mr. Chairman, laws passed by Congress continue to 
serve the intellectual property community, including music 
creators and music users alike. There is no need to fix, as we 
say, what ain't broke.
    I thank the Committee for this opportunity to testify. I am 
happy to answer any questions in writing later. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Murphy follows:]

 Statement of Edward P. Murphy, President and Chief Executive Officer, 
              National Music Publishers' Association, Inc.

    Good morning, Mr. Chairman, Senator Leahy and members of the 
Committee. I am Edward P. Murphy, President and Chief Executive Officer 
of the National Music Publishers' Association (``NMPA ''). On behalf of 
the more than 700 members of NMPA that own or control the majority of 
the musical compositions licensed for manufacture and distribution as 
phonorecords in the United States, I want to thank you for inviting me 
to testify today about music publishers' successful efforts to license 
their music on the Internet and to guarantee a level playing field for 
all of our licensees. Songwriters and music publishers have long been 
enthusiastic about the Internet's potential, and are working hard to 
get their music to the millions who log on to the Internet every day.
    Nearly a century ago, a new technology emerged that changed the 
music industry forever. The new technology was the piano roll--
essentially long perforated sheets that operated a player piano's keys. 
One piano roll company attempted to acquire exclusive rights to 
virtually every musical composition. To make sure that musical 
compositions were widely available for reproduction as piano rolls and 
in other media and technologies, Congress enacted a compulsory license. 
A compulsory license means that once a sound recording of a copyrighted 
musical work is made and distributed with permission, anyone else can 
obtain a statutory license from the copyright owner.
    The Harry Fox Agency, Inc. (``HFA '') was founded in 1927 and today 
operates as an industry service subsidiary of NMPA. HFA acts as agent 
for more than 27,000 music publishers in licensing their musical 
compositions for reproduction as CDs, cassette tapes, LPs and digital 
phonorecord deliveries, as well for use in motion pictures and other 
audiovisual productions. Over the years, Congress has repeatedly 
recognized and affirmed HFA's role in negotiating on behalf of its 
music publisher-principals. HFA is the place everyone knows they can go 
to get a license to make phonorecords. With HFA, songwriters and music 
publishers are poised to license music for use on the Internet.
    Thanks to Congress, the rules of the road for the use of music on 
the Internet also have never been clearer. With passage of the Digital 
Performance Right in Sound Recordings Act of 1995, Congress confirmed 
the exclusive right of song owners to transmit (or authorize others to 
transmit) phonorecords of their works over the Internet known as 
digital phonorecord deliveries, or ``DPDs.'' Congress expressly made 
DPDs subject to compulsory licensing in the same manner as CDs, 
cassettes and LPs. If a record label or Internet music company follows 
the rules of the road, the toll that must be paid is a fair and 
reasonable one: now just seven-and-a-half cents per download.
    In that connection, Mr. Chairman, you have asked whether online 
entertainment will be ``coming soon to a digital device near you.'' For 
music, the question is not whether it is coming--the music is here. 
Indeed, our members have licensed more than thirty enterprises, most of 
them fledgling businesses less than five years old, to distribute 
recordings of music over the Internet. Among them are Emusic and 
MP3.com and Musicbank. These companies have chosen to respect the rules 
laid down by Congress by obtaining licenses and paying compensation to 
the copyright owners. These licenses demonstrate that music publishers 
are fully prepared and poised to license any Internet music service if 
it observes the rules Congress has set.
    Unfortunately, many Internet music services, most notably Napster 
and its imitators, have flouted the law that Congress enacted and are 
making a mockery of these rules. Two federal courts have now concluded 
that Napster is facilitating copyright infringement on a scale that is 
without precedent. And while Napster has acted disreputably, those who 
seek to imitate Napster in the wake of those decisions truly have no 
excuse. By refusing to obtain licenses and pay copyright owners as 
required by Congress, Napster and its imitators are placing music 
publishers' law-abiding licensees at a substantial competitive 
disadvantage. Many of our licensees are feeling the squeeze and are 
under intense financial pressure from Napster. Mr. Chairman, the 
situation is, frankly, outrageous. Why will anyone want to get a 
license, if that will only put the licensee at a potentially fatal 
competitive disadvantage? Businesses that respect the rules should not 
be penalized because a few irresponsible parties willfully ignore the 
speed limit.
    The music publishers' lawsuit against Napster is about restoring a 
level playing field. We do not object to peer-to-peer technology as 
such; however, our members do object to Napster's parasitic business 
practices. Napster does not pay for content, bandwidth or storage for 
its music service. Napster claims that it has the right to make its 
shareholders Internet billionaires, but its service was built on the 
premise that music creators should provide the content that draws 
consumers to Napster's service for free. Now Napster wants music 
creators and copyright owners to bear the expense of monitoring the 
Napster service. While many are quick to jump on the Napster bandwagon, 
if copyright owners are no longer to be compensated for their creative 
efforts and must bear such burdens, in the long-run, far fewer songs 
will be written. Consumers will be the ultimate losers.
    Remarkably, in the wake of the Ninth Circuit's affirmance of the 
District Court's issuance of a preliminary injunction, Napster now sees 
compulsory licenses whether established by Congress or the courts--as 
the solution. Songwriters and music publishers find this to be 
disingenuous because Napster chose to flout the rules prescribed by 
Congress for obtaining a compulsory license in the first place.
    There are precedents, of course, where companies have ceased their 
infringement and moved to respect the rules established by Congress. 
The most notable, recent example is MP3.com. MP3.com copied tens of 
thousands of CDs and placed copies of the sound recording tracks on its 
computer servers to offer the MyMP3 interactive music service in 
January 2000 without first obtaining licenses. After litigation, the 
music publishers and MP3.com entered into a landmark settlement 
pursuant to the compulsory license provisions of the Copyright Act. The 
settlement provides for payment of compensation for past acts of 
copyright infringement and a forward-looking license for the MyMP3 
service.
    In this regard. MP3.com raises two issues relating to licensing 
musical compositions in connection with its MyMP3 service:
    First, MP3.com has expressed its concern regarding the availability 
of a compulsory license for subscription music services because there 
is no current rate in effect. The compulsory license provisions 
specifically contemplate that owners of musical works will negotiate 
and reach private agreements as new business models arise. Pursuant to 
those provisions, MP3.com has obtained a license with specified rates. 
Representatives of the recording industry, the digital media companies 
and NMPA are currently exploring a range of options for licensing these 
types of services. If a resolution cannot be reached as to appropriate 
rates, Congress provided that such matters will be addressed by 
arbitration before a Copyright Arbitration Royalty Panel. If lower 
rates are agreed upon in a broader consensus or are determined by a 
Copyright Royalty Arbitration Panel and are adopted by regulation, MP3 
will receive the benefit of those terms under the ``most favored 
nation'' provision in its settlement agreement with the music 
publishers, thus preserving a level playing field.
    Second, MP3.com has expressed its concern over the difficulty it 
has encountered in preparing proper license requests. Accurate 
licensing information is necessary to make sure the proper copyright 
owner is paid for the use of its musical work and the legislative 
proposals suggested by MP3.com would not eliminate the need for 
accurate information. To help MP3.com identify the music MP3.com had 
already put on its service, HFA has provided MP3.com with an electronic 
copy of its licensing database, something HFA had never before provided 
to any record company or any other licensee. And NMPA and HFA have 
provided MP3 written assurance they will not support any litigation 
against the company while both work in good faith to address these 
problems.
    Finally, we agree with MP3.com that HFA could better serve MP3.com 
and other music service providers if the lag time between the release 
of a new recording and the submission by the record company of its own 
license requests were substantially shortened. We will continue to work 
with MP3.com and with the record companies to make improvements in this 
area.
    In sum, we believe that the compulsory license provisions already 
in existence for musical compositions are sufficiently flexible to 
address the new business models that crop up every day on the Internet. 
A level playing field, however, is essential so that Internet music 
services have every incentive to obtain licenses and compensate 
songwriters, and so companies that do so are not penalized for 
following the rules of the road.
    I thank the Committee for this opportunity to testify.

    Chairman Hatch. Thank you, Mr. Murphy.
    Mr. Farrace?

   STATEMENT OF MIKE FARRACE, SENIOR VICE PRESIDENT, DIGITAL 
         BUSINESS, TOWER RECORDS/BOOKS/VIDEO, MTS. INC.

    Mr. Farrace. Thank you, Mr. Chairman.
    Along with its competitors, Tower Records plays an 
important role in assuring that the consumer benefits from 
vigorous competition in the marketing and sale of recording 
audio and video products. Right now, we think the law provides 
a good balance between copyrights and competition, but it may 
not in the future.
    The law gives copyright owners incentive to create, but 
gives balance to the process by granting owners of copyrights 
broad rights to distribute those creations after the first 
sale. It is these checks and balances that keep competition 
keen. And as I will mention in a moment, if intellectual 
property owners had the right to control copyrights years ago 
the way they propose to do so now, there would be no used 
books, no lending your records to a friend, no video rentals, 
and no donations of recorded products, software, or even books 
to libraries or schools.
    About 5 years ago, a friend sent me one digital song file 
which took me about 3 hours to download, but it was still one 
of the most exciting things I had ever done. A couple of years 
later, our company got T1 access and the resulting increase of 
download speed convinced me that we were on the threshold of 
the most incredible period in our history. The promise of 
instant access, portability like never before imagined, rich 
multi-media add-ons and all the rest was irresistible. This was 
the chance of a lifetime to provide our customers with the best 
possible experience.
    We did download experiments with our record company 
partners, mostly free promotions. At the same time, we started 
working with new digital companies like Liquid Audio to build 
digital retailing tools and to integrate digital sound files 
into our business.
    As a result, we can now add secure, watermarked digital 
files to an Internet shopping basket that contains physical 
goods like CDs or DVDs. We can accept virtually any form of 
payment. We can reconcile the charge, provide refunds, issue 
credits, replace defective merchandise--all the stuff retailers 
do. So we have a system that works.
    We have been selling downloads for almost 4 years now, and 
though the technology continues to evolve and improve, the 
rocket science part is over. The members of the retail 
community know how to send a secure digital sound file safely 
and securely without running the customer through a gauntlet or 
invading their privacy.
    We have made it clear to record companies that we are ready 
and willing to go into business with them. We have demonstrated 
that we are willing to work on solving any digital dilemmas, 
and they know we want to play by the rules. But quite honestly, 
we are puzzled by some of the rules which are unfriendly to 
customers and retailers.
    Particularly worrisome is that some companies require 
individual personal data from the consumer in order to access 
the content. Virtually all the companies interrupt the 
transaction process in some way to gather customer information. 
Only one company does not, and none of the others will promise 
not to use this information to solicit our customers directly 
in the future.
    So what is wrong with this picture? We market to and 
acquire the customer, then are forced to violate their privacy 
and damage our relationships, which are requirements just to 
get the merchandise we want to sell. So you may see why we are 
concerned.
    We are a one hundred-percent permission-based company. We 
never send e-mails to our customers without their permission. 
So, naturally, we think requiring customers to submit their 
individual personal data to access a recording they are paying 
for or enticing them while we are trying to conduct business 
with them is unfair.
    We have the same concerns about the rules our customers are 
being asked to agree to. These end user license agreements 
which aren't even seen by the customer until after they have 
paid for the music can be downright oppressive. Some have had 
outrageous restrictions written by lawyers who saw people as 
thieves instead of customers. And although we deal with our 
fair share of theft, this is not the way we choose to perceive 
our customers, nor is it the way we want them to perceive us.
    These click-through agreements are awkward, confusing, and 
they create serious customer service issues for companies like 
Tower. It is like someone else is standing behind our cash 
register, free to create customer service policy on our behalf 
and even sell to our customers directly. We must control this 
relationship that we have spent so much time and energy and 
money cultivating and which is at the core of our commitment.
    So these barriers to broad access lead us to question 
sometimes the motives of our suppliers. We worry that all this 
talk and activity about protecting the music is really about 
controlling lawful use and cutting retailers out of the 
marketplace.
    The deals record companies are pursuing are with each other 
or with new or small companies that they may end up owning. 
They say they want us in this business, but they don't honor 
our privacy policies or make systems simple enough for users. 
Instead, Bertelsmann buys CDNow, which has a strategic 
relationship with Time Warner, which is trying to cross-license 
with Sony, which is building a subscription service with 
Universal, which has a joint venture with BMG. That is four out 
of the five major suppliers, and the fifth one, EMI, has been 
for sale all year. And similar announcements are coming from 
the movie studios.
    Our suppliers have the right to get into retailing, and we 
recognize that and we are not afraid to compete with them. But 
it is not fair to let these companies use their power over us 
to steal the customers and ultimately steal our business. 
Retailers need rules that protect competition.
    I am speaking just for Tower today, Mr. Chairman, but if 
you ask Pam Horvitz at NARM, which is the association that 
represents music retailers, or Bo Anderson at VSDA, which 
represents video retailers, they will tell you that all 
retailers just want a level playing field that lets them do the 
marketing and the selling, and I think that is what our 
Government wants also.
    The bottom line, in conclusion, is that we are frustrated 
by the progress that has been made so far. We are sympathetic 
to the record companies' worries about piracy in cyberspace. We 
understand their fear of losing control of assets. We 
understand that this could endanger their profitable durable 
physical goods distribution system. Believe me, we understand 
that, too, but it is time to get out of each other's way a 
little and go to work.
    I thank you for inviting me to testify today and I am happy 
to take any questions later. I have summarized this testimony 
here, but I have submitted the written testimony to be put in 
the record.
    Chairman Hatch. Without objection, we will put all full 
statements in the record. That is for sure.
    [The prepared statement of Mr. Farrace follows:]

  Statement of Mike Farrace, Senior Vice President, Digital Business, 
                 Tower Records/Books/Video, MTS., Inc.

    Good morning. My name is Mike Farrace, and, among other things, I'm 
responsible for digital business at Tower Records. Tower started out as 
a single store selling records in Sacramento, California in 1960. 
Today, we own and operate 189 stores in 17 countries not counting 
franchises, and we sell books and movies as well as music.
    We're famous for a couple of things: great selection and knowing 
what we're talking about. Every record in stock and every kid roaming 
the sales floor represent investments in customer satisfaction. We 
stock an amazing variety of recordings, and the people we employ are 
there because they love records. We open early, stay up late, make our 
stores beautiful and work our tails off to make music lovers happy.
    We find out what people want, and we sell it to them the way they 
want it. Our stores have been in the thick of every musical revolution 
since 1960. We've managed at least 13 physical configurations of audio 
playback media and at least four video formats during that period. 
We've sold vinyl albums and 45s, Eight Tracks, Four Tracks, Reel to 
Reel, Cassettes, Compact Disks, Digital Compact Cassettes, MiniDiscs, 
CDR, Enhanced CD, CD ROMs Mini CDs and probably a few formats I've 
forgotten. We were the first U.S. music retailer in Japan, the first to 
publish our own magazine, and the first traditional reseller with an 
online record store. We were among the very first to embrace LaserDisk 
and later DVD. Sometimes these investments turn out to be great. 
Sometimes they don't. But we keep trying because that's what we do. 
We've never been shy.
    We're where the record labels turn when they're trying to break new 
music, which is the hardest job of all. We've done many thousands of 
promotions in support of bands in almost every conceivable genre of 
recorded sound, including ones for Don Henley and Alanis Morrisette. 
All the in-store performances, display contests we run, and crazy 
things we've asked our stores to do have helped sell a lot of records, 
and helped establish careers for these artists.
    While, without a doubt, we are completely dependent on the artist 
and the customer for our livelihood, because of the way the record 
business works, we are also dependent on labels and distributors. We've 
had many battles over all kinds of things with our suppliers. We've 
gone toe to toe about terms and support. We've wrestled over more 
complex issues, like whether ``12 CDs for a penny'' record clubs are 
really fair play, or whether embedding a hyperlink on a CD, which is a 
couple of clicks from a reseller that isn't us, and is sometimes the 
supplier, isn't just a bit devious, and unfair.
    Of course, the record companies could probably add a few pet peeves 
about us. But together, we manage. In the best of times, it's a 
privilege to be a partner in the chain to creative works that please so 
many people, and a pleasure to work with the people that create and 
distribute it.
    We've been a good partner so far in the music industry, and we want 
to continue to be a good partner in the digital age.
    Five years ago, someone I knew sent me a digital song file. I was 
convinced we were on the threshold of one of the most invigorating and 
fulfilling periods in retailing history. The promise of instant access, 
portability like we never imagined, rich multimedia addons and all the 
rest was irresistible. If our core values included giving the customer 
the best possible experience, this was the chance of a lifetime.
    We started working with new digital companies, (one of which--
Liquid Audio--is present here today), to integrate digital sound files 
into our physical goods systems. In the last five years, we've used 
over a dozen audio codecs and four digital rights management systems. 
We have seen at least a half-dozen secure bonafide digital delivery 
mechanisms and have implemented two.
    As a result, we can add secure, watermarked digital files to a 
shopping basket containing physical goods and can accept a wide range 
of payment forms. We can provide samples on virtually every song in our 
database. We provide reports ranging from basic sales and traffic to 
incredibly detailed user behavior statistics where we have our 
customer's permission. We use digital special ordering and sampling in 
some stores and will continue to roll out even more services in the 
coming months. We have a system that works. We've been selling 
downloads for almost four years and while the technology continues to 
improve, the rocket science part is over. We've shown record companies 
that we're willing to work with them on digital distribution. The only 
thing missing is a big press conference to announce we have all the 
content.
    So far we've had something around 100,000 downloads available for 
both sale or promotion from a handful of companies including Liquid 
Audio, EMI, Warner and Sony. But as a retailer, I don't think my 
digital offering is very attractive. First of all, there isn't much of 
a selection. There are tens of millions of songs available on compact 
disk around the world, and only a small percentage have been authorized 
for digital sale. Our Internet experience has taught us that selection 
equals sales. Our first online store in 1995 started with just 20,000 
titles. All things being equal, sales increased consistently with 
selection. Today, towerrecords.com offers well over 500,000 titles--
something like 5 million songs. We want the digital equivalent of that.
    Second, the suppliers use disparate delivery systems, each one 
unique, requiring the download of special software and the use of a 
specific digital rights management provider. It's like requiring the 
retailer to have a different cash register for each distributor not to 
mention a plethora of separate steps and confirmation emails to the 
unfortunate customer who actually wants multiple songs from more than 
one company.
    We've always played by the rules, but today we're puzzled by the 
rules. Particularly worrisome is that some companies require personal 
data from our customers. They insist on actually possessing the names, 
and only a few will promise not to solicit these customers immediately 
or in the future. We're trying it, but we're worried about violating 
our own privacy policy, damaging our relationship with our customers, 
and maybe even result in Tower violating the law. Tower Records is a 
100% permission-based company. We never send emails to our customers 
without their permission, and feel that either requiring customers to 
submit their personal data to access the recording or enticing them 
while we are conducting a transaction is unfair.
    We have the same concerns about the rules our customers are being 
asked to agree to. First off, these End User License Agreements aren't 
even available to our customers until after they've bought the music. 
Some of the first ones we saw were pretty horrible, and had some 
outrageous restrictions that made customers feel like untrustworthy 
thieves. These ``click through'' agreements are very awkward and 
confusing to consumers and create service issues for resellers. This 
control over usage is enforced by technological locks that are the 
digital equivalent of preventing anyone from reading a book unless they 
make a payment to the copyright owner every time they open it. It's 
like having someone else standing behind our cash register, taking 
control of the customer relationship that we have cultivated, and which 
is core to our commitment.
    The bottom line is that we're pretty frustrated by the progress 
that's been made so far. We're sympathetic to the record company 
worries about piracy in cyberspace. We understand their fear of losing 
control of assets. We think part is fear that it will endanger their 
profitable and durable physical goods distribution system. And believe 
me, we understand that too.
    But many of the barriers that prevent access to an exhaustive 
inventory of sound are perplexing, and frankly, lead us to question the 
motives of our suppliers. We're starting to worry that maybe all the 
talk and activity about protecting the music is not just about 
controlling copyright infringement, but is really about controlling 
lawful use and hiding plans for cutting retailers out of the 
marketplace. A lot of the deals the record companies seem most 
interested in pursuing are with each other, or with companies that they 
all buy a piece of--like MusicNet. They tell us they want us in this 
business, but they don't follow up with products that we would want to 
sell or that our customers would want to buy. Instead, Bertelsman buys 
CDNow which has a strategic relationship with Time Warner which wants 
to cross license movies with Sony which has a subscription service 
project with Universal (called Duet) which has a joint venture called 
``GetMusic'' with BMG. That's four out of five of my major music 
suppliers, and the fifth one, no offense to Ken Berry at EMI, has been 
for sale all year.
    OK. My suppliers have the right to get into retailing. Tower isn't 
afraid to compete with retailers. We think we're pretty good. But we 
don't think it's fair to let these companies use their power over us to 
steal our customers and ultimately steal our business. Retailers need 
rules that protect competition. I'm speaking just for Tower today, but 
if you ask
    Pam Horovitz at NARM, which is the association that represents 
music retailers, she'll tell you that all retailers just want a level 
playing field that let's them decide how to market and sell music. 
That's what I think our government wants also.
    I would have liked to have been accompanied here today by 
representatives of two trade associations Tower belongs to: National 
Association of Recording Merchandisers and Video Software Dealers 
Association. NARM and VSDA have been active before the Copyright Office 
and Department of Commerce in presenting the legal issues involved in 
this intersection of copyright law, antitrust law, and consumer rights. 
Each has prepared a written statement on the topic of today's hearing, 
and I respectfully request that their statements be included in the 
record of this hearing.
    I thank you for inviting me to testify here today.

    Chairman Hatch. Ms. Greenberg, we will turn to you. Thank 
you for being here.

 STATEMENT OF SALLY GREENBERG, SENIOR PRODUCT SAFETY COUNSEL, 
                        CONSUMERS UNION

    Ms. Greenberg. Thank you, Mr. Chairman. Consumers Union 
appreciates the opportunity to represent the interests of 
consumers here today, consumers who haven't always had a place 
at the table in these ongoing discussions about consumers' 
access to music online.
    Consumers Union, as you know, no doubt, is the publisher of 
both Consumer Reports, which is a print magazine with 4.5 
million subscribers, and also the publisher of a Web site with 
one of the Internet's largest paid subscriber bases. We 
understand the importance and value of copyright protection.
    In our role as advocates for consumer and public interest, 
we also understand that copyright law is a delicate balance 
between the rights of those create, compile and distribute 
information, and the ability of the public to get access to 
that information. We are, in short, pro-consumer and pro-
copyright.
    We are here today because of our belief that while we must 
protect the rights of authors of creative works, we should not 
in the name of copyright unduly burden consumers. Irrespective 
of the merits or legality of Napster's online music service, 
Napster has popularized the power of peer-to-peer networking. 
We believe peer-to-peer, which allows individuals users to 
share files with other users without going to a central 
location, has the potential to revolutionize the way we 
communicate and learn, but it is a model that is in its 
infancy. Actions that we take today can have the effect of 
facilitating the development of peer-to-peer networking or 
chilling its development.
    When the VCR was introduced in the 1980's, Jack Valenti, 
who was with us this morning, lobbying for the motion picture 
industry made the famous statement, or in retrospect perhaps 
the famous overstatement that the VCR is to the motion picture 
industry and the American public what the Boston strangler is 
to a woman alone.
    Of course, we now know the real end of the VCR story. 
Videocassettes and rentals are one of the most valuable and 
profitable components of the entertainment industry. Had it not 
been for judicious policymakers and judges, the story of VCRs 
may have had a very different ending. Consumers could just as 
easily been denied the benefits of the VCR if the industry's 
``Chicken Little'' approach had prevailed.
    We are concerned that the recording industry's opposition 
to Napster and other peer-to-peer online systems may be more of 
the same. Consumers Union understands the concern of the 
recording industry that Napster users enjoy creative works 
without having to pay the artist or recording company. This is 
a valid issue and we firmly believe that creators of artistic 
works, be they musicians, artists, authors, or others, must 
have financial incentives to continue their creative endeavors 
and should be fairly compensated for their work. Those who add 
value to their work, like recording studios, have a right to 
fair compensation as well.
    Unfortunately, we believe the Napster debate has been 
reduced to the question of whether music should be free, and 
that is the wrong question. Of course, music should not be 
free, but there is an important point we shouldn't lose sight 
of. In a very short period of time, there have been over 72 
million installations of Napster's online service and the 
public has manifested a previously unimaginable demand for 
music distribution online. At the same time, that public has 
demonstrated a previously unparalleled appetite for peer-to-
peer information delivery.
    So where do we go from here? Despite the recording 
industry's arguments that it has made and is making efforts to 
provide music online, it appears to us at this moment that the 
recording companies that control the music business aren't 
giving consumers what they want. If ever there was a crystal-
clear indicator that consumer is there, Napster is there.
    To reduce this to even simpler terms, what we have is a new 
technology, we have a great consumer demand for that 
technology, but we have an inefficient marketplace that 
prevents the new technology from operating in a way that 
appropriately balances the competing needs of copyright owners 
and the public's right to receive information.
    Congress has before it an opportunity to redress this 
problem and arrive at a fair and equitable balance between 
copyright owners, creative artists, and the public. Last July 
when this panel held hearings, Senator Leahy and you, Senator 
Hatch, expressed hope that the parties might work together 
toward a mutual agreement. Otherwise, there would be pressure 
on Congress to create statutory compulsory licenses.
    Since that time, there has been a preliminary injunction 
against Napster and an offer from Napster to pay the recording 
industry $1 billion to license Napster to offer its users paid 
subscriptions. To our knowledge, the industry, with the 
exception of Bertelsmann, has flatly rejected that offer and 
has made no counter-offer. Meanwhile, consumers continue to be 
deprived of access for a reasonable fee to the kind of online 
service that Napster was providing.
    In that vein, Consumers Union believes the best approach 
would be one that has been tested and proved successful for 
users of other technologies. We would propose the establishment 
of a compulsory licensing mechanism through which Napster and 
other online music providers would have a legal avenue for the 
72 million people who have installed Napster to share music 
online. We urge this Committee to use the models that exist to 
authorize a Copyright Arbitration Royalty Panel, or CARP, to 
resolve the disputes over the issue of music royalties between 
Napster and other peer-to-peer online services and the 
recording industry.
    Compulsory licensing systems we know are not popular with 
the labels; they are not perhaps popular with others involved 
in the distribution and the production of CDs in this case. But 
they do serve both owners and users by reducing the transaction 
costs involved in licensing through the private market system.
    Consumers Union is on record supporting compulsory 
licensing for both satellite and cable transmission. Compulsory 
licensing provides a fair profit to the owners of copyright, 
while ensuring that the public has access to creative works. It 
has also provided consumers with greater choice.
    Let me close by saying that Consumers Union fears that 
unless Congress provides for compulsory licensing, which is a 
tried and true system that has worked in the past to provide 
consumers with access to emerging technologies, we will see a 
quashing of innovation and competition, and consumers will be 
the losers for it.
    Thank you.
    [The prepared statement of Ms. Greenberg follows:]

      Statement of Sally Greenberg, Senior Product Safety Counsel

    Consumers Union, a publisher of both Consumer Reports-a print 
magazine with 4.5 million paid subscribers-and a Web site with one of 
the Internet's largest paid subscriber bases, understands the 
importance and value of copyright protections. In our role as advocates 
for consumer and public interests, we also understand that copyright 
law is a delicate balance between the rights of those who create, 
compile, and distribute information and the ability of the public to 
get access to that information. We are, in a word, pro-consumer and 
pro-copyright. As Senator Hatch said last July at hearings on this same 
subject, we must protect the rights of the creator but we cannot in the 
name of copyright unduly burden consumers.
    New technologies historically have challenged our system of 
protecting creative works through copyright, and required a balancing 
between the public's right to know and the limited monopoly rights of 
authors. Whether it was the printing press, the jukebox, the 
photocopier, cable television, or the Internet, these technologies have 
forced us to continually revisit the balance between the rights of 
authors and rights of users to have access to information and creative 
works. Promoting and fostering innovation is clearly the goal of 
intellectual property law, but with changing technology we will 
continue to debate what will best accomplish that goal.
    When the VCR was introduced in the early 1980s, Jack Valenti, 
lobbying for the Motion Picture Industry Association of America, made 
the famous statement, or in retrospect, perhaps, overstatement that 
``the VCR is to the motion picture industry and the American public 
what the Boston strangler is to the woman alone.'' Of course, we now 
know the real end to the VCR story--videocassette sales and rentals are 
now one of the most lucrative slices of the industry's copyright pie. 
Had it not been for judicious policymakers and judges, the story of 
VCRs might have had a very different ending-consumers could just as 
easily have been denied the benefits of the VCR if the industry's 
``Chicken Little'' approach had prevailed. We are concerned that the 
recording industry's opposition to Napster and other peer-to-peer 
online systems may be more of the same.
    While it is almost a cliche to speak of the Internet and 
information technologies as revolutionary, it is nonetheless accurate 
to say that the Internet has completely changed the way we gather and 
distribute information. I don't think anyone here would disagree that 
Internet and information technologies have been responsible for 
tremendous gains in productivity and an unrivaled period of economic 
expansion.
    As the Internet has developed, several milestones were responsible 
for huge increases in users on the network: the creation of HTML, the 
programming language of the World Wide Web, enabling users of the 
network to exchange information in a common format, and the creation of 
Mosaic, the world's first generally accessible Web browser. And we 
believe that peer to peer networking is a milestone on par with these 
other developments.
    Irrespective of the merits or legality of Napster's service, 
Napster has popularized the power of peer to peer networking. The first 
Web browser introduced to users the idea that they could instantly get 
access to information anywhere on the planet-what Napster has done is 
introduce millions of users to the idea that they can find information 
by connecting directly with other users.
    We believe peer to peer networking, which allows individual users 
to share files with other users without going through a central 
location, has the potential to revolutionize the way we communicate and 
learn, but it is a model in its infancy. Actions that we take today can 
have the effect of facilitating the development of peer to peer 
networking, or chilling its development.
    CU understands the concern of the recording industry that Napster 
users enjoy creative works without having to pay the artist or the 
recording company. This is a valid issue. We firmly believe that 
creators of artistic works, be they musicians, artists, authors, or 
others, must have financial incentives to continue their creative 
endeavors and should be fairly compensated for their work. Those who 
add value to their work, like recording studios, have a right to fair 
compensation, as well. Unfortunately, we believe the Napster debate has 
been reduced to the question of whether music should be free, and we 
believe that is the wrong question. Of course music should not be free.
    But there is an important point we should not lose sight of: in a 
very short period of time, over 72 million people have installed 
Napster's online service and manifested a previously unimaginable 
demand for music distribution online. At the same time, that public 
demonstrated a previously unparalled appetite for peer to peer 
information delivery.
    We are concerned that shutting down Napster, and thereby sending a 
chilling message to other peer-to-peer online systems, will stifle the 
kind of innovation that brought us the Internet in the first place. The 
direction taken in response to Napster-like online music services will 
be instructive to every fledgling peer to peer service, and their 
network architecture will be directly influenced by legislative actions 
taken--or not taken--by this panel.
    In the aftermath of the Federal court's preliminary injunction 
ordering Napster to cease providing free downloads of copyrighted 
music, where do we go? Despite the recording industry protestations 
that it has made and is making efforts to provide music online, it 
appears to us that at this moment, the recording companies that control 
the music business aren't giving consumers what they want. If ever 
there were a crystal clear indicator that the consumer demand is there, 
Napster is it. So why have the major labels not stepped up and given 
consumers what they are asking for?
    To boil it down in even simpler terms, we have new technology and 
we have great consumer demand for that technology. But we have an 
inefficient marketplace and that prevents the new technology from 
operating in a way that appropriately balances the competing needs of 
copyright owners and the public's right to receive information.
    We suspect that the recording industry is resistant to changing the 
status quo and adapting to consumer demand for getting music online to 
protect current profit margins. According to columnist Thomas Weber 
writing in the Wall Street Journal last week, $1.50 or less of a CD 
priced at $15, goes to the artist.\1\ Add in composer's royalties, 
manufacturing, packaging, and distribution costs and you're only 
talking about $5 of the total price. $5 goes to the retailer, and the 
record company gets $5 for marketing costs and profit. But the record 
company also gets a portion of the manufacturing, packaging and 
distribution costs through its subsidiaries, so each ``cost item'' in 
that chain also may generate profit for them.
---------------------------------------------------------------------------
    \1\ Weber Thomas. ``Why Gutting Napster Won't Cure the Blues of the 
Music Industry.'' Wall Street Journal, March 26, 2001.
---------------------------------------------------------------------------
    Therein lies the problem for consumers. The public demand for 
online music cries out for a transformation of the way music is 
delivered, but the recording industry has strong disincentives from 
transforming their current distribution and marketing system. With the 
courts ordering Napster to stop providing free downloads of copyrighted 
music, the recording industry failing to respond to Napster's offers to 
set up a subscriber service, for which they have offered to pay the 
recording industry a lump sum of one billion dollars over five years, 
and the industry's failure to offer the same Napster-style service to 
consumers themselves, we appear to be at an impasse. And so consumers 
turn to Congress to properly balance the interests at stake.
    We believe the recording industry also fears that online 
distribution of music could result in total disintermediation. In other 
words, what if consumers have the means to bypass the label entirely, 
connecting directly to an artist's Web site and cutting the recording 
company out of the transaction entirely?
    Indeed, the recording industry has demonstrated through its actions 
that it is entirely aware of this possibility by waging a war on the 
technologies of online music distribution, rather than going after uses 
of those technologies. Over the last few years, Congress has already 
passed the No Electronic Theft Act of 1997 and the Digital Millennium 
Copyright Act in 1998, both of which would allow the Recording Industry 
Association of America (RIAA) to go after individuals who are illegally 
copying. But the recording industry seems not to be going after 
individual violators; their real interest seems to be in going after 
the technology. They realize that with 72 million people installing 
Napster, they cannot all be made criminals. Regrettably, the recording 
industry appears to be attacking innovation more than it is attacking 
piracy.
    Consumers are paying the price doubly: they are faced with fewer 
choices and are paying higher prices for those choices. It also appears 
that the recording industry may be using litigation as a strong-arm 
business tactic to freeze the status quo and protect its profits. For 
instance, the Recording Industry Association of America (RIAA) sued 
MP3.com, a service that merely allowed users to take a CD that they 
legitimately bought and access it from any location through the 
Internet. As Michael Robinson of MP3.com testified here last summer, 
when MP3.com attempted to abide by a court order and get its system 
licensed, the company ran into a hornet's nest of different licensing 
agreements and spent large sums of money in the process. This for a 
service that simply gave users the ability to get online access to 
music they legitimately purchased and owned. MP3.com's experience is 
hardly incentive for other Internet innovations.
    We have another concern that may contribute to the diminishment of 
rights consumers now have. In the offline world, once an individual 
purchases a copy of music, that individual is allowed to give or sell 
that copy to anyone he or she pleases, otherwise known as the first 
sale doctrine.\2\ Yet in the online world, first sale is rapidly 
disappearing. CU acknowledges that when the first sale doctrine was 
first contemplated, peer-to-peer online capability didn't exist. That 
is why we think Congress should take a look at this issue as well.
---------------------------------------------------------------------------
    \2\ The first sale doctrine was incorporated into the 1909 Act in 
17 U.S.C. Section 27 (1909 Act).
---------------------------------------------------------------------------
    Congress has a model for addressing and balancing interests to 
arrive at a fair and equitable balance between copyright owners, 
creative artists, and the public. Last July, when this panel last held 
hearings on this issue, Senator Leahy expressed hope that the parties 
might work together toward some mutual agreement, otherwise there will 
be pressure on Congress to create statutory compulsory licenses. That 
hearing happened before the preliminary injunction against Napster was 
in place, and before Napster had offered to pay the recording industry 
$1 billion to license Napster to offer its users paid subscriptions. To 
our knowledge, the industry, with the exception of Bertelsmann, has 
flatly rejected that offer and has made no counteroffer. We have 
neither heard of nor seen any signs of progress. Meanwhile, consumers 
continue to be deprived of access, for a reasonable fee, to the kind of 
online service that Napster was providing. We believe the need for 
Congressional action is even more urgent today than it was last July.
    In that vein, Consumers Union believes the best approach would be 
one that has been tested and proved successful for other new 
technologies. We propose the establishment of a compulsory licensing 
mechanism through which Napster and other online music providers would 
have a legal avenue for the 72 million people who have installed 
Napster. The compulsory licensing system supercedes the normal 
marketing mechanism for distributing copyrighted works and allows the 
prospective user the right to obtain a compulsory license under which 
he or she can use the work without the copyright owner's permission. In 
this way, we believe that Congress would help peer to peer networking 
to realize its full potential.
    Congress has set up compulsory licensing systems in several 
instances (one repealed pertaining to jukebox licensing), each outlined 
below.
 The Mechanical License, Congress in 1909 created a right 
        against the reproduction of musical compositions in mechanical 
        forms (piano rolls). Congress limited this right however, 
        through the creation of a mechanical compulsory license for 
        musical works.
 The Cable License of Section 111 establishes a compulsory 
        license for secondary transmissions by cable television 
        systems.
 The Satellite Retransmission License establishes a compulsory 
        license for satellite retransmissions to the public for private 
        viewing.
 The Audio Home Recording Act, establishes compulsory 
        licensing-like system by proving immunity from liability for 
        copyright infringement by manufacturers and importers of 
        digital recording devices, but imposes a levy on these devices, 
        the proceeds from which are to be distributed to copyright 
        owners.
    We urge this Committee use these models to authorize a Copyright 
Arbitration Royalty Panel, or CARP, to resolve the disputes over the 
issue of music royalties between Napster and other peer-to-peer online 
service, and the recording industry. We also urge the panel to set a 
time limit in the law to finalize royalties, so that the parties are 
not debating the issue 3 years down the road, with consumers still left 
out in the cold.
    While we realize fully that rights holders tend to dislike 
compulsory licensing systems, these systems are products of political 
compromise; they serve both owners and users by reducing the 
transaction costs involved in licensing works through the private 
market system. Compulsory licensing has worked well in other contexts 
where we have supported it. For instance, CU is on record supporting 
compulsory licensing for both cable and satellite transmission 
entities. CU's Gene Kimmelman told the Senate Commerce Committee in 
1998 and 1999 that by ``eliminating the transaction costs associated 
with thousands of copyright clearing negotiations, the compulsory 
license ensures fair compensation to copyright holders while also 
providing consumers greater opportunity to receive multichannel video 
programming from a variety of vendors.'' Those principles apply to 
music, as they do to cable and satellite. Indeed, without compulsory 
licensing mechanisms for satellite or cable systems, consumers would 
not have had access to a broad range of programming and we don't 
believe these technologies could have flourished. Compulsory licensing 
provides a fair profit to owners of the copyright while ensuring that 
the public has access to creative works.
    Compulsory licensing has not only provided consumers with greater 
choice, it also spurred competition. Imagine if Congress had not acted 
to provide a compulsory license in the case of satellite retransmission 
of broadcast signals. The only truly viable potential competitor to 
cable monopolies direct broadcast satellite-would not be in a position 
to offer consumers an alternative to cable.
    We support compulsory licensing because we believe that ``killer 
applications'' like Napster will encourage the rollout of broadband 
Internet services, just as email and instant messaging were responsible 
for huge growth in the narrowband Internet. Congressional action will 
be instrumental in greasing the wheels to facilitate this process, 
thereby bringing users of Napster and other peer-to-peer technologies 
into the sanctioned marketplace.
    Consumers Union is concerned that unless Congress provides for 
compulsory licensing, a tried-and-true system that has worked in the 
past to provide the consumers with access to emerging technologies, we 
will see a chilling of innovation and competition, and consumers will 
be the losers.

    Chairman Hatch. Thank you, Ms. Greenberg. That was very 
interesting.
    Mr. Fish?

    STATEMENT OF EDMUND FISH, PRESIDENT, METATRUST UTILITY 
         DIVISION, INTERTRUST TECHNOLOGIES CORPORATION

    Mr. Fish. Mr. Chairman, Senators Leahy, Feinstein, and the 
other members of the Committee, I have the distinct honor today 
of being the last, but hopefully not the least person to 
address this Committee on the very important issues that are 
before it.
    In sitting and listening to all of the other testimony, I 
had an observation. It strikes me each time I hear this debate 
how many diverse interests there are. You could think of it as 
a symphony. Symphonies take practice or you have got a lot of 
discordant efforts. At the same time, symphonies need a 
framework, and I am here to talk about that framework today.
    I am here on behalf of our founder, Chairman and CEO, Mr. 
Victor Shear, and our organization that has grown from a 
handful a few years back to more than 350 worldwide today. 
InterTrust has been focusing on the issues before this 
Committee since its founding in 1990. We coined the expression 
``digital rights management'' to describe the requisite 
mechanisms.
    It took 9 years and more than $100 million in capital to 
bring this technology to market, and we have made many 
significant inventions along the way. We now provide technology 
to a number of copyright owners, artists, device manufacturers, 
software providers, and online services bringing digital 
information to the Internet. These include Adobe, AOL, 
Bertelsmann, Blockbuster, Compaq, Diamond Rio, Nokia, Philips--
many, many different participants in this process.
    Mr. Chairman, let me suggest that at the heart of the issue 
is how do we bring civility to the post-Napster world without 
compromising our traditional cultural values or our leadership 
in technology, as was so poignantly pointed out this morning. 
We suggest that the answer lies in the following two ideas: 
first, a balanced partnership between technology and law, and, 
second, an understanding of what digital rights technology can 
do and how it should do it.
    One might say that technology created this problem, but 
technology can also help to solve it. To do that, however, it 
needs a partnership between law and technology. Until now, we 
have had technology pitted against law. This technology is 
called digital rights management, or DRM.
    Sophisticated DRM technologies such as InterTrust can 
provide the mechanism to help effect this partnership of law 
and technology. It facilitates a workable framework for the 
efforts of artists, as well as the industries that bring their 
works to the public. This framework must also satisfy law and 
the legitimate expectations of consumers. The digital world 
should live up to the principles most of us believe are the 
minimum standards we would demand in the traditional analog 
world.
    To be clear, when I am speaking about DRM technology, I am 
not referring to mechanisms that simply deliver protected music 
online in return for a payment and then lock it to a PC. 
Rather, to create the partnership framework I have mentioned, 
it is critical to create a zone, independent of time, place, or 
device, where music is protected by technology and where 
rights-holders and consumers are free to express and protect 
their rights through the freedom to establish differing rules 
reflecting their own individual interests.
    Robust business models such as download, streaming, 
subscription, pay-per-listen, or super-distribution are 
possible. DRM technology, however, can also allow special 
consumption rules to be created for particular consumers or 
classes of users, for schools and universities, for libraries, 
and for consumers with special needs such as the blind. 
InterTrust Technologies does this today.
    Our experience tells us that there are three fundamental 
requirements in order to establish this framework. First, 
technology must provide creators of digital information the 
secure ability to manage and protect their rights throughout 
the life cycle of the content and however that content may be 
exploited, and it must operate wherever music is played--
personnel computer, to PDA, to cell phone, and back again. We 
live in a connected world.
    Second, it must provide copyright owners and value chain 
participants such as retailers the ability to offer consumers a 
wide range of usage options.
    Third, it must be unimpeachably neutral and a trusted 
environment in which technology assures these agreed-upon 
arrangements. It may not in any way advantage any interests, 
including those of the technology provider. The trusted 
environment should be open enough to permit multiple formats, 
multiple services, multiple applications, a true competitive 
ecosystem. That is why InterTrust restricts itself to building 
a platform that solely supports third-party businesses. We run 
no other such services.
    In closing, we should remember that the issue is about 
constructing a civil digital society in the Internet Age, where 
rules created by citizens and for citizens can be implemented 
and respected wherever and whenever legitimate interests are in 
play. InterTrust is helping to make this a reality with a whole 
variety of partners, many of whom you have heard from today.
    Thank you very much.
    [The prepared statement of Mr. Shear, as presented by Mr. 
Fish, follows:]

  Statement by Victor Shear, Founder and CEO, Intertrust Technologies 
                              Corporation

    InterTrust Technologies Corporation is the leading provider of 
Digital Rights Management (DRM) technologies, which in the field of 
copyright protection will secure four objectives: (i) give consumers 
new freedom to enjoy music and entertainment online; (ii) give 
copyright owners the means to manage and protect their rights in the 
works they create and publish; (iii) give effect to elements of law, 
such as copyright exceptions; and (iv) provide users with the means to 
manage legitimate personal rights and interests.
    Until now, the ability of the creative community to enforce rights 
in their copyrighted works has never really caught up with the 
technologies enabling anybody to make and distribute unlawful digital 
copies. What has been urgently needed is a partnership between 
technology and law to provide a workable economic framework for the 
vital efforts of our musicians, writers, actors and artists, and to 
accommodate and satisfy the legitimate expectations of consumers--
including limitations on exclusive rights to the extent they are 
sufficiently formulated. Sophisticated DRM technology now provides the 
mechanism to effect this partnership.
    InterTrust's DRM technology is now capable of securely managing 
rights in copyrighted works in the context of peer-to-peer 
distribution, and can enable consumers to listen, record, and 
distribute music online without compromising the rights of artists, 
record labels, and other copyright owners. It also makes it possible 
for the creative community to offer consumers a limitless range of ways 
to enjoy music and entertainment: sale of downloads; subscriptions; 
payper-listen; superdistribution (consumer A delivering material to 
consumer B and so on); file sharing. It can do so because it associates 
the technical protection with the content regardless of the channel 
through or platform upon which it is exploited.
    But effective DRM solutions require more than sophisticated 
technology. They also require credibility and trust. That is why 
InterTrust restricts itself to building a platform that supports third 
party businesses. It is not itself a distributor of copyrighted works; 
a builder of consumer applications such as electronic music players; or 
a credit card transaction processor. InterTrust's business role and 
model is that of a utility: it facilitates but strictly refrains from 
intruding into the business models and distribution channels for 
copyrighted works. InterTrust's function is not to dictate the 
arrangements for digital rights management, but to establish and 
maintain a platform to ensure the neutrality, security, commercial 
reliability, and trusted interoperability of services and software 
applications used for the protection and management of rights in 
digital information of all kinds, including online entertainment. It is 
fundamental to our vision that this trusted, neutral infrastructure is 
essential to the long-term effectiveness of DRM solutions, and to their 
acceptance by copyright owners, distributors, and consumers alike.
    Ultimately, the reality of sophisticated DRM technology is about 
far more than Napster, online entertainment and copyright law. It is 
about constructing a civil digital society in the Internet Age, where 
rules created for or by its citizens can be implemented and respected 
wherever and whenever their legitimate interests are in play. It is 
this simple proposition that InterTrust is making a reality.
    On behalf of InterTrust, I wish to thank Senators Hatch, Leahy, 
Feinstein, Thurmond, and all the members of the Committee for the 
opportunity to testify this morning on the important issue of on-line 
entertainment and copyright law. I would like to tell the Committee 
about how InterTrust Technologies Corporation has developed Digital 
Rights Management technologies that in the field of copyright 
protection will secure four objectives:
 give consumers new freedom to enjoy music and other forms of 
        content,;
 give copyright owners and other value chain participants the 
        means to manage and protect their rights in published works;
 give effect to elements of law, such as copyright exceptions, 
        for ensuring that rights are managed in accordance with public 
        interest;
 provide users with the means to manage their legitimate 
        personal rights and interests.
    InterTrust is the leading provider of peer-to-peer Digital Rights 
Management (DRM) technology. This technology ensures the neutrality, 
security, commercial reliability, and trusted interoperability of 
applications and services used to protect and manage rights in all 
forms of information, including the creative works under consideration 
here. Our enterprise is focused on the rapidly evolving area of digital 
commerce in information; our aim is to provide a framework of 
commercial trust comparable in scope, and at least as reliable, as the 
systems of trust that underpin commerce in the physical world.
    The focus of this Committee extends beyond a simple re-examination 
of the particulars of the Napster case to the broader questions it 
raises. I respectfully submit that, from that perspective, InterTrust 
has a particularly valuable contribution to make. Given our unique 
position in the DRM arena, we believe we can assist the Committee in 
considering the complex issues before it.

           Background on InterTrust Technologies Corporation

    I founded InterTrust in January 1990. The goal was to provide 
solutions to many of the complexities involved in realizing the full 
potential of electronic commerce. It seemed clear that digital commerce 
would require mechanisms enabling the dynamics of traditional commerce 
to be seamlessly translated into the electronic world. My associates 
and I coined the expression Digital Rights Management to describe the 
requisite mechanisms. In effect, we were looking towards a world in 
which, where and as appropriate, commerce could be digitally ``virtual] 
zed''. Over the last 10 years, InterTrust has developed the concept of 
Digital Rights Management (``DRM '') and has grown from myself and a 
handful of researchers to a fully-fledged commercial enterprise 
employing more than 350 people worldwide. Approximately $340 million of 
working capital has been provided to InterTrust by its investors, and 
all of this capital is dedicated to the creation of a digital rights 
management framework for digital commerce and participant conduct.
    The impact of the Internet has meant that the initial and most 
visible applications of InterTrust's technology have been for digital 
music, video, and publishing. Literally any digital information that is 
shared or stored will ultimately be implicated, however. This includes, 
for example, medical records, enterprise workflow, financial 
interactions, and the policy management of any stored or communicated 
information--policies ranging from privacy rights to enforcing 
government regulations to reliably automating commercial interests.
    As concerns electronic distribution of entertainment products and 
services, InterTrust has been a very active member of the Secure 
Digital Music Initiative (SDMI) since its inception, and its employees 
have chaired SDMI's Portable Device Working Group and its Screening 
Group. We played the role of primary developer of the Intellectual 
Property Management Protocol (IPMP), which became an MPEG-4 standard 
for electronic devices. We have strategic alliances and partnerships 
with a number of major enterprises including Adobe, AOL, Bertelsmann, 
Blockbuster, Compaq, Diamond Rio, Enron, Mitsubishi, Nokia, Philips, 
Samsung, Texas Instruments, Universal Music and numerous others. They 
are all actively working with InterTrust DRM technology to further the 
enjoyment of music, video, published text and other information 
products on PCs, portable music players, cable systems and mobile 
phones. InterTrust works with these and other companies to help 
establish standards, and, through InterTrust's MetaTrust Utility, to 
help ensure that consumers and commercial organizations can enjoy a 
consistent degree of reliability, integrity, and interoperability when 
they expose their interests through digital interaction. We pride 
ourselves on working with individuals and companies, large and small, 
that have interests in, or rights related to, digital information that 
need rights management.

           Online Entertainment and Digital Rights Management

    Great creators are normally great communicators, their individual 
voices collectively embodying and expressing the values and passions of 
their culture. Using digital technology expedites the accurate 
dissemination and reception of creators' works and, when employed in 
the proper context, digital technology can also support the universe of 
rights associated with most creative works--the rights of creators, 
value chain members, users, and societal organizations. Although 
digital technology can greatly enhance the communication of creators' 
works, unless it is properly employed, its use creates severe problems. 
Digital technology, when improperly used, can deny content creators and 
their successors the commercially essential return for labor and right 
to manage and exploit property. The improper use of digital 
technology--when employed as a vehicle for the unfettered purloining of 
copyrighted content--directly undermines the basic building blocks of 
modern society, the respect for the rights of others, as well as proper 
return for one's creative output and labor. Moreover, such improper use 
directly suborns the stable economic basis necessary for further 
development of art.
    Ultimately society loses out as the basic ``glue'' of commerce and 
democracy, the civil interaction between multi-party rights and 
interests and the maintenance of a market for goods and services, is 
undermined in the service of convenience and self-interest. At times it 
appears there's a call to revolt, ``free the content,'' when such a 
call--if extended beyond fair use -obscures the real issues and would 
seek to legitimize people taking for free whatever they want. Others' 
rights be damned!
    Although the impetus for this hearing may be ``file-sharing'' and 
the recent Court of Appeals decision affecting it, it is not just about 
Napster. It is about the changes that digital technology is bringing to 
the worlds of art, entertainment and information. It is also about the 
kind of society that electronic communities and digital technology, 
used in concert with copyright law, can create. Many people are just 
now beginning to realize how profound those changes and possibilities 
are. In under two years and with very little in the way of direct 
investment, an electronic community of some 60 Napster million file 
sharers was created. Ordinary consumers used the Napster system to 
obtain unauthorized copies of copyrighted music without payment when 
most of them, at least previously, would never have considered buying 
pirated CDs in the physical world. Other communities are springing up 
worldwide where individuals communicate electronically and eschew any 
reference to traditional principles of commerce and property rights.
    The Digital Millennium Copyright Act, which this Committee was 
instrumental in enacting, was the first in the world to tackle the 
challenges of digital technology. Yet for all its thoroughness, we are 
probably even now past the point where we could claim that copyright 
law alone is sufficient to establish adequate mechanisms for the 
protection and management of rights in creative works (though it is 
essential that legislators continue to develop the body of digital 
copyright laws and regulation). Despite shorter revision cycles for 
law, the ability of the creative community to enforce the rights in 
their works has never really caught up with the technologies enabling 
anybody to make and distribute unlawful digital copies. The situation 
is now being considered by some leading academics as one in which 
copyright law may in practice become virtually irrelevant.
    Society simply cannot afford to accept copyright law becoming 
irrelevant. And we cannot afford to set the extraordinary example of 
dispensing with the rights of content providers because we are 
unwilling to develop a framework for proper commercial and civil 
behavior. There is therefore an urgent need for a partnership between 
technology and law that effectively maintains the underlying commercial 
and social principles of modern free society. With respect to online 
entertainment the partnership must provide a workable framework for the 
efforts of our musicians, writers, actors and artists. We need a 
partnership between government and content commerce participants that 
accommodates and satisfies the legitimate expectations of American 
citizens--including any limitations on exclusive rights appropriate for 
an intelligent public policy.
    Sophisticated DRM technology such as InterTrust's can provide the 
mechanism to help effect this partnership. While technical complexities 
and challenges abound, the mission is achievable: to provide a 
combination of technical mechanisms and social compacts that allow the 
transfer of the basic features of traditional commerce into the digital 
market place. The means to achieve this goal are now at hand, and the 
means to continue developing a flexible, free, and safe commercial 
digital environment, are readily accessible. There are, of course, new 
and complex commercial, economic and social issues to be addressed. But 
this cannot deflect us from the simple, basic responsibility that we 
all have, to not settle for over-simplifications that result in 
distorting, unfair, and socially and commercially flawed solutions. 
Rather, we must strive to allow the digital world to live up to the 
principles most all of us believe are the minimum standards we would 
demand in the traditional, non-digital world.
    The basic principles of granting rights to creators to control the 
use of their work and of maintaining trusted systems for commerce 
remain as valid as ever. We should not ignore the opportunities as they 
arise of reviewing current copyright limitations and other 
accommodations that were made before the advent of effective digital 
rights management to ensure they continue to serve these principles. We 
should also be ready to reshape these limitations, where necessary, to 
fit the emerging digital marketplace. Above all we should be driven by 
a simple principle: to maintain a free and effective commercial society 
that, in a balanced fashion, supports the rights of all participants.

                  Digital Rights Management Technology

    It is important to understand from the outset that when talking 
about DRM technology we are not referring to simple mechanisms that, 
say, carry protected material from a server to a client in return for a 
payment, locking the material to a single device. Such a proposition 
offers nowhere near the degree of flexibility and coverage necessary to 
support either traditional or new business offerings. Post delivery, 
persistent protection of commercial interests, flexibility in use of 
content across devices and locations, and flexible interaction with 
content, are all priorities for content value chain participants. In 
the context of music as it relates to Napster, users want to play music 
on-line or off-line, and they want the right and ability to combine 
music into playlists that are used to create a specific personal or 
group music experience, for use wherever and whenever they wish.
    The technology system that InterTrust has developed protects 
content, in the instance of this discussion music, on a persistent 
basis throughout its commercial lifecycle. It does this by binding 
rules governing content use with governed content. This tamper 
resistant association persists regardless of the channel through or 
platform upon which the music is played, and the number of handlers of 
the content, the duration of time, or the physical location of the 
content. InterTrust technology creates a zone--independent of time, 
place, or device--where music is governed by technology and where 
rights-holders, including consumers, are free to express and protect 
their rights through the freedom to establish differing rules 
reflecting their individual interests.
    Within this technical protection zone, digital information such as 
music can be offered to consumers via a virtually limitless range of 
models: sale of downloads; subscriptions; pay-perlisten; 
superdistribution (consumer A delivering material to consumer B and so 
on); and file sharing. This freedom is also available for the 
implementation of a richly diverse range of policies that govern usage, 
and any consequences of usage, in relation to groups of any nature, 
such as special interest groups. To accommodate statutory limitations 
on copyright, special consumption rules can be created, either through 
law or through accepted practice of rightsholders, for particular 
consumers or classes of users: for schools and universities; for 
libraries and archival institutions; and for consumers with special 
needs such as the blind. Whatever the needs, whatever the relationship 
between different participants the digital information remains 
persistently protected while freely available according to agreed rules 
of use.
    If this protection is to remain effective throughout the lifecycle 
of the content then it follows that it must be possible to change the 
rules relating to use. Material can have a succession of different 
owners. It can change in value; it can be traded for different 
purposes; it can be used on multiple, different devices; and it can be 
loaned to other parties. Our system anticipates and accommodates all 
these possibilities. In our system, digital information and the rules 
governing its use by a particular user can exist and move independently 
of each other, coming together to give effect to the agreement between 
supplier, distributor, and consumer, and respecting whatever rules may 
be applied by government, or, for example, by financial institutions.
    An efficient system of protection must not only accommodate a wide 
variety of business offerings. It must also support the complex value 
chains through which many of the offerings are delivered. The 
architecture InterTrust has developed supports value chain 
relationships based on traditional commercial principles--we call this 
digital enabling of value chains ``chain of handling and control''. 
This means that each actor in the value chain is able to create the 
rules it wishes to apply to the material in question within the scope 
of authority granted to the participant by the previous or governing 
actors in the value chain. A publisher could establish the commercial 
terms for a work within the authority granted by the author; the 
distributor could then set rules within the scope of authority granted 
by the publisher and so on through the value chain, all in accordance 
with law and accepted practice.

               Requirements of Digital Rights Management

    We believe there are a number of precedent requirements for 
effective digital rights management of content. First, it must provide 
creators of digital information the ability to manage and protect their 
rights throughout content lifecycles and however content may be 
exploited. This means that a DRM system must be secure and resilient to 
tampering, and certain elements of the protection system must accompany 
the copy of the work as it is passed from party to party, format to 
format, platform to platform.
    Second, it must support commercial flexibility so that it can 
accommodate the arrangements struck between copyright owners, their 
customers, distributors, retailers and other value-adding participants. 
This means that a rights management system must provide content 
creators and/or publishers the means to allow consumers choices 
appropriate to the commercial circumstance.
    Consumers must be able to enjoy copyrighted works, and the system 
must permit consumer arrangements to vary based on the terms agreed to 
by the content commerce participants.
    Third, it must provide a neutral and trusted environment in which 
technology assures these agreed upon arrangements. The rights 
management technology must be unimpeachably neutral, that is it may not 
in any way subtly or secretly advantage any hidden interests, and 
further, it is essential that the rights management technology not 
advantage any out-of-context interests of the rights management 
technology provider. Consequently, for example, neither a rights 
holder, nor a consumer, nor the rights technology provider should be 
able to alter or tamper with any agreed upon commercial arrangements 
once agreed or impede the expression of a parties' rights or interest.
    Unless a rights management system meets these requirements--that 
is, unless the trust system is itself unimpeachably trustable--it will 
fail to satisfy the legitimate interests of businesses, consumers, and 
government. Further, unless a rights management system is able to 
maintain its trust attributes regardless of the underlying digital 
commerce platform, device, or application, it will fail one of two 
tests. Either the system will (A) lack reliability in protecting 
participant rights, since a loosely coupled array of rights systems, 
without a unifying maintained rights environment, will readily succumb 
to hackers; or the system will (B) lack interoperability, and consumers 
and commercial participants alike will lose the convenience and 
efficiency essential to content commerce, and risk having their 
interests suborned to the interests of a party controlling a narrow, 
proprietary environment.
    In the domain of music, InterTrust DRM technology is now capable of 
permitting consumers to listen, record, and distribute music online in 
ways that do not compromise the rights of artists, record labels, and 
other copyright owners. It is capable of managing the rights in 
copyrighted works in a secure manner in the context of peer-to-peer 
distribution. Its technology supports the ongoing effort of Digital 
World Services (DWS), a Bertelsmann subsidiary, and the Universal Music 
Group, as well as many other interests both large and small, enabling 
them to implement new business models for the distribution of music on-
line. A leading international music group, Daft Punk, for example, 
recently accompanied the release of its latest album with a novel 
application of InterTrust technology. The band is encouraging 
traditional retail relationships and creating digital economy value for 
its fans by enabling those fans who have purchased the CD to access the 
group's web site and to download additional music--at no further cost, 
but protected with InterTrust DRM.
    Effective DRM solutions require more than sophisticated technology. 
They also require credibility and trust. That is why InterTrust 
restricts itself to building a platform that supports third party 
businesses. It is not itself a distributor of copyrighted works; a 
builder of commercial consumer applications, such as electronic music 
players; or a credit card transaction processor. InterTrust's MetaTrust 
Utility, the core of InterTrust's business interests, functions as a 
utility. It facilitates--but refrains from intruding into--the business 
models and distribution channels for copyrighted works. Its function is 
not to dictate the arrangements for digital rights management, but to 
establish and maintain a platform that ensures the neutrality, 
security, commercial reliability, and trusted interoperability of 
services, software applications, and devices used for the protection 
and management of rights in digital information of all kinds. A 
trusted, neutral infrastructure is essential to the long-term 
effectiveness of DRM solutions, and to their acceptance by copyright 
owners, distributors, and consumers alike.

                               Conclusion

    DRM technologies should give consumers new options for legitimately 
acquiring and enjoying music and other forms of online entertainment, 
while ensuring that copyright owners and other commercial participants 
have the means to manage and protect their rights. Enabling peer-topeer 
distribution of music and other copyrighted works without compromising 
copyright is an obvious example. In our view, sophisticated DRM 
solutions must support the fundamental principle of any effective 
copyright system: that of striking the correct balance between 
protecting the rights and interests of copyright owners while promoting 
the interests of the wider community and facilitating the efficient and 
flexible dissemination of, and greater access to, music and other 
copyrighted works.
    Ultimately, the reality of sophisticated DRM technology is about 
far more than Napster, online entertainment and copyright law. Policy 
makers, consumers, and busines globally will come to realize that the 
``Napster issue'' isn't just about music and the Internet. It is about 
constructing a civil digital society in the Internet Age, where rules 
created for and by its citizens can be implemented and respected 
whereever and when ever legitimate interests are in play. It is this 
simple proposition that InterTrust is helping to make a reality.
    In closing, InterTrust once again thanks the Committee for the 
opportunity to present testimony on this important issue, and looks 
forward to working with members of the Committee as they onsider the 
important issues related to online entertainment and copyright.

 Statement of Todd Slosek, InterTrust Technologies Corporation, Santa 
                               Clara, CA

    Washington, D.C., April 3, 2001--Victor Shear, the founder and CEO 
of InterTrust Technologies Corporation, testified today before the 
United States Senate on the critical role that Digital Rights 
Management (DRM) solutions will play in the future of peer-to-peer file 
sharing technologies like Napster and other online entertainment.
    At a hearing of the Senate Judiciary Committee on online 
entertainment and copyright, Shear testified that the InterTrust DRM 
technology is now capable of securely managing rights in copyrighted 
works in the context of peer-to-peer distribution, and can enable 
consumers to listen, record, and distribute music online without 
compromising the rights of artists, record labels, and other copyright 
owners.
    ``The ability of the creative community to enforce the rights in 
their works has never really caught up with the technologies enabling 
anybody to make and distribute unlawful digital copies,'' said Shear. 
``We urgently need a partnership between technology and law to provide 
a workable economic framework for the vital efforts of our musicians, 
writers, actors and artists, and to accommodate and satisfy the 
legitimate expectations of consumers. InterTrust's sophisticated DRM 
technology now provides the mechanism to effect this partnership.''
    InterTrust DRM technology makes it possible for the creative 
community to offer consumers a limitless range of ways to enjoy music 
and entertainment: sale of downloads; subscriptions; pay-per-listen; 
superdistribution (consumer A delivering material to consumer B and so 
on); file sharing. It can do so because it associates the technical 
protection with the content regardless of the channel through or 
platform upon which it is exploited. For example, the leading 
international group, Daft Punk, uses InterTrust DRM technology to 
enable fans who have purchased the group's latest CD to download 
additional music from its web site.
    ``Ultimately, the reality of sophisticated DRM technology is about 
far more than Napster, online entertainment and copyright law,'' Shear 
told the Senate panel. ``It is about constructing a civil digital 
society in the Internet Age, where rules created for or by its citizens 
can be implemented and respected wherever and whenever their legitimate 
interests are in play. It is this simple proposition that InterTrust is 
making a reality.''
    InterTrust [Ticker ITRU] is the leading provider of peer-to-peer 
Digital Rights Management (DRM) technology to ensures the neutrality, 
security, commercial reliability, and trusted interoperability of 
online applications and services. InterTrust has strategic alliances 
and partnerships with a number of major enterprises, including Adobe, 
AOL, Bertelsmann, Blockbuster, Compaq, Diamond Rio, Enron, Mitsubishi, 
Nokia, Philips, Samsung, Texas Instruments, and Universal Music, using 
InterTrust technology to enable consumers to enjoy music, video, 
published text and other information products on PCs, portable music 
players, cable systems and mobile phones. For more information, please 
visit the InterTrust website at www.intertrLISt.COM.

    Chairman Hatch. Well, thank you so much. This has been a 
particularly interesting panel to me. I am sorry I had to step 
out for a minute or two, but I got most of the message here and 
it was very good.
    In closing, I appreciate the time and effort all of you 
have put in for your testimony today, and the artistic efforts 
of those whom you represent. We now have increased appreciation 
of the continual evolution of Internet music and the legal and 
ethical complexities that has generated. It seems to me this 
hearing has brought that out.
    As with any new technology, the scientific advancements 
often outpace the necessary legal adjustments. We have recently 
seen similar discussions in the current situation with 
molecular biology and genetic research. The research has 
outpaced the law.
    My goal has always been to respect the efforts of 
individual artists and associated intellectual property rights, 
but at the same time to allow a legal framework that does not 
stifle the technological innovation which is the foundation of 
our entertainment industry, which is, of course, the envy of 
the whole world.
    Let me just say this: We will leave the record open until 
Friday, and we will allow any member of this Committee to 
submit questions, which I hope you will answer within 2 weeks. 
It is important that you get your answers back to us, because 
we are building a record here that literally may determine the 
future for all of you with regard to music, and I would like to 
do it the right way.
    I don't have any axes to grind here. I think I have 
expressed how important every aspect of this business is, but I 
do have an axe to grind in that I love the business and I love 
what it does. I love the softening it brings to America. I love 
the good things about the business that really mean so much to 
all of us.
    I think Mr. Valenti's comments today of how important this 
business is vis-a-vis the rest of the world and vis-a-vis our 
balance of trade--this is the one industry, and I am talking 
about the whole entertainment industry--movies, music, books, 
et cetera--it is the one industry where we really have a great 
balance of trade surplus.
    To me, it is an industry that brings a great deal of joy 
and satisfaction to millions and millions and millions of 
people out there, and we want to keep it going. But it is also 
an industry which is very tough to break into. I know a lot of 
really fine writers and artists who will never have a chance, 
in my eyes, because of the way the industry is currently 
structured, and it is a sad thing.
    I remember when I received my first royalty check from 
ASCAP that they had collected. I was at an ASCAP annual meeting 
and there were about 1,000 people there, all writers, and I 
raised my check and said I just got my first royalty check. The 
whole place went out of control; everybody stood and applauded 
and stomped their feet.
    When I sat down, Marilyn Bergman, who heads ASCAP, reached 
over to me and said, ``Senator, the reason they are so excited 
is because none of them will ever receive a royalty check. And 
yet there is some real talent out there that ought to be 
compensated.''
    I think Napster understands that the court is right in 
determining that Napster needs to operate within the legal 
framework of the law, and they are trying to do so. I said to 
the industry that they ought to capture Napster, because it is 
a great peer-to-peer system that literally people love, 
especially our young people, and I think our young people are 
willing to pay something to be able to use Napster.
    I would hope that we could do this without having the 
compulsory licensing situation. I don't know that we can, but I 
hope that we can. That is my goal. We have come a long way 
since last summer, but in my opinion we haven't gone anywhere 
near as far as we should go, and we haven't accomplished 
anywhere near what we should accomplish. There is all too much 
litigation and in-fighting in this industry that ought to be 
resolved, it seems to me, by good business plans and good, 
honest approaches inter-industries. I hope that we can do that.
    This has been a great hearing for me because I have learned 
a lot from it, and I am not going to forget what I have learned 
here today. I just want to thank all of you for being here.
    With that, we will adjourn until further notice.
    [Whereupon, at 1:47 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow:]

                         QUESTIONS AND ANSWERS

Responses of the Recording Artists Coalition to questions submitted by 
                             Senator Leahy

    1. Compulsory licenses and licensing disputes--RAC believes that 
the content owners and content users must be afforded a reasonable time 
period to develop a licensing system without government intervention. A 
fair system might be created if the parties engage in ``good faith'' 
negotiations. However, if an agreement cannot be reached within a six 
month to one-year time period, then Congress should step in and 
implement a compulsory license system that fairly compensates the 
recording artist and the record label. Without a compulsory system or a 
functioning voluntary licensing framework, there will be a disincentive 
to use music on the Internet and that would harm all parties. The goal 
of Congress should be to provide incentives to use music on the 
Internet, but only in the absence of a voluntary framework should a 
compulsory license system be implemented to accomplish that objective.
    RAC does not consider contract provisions requiring the artist's 
approval to grant rights for Internet delivery of music as a serious 
roadblock to increased Internet distribution of music. Most artists 
will agree to such a request from their record label, so long as the 
record label acknowledges the label's obligation to negotiate with the 
recording artist as to the appropriate division of receipts, including 
advances on the entire licensing deal, equity participation, etc. There 
are few provisions in artist contracts providing much negotiating 
leverage. Provisions such as ``anti-coupling'' provide artists with a 
modicum of control and rare negotiating power. It is a cause of 
concern, however, that the ``anti-coupling'' clauses in some new artist 
contracts have been eroded for some uses in the digital space.
    2. Historical instances in which compulsories were created as 
raised by Mr. Barry--Mr. Barry is right to point out that compulsory 
licenses have been used in the past to license music. However, just 
because there have been compulsory license systems created in the past 
does not mean that Congress should or must step in immediately. In both 
instances cited by Mr. Barry, the impasse between the content owners 
and content users was clear and intractable. A compulsory license 
system was only implemented after extensive negotiations failed, and 
essentially all other options were exhausted.
    At this point in time, RAC does not believe that all options have 
been exhausted. The key condition, however, must be open and fair 
``arms length'' negotiations between the parties. If the record labels 
refuse to negotiate in ``good faith'' or simply perpetuate the status 
quo, then Congress should strongly prod the record companies and music 
publishers to enter into ``good faith'' negotiations with the 
independent Internet companies. In the case of Napster, Congress should 
implore the record labels and music publishers to offer Napster license 
rates on essentially the same terms as provided by them to other 
Internet content users so long as Napster follows through on its 
assurances of security. No one could have anticipated the public's 
tremendous demand for interactive music or out-ofprint recordings. 
Therefore, Napster's effort to create a pay system to legitimately meet 
this consumer demand should be supported. As stated before, however, if 
the parties are unable to independently develop a new system within six 
months to one year, then Congress should intervene as a ``last 
resort.'' Congress can then rely on the precedents set by the previous 
compulsory music license systems to craft a new Internet music 
compulsory license system.
    3. Digital Rights Management--RAC has no evidence either supporting 
or disputing the existence of adequate technology.
    4. How soon is soon--Before Napster became so popular, the major 
record labels' forays on the Internet market were apprehensive. The 
labels released a very limited selection of cumbersome, encrypted 
downloads at exorbitant prices. The record labels simply did not listen 
to the fan's demand or recording artist's excitement for music on the 
Internet. In particular, many recording artists have been pushing 
record labels for years to take a more serious and comprehensive 
approach to the Internet. The label's inaction created a vacuum 
directly leading to the creation of Napster. Napster simply responded 
to consumer demand while the labels did not. As such, it is still in 
large part up to the record labels to determine in what fashion and 
when digital content will be fully exploited. RAC hopes sooner rather 
than later and with consideration for the artists' concerns. With that 
stated, however, the most important element of an Internet music 
business model is the continued existence and expansion of a viable 
independent distribution system on the Internet. Systems like a fee-
based Napster will not only provide an outlet for independent recording 
artists and those recording artists signed to major labels who are not 
given the major star promotional push, but these independent Internet 
music sites will challenge the major labels to continue on an 
aggressive course and timetable.
    5. All other issues will be dealt with below.

                             Work for Hire

    RAC believes strongly that Congress should reexamine the work for 
hire provisions in the 1976 Copyright Act with an eye toward clarifying 
authorship issues of sound recordings. However, before any real 
progress can be made on the work for hire issue, the record labels, 
represented by the RIAA, must fundamentally change their relationship 
with recording artists and more importantly, with the organizations and 
groups representing recording artists. While paying great lip service 
to the importance of the recording artist to their companies in 
testimony before Congress, the record labels and the RIAA, have adopted 
a policy of indifference and confrontation regarding work for hire. The 
RIAA has made it very clear that they are not interested in meeting or 
negotiating with the recording artists. Nor have they shown a 
willingness to fulfill the strong desire of Congress (specifically this 
Committee) for the parties to negotiate an acceptable work for hire 
amendment that would be supported by all factions in the music industry 
and Congress. Apparently, the RIAA has taken the position that they 
will fight this issue in court, thereby taking full advantage of the 
immense difference in financial resources between the record labels, 
owned and supported by multinational corporations, on the one hand, and 
the recording artists on the other. This record company posture is 
unacceptable to the recording artists, and should be unacceptable to 
Congress.
    As the record labels have no intention of starting any kind of 
substantive dialogue with the recording artists, it is imperative that 
Congress intercedes and calls for hearings on this issue. All sides in 
this debate--there are many--must be heard in a ``blue-sky'' forum. 
Academics must offer their counsel, and even producers, backing 
performers, and the unions must be given the opportunity to present 
their views. Only when a full public airing of all viewpoints is made, 
can the parties and Congress fashion a fair and sensible amendment or, 
in the alternative, decide to refrain from offering an amendment. This 
is how the Copyright Law has been amended in the past. There is no 
reason to veer from this democratic and mutually respectful tradition.
    Seemingly, the record labels learned very little from the work for 
hire episode. At the core of this conflict is the disconnect between 
the public perception of recording artist/record company relations, and 
the reality. Record companies publicly portray the recording artist as 
a partner in their enterprise. The record companies use this image of a 
working ``partnership'' between recording artists and record companies 
as a way to entice recording artists to sign with their companies. 
However, once the record contract is signed, generally the record 
labels true goal, that of creating an employer/employee relationship, 
quickly replaces the illusion of a partnership. Recording artists are 
not employees. We are not entitled to the benefits of employees such as 
pensions and health care, and as such we do not create works for hire.
    In fact, the working relationship between a recording artist and a 
record company is that of a joint venture/partnership. Other than the 
standard boilerplate work for hire language that is mandatory and non-
negotiable in almost every record agreement with a major label, there 
are no contractual indicia of an employer/employee relationship. So 
while the recording artist works with the record company as a 
functional partner, the record company treats the recording artist as 
an employee. The record companies must treat recording artists more 
like partners, which in fact they are. If the record labels would 
listen to and respect the recording artists' collective political and 
economic voice, tremendous progress could be made to resolve the 
lingering political and contractual differences between the recording 
artists and the labels, including work for hire.

                  Compulsory Licenses as a Last Resort

    This issue is addressed above.

                 Interactive Digital Performance Right

    The Digital Performance Right in a Sound Recording Act of 1995 
created the first performance right for the performers of music. 
Congress mandated a royalty payment of 50% to the copyright holder 
(most often the record label), 45% to the featured artist, and 5% to 
the non-featured musicians and vocalists. This royalty applies only to 
noninteractive webcasting as defined by the compulsory structure of the 
Digital Millennium Copyright Act. The problem is that for an 
interactive service such as Bertelsmann/Napster, My.Mp3.com, MusicNet, 
or Duet, the compulsory license does not apply: Artists lose their 45% 
and have to settle for whatever they are promised in their label deal. 
This might range anywhere from 7% to 50%, but more importantly would be 
recoupable against the artist's outstanding balance. As such, for most 
artists, there will be little revenue from interactive music services 
under the licensing structure that exists today.
    Writers of music share a performance right with publishers. The 
writer's 50% share is paid directly to the writer, and is not subject 
to recoupment. RAC believes that digital performance rights for sound 
recordings should mirror the writer's system.
    The Digital Performance Right in a Sound Recording Act contains 
provisions for labels to strike exclusive licenses with webcasters. 
Under an exclusive license, artists once again potentially lose the 45% 
afforded to them by the compulsory. The difference between a direct 
payment to an artist and a recoupable payment is dramatic for both the 
artist and the label. For the artist, it may be the difference between 
some payment and none. Since the incentive is greater for the label to 
negotiate directly with webcasters, the labels could retain more money 
possibly at a lower rate.
    There is also the matter of equity stakes the labels have 
negotiated with digital media companies. It is now common for the 
labels to take equity in digital media companies as a precondition to 
licensing their content. For instance, AOL Time Warner, Bertelsmann, 
and EMI hold equity in MusicNet, and Sony and Universal in Duet--equity 
shares that will not be offered to recording artists. Perhaps one way 
to level this inequity is to ensure direct, substantial, and non-
recoupable payment to artists from interactive music services.

                          Independent Artists

    The answer to this question must be in two parts. First, the issue 
of new artists signing major label agreements will be addressed, and 
second, the issue of independent artists will be addressed:
    A. New Major Label Artists--A young recording artist signed to a 
major label has many obstacles to overcome. The rate of success of new 
artists is incredibly low. Most do not get past their first album 
release, and for those who do, the success rate after that is still 
quite low. This is a very tough business. The Internet provides a new 
artist with a valuable promotional tool that had never existed before. 
A new artist can use the Internet to release promotional tracks and 
drive traffic their way. New artists can create web sites that provide 
promotional information and develop a degree of interactivity with 
their fans. In many instances bands communicate with their fans by 
amassing an e-mail database. They can inform their fans when and where 
they will be performing live, or when their new album is being 
released. They can interact with their fans through chat rooms, and in 
some instances they receive feedback from their fans about their music. 
In fact, the band Journey recently revised an unreleased album, 
including creating new tracks, based on feedback from fans who heard 
the album after it was prematurely put on the Internet without the 
band's approval. The Internet undoubtedly provides the newly signed 
artist with an unprecedented marketing and promotional tool. 
Furthermore, the Internet is, as of yet, unproven as a primary 
distribution mechanism. New artists still rely on CD sales and it 
remains difficult to obtain shelf space in the terrestrial retail 
outlets. The promise of independent Internet distribution is unlimited 
``shelf space''.
    Unfortunately, many major labels are beginning to acquire more and 
more Internet rights from bands when they are signed. Some major labels 
now try to own and/or control an artist's web site, even if the site 
was created before the recording agreement was signed. They are 
especially concerned about controlling data which is stored on the web 
site, and in some instances, they have attempted to exclusively control 
the artist's trademarked name on a web site address even after the 
termination of the recording agreement. The newly signed artist must 
try to retain these rights so the artist can take a substantive role in 
promotion during and after the deal. Major labels are very shortsighted 
in this regard. By seeking to control an inordinate amount of Internet 
and digital rights of the newly signed recording artists; they are 
unwittingly ensuring that the failure rate of new artists remains at 
the same level or conceivably gets worse. Major labels have cut 
promotional budgets and staffs across the board; especially those 
recently acquired by multinational corporations. The labels must 
apportion their shrinking promotional money and manpower to a greater 
number of deserving bands. A new band might well find itself in the 
middle of this type of number crunching that ultimately may result in 
record label neglect. At times the only player actually promoting a new 
band is the band itself. A new act must retain as many Internet rights 
as possible so as to give itself a fighting chance in the ever more 
constricted major label market.
    B. Independent Artists--A viable independent Internet distribution 
system must be allowed to survive. Otherwise, independent artists will 
not be able to take advantage of the wonderful promotional, marketing, 
and creative benefits of the Internet. The Internet provides many 
independent recording artists with an outlet that was simply not in 
existence before. The major record companies should not be allowed to 
destroy or inhibit independent online distribution in the name of 
copyright infifringement enforcement, when in fact, its destruction 
will only secure Internet market dominance for the major labels. Will 
the major labels willingly allow for competition with independent 
artists through an Internet system the majors control such as MusicNet? 
There is reason to be concerned that the major labels will only want 
their respective artists to be promoted via the Internet. This is the 
most compelling reason why the major labels should license their music 
to Napster and services like it, so that independent distribution will 
survive. Otherwise the independent artist will be as isolated as ever.

                           Contractual Issues

    For years, recording artists and their representatives have 
recognized and vilified the antiquated, but universally used, standard 
recording agreement. Some surmise that the standard recording 
agreement, with all of its anti-artist provisions, arguably constitutes 
a restraint of trade under the laws of the United States. There is some 
degree of support for this point of view. Courts in the United Kingdom 
have at times ruled that certain standard music industry contracts 
constitute a restraint of trade under the laws of the United Kingdom, 
and perhaps even under the laws and regulations of the European 
Community, if the court determines that the contract in question is 
oppressive and against the public interest. In those instances UK 
courts have rescinded or terminated contracts and at times awarded 
recording artists with significant damages. Based on this precedent in 
the UK, this Committee should examine the standard recording agreement 
as is used in the record industry today in the United States to 
determine whether there is any basis to conclude that this type of 
standard agreement also violates US law. The following are examples of 
certain controversial provisions Congress may find troublesome:
    1. A key issue in many of the United Kingdom restraint of trade 
cases is the inordinately long term of the standard contract. Most 
major label agreements require a commitment for six to eight albums, 
with a term that could conceivably last well over ten years. The United 
Kingdom and the State of California have tried to address this problem 
either through court intervention or through the legislature. (No 
action has been taken elsewhere in the United States.) Courts in the 
United Kingdom have ruled at times, that as a matter of UK law an 
excessively long term recording agreement, as well as other types of 
similar agreements in the music industry, constitutes a restraint of 
trade. The State of California responded by enacting Labor Code 2855 
which prohibits, under certain circumstances, a term for entertainment 
industry personal service contracts longer than seven years. RAC 
believes a legislative solution is desirable, and therefore Congress 
should seriously consider enacting a seven-year federal law similar to 
the law in California. While the California law is not perfect, 
Congress should consider it as a guide. Free agency in the music 
industry will help the established artists, the new artists, and the 
independent artists. Free agency in the movie industry has been a 
fantastic success, increasing the economic viability of both the 
studios and the actors. In the music business, both the record labels 
and the recording artists will benefit from a free agency system that 
places a premium on success and gives artists a new degree of control 
over their careers. This is why a federal seven-year rule would be good 
public policy. It guarantees competition and innovation in the music 
industry.
    2. The majority of recording artists will never achieve financial 
success or independence while the very onerous recoupment policy 
remains a staple of the standard record agreement. As Chairman Hatch 
has stated in the past, this is the only industry in which, after you 
pay off the mortgage, the bank still owns the house. This standard 
recoupment policy is also a very compelling reason why Congress and the 
Courts should recognize that a recording artist is not an employee or 
independent contractor of the record company. Congress should undertake 
a very close examination of this policy.
    3. When a band signs a record contract with a major label there is 
almost always a ``leaving member'' clause. This type of clause mandates 
that a recording label has the right to retain the services of a 
leaving member of a band as a solo artist.
    4. The work for hire provision of the standard record agreement 
offers another compelling example of a provision which raises anti-
competitive concerns as it denies the creator of the work the right, 
otherwise granted to all other copyright creators in similar 
circumstances, to exercise termination rights. Essentially, the work 
for hire provision tries to contractually deny the recording artist 
their termination right, even though the Copyright Law clearly does not 
include sound recordings as a qualifying category for work for hire 
status.
    5. Recording artists who also write their own music often must 
waive the full, statutory mechanical royalty rate as a precondition to 
signing a record contract (the ``controlled compositions'' clause).
    In almost all record contracts, the standard royalty is drastically 
reduced for all sorts of inappropriate and arbitrary reasons. For 
example, a recording artist will receive a reduced royalty if a record 
is sold in a foreign territory, if the record is sold in a PX or a 
military base, if the record is released in a ``new format or 
technology,'' and if the record is sold through a record club. The 
major labels cross-license their catalogs to record clubs, such as 
Columbia House and BMG Direct. The labels take enormous advances that 
they do not share with recording artists and pay artists based upon a 
50% royalty rate. RAC is also concerned that this long-contended 
practice is extending to the online marketplace. With Mp3.com, for 
example, each of the major labels took $20 million advances on blanket 
licenses--advances they have not offered to share with artists. A 
certain amount of records will be distributed as ``free goods'' when in 
many instances the recording agreement provides that the record company 
may include these records in special merchandising programs. In these 
instances, the record company would still get paid for these records 
while the artist would not. Some contracts actually charge a packaging 
deduction against the recording artist for sales of records via the 
Internet. In other words, the record company does not create any 
packaging, but nevertheless charges the recording artist for the non-
existent packaging. Sometimes these packaging charges amount to 25% of 
the standard list price of a record. RAC member, Tom Waits sums up the 
situation very nicely with this prophetic line in his song ``Step Right 
Up'': when it comes to recording contracts, ``the big print giveth, and 
the small print taketh away.'' All in all, the practices of the record 
industry relating to calculation of royalties warrant serious 
attention.
    All of the above are compelling reasons why Congress should 
investigate, understand, and hopefully act to change the very basic way 
that business is conducted in the music industry. Even though the 
record companies will protest, this type of intervention will help all 
concerned, including the record companies, as it will revitalize 
creativity and guarantee that the record industry will be a vital and 
important American treasure for many years to come.

                                

  Responses of Mike Farrace to questions submitted by Senators Hatch, 
                             Leahy and Kohl

    I am pleased to provide these responses to the written questions 
asked subsequent to the April 3, 2001 hearing. I thank the Judiciary 
Committee for the attention it is giving to the need to encourage ample 
dissemination of creative works and the importance of maintaining 
vigorous competition in the distribution of sound recordings.

           Responses to written questions from Senator Hatch

    Question: One argument we have heard in favor of a compulsory 
license is that music has so many pieces to license and there have been 
substantial disputes between the record labels, the publishers and 
technology companies like MP3.com about how to get the publishing 
rights cleared in the volume demanded by online offerings. Some have 
suggested that a stumbling block to getting the labels to license sound 
recordings is that they may not have the rights from their artists to 
grant these rights. I understand there may even be problems with the 
MusicNet offering to some degree because of these impediments. Would 
any of you be interested in commenting on this particular problem and 
suggest ways to remedy it?
    Answer: It is Tower's understanding that while many artist 
contracts of the past may not have included language providing for 
distribution via new configurations, the language of most artist 
contracts today acknowledges that record companies will face an ever-
changing landscape of technological opportunities for distribution, and 
therefore, contract language provides for the record companies' ability 
to exploit copyright via new configurations and channels of 
distribution which may not specifically be identified by name. More 
importantly, however, if such a stumbling block exists for a label, we 
believe it should preclude content availability for MusicNet or Duet 
just as it would for a delivery system using an independent company 
such as Tower. Conversely, if MusicNet and Duet can be licensed, so can 
Tower.
    It may also be useful to note that disputes over ownership of 
copyrighted material have existed in the past, and can logically be 
expected to exist in the future. A compulsory license would not address 
issues of ownership. We believe Congress is correct in hesitating to 
impose an extreme measure such as a compulsory license without giving 
the marketplace time to offer its own solutions. At the same time, we 
urge the Committee of the Judiciary to view with caution claims of 
stumbling blocks that appear to exist only for companies not owned or 
controlled by copyright owners.

    Question: Mr. Hank Barry argues that we have created compulsory 
licenses in the past, for publishing rights in music and in rebroadcast 
of television programming because it was difficult to clear the rights 
to the myriad creative interests involved in making up a broadcast day. 
Would anyone like to explain why that analogy does or does not obtain 
in the online music and entertainment world?
    Answer: The analogy appears to apply. A song can have more than one 
writer and owner; an album can have multiple writers; a compilation 
album or soundtrack can involve multiple labels and distributors. Ed 
Murphy, in his testimony on behalf of NMPA, acknowledged that the size 
of the licensing demand placed on Harry Fox by just MP3.com was far in 
excess of their current licensing capability. However, Mr. Murphy also 
insisted that they were working hard to meet not only the needs of 
MP3.com, but to anticipate the licensing needs of the industry as a 
whole. We readily acknowledge that many in the industry have been 
working feverishly to address the myriad rights involved in creating a 
digital marketplace. We believe that while current progress has been 
slower than we would like, a careful review of the industry's ability 
to solve the licensing issues identified at the hearing is necessary 
before concluding that a compulsory license is required.
    Tower supports the concept of Section 115, which allows anyone to 
obtain a compulsory license to make and distribute phonorecords of a 
copyrighted work once that work has been distributed to the public, 
thereby encouraging more creative uses of the work while insuring that 
the copyright owner receives a reasonable royalty payment. The public 
may benefit from similar tools applied online to eliminate the 
potential logjam created when an entity that controls a copyright 
frustrates the widespread distribution intended by the Constitution. 
Some conditions upon the licensee may be warranted to insure that the 
right to a compulsory license to make a reproduction via a digital 
phonorecord delivery (DPD) be available only to those who can 
demonstrate the ability to (a) be accountable for the number of DPDs 
actually distributed and (b) can deliver them in a reasonably secure 
format. (See, for example, House Report No. 76-1476, noting the 
authority of the Register of Copyrights to prescribe regulations 
pursuant to Section 115 containing ``detailed provisions ensuring that 
the ultimate disposition of every phonorecord made under a compulsory 
license is accounted for.'') These details are beyond the scope of this 
response. However, Congress should reasonably expect that a statutory 
framework for this could be developed with the help of knowledgeable 
experts if compulsory licensing becomes warranted.

    Question: I have heard a number of entertainment companies say that 
acceptable protection for online content simply does not exist yet, 
that existing Digital Rights Management and watermarks, wrappers, or 
encryption, is simply not good enough to protect valuable content. Yet 
we have a number of technology companies here today who believe that 
they have such a solution, and now we have announcements of online 
initiatives from all five major labels, which suggests the 
technological protections have developed recently. Would any of you 
care to comment on the state of technological protection for content?
    Answer: Our belief is that the copyright management through 
watermarking and encryption available through existing systems are 
suitable and more than adequate for use in launching the sale of 
digital files online. Making an extensive selection of audio content 
available for consumer use now would provide a convenient, genuine and 
legal alternative to piracy. Secure digital delivery systems will 
continue to improve over time, just as loss control systems at retail 
have improved over the years. Tower has long been a faithful partner in 
helping record companies combat piracy of physical goods all over the 
world. We believe we have earned the right to be trusted in the new 
digital distribution channel.
    Tower can today offer downloads that are infinitely more secure 
than the music published on CDs. Every time a record company refuses 
legal content to Tower and other retailers, the result is that Tower 
and other retailers are prevented from competing with services like 
Napster. It seems illogical to us, and leads us to question the motives 
of our suppliers. We worry that their long-teen plans may be to confine 
existing retailers to the ``bricks and mortar'' world while the record 
companies try to establish stronger technological controls not only 
over electronic distribution, but also over lawful use subsequent to 
the initial distribution.

    Question: The premise of this hearing is that digital content is 
coming soon to digital devices to be enjoyed by consumers soon. Based 
on our discussion today, how soon is soon, and when will the promise 
become reality?
    Answer: There is no technological barrier preventing that from 
happening right now. As I said in my testimony, robust technology 
exists to facilitate the portability of song files to a variety of 
media and playback mechanisms. We do acknowledge that there is the 
challenging issue of developing viable economic models for digital 
distribution. However, we believe that the best way to test the 
viability of these economic models is to work with trusted partners 
like Tower who will provide real feedback from real consumers about 
real products available in the marketplace.

    Question: Is there any point you feel should be raised or that you 
would like to further respond to for the completeness of our record?
    Answer: We are concerned that what is happening today has less to 
do with controlling piracy, and more to do with copyright owners 
controlling the distribution and use of copies and phonorecords beyond 
the limits imposed by Congress. The piracy rationale is not limited to 
music, but is being extended to motion pictures as well. See, e.g., 
Alen Koebel, ``Digital Video Interfaces And Consumer Displays,'' 
Widescreen Review, April 2001, p. 102, at 106 (``Digital technologies, 
for the first time, make it possible to control where, when and in what 
manner content is viewed. Digital content protection could be used 
simply to prevent copies, but is capable of much more . . . [and] the 
evidence suggests that Hollywood is actually more concerned with 
controlling honest consumers--with the ultimate aim of extracting more 
money from their wallets--than stopping pirates'').
    Previously, when new technologies that ``steal'' copyrighted 
material have been introduced (like cable TV or video), Congress has 
sought solely to ensure compensation Congress has never sought to 
guarantee control. Copyright owners have never been permitted to decide 
who gets to sell copies and phonorecords, or to whom or at what price. 
Nor have copyright owners been permitted to decide who gets to read a 
book, listen to a song, rent or watch a movie, or whether the owner of 
a lawfully purchased copy can give it away. Today record companies and 
studios are attempting to claim the unlimited right to control these 
decisions. See ``Report to Congress: Study Examining 17 U.S.C. Sections 
109 and 117 Pursuant to Section 104 of the Digital Millennium Copyright 
Act,'' U.S. Dept. of Commerce, National Telecommunications and 
Information Administration, March 2001, n.101.

    Question: What are your concerns regarding the recently announced 
MusicNet and Duet deals, and what issues in connection with these deals 
should the Judiciary Committee, in your opinion, continue to watch?
    Answer: Tower's concerns are based in part on the fact that the 
details of these deals have yet to be made clear. It appears that 
MusicNet intends to offer streams and downloads. Their first customers 
will be AOL and Real Networks, both major stakeholders in the MusicNet 
Company. Record companies tell us MusicNet is an independent company 
that will be non-discriminatory. Tower expects that the terms and 
conditions through which content is made available to us will allow us 
to compete just as aggressively against AOL and Real as we do against 
other retailers.
    Our concerns also echo those of the Register of Copyrights, which 
offers that ``any one work will ordinarily be competing in the market 
with many others . . . [t]he real danger of monopoly might arise when 
many works of the same kind are pooled and controlled together.'' 
Register's Report on the General Revision of the U.S. Copyright Law 
(1961), at 5. In the off-line world, the five major record companies 
have already formed crosslicensing relationships with each other that 
disfavor competing retailers, in a manner very similar to what appear 
to be the MusicNet/Duet deals. Record clubs like Columbia House and BMG 
Direct cross license audio content to companies owned by the record 
companies themselves, resulting in the ubiquitous ``10 CDs for a 
penny'' offers which not only dramatically reduce the perceived value 
of music generally, but which foster a belief among consumers that 
recordings retailers like Tower sell are overpriced. Online, MusicNet 
and Duet reflect the recognition of the record companies, voiced by 
Richard Parsons at the April 3, 2001 hearing and recently echoed in 
Time. ``None of these services can survive without content from all 
five major labels.'' Dannielle Romano, music analyst at Jupiter Media 
Metrix, as quoted in by Chris Taylor in ``More Pain for Napster: The 
big music labels spin plans go to the Net,'' Time, April 16, 2001, p. 
43. Retailers, likewise, must have content from at least each of the 
major companies to be competitive.
    Thus, the danger mentioned by the Register of Copyrights forty 
years ago has increased exponentially. Currently, five companies 
control 85% of all sound recordings. So, MusicNet and Duet will 
together control 85% of the market. Moreover, since neither MusicNet 
nor Duet can succeed on the strength of their own collections, it 
stands to reason that soon these two behemoths will follow the model 
they established with BMG Direct and Columbia House, cross license to 
each other, and each be in a position to dispense with having to deal 
competitively with any other competing distribution entity. See 
Learmonth, ``Universal and Sony in Napsterless Harmony,'' The Industry 
Standard, visited at http://www.idg.net/crd--music--450642--103.htm1 
(``. . . sources say, Duet development has been launched; the staff is 
based in New York and its corporate structure will be much like the 
Columbia House record club, which is half-owned by Sony and half by 
Warner Music Group. '') Independent record companies will be forced to 
accede to their terms if they want an outlet, and no retailer would 
have any hope of offering competitive terms to consumers because their 
wholesale costs will, as we have seen with the record clubs, be several 
times higher than the wholesale prices the record companies give each 
other.
    As I mentioned in my testimony, many entities are ready to offer 
lawful digital downloads. Thus, the creation of MusicNet and Duet was 
not really necessary to achieve that objective. To the contrary, the 
evidence suggests that the reason these record companies have denied 
others the opportunity to lawfully compete with Napster by delaying 
secure digital downloads is that they hope to devise a network by which 
they alone can control substantially all digital distribution.
    There are, then, two issues that Tower would ask this Committee to 
continue to watch. First, the degree to which companies that have 
amassed substantial collections of copyrighted works leverage the power 
of these monopoly collections into control over their competition. 
These companies have shown a historical predilection to monopolize 
online entertainment in ways both subtle and overt, and therefore, 
examining the reciprocal relationship licensing used to favor their own 
companies and joint ventures over those of their competitors, would be 
appropriate. See, for example, Six West Retail Acquisition, Inc. v. 
Sony Management Corp., No. 97 Civ. 5499 (DNE), 2000 U.S. Dist. LEXIS 
2604, *60-*64 (S.D.N.Y. March 8, 2000).
    Second, the Judiciary Committee should continue to watch the same 
issue that was of concern to Congress nearly 100 years ago--striking 
the proper balance between content owners' legitimate demands for 
compensation, and yielding to their illegitimate demands for control. 
Today, there is every reason to stay the course explained by your 
colleagues in the House in 1909 when the House Judiciary Committee 
said: ``Your committee feel that it would be most unwise to permit the 
copyright proprietor to exercise any control whatever over the article 
which is the subject of copyright after said proprietor has made the 
first sale.'' In the online world, this means that a copyright cartel 
must be prevented from controlling the retail-level authorization of 
downloads because the result of a digital download is the same as the 
purchase of a DVD or CD: The consumer will become the ``owner of a 
lawfully made copy or phonorecord.'' See Section 109. Just as Congress 
prevents copyright owners from controlling distribution once having 
sold copies for distribution, so, too, should they be prevented from 
controlling retail-level DPDs once they have licensed a merchant to 
offer the DPD to the public.
    Just as in the sale pre-packaged copies and phonorecords, the 
public interest demands that retailers remain free to charge competing 
prices, offer competing levels of customer support, and otherwise offer 
the public the benefit of vigorous competition. In the same manner, 
consumers must be free to give, sell or lend lawfully acquired songs. 
Congress should act swiftly in response to any use of new technology to 
prevent the lawful use of lawfully made copies, and should take the 
additional step of making sure that digital distribution of 
phonorecords made at home or in a retail store remains just as free 
from copyright owner control as is the physical distribution of pre-
recorded phonorecords made in a factory.

    Question: There have been calls for compulsory licensing of sound 
recordings, of publishing rights, and of ``most favored nation'' 
protections for online distributors not affiliated with record 
companies. Others argue that no one has rights to use property other 
than the property owner and those property owner agrees with (with fair 
use exceptions in the copyright context, of course). Could you each 
explain what justification you see, if any, for such extreme 
legislative action, other than that your business plans rely on using 
the major labels' content to be successful? Please be specific if you 
suggest such theories as misuse of copyright, etc.
    Answer: While Tower does not favor compulsory licensing at this 
time, we believe a careful review of industry practices up to this 
point is helpful in evaluating two separate but related issues. One is 
whether the copyright owner should be obligated to license the online 
reproduction of its works, and the other is whether such licensing, 
once authorized, should be given on a non-discriminatory basis. The 
effect of the copyright owner's decision upon freedom of competition is 
fundamentally different in an online or ``postrecorded'' distribution 
than it is for physical or ``pre-recorded'' distribution.
    For the consuming public, the most important feature of physical 
distribution is not whether or to whom the reproduction right or 
distribution right is licensed, because at some point the goods will 
reach a retailer of the customer's choosing, should that retailer 
choose to carry the product. Moreover, thanks to the Robinson-Patman 
Act, all retailers will have roughly the same acquisition cost, and 
thanks to the first sale doctrine, all retailers will have a chance to 
buy the product and compete on a relatively level playing field.
    In the online world, the strictures of the Robinson-Patman Act can 
be avoided because the courts have interpreted it to apply to the sale 
of tangible goods, but not to licenses. Free of the restrictions in the 
Robinson-Patman Act, copyright owners have the power to license the 
reproduction right to only those companies of their choosing and can 
also decide who will survive through the use of terms which favor one 
competitor (such as a company which they own) over another.
    In short, in the physical goods world, the copyright owner may 
strategically restrict who can manufacture (reproduce) copies and 
phonorecords of its works, and who can make the initial distribution of 
its works, but the distributors must not discriminate in price and 
retailers to whom they refuse to sell will always have a way of 
obtaining the product for resale. In the online distribution world, in 
contrast, the copyright owner can both shut a retailer completely out 
of the market and/or license the reproduction right on grossly 
discriminatory terms, to the same effect.
    A case brought by NARM against Sony Corporation, on behalf of its 
music retail members, challenges Sony's cross-licensing wherein the 
record clubs can obtain sound recordings identical to the ones 
retailers sell, but at a small fraction of the price. Sony claims that 
it can do this because licenses are not subject to the Robinson-Patman 
Act. In this case, which is currently before Judge Sullivan in the U.S. 
District Court for the District of Columbia, we allege that these 
licenses are in reality just sham licenses intended to cover up what 
are, in substance, sales of goods of like kind and quality to similarly 
situated buyers but at grossly dissimilar prices. The CDs are 
manufactured in the same manufacturing facilities and result in 
virtually identical copies. A CD Sony sells to Tower for $12.50 costs 
Columbia House (the record club jointly owned by Sony and AOL/TW) only 
about $2.50. The result is that Columbia House can make a $10 profit 
before retailers can break even. If that same model is carried over to 
digital distribution (and every indication is that the record companies 
intend precisely that), then the retailers favored by the copyright 
owners could offer downloads at a small fraction of the ``wholesale'' 
cost offered to other retailers.
    Do consumers benefit when two retailers are charged one wholesale 
price, and all others are charged 500% more? Clearly, they would be 
better off if thousands of retailers like Tower were charged the lower 
wholesale price.
    Congress should adopt the same policy restrictions for copyright 
owners in the world of digital distribution as it did for physical 
distribution. ``[W]here the copyright owner first consents to the sale 
or other distribution of copies or phonorecords . . . continued control 
over distribution of copies is not so much a supplement to the 
intangible copyright, but is rather primarily a device for controlling 
the disposition of the tangible personal property that embodies the 
copyrighted work. Therefore, at this point, the policy favoring a 
copyright monopoly for authors gives way to the policy opposing 
restraints of trade and restraints on alienation.'' 2 M. Nimmer & D. 
Nimmer, NIMMER ON COPYRIGHT, Sec. 8.12[A] (2000).
    Your question notes that some ``argue that no one has rights to use 
property other than the property owner and those the property owner 
agrees with . . .'' but such argument fails following a quick reference 
to the Copyright Act. There is absolutely nothing in the Copyright Act 
that creates any exclusive right of ``use.'' Anyone can use a 
copyrighted work in any way they desire, so long as it does not 
infringe any of the enumerated exclusive rights. If I were to sneak 
into a theater to watch a movie without paying, I may be in trouble 
with the theater owner if I get caught, but I'm not infringing 
copyright. Similarly, a record company has no power under the Copyright 
Act to control who gets to listen to a recording.
    There have been many business plans that have relied on using 
copyrighted content in ways that copyright owners may not have 
supported, but which have ultimately benefited them. Cable TV has 
provided thousands of additional outlets for content. MTV created a 
market for selling music video in addition to promoting the sale of 
millions of CDs. Independent video stores created both the video rental 
and video sell-through markets. The notion that an independent business 
plan that uses copyrighted material is somehow ``tainted'' should be 
treated with suspicion.

    Question: I assume you agree that ultimately online distribution of 
music, be it downloads or streaming services, can be less costly than 
distribution in the physical world where trucks, warehousing, damaged 
goods, and overstocks can run up costs. Some have suggested that the 
labels cannot pass these cost savings on to consumers because doing so 
would upset the record store retailers they rely on like Tower Records 
by undercutting the record store sales price. Would you agree that 
brick and mortar retailers are the reason online cost-savings cannot be 
passed on to consumers? Similarly, would you object to retailers using 
deep discounts on recorded music as loss leaders to induce customers to 
visit the store, perhaps to buy stereo equipment, etc., and if so, why?
    Answer: We agree that online distribution of music may be less 
costly than distribution in the physical world. We do not agree that 
brick and mortar retailers are the reason that online cost-savings 
would not be passed on to consumers. First, let us clarify the use of 
the term ``distribution,'' which refers to the wholesaling of music, 
and which is distinct from ``retailing'', which involves selling to the 
end user. Today, if Tower buys 1,000 CDs, they would have to be 
manufactured, labeled, packaged and shipped to our stores. Tomorrow, 
Tower could obtain one digital file and a license to sell 1000 Tower 
customers the rights to download a copy. For the record company, the 
latter form of distribution is certainly cheaper because the costs of 
manufacturing the components of a recording are being shifted 
downstream.
    If lower wholesale prices result from economies realized in online 
distribution, and if they are commensurate with the actual savings, we 
see no reason to be upset. The cost of producing the recorded media, 
printing the booklet, inserting the CD and booklet in a package, 
boxing, shipping and maintaining the necessary warehousing, sales and 
inventory systems and personnel as well as any other physical-world-
only materials and activities could be reasonably deducted from the 
existing wholesale cost. However, there are other activities which must 
reasonably replace them such as storing and serving the content in a 
secure server, utilizing a copyright management system, verifying the 
completion of the download, and providing customer service for 
incomplete or faulty downloads. Once these are added back in, along 
with activities which do not change, such as advertising and promotion, 
we will be able to determine the true savings that might be passed on.
    As long as the cost-basis of merchandise is consistent and 
supported by reasonable volume requirements and other accepted 
marketing programs such as dating, advertising support, and 
merchandising support, we would embrace lower costs online. What record 
companies are really describing when they say brick-and-mortar 
retailers will object to passing on savings are the ``savings'' they 
intend to reap by eliminating retailers from the distribution chain 
altogether.
    We are concerned that record companies will create direct marketing 
strategies that mirror those in the record clubs, where cross-licensing 
and sweetheart licenses are granted only to affiliated companies. These 
arrangements in the past have eroded the perceived value of music and 
lead consumers to believe retailers are making dramatically greater 
profits than they really are.
    We define a ``loss leader'' as a product that is sold for less than 
its actual cost. We do not object to low margin ``deep discounting,'' 
per se, as a means to induce customers to visit a store to buy other, 
more profitable products, and while we think pricing below cost is bad 
public policy and we don't engage in it ourselves, we recognize that 
some of our competitors do. However, consumers as well as government 
need to understand the true impact of loss leader programs on the 
ecosystem of bringing, and keeping, music widely available to the 
public. Tower has always been devoted to finding and stocking every 
piece of music offered to us, and to having personnel who are 
knowledgeable about such a vast selection of music. The cost of such an 
approach is substantial, and therefore we place less emphasis on having 
the best price in our marketing. However, our concerns about the impact 
of widespread loss leader programs extend well past the impact on 
Tower's marketplace niche.
    Particularly in this age of dot-coms, when the cost of new customer 
acquisition may exceed the wholesale price of two or three CDs, it 
concerns us when CDs are sold below wholesale because the company in 
question is not really in the business of selling music at all, but in 
the business of selling advertising or in selling consumer data, in 
which case the lure of cheap music may be used as the bait to engage in 
lucrative consumer data mining, or to solicit for sales of unrelated 
consumer goods. Such activities undermine the value of music, both real 
and perceived, and tend to undermine what should be one of the primary 
sources of income for creative artists.
    Sometimes our issues dovetail with those of others in the value 
chain, like artists. Why should an artist forgo regular royalty levels 
to enable a record club to use these strategies to erode the value of 
their work? Why should a record company be permitted to reduce the 
artist's compensation for an identical consumer product, just to 
undercut the competing retailer? And, how does the consumer benefit 
when a purported cost savings is made possible by shifting the cost 
from one retailer (the one in which the record company has a financial 
interest) to another (that competes independently)?
    The short answer to your question, then, is that retailers fear the 
lack of true competition more than we fear true competitors. The 
Copyright Act makes a careful distinction between the copyright in the 
intellectual property, which grants a limited monopoly, and rights in 
the copies and phonorecords themselves, where the free market and 
antitrust laws come into play. See Section 202 (``Ownership of a 
copyright, or of any of the exclusive rights under a copyright, is 
distinct from ownership of any material object in which the work is 
embodied''). When the copyright monopoly in the intellectual property 
is used to restrict competition in the physical property (whether made 
in a factory, store or home), Congress should provide the tools with 
which the courts can draw the line. In this, we echo the concern raised 
by Senator Hatch when he stated: ``We will also need to review the 
increasing legal tension in the high technology industry between 
intellectual property rights and antitrust laws. There has always been 
a tension here, but in the Internet world, we need to be careful that 
intellectual property or content power is not leveraged into 
distribution power, or otherwise used in anticompetitive ways.'' 107 
Cong. Rec. S 1376 et seq., February 14, 2001).

           Responses to written questions from Senator Leahy

    Question 1: Mike Farrace, Senior Vice President, at Tower Records 
testified that some record companies are requiring personal data from 
and about Towers' customers, prompting concerns by Tower Records about 
violating its own privacy policy, damaging the relationship with the 
customer, and ``maybe even result[ing] in Tower violating the law.''

    Question 1(A): What sort of personal data are record companies 
requesting from retail distributors, such as Tower Records, and other 
online distribution services to provide from or about customers?
    Answer: The customer's e-mail address is the primary bit of data 
labels want, although some proposed systems require much more. Record 
companies have used several strategies to acquire the email address and 
other information, which we outline in Question 1(B).

    Question 1(B): Are record companies asking retail distributors to 
provide any personal data about customers who purchase CDs in brick-
and-mortar stores, or have the requests for collection of customer data 
been limited to online music purchases?
    Answer: Record companies have solicited personal retail customer 
data in both selling environments. They have long sought customer data 
through the use of ``blow in'' cards which invite a CD purchaser to 
complete a form in order to join a fan club or get additional 
information about a company's catalog of releases. Some record 
companies embed links on CDs sold at brick and mortar stores which link 
to record company-owned artist web sites, which in turn link to record 
company-owned commerce sites, or to third party commerce sites. 
Manufacturers have not yet specifically requested or required that 
Tower provide personal data about brick and mortar customers who 
purchase CDs to them directly. However, they do routinely print the 
URL's of artist and label sites on the product, so we are forced to 
market their data collection web site and, ultimately, their own or 
third-party commerce sites. It is as though instead of requiring that 
we give them our best customer list, they simply forced us to send 
everyone on that list free advertising for their competing retail site.
    Online, record companies have variously proposed several systems 
that have inherent data collection, and/or systems which have ``opt 
in'' screens intermingled with the transaction process, but email data 
can be gathered under a variety of circumstances.
    In the first, the record company's digital delivery system 
processes the transaction. In these systems, the label captures the 
consumer's e-mail address, specifics about the product purchased, the 
customer's credit card number, dates, times, etc. This information can 
then be combined with prior purchases to determine trends and create 
user profiles. This is the most objectionable situation for retailers.
    The second strategy is to insert an ``opt-in'' screen during the 
transaction process. In some cases, this has been a simple screen that 
asks for the customer's email address without explanation. In others, 
text below the entry field asks the user if they would like more 
information about this artist. In some cases, the name is simply 
gathered by the content owner and no particular use of the name is 
specified. In others, the user is sent to a web site where they are 
presented with a large list of artist names with checkboxes, and told 
they will receive email about the artists they checked.
    The third strategy is one in which the record company partners with 
a technology company to offer their own customer support function, and 
in which the technology company will collect consumer data at the 
customer support level and share it with the record company.
    The fourth is one in which the record company limits the retailer 
to the role of sales agent, wherein the online retailer's only function 
is to promote links to the record company itself and perhaps handle the 
customer support function if the transaction fails. The consumer 
transaction is made directly with the record company (though the 
consumer may not be aware of it) in exchange for a commission to the 
retailer/sales agent, and thus the record company can solicit whatever 
information it wishes without regard to the retailer's wishes or 
privacy policies.
    We do not object to opt-in opportunities generally. We do object to 
the use of these names by record companies for marketing directly to 
Tower consumers. Only one label that does not already require personal 
data as part of a proprietary transaction mechanism, EMI, has agreed to 
refrain from activities of this kind. Some companies have offered to 
share the names under certain conditions, or agree to mail only in 
conjunction with the primary retailer, or to allow the retailer to 
email, provided the retailer does the mailings whenever the record 
company wants and/or agrees to limit the content of the emails.
    The problem with these scenarios is twofold: (1) Because there are 
multiple retailers and multiple content owners, customers could 
potentially be barraged by numerous indiscriminate mailings, which will 
create customer service burdens to retailers and, as a result, 
undermine each retailer's customer relationship. (2) Of equal concern 
is that we know that information about Tower customers will be used to 
eventually divert future purchases from our customers to retailers 
owned or operated by the record companies. Other than EMI via the 
agreement with Liquid Audio, no record company will promise never to 
use the data independently unless we agree to conditions like the ones 
above.
    Most labels also want recaps of sales, including artist, title and 
sales price. We don't object to sales recaps when they are used in 
aggregate to discern trends, identify ``hot'' records or for other 
purposes consistent with building marketing plans that intelligently 
allocate resources to resellers. We do object when our own customer 
information is used to market to our customers, or is used by the 
recipients to compete with us. It frustrates free market economics by 
using monopoly power to raise the costs to a competitor.
    (The use of embedded hyperlinks as described above is part of a 
lawsuit filed by the National Association of Recording Merchandisers, 
the music retailer trade organization to which we belong, against Sony 
Corporation.)

    Question 1(C): Are retail distributors and online distribution 
services formulating or revising their privacy policies to accommodate 
requests from record companies to provide personal data from or about 
customers?
    Answer: Tower's privacy policy requires explicit permission from 
our customer to send email beyond order acknowledgements, confirmations 
and receipts. Opt-in opportunities exist on our site, and are included 
at the bottom of these transactional mailings. We are concerned that we 
do not know exactly what information our suppliers or their agents may 
be collecting or what they may be doing with the data. We have not 
revised our privacy policies to accommodate labels, preferring instead 
to fight for our customers' privacy as well as for the exclusive 
ownership of the existing retail relationship, including customer 
contact information. We are willing to cooperate with record companies, 
as we always have, in marketing recordings. For example, in return for 
dropping record company requirements to possess and use our customer 
information, we have offered to feature their products in a guaranteed 
number of periodic emails executed by mutual agreement on behalf of 
their artists.
    On the video side of our business, we are fortunate that Congress 
enacted the Video Privacy Protection Act, 18 U.S.C. Sec. 2710, which 
prohibits such data mining without the contemporaneous consent of the 
consumer. The courts have held that third parties who obtain such 
information may also be liable for the disclosure. This was the 
determination reached in Video Software Dealers Association, Inc. v. 
City of Oklahoma City, No. CIV97-1150-T, 1998 U.S. Dist. LEXIS 22095 
(W.D. Okla. Dec. 18, 1998), a case brought on behalf of retailers such 
as Tower by our trade association. Because of this law, our customers' 
private video sales and rental records cannot be surreptitiously taken 
from us.

    Question 1(D): Are record companies requiring as part of their 
licensing agreements for digital music that they be provided access to 
customers' personal data?
    Answer: Yes. As described above, some licensing agreements include 
the use of delivery systems that automatically deliver customer data to 
record companies preempting the need to have ``access.'' They get the 
customer personal data as part of the transaction, and do not pay for 
the information or even negotiate with us for access. As in the case of 
hyperlinks on CDs, retailers simply do not have an alternative if they 
want the content.

    Question 2: Jack Valenti testified that within four to six months, 
several movie studios plan to use the Internet to transmit movies to 
American homes in encrypted form, but that more protection may be 
needed, ``some of which might require congressional legislation.'' In 
the Digital Millennium Copyright Act (DMCA), the Congress has provided 
protection for technological measures that effectively control access 
to copyrighted works and barred the manufacture, import or sale of 
products or services primarily designed to circumvent such 
technological measures. 17 U.S.C. Sec. 1201(a)(1) & (2). Please 
describe the circumstances where additional protection may be warranted 
and the areas not already covered by the DMCA where additional 
legislation may be requested.
    Answer: Mr. Valenti's statement is open-ended. While we support all 
ongoing efforts to restrict the illegal copying and distribution of 
copyrighted works, we do as long as they do not create onerous limits 
on fair use, or require that retail customer data be turned over to 
copyright holders. That said, Tower does not foresee a future need for 
additional legislative protection. Indeed, it appears that 
technological developments alone are now replacing the Copyright Act as 
the greatest source of power for copyright owners, such that Congress 
may need to address restoring the appropriate public/private balance in 
copyright law rather than creating greater protections for copyright 
owners. As noted by Alen Koebel, supra, this may be more about 
controlling lawful use than controlling piracy. The new prohibition on 
circumventing effective access control technologies ``must be weighed 
against the potential for misuse that content protection brings.'' 
Koebel at 106.

    Question 3: Concerns have been expressed that ``copyright 
management'' measures being developed by copyright owners to control 
the distribution of their digital works may erode the first sale 
doctrine. If a customer pays for the personal use of a copyrighted 
work, the rights holder may use technological means to ensure that the 
work is not posted on a web site for use by others. Do you believe that 
the marketplace will sort out the scope of copyright management 
measures since customers who believe they are not getting what they pay 
for will simply stop buying?
    Answer: We support copyright management measures which limit 
illegal distribution of digital works while still providing an 
acceptable end-user experience and respecting the rights copyright law 
gives to owners. We object to the use of so-called ``digital rights 
management'' (or ``DRM '') systems and other access control 
technologies which have little to do with copyright management, but 
are, instead, being implemented in ways that prevent consumers from 
exercising Section 109 rights.
    We believe that access control technologies are already proving to 
be unacceptable to consumers because of the severe restrictions to 
legal use imposed after the sale. Since resellers are being forced to 
pass on such restrictions (as we have no control over them and it is 
unlawful to circumvent them), the record company restrictions become 
unreasonable barriers for resellers in their efforts to market digital 
content. The marketplace cannot sort out the use of restrictive 
measures because the copyright monopoly is being used in conjunction 
with the prohibitions in Section 1201 to prevent the normal market 
effects to sort this out. For example, copies of motion pictures are 
being offered through digital download using DRM technology that 
prevents the owner of the lawfully made copy from renting, lending or 
selling it. That is, the technology prevents owners of the download 
from exercising their rights under Section 109. The download of the 
Miramax film Guinevere is one example. The consumer who downloads the 
film becomes the owner of a lawfully made copy, but can only enjoy the 
copy for a 24-hour period, after which access is denied unless an 
additional payment is made. If consumers object to the terms contained 
at the single retail site from which it is available 
(www.sightsound.com), there is no other place to which the consumer can 
turn for better terms. Thus, the consumer only has the choice of giving 
up their rights guaranteed by Section 109 or never owning the download.
    If we consider, however, how a competitive market might sort this 
out, the result is completely different. Section 109 limits the right 
of copyright owners, not retailers. If a retailer were to offer the 
downloaded copy with similar restrictions, consumers who object to such 
terms could simply shop elsewhere, just as today, a consumer who 
objects to having to return a rented video the next day can shop with a 
retailer who offers longer rental periods, or the consumer can purchase 
it outright.
    We believe customers will pay for reasonably secured content that 
is reasonably priced. The question is, ``Is what they want to buy being 
offered, and if not, why not?'' A competitive retail market would 
normally charge a lower price for a product with added restrictions on 
use. What we are seeing in the digital music industry, even in the 
prerecorded media, is added cost (that is, added restrictions) with no 
countervailing price reduction. When Sony added a restrictive EULA to 
one of its CDs, there was not a penny of price reduction. According to 
Sony, the consumer who failed to return the CD to Sony within seven 
days of purchase agreed never to sell it, lend it or give it away, and 
agreed never to play it on a different computer, yet there was neither 
a price reduction in exchange nor an option to purchase the CD 
elsewhere without the restrictions. (See Attachment A to my written 
testimony.) Retailers could not compete to offer the CD with or without 
the restrictions, and therefor the marketplace will never have the 
tools with which to sort out the most competitive scope of access 
control technologies. Only illegal distribution sites are in a position 
to offer a competitive choice.
    The only way for the market to sort out the appropriate scope of 
copyright management measures is for the use of such measures to be 
strictly limited to the management of the copyrights set forth in 
Section 106, as further limited by the Copyright Act and, in 
particular, Section 109. When copyright owners leverage their 
monopolies to ``manage'' rights they do not have (such as to control 
how the lawful owner disposes of a lawfully made copy), the free market 
is subverted, competition is suppressed, consumers lose out, and 
artists gain less exposure.

    Question 4: Retailers of music, movies, video games and other 
copyrighted works have expressed concern about whether copyright 
management measures and end user licensing agreements will erode the 
ability of retailers and distributors to distinguish themselves from 
one another in meaningful ways with the potential of stifling 
competition among retailers, since those measures may set uniform 
prices, policies and terms for the online distribution of digital 
works.

    Question 4(A): Please explain whether you believe that uniform 
copyright management measures and user licensing agreements carry the 
potential risks for competition identified by retailers?
    Answer: It is not just the uniformity, but also the oppressiveness 
of these measures that give rise to our concerns. We believe copyright 
management measures and user licensing agreements, to the degree that 
they preserve first sale rights and provide resellers with 
opportunities to sell their customers digital works in the form 
customers want, do not carry undue risks inherently. It is the degree 
to which copyright owners restrict access and use outside of the bounds 
of their copyrights, to fix retail prices, suppress retail competition, 
or use such access controls to gather and use our customer information, 
that present the risks. The uniformity itself is a symptom of the lack 
of retail competition, and an element detrimental to consumers (as it 
is any time all stores look alike), and to retailers, who have fewer 
significant ways in which to compete. The need for us here at Tower to 
distinguish ourselves from our competitors is not just a desire to 
maintain our unique personality, character and reputation, but is the 
essence of the way we compete. We can't claim to be better than the 
store down the street if we are prevented from being better.

    Question 4(B): Would variation in the terms for pricing, use 
policies and terms for the distribution of digital works provide 
flexibility for different distribution models and give the consumer the 
maximum number of choices?
    Answer: Absolutely, provided that these variations are the result 
of retail competition and not the result of the copyright owners 
discriminating among competing retailers. Some of the most innovative 
business models giving consumers the most choice are those that are 
beyond the control of the copyright owner. For example, without (and 
indeed against) the consent of the copyright owner, consumers can 
obtain pre-recorded copies and phonorecords new from a store, free on 
loan from the library or a friend, second-hand at a used goods store, a 
yard sale or flea market, at a low-cost rental in the case of movies 
and video games, or as a gift. We at Tower consider competing with 
these avenues part of doing business. The fact that our customers can 
re-sell, loan or give away what they buy from us adds value to that 
initial purchase transaction, even though neither we nor the copyright 
owner derive any additional value from the myriad possible subsequent 
distributions.
    The best business model we have today is where they sell us the 
copies at a price of their choosing, and we in turn market them and 
develop all sorts of competing ways of getting them into the hands of 
consumers, who are free, in turn, to legally transfer title or 
possession to others. That's how it should work for digital downloads. 
Once someone else owns the downloaded copy, the copyright owner's 
control over that copy should cease. Let others compete over the 
pricing and distribution terms, so consumers will have some real 
choices.

    Question 5: The Copyright Office issued a Notice of Inquiry on 
March 9, in response to a petition by the RIAA, stating that: ``there 
is considerable uncertainty as to interpretation and application of the 
copyright laws to certain kinds of digital transmissions of prerecorded 
musical works. It is also apparent that the impasse presented by these 
legal questions may impede the ability of copyright owners and users to 
agree upon royalty rates under section 115. . .'' 66 Fed. Reg. 14099, 
141101 (2001).

    Question 5(A): Do you agree with this statement and, if so, please 
explain how the uncertainty over the legal questions presented in the 
petition are affecting voluntary licensing agreements for new online 
music services?
    Answer: It appears to us that much of what passes for uncertainty 
is, in reality, the result of an effort by various interest groups to 
advance a position which stretches copyright law in a direction more 
favorable to them. Perhaps it is not so much the uncertainty that is 
affecting voluntary licensing agreements, but the positions that are 
being staked out as part of a negotiating posture.

    Question 5(B): In 1995, the Digital Performance Right in Sound 
Recordings Act expanded the scope of the mechanical license, under 17 
U.S.C. Sec. 115, to include the right to distribute, or authorize the 
distribution of, by digital transmission both hard copy phonorecords 
and ``digital phonorecord deliveries'' or ``DPDs.'' DPDs are defined in 
the Act but a subset of DPDs, called ``incidental DPDs,'' which are 
also subject to the mechanical licensing process, are not defined. One 
of the issues before the Copyright Office is to determine what is and 
what is not an ``incidental DPD.'' Is this a question that the 
Copyright Office or the Congress should determine in the first 
instance?
    Answer: To a large extent, this issue may have been addressed more 
effectively than Congress realized back in 1976, when it revised the 
basis for calculating the royalty rate to provide that ``the royalty 
under a compulsory license shall be payable for every phonorecord made 
and distributed in accordance with the license.'' Section 115(c)(2) 
(emphasis added). House Report No. 94-1476 explained: ``It is 
unjustified to require a compulsory licensee to pay license fees on 
records which merely go into inventory, which may later be destroyed, 
and from which the record producer gains no economic benefit.'' (Let's 
call them ``incidental phonorecords,'' by analogy.) It was Congress' 
intent ``that the Register of Copyrights will prescribe regulations 
insuring that copyright owners will receive full and prompt payment for 
all phonorecords made and distributed.'' Id. (emphasis added). 
Moreover, as noted in said Report, Section 115(c)(2) further provides 
that ``a phonorecord is considered `distributed' if the person 
exercising the compulsory license has voluntarily and permanently 
parted with possession.'' Finally, the Report stresses that the term 
``made'' was used instead of ``manufactured'' so as to include ``every 
possible manufacturing or other process capable of reproducing a sound 
recording in phonorecords.''
    It appears to us, then, that Congress already determined this issue 
in the first instance. Certainly DPDs are one possible ``manufacturing 
or other process capable of reproducing a sound recording in 
phonorecords.'' (Even a computer hard drive can be a ``phonorecord,'' 
as that term is defined in Section 101.) Further, Congress has already 
empowered to Copyright Office to insure that prompt payment is made for 
DPDs that are ``made and distributed.'' Just as no royalty obligation 
would be triggered by ``incidental phonorecords'' from which the 
producer gains no benefit, logic would dictate that ``incidental DPDs'' 
which serve only to facilitate efficient distribution of the actual DPD 
would trigger no compulsory license royalty obligation. Congress has 
delegated to the Copyright Office responsibility for determining when 
the royalty payable for actually distributed DPDs becomes due.

    Question 5(C): The Copyright Office is currently considering the 
applicability of the section 115 mechanical license to two new services 
for delivery of digital music: ``On-Demand streaming'' (which permits 
users to listen to real-time streamed music they want when they want 
it) and ``Limited Downloads'' (which permits users to download music 
for listening for only a limited time). According to the Notice of 
Inquiry, these types of services were not ``anticipated'' when the 
Congress expanded the scope of section 115 to cover digital 
transmissions. Is legal uncertainty over the applicability of section 
115 to these new services having any effect on the deployment of such 
services and, if so, please explain what that effect is?
    Answer: As for ``On-Demand streaming,'' we agree with the comments 
of the Consumer Electronics Association and Clear Channel 
Communications, Inc., filed on April 23, 2001, in response to the 
Copyright Office' Notice of Inquiry, 66 Fed. Reg. 14,099. We do not see 
how a public performance could possibly generate a mechanical royalty. 
A DPD could be made concurrent with a public performance, but in that 
case, the mechanical license is triggered by the DPD, not the public 
performance.
    ``Limited Downloads'' are not recognized under copyright law. What 
is being sought by the RIAA from the Copyright Office is power to 
authorize the reproduction and distribution of a copy of a work, only 
to have the resulting copy time out or otherwise be rendered useless to 
its owner. We can se no room for such an approach, particularly given 
the rights of owners of lawfully made copies to dispose of them without 
the copyright owner's consent. The proposal would allow the use of 
access control technologies to effectively lock out the owner of a 
lawfully made copy from continuing to enjoy the fruits of ownership.
    The RIAA proposal may be consistent with the position of the 
Copyright Industry Organizations, which maintain that Section 109 
rights may be exercised only ``in the absence of licensing or 
technological restrictions to the contrary.'' But surely Congress never 
intended the rights in Section 109, which specifically limit the 
copyright monopoly, to be taken away by the copyright owner's own use 
of technological access controls. A logical extension of such concept 
would prevent the public from re-reading books, borrowing books, 
purchasing them used, or receiving previously read books by gift, 
because they would be unreadable.
    So the question is not whether legal uncertainty over the ``Limited 
Download'' is having an effect on the deployment of such a ``service.'' 
The question is whether Congress should make it even clearer that a 
Limited Download as a tool used at the sole discretion of the copyright 
owner is not a ``service'' to consumers, but an unauthorized extension 
of the copyright owner's control over lawfully made copies which are 
the property of others.
    On the other hand, we are more than willing to explore how 
technology can be used to extend the number of options available for 
disseminating works. Rep. Boucher introduced legislation during the 
last Congress to allow owners of lawfully made copies to forward them 
to others if the original is deleted, but without infringing the right 
of reproduction. The use of ``check-in/check-out'' technology to allow 
consumers to redistribute a digital file while ensuring that only one 
authorized copy is accessible at a given time sounds very attractive, 
and we are pleased to be working with copyright owners and technology 
companies to support industry standards for such actions. In the very 
near future, Congress should carefully consider how copyright law 
should evolve to facilitate such business models, but now is not the 
time to be fitting a square peg into a round hole.
    In the motion picture industry, limited use is a service provided 
by your local video store--not the copyright owner. (Videos can already 
be rented online, even though the delivery is still through the mails.) 
In the event that Congress visits this issue, we would suggest that the 
analogy be drawn from the physical distribution world, where copyright 
owners are prevented from using their monopoly to control distribution. 
For example, a library might have the right to ``lend'' an electronic 
copy by letting a patron download the file to their computer while the 
original is rendered inaccessible. Or the library might ``own'' the 
virtual right to three copies, but only have one actual copy, which 
could be downloaded by up to three patrons at a time. The ``check-in'' 
technology would allow the patron to ``return'' the copy, in which case 
the original is made accessible again and access is denied to the 
patron's copy. Such a model could be used for video rental as well. 
Under current law, each copy made implicates the reproduction right, 
regardless whether it is accessible. If copyright law were to be 
amended to support such functions without infringing the reproduction 
right, we feel it would be imperative for the physical distribution 
model to be followed. That is, just as selling, giving, library lending 
and video store rentals do not require the copyright owner's consent, 
so, too, should the virtual equivalent remain outside of the control of 
the copyright owner.
    If, indeed, an ``online rental'' model is to ever be recognized in 
copyright law, it should be developed along the lines of the physical 
goods model by an Act of Congress, the principles of the first sale 
doctrine should be maintained, and the rental terms should be 
determined by competing retailers rather than the copyright owner.
    The Limited Download proposal also concerns us because one of the 
justifications for it is a promotional use of consumer sampling--a use 
for which the Copyright Act already makes ample provision. First, there 
is the in-store play exception contained in Section 110(7). This allows 
consumers to listen to an entire album in the record store. Second, the 
fair use doctrine allows what has been the industry practice since the 
inception of electronic commerce, and that is to permit the merchant to 
promote the sale of prerecorded works and downloads by offering song 
samples, normally lasting only about thirty seconds, or representative 
excerpts of a motion picture, commonly referred to as movie trailers, 
at the point of sale and without the need to first obtain permission. 
Just as booksellers may display copies of books open for perusal 
without fear of violating the copyright owners exclusive right of 
public display, and just as the grocer may reproduce copyrighted labels 
of soup cans in the Sunday newspaper to advertise the next week's sale 
without violating the copyright owner's exclusive right of 
reproduction, so, too, can music and video retailers copy and make 
available cover artwork, a thirty-second sound clip sample, or a movie 
trailer, to assist and encourage the consumer in making a purchasing 
decision
    This is, in fact, very simple, and it concerns us that this effort 
to take what has been a standard no-cost industry practice and convert 
it into a new exclusive copyright called a Limited Download is coming 
at the very same time that several copyright owners have, almost in 
unison, begun asking retailers to get a license from them to promote 
the sale and rental of their works by use of such simple consumer-
friendly devices. We can't tell whether this is sheer coincidence or 
part of a carefully orchestrated plan to further encroach into the 
domain beyond the reach of their copyrights but, either way, it is 
making retailers very nervous. The legality of this promotional 
activity in digital distribution should be affirmed in the law.

    Question 5(D): Various music publishers filed suit in December, 
2000, against UMG for copyright infringement alleging that UMG was 
copying sound recordings on servers for its new online music 
subscription service, Farmclub.com, and stating that: ``UMG recently 
obtained a judgment from this court that the operator of another 
Internet music service, MP3.com, Inc., had willfully infringed UMG's 
sound recording copyrights by placing copies of those sound recordings 
on its public servers--precisely what UMG has done here without 
plaintiffs permission.'' Would clarifying the scope of the mechanical 
license under section 115 of the Copyright Act in the context of such 
new online music services help avoid the undue delay and undue 
distraction from litigation?
    Answer: Yes. We believe that some clarification might be in order. 
It would appear that reproducing a sound recording onto the hard drive 
of a file server for the purpose of offering digital performances to 
the public would be an act of infringement unless some exception 
applies (such as in Section 107 or 114, for example). It should be 
equally clear that reproductions incidental to the delivery of an audio 
stream or digital downloads, but that have no independent value and 
cannot be perceived by the consumer, should not trigger the mechanical 
royalty. (See Section 115.)
    Somewhere between these two rather clear issues (though we concede 
that some might debate them), are practices which may make perfect 
business and common sense from the standpoint of creating greater 
efficiencies for the benefit of consumers and copyright owners, but 
where the law did not anticipate the many recent improvements in 
digital distribution technology which depend upon the creation of 
multiple copies incidental to the actual public performance or DPD.
    The best example I know of is the very practical need for making 
multiple copies of a work just to have available the most popular 
formats and CODECs. A merchant who is preparing a database of licensed 
song files for the purpose of offering lawful downloads or licensed 
audio streams should not have to pay more just for the ability to offer 
the consumer a choice of format, CODEC or transfer speed. That is like 
requiring a printer to pay extra for typesetting a large font version 
of a book for the vision impaired.

    Question 6: Hillary Rosen has testified that RIAA member companies 
have committed to licensing Napster once the service operates in a 
fashion that respects copyrights and Napster has an agreement with 
Bertelsmann to help develop this system. What is the current status of 
Napster's efforts to develop a technological upgrade to digital rights 
management system that is secure and addresses the needs of artists and 
copyright owners addresses the rights of artists and copyright owners? 
Has Napster been able to share a new technological approach with (a) 
the court; (b) with artists or (c) with copyright owners? When does 
Napster expect to be able to introduce the new technological model?
    Answer: I have no comment in response to this question.

    Question 7: The record companies have announced new online music 
services, including MUSICNET and Duet, which will provide competing 
business-to-business platforms for music subscription services that 
will cross-license music and offer the services on a non-exclusive 
basis. As Hilary Rosen stated in her testimony, the record companies 
recognize the need to ``ensure that online distribution enhances rather 
than undermines the commercial viability of our retail partners.'' 
Thus, the non-exclusive nature of these new platforms is important. Do 
you believe that it is also important for the record companies to make 
digital music available to those competing retailers capable of 
offering secure and accountable downloads, on a non-discriminatory 
basis that does not price them out of any competitive opportunity or 
give them substantially less attractive nonprice terms?
    Answer: Yes, we do. We believe it is critically important for the 
record companies to make digital music available to competing retailers 
capable of offering secure and accountable downloads, on a non-
discriminatory basis that does not price them out of any competitive 
opportunity or give them substantially less attractive non-price terms. 
The same is true in the case of audiovisual works, and requires that we 
pay special attention to similar ventures in the motion picture 
industry such as MovieFly.
    We also feel compelled to point out that we think non-
discriminatory means offering these digital products equally on all 
levels, including at the same time, for the same price, with equivalent 
terms and conditions (such as warranties and replacement policies), and 
with the same bonus features (such as free promotional tracks or 
special added content).
    To date, there have been announcements about the services, but no 
contact with retailers that we know of by Duet, MusicNet or any record 
companies about the planned new services. Nor have MovieFly or the 
motion picture studios been open to retail competition. Instead, 
announcements concerning their non-retail partners were made, with no 
mention of retail, which seems curious in light of Ms. Rosen's remarks 
about the importance of retailers to her member companies. The 
importance of retailers seems rather like that of a parasite to its 
live host, and reminds me of the analogy NARM drew to witchweed in its 
case against Sony, where it explained that ``Witchweed (STRIGA 
ASIATICA) is a parasitic plant that attacks some of the most important 
crops in the U.S. . . . Unlike most weeds, which merely compete with 
crops, parasites like WW do their damage more directly. They rob 
nutrients and moisture by tapping directly into the host's root system. 
Consequently, the host spends energy supporting WW growth at is own 
expense.'' Fact Sheet for Witchweed (WW), FACT Sheet 07 PPQ, made 
available through the Cooperative Agriculture Pest Survey program, May 
25, 1993, http://ceris.purdue.edu/napis/pests/ww/facts.txt accessed 
April 21, 2000. According to ``Parasite,'' Microsoft Encarta 
Encyclopedia 2000, it eventually kills the host. And that is exactly 
how retailers are beginning to feel. We are an integral part of the 
industry which has resulted in the success of record companies, movie 
studios and computer game manufacturers, yet our root system--which is 
our customer base--is being tapped in an effort to feed off of it until 
we are no longer needed. They can't live without us, just yet.
    The last contact we had with MusicNet was a meeting where nothing 
remotely similar to their press release the day before the Senate 
hearing was even mentioned. There has been no contact with Tower 
regarding details of the offers from either MusicNet or Duet, much less 
any offer from the record companies to invite us to compete with either 
of the two entities they jointly control.

             Response to written question from Senator Kohl

    Question: While all of the panelists are primarily concerned with 
access to online entertainment marketplace, they must also understand 
that they have a responsibility to parents. The Internet makes it even 
more difficult for parents to police the songs that their children 
hear, the images that they see and the games that they play. I'd like 
the panelists to discuss what their company or industry plans to do to 
help parents as online entertainment becomes more readily accessible to 
all consumers, especially children.
    Answer: We are proud of what Tower is doing in this area. We met 
with the RIAA in February at the NARM convention, agreed with their 
recommendations, and have initiated a project with our online 
merchandising team which will improve the current notification which we 
implement online in the following ways:
    1. Clearer language indicating parental advisory titles. We intend 
to use the terms, ``Unedited, Explicit Lyrics'' to describe such titles 
in place of ``PA,'' or ``explicit'' to describe unedited recordings, 
and ``Edited Lyrics'' to describe edited versions.
    2. Links to descriptions of what the language means. We intend to 
implement a web page describing what the terminology above means.
    3. Persistent notification throughout the transaction process. 
While we haven't decided exactly how, we are working on methods to keep 
the Parental Advisory message ``live'' right through to the shopping 
basket.
    You also asked about what our industry is doing. Tower is a member 
of two trade associations that have taken leading roles in this area. 
The National Association of Recording Merchandisers (``NARM '') is the 
principal trade association for retailers and distributors of sound 
recordings, and the Video Software Dealers Association (``VSDA '') is 
the principal trade association for retailers and distributors of home 
video movies and video games. As an active member of each, Tower has 
had the privilege of having a representative on the Board of each of 
these trade associations, and has participated in the development of 
our industry's programs in this area.
    I must note, however, that despite challenging all members to be 
responsive to public concerns, both trade associations have been 
careful to preserve the freedom of each member to remain competitive 
with other members when it comes to dealing with their customers. Each 
retailer sees customer relationships as one of the key areas in which 
we all compete with each other, and attempt to distinguish ourselves as 
the retailer most responsive to consumers, including children and their 
parents. How we do that is, ultimately, something we, at Tower, work 
very hard on independent of what any competing retailer may do. So, 
although industry-wide programs such as those NARM and VSDA have 
initiated have a very important function, we recognize that there are 
some areas in which freedom of competition is the best solution. When 
push comes to shove, as it often does in the competitive retail level 
of distribution, we want customers to choose our store over any 
competitor's, and if a younger customer needs their parent's permission 
to shop with us, we certainly want every parent to feel confident that 
their permission should be granted. That is one reason why we have so 
vigorously opposed proposals that would give our suppliers permission 
to enter into agreements in unreasonable restraint of trade against us. 
After all, as my responses to the previous questions make clear, they 
are becoming our fiercest retail competitors, and we cannot afford to 
let them have any additional control over retail distribution.

                          Concluding Statement

    I respectfully ask the members of this Committee to consider 
whether you ever became fans of a particular artist because someone 
shared their copy of the music with you. I suspect that each of you can 
recall an occasion in which an artist's work touched you, even though 
someone else paid for the copy of the sound recording you heard. All of 
you have probably enjoyed the freedom to rent a movie instead of buying 
it. Yet, these opportunities are currently being threatened by 
technology. This debate should be more than about whether a record 
company may restrict distribution and redistribution to increase its 
profit from an artist's work, or whether a movie studio may use 
technology to prevent retailers from renting copies if their profit 
margins will increase. Rather, this debate should be about how ``the 
Progress of Science and the Useful Arts'' (U.S. Constitution, art. 8) 
can be promoted for the public good. The profits of the Copyright 
Industry Organization members, retailers and authors should be 
subservient to that end, and we think that end is best served by 
preserving our freedom to aggressively and lawfully compete in 
disseminating these treasures to the public.
    Thank you for the opportunity to participate in this important 
debate.

                                

   Responses of Mark Traphagen, on behalf of InterTrust Technologies 
 Corporation, to questions submitted by Senators Hatch, Leahy and Kohl

    I have heard a number of entertainment companies say that 
acceptable protection for online content simply does not exist yet, 
that existing Digital Rights Management and watermarks, wrappers, or 
encryption, is simply not good enough to protect valuable content. Yet 
we have a number of technology companies here today who believe that 
they have such a solution, and now we have announcements of online 
initiatives from all five major labels, which suggests the 
technological protection have developed recently. Would any of you care 
to comment on the state of technological protection for content?

                        Response by InterTrust:

    The DRM technology developed by InterTrust is now capable of 
securely managing rights in copyrighted works--music, video, text, and 
graphics--in the online environment without compromising the rights of 
artists, record labels, and other copyright owners. Indeed, a number of 
entertainment companies (including AOL Time Warner, Bertelsman, and 
Universal Music Group), entertainment distributors (including 
Blockbuster), and entertainment device manufacturers (including Diamond 
Rio, Samsung, Nokia, and Philips) are actively working with InterTrust 
DRM technology to make music video, published text and other 
information products available for consumers to use on PCs, portable 
music players, cable systems and mobile phones.
    Unlike simple technological measures that carry copyrighted works 
from a server to a client and lock the copy to a single device, the 
InterTrust DRM technology protects copyrighted works regardless of the 
channel through or platform upon which the music is played, the number 
of intermediaries, the duration of time, or the physical location of 
the content. This post-delivery, persistent protection of copyrighted 
works permits alternatives in making copyrighted works available, 
including sale of downloads, subscriptions, pay-per-use and peer-to-
peer distribution. It also provides flexibility for each actor in the 
distribution channel, meaning that a publisher can establish the 
commercial terms for a work within the authority granted by the author; 
a distributor can set rules within the scope of authority granted by 
the publisher, and so on. Because the copyrighted works are 
persistently protected by the InterTrust DRM technology, it also 
permits flexible use of these works by consumers using different 
devices in different locations.

                      Question from Senator Leahy:

    Concerns have heen expressed that ``copyright management'' measures 
heing developed by copyright owners to control the distrihution of 
their digital works may erode the first sale doctrine. If a customer 
pays for the personal use of a copyrighted work, the rights holder may 
use technological means to ensure that the work is not posted on a weh 
site for use by others. Do you helieve that the marketplace will sort 
out the scope of copyright management measures since customers who 
helieve they are not getting what they pay for will simply stop huying?

                        Response by InterTrust:

    InterTrust believes that the advent of effective DRM technologies 
should launch a period of lively marketplace experimentation in online 
delivery by the owners and distributors of copyrighted works and that, 
as illustrated by the popularity of the Napster service, consumers will 
make their preferences clearly known. To avoid stifling this lively 
experimentation, InterTrust believes that, until it is shown to be 
ineffective in reflecting the balance struck in the Copyright Act, the 
marketplace should be where consumers, copyright owners, and 
distributors sort out the ways in which DRM technologies are used to 
protect and manage rights in copyrighted works.
    Why does InterTrust believe this? Because DRM technologies give 
copyright owners new confidence that their works will be protected in 
the online environment, DRM technologies also enable them to permit 
consumers to use copyrighted works in new and more convenient ways, 
some of which may surpass the scope of copyright exceptions such as the 
first sale doctrine. For example, while the first sale doctrine 
exhausts the exclusive right to distribute a copy or a phonorecord of 
most copyrighted works to the public, it does not limit the other 
exclusive rights of the copyright owner--reproduction, adaptation, 
public display, and public performance. With the protection of 
effective DRM technology, however, some copyright owners and 
distributors could choose to attract consumers by permitting them to 
make and display copies.
    Moreover, InterTrust's DRM technology also enables copyright owners 
and distributors to accommodate a richly diverse range of policies 
arising through law or through accepted practice (provided they are 
sufficiently detailed) for use of works by particular groups of 
consumers, such as schools and universities, libraries and archival 
institutions, and those with special needs, such as the blind. 
Consumers are likely to respond favorably to copyright owners and 
distributors who use these capabilities of DRM technologies to permit 
flexible use in the course of managing their rights.

                      Question from Senator Kohl:

    While all of the panelists are primarily concerned with access to 
the online entertainment marketplace, they must also understand that 
they have a responsibility to parents. The Internet makes it even more 
difificultfor parents to police the songs that their children hear, the 
images that they see and the games that they play. I'd like the 
panelists to discuss what their company or industry plans to do to help 
parents as online entertainment becomes more readily accessible to all 
consumers, especially children.

                       Response from InterTrust:

    The InterTrust DRM technology includes features that enable 
entertainment producers and distributors to associate content 
advisories, such as ratings and labels, with the digital material and 
to display such advisories when the digital material is opened by 
consumers. The DRM technology also includes other features that enable 
parents to control or prohibit access to digital material incorporating 
such content advisories. Provided that these features are used by 
producers, distributors, and parents, the content advisories would be 
persistently associated with the digital material after delivery to the 
consumer.

                                

Responses of Gerald W. Kearby to questions submitted by Senators Hatch 
                               and Leahy

                            I. Introduction

    Thank you for the opportunity to respond to the written questions 
from the Chairman and the Ranking Minority Member of the Committee. I 
have only endeavored to answer the questions that directly pertain to 
my testimony as supplemented on April 5, 2001 (the Supplement).

    Question. Acceptable Protection for Online Content:
    Answer. Detailed answers to this question are contained both in my 
testimony and in the Supplement. To reiterate, the basic points of that 
testimony, the technology necessary to secure distribute online music 
has been available for several years. Liquid Audio commercially 
deployed such a system in 1997, and we are currently developing our 
6th generation of products. Liquid Audio requests the 
opportunity to demonstrate its copy protection system to the Committee. 
One demonstration is worth several thousand words and, we hope, would 
set this issue to rest.

    Question. When Will Digital Music Come to A Device Near You?
    Answer. Unfortunately, it appears as though billions of digital 
songs are now on a large variety of devices today. I say unfortunately 
because the vast, vast majority of those digital songs were downloaded 
from Napster without authorization from the copyright holder. The 
question should be: when will there be a legitimate market supplying 
digital music to those devices near you? That is entirely in the hands 
of the major record labels. As discussed below, it appears that they 
have taken some first steps towards entering the marketplace. Those 
steps, however, appear unclear and do not seem to represent an adequate 
response to the demand in the market.

    Question. Record Companies and Online Resellers. Senator Leahy 
asks: ``Do you believe that it is also important for the record 
companies to make digital music available to those competing retailers 
capable of offering secure and accountable downloads on a non-
discriminatory basis that does not price them out of any competitive 
opportunity or give them substantially less attractive non-price terms? 
''
    Answer. The answer is simple--yes! To attract the tens of millions 
of people away from unauthorized distribution of digital music will 
require adding value to attract them to the legitimate online music 
sites. Competing resellers of digital music are far better positioned 
to respond to the market than would be a monolithic captive reseller. 
Obviously price will be an important factor. But beyond that ease of 
user, i.e., user interface and additional services such as playlist 
creation and distribution, music news, personalized music search and 
delivery, custom CD creation, etc. will need to be created to draw 
users from illegal services such as Napster.
    There are lessons to be learned from the Napster experience beyond 
the fact that many people will trade music for free. One significant 
factor is that consumers want all of the music available in one place. 
A music buyer in the analog world won't tolerate a record store that 
only carried three of the five major labels' CDs. Unlike buying an 
automobile, the consumer doesn't go into a record store to buy a brand. 
They go to buy music by artist, or by song or by genre--few clerks are 
asked for a Sony Music CD, rather the user would ask, for example, for 
music by the artist Billy Joel or the song Piano Man. So it is in the 
digital world. At the moment there are two nascent services: Duet with 
two labels and Music.Net with three labels. Online resellers must be 
able to offer one-stop shopping for all the music. Consumers demand it.
    Consumers also want an easy to use digital system. They don't want 
to click through fourteen steps before they can download their music. 
Competition among resellers will result in the best interfaces 
succeeding in the market. In addition, to attract customers resellers 
will have to add value beyond just having all the music. The more 
legitimate resellers that have access to the music at reasonable 
nondiscriminatory prices, the more services will be developed. That in 
turn will lure music fans away from unauthorized services.

                                

 Responses of Billy Pitts, Executive Vice President, MP3.com Inc., on 
behalf of Robin Richards, to questions submitted by Senators Hatch and 
                                 Leahy

    Question. For all panelists (especially Mr. Parsons, Mr. Ken Berry, 
Mr. Murphy, and Mr. Richards, and Mr. Henley and Ms. Morissette): One 
argument we have heard in favor of a compulsory license is that music 
has so many pieces to license and there have been substantial disputes 
between the record labels, the publishers and technology companies like 
MP3.com about how to get the publishing rights cleared in the volume 
demanded by online offerings. Some have suggested that a stumbling 
block to getting the labels to license sound recordings is that they 
may not have the rights from their artists to grant these rights. I 
understand there may even be problems with the MusicNet offering to 
some degree because of these impediments. Would any of you be 
interested in commenting on this particular problem and suggest ways to 
remedy it?
    Answer: As we discussed in our written testimony, the existing 
marketplace and statutory mechanisms for licensing the use or music 
simply do not work m the digital environment. The My.MP3.com service 
allows consumers to ``store'' CDs that they purchase in a digital 
``locker'' and to use any Internet-enabled device to playback the songs 
on those CDs. There is no practicable way for MP3.com (or similar 
service providers) to identify and obtain licenses from the copyright 
owners for each and every song on the wide array of CDs that consumers 
might choose to store (assuming that it even is necessary to obtain 
licenses to offer consumers this tool). These practical problems could 
be overcome by establishing a more streamlined compulsory license, 
modeled on the satellite and cable licenses (Sections 119 and Section 
111). Under such a compulsory license, it would be sufficient for the 
user of the work to submit to the Copyright Office information 
identifying the user and the works being used along with semi-annual 
royalty payments (with rates set by arbitration). The copyright owners 
whose works were used could then submit claims for their respective 
shares of the royalty pool.

    Question. For all panelists: Mr. Hank Barry argues that we have 
created compulsory licenses in the past, for publishing rights in music 
and in rebroadcast of television programming because it was difficult 
to clear the rights to the myriad creative interests involved in making 
up a broadcast day. Would anyone like to explain why that analogy does 
or does not obtain in the online music and entertainment world?
    Answer: In the context of cable and satellite retransmissions of 
broadcast television programming, Congress has recognized that 
compulsory licensing is necessary to overcome the logistical burdens 
that would otherwise arise. It is not possible for cable operators and 
satellite carriers to identify and contact, either in advance or after 
the fact, each of the copyright owners claiming an interest in each of 
the dozens of television programs broadcast daily on the broadcast 
channels that the cable operator and satellite carrier retransmit. The 
situation presented by the on-line delivery of music, particularly by 
services that offer access to a vast library of CDs containing hundreds 
of thousands of song titles, is directly analogous.

    Question. For all panelists: I have heard a number of entertainment 
companies say that acceptable protection for online content simply does 
not exist yet, that existing Digital Rights Management and watermarks, 
wrappers, or encryption, is simply not good enough to protect valuable 
content. Yet we have a number of technology companies here today who 
believe that they have such a solution, and now we have announcements 
of online initiatives from all five major labels, which suggests the 
technological protections have developed recently. Would any of you 
care to comment on the state of technological protection for content?
    Answer: MP3.com's server-side security system is designed to 
fulfill the needs of the consumer, the rights-holder, and the emerging 
technology providers. Our first goal is to provide the consumer with a 
satisfying experience where he or she may access content already 
purchased and play that content back to themselves in a secure and 
transparent environment. Through the development of our Beam-It and 
Instant Listening programs, we are able to help consumers verify 
ownership of their CDs and store those CDs in a matter of seconds as 
opposed to having to wait hours to rip and encode the song themselves 
and then having to worry about the amount of space the song is taking 
up on their hard drive. Our security mechanisms have been independently 
evaluated by Adam Stubblefield and Dan Wallach at the Department of 
Computer Science at Rice University.
    Our second goal is to ensure rights-holders that our system will 
replicate the protection of their content as well or better than the 
protection in place in the physical world. Through our server-side DRM 
system we provide a number of levels of security that are not available 
in the physical world. For instance, CDs produced today are created 
without copy protection and CD players are unable to keep users from 
copying songs at will. Because music can be distributed quickly through 
the digital space, we have put measures in place to monitor the 
behavior of an account to make sure that the activity of that account 
is consistent with the guidelines set by the content provider. If 
account sharing or song trading is detected then the account can be 
disabled.
    Finally, we strive to have a system that works independent of any 
current piece of technology so that it can adapt to new Internet 
enabled devices (like cell phones and set top boxes) or digital rights 
management protections without the consumer having to take further 
action. All security systems are required to evolve over time. Our 
server-side solution adapts itself to new requirements without 
incurring hardship on the user by forcing them to go through complex 
and cumbersome software updates. Further, by managing protection at the 
server level, rather than the client level, we are able to ensure that 
the system is ubiquitous.

    Question. For all panelists: The premise of this hearing is that 
digital content is coming soon to digital devices to be enjoyed by 
consumers soon. Based on our discussion today, how soon is soon, and 
when will the promise become reality?
    Answer: With respect to music, the ``promise'' that digital content 
will be available to consumers over a variety of digital devices 
already is a reality. The technical hurdles to streaming music to a 
variety of wired and wireless digital devices have largely been 
overcome. For example, MP3.com has sponsored demonstrations of the use 
of streaming technology to deliver music to Internet-enabled devices in 
cars and to phones. The principal obstacle to the full deployment of 
these and other technological developments is the uncertainty 
surrounding the status of digital music under the copyright laws and 
the insistence by copyright owners that streaming of audio over the 
Internet requires a multitude of separate performance and reproduction/
distribution licenses for both the sound recording and the musical 
compositions embodied in the sound recording.

    Question. Mr. Barry, Mr. Richards, Mr. Kearby, and Mr. Farrace: 
There have been calls for compulsory licensing of sound recordings, of 
publishing rights, and of ``most favored nation ``protections for 
online distributors not affiliated with record companies. Others argue 
that no one has rights to use property other than the property owner 
and those the property owner agrees with (with fair use exceptions in 
the copyright context, of course). Could you each explain what 
justification you see, if any, for such extreme legislative action, 
other than that your business plans rely on using the major labels' 
content to be successful? Please be specific if you suggest such 
theories as misuse of copyright, etc.
    Answer: MP3.com respectfully disagrees with the suggestion that 
compulsory licensing and ``most favored nation'' protections are 
``extreme'' legislative measures. The Section 115 compulsory license 
for the reproduction and distribution of phonorecords dates back nearly 
100 years and was recodified in 1976; in 1995, Congress sought to 
expressly extend Section 115 to the digital environment (albeit in an 
imperfect manner that needs to be addressed administratively and/or 
legislatively as soon as possible). In addition, Congress has enacted 
compulsory licensing mechanisms for the delivery of broadcast 
television signals by cable systems and satellite carriers, for the 
public performance of sound recordings by digital audio transmission, 
and for certain ephemeral copies. And Congress has recognized a right 
of non-discriminatory access to vertically-integrated content, both in 
the Copyright Act (Section 114(h)) and in the Communications Act 
(Section 628). The underlying bases for these various legislative 
enactments include overcoming logistical problems in marketplace 
licensing, ensuring the public's access to content, and protecting 
against anti-competitive behavior. Each of these same concerns is 
applicable to the on-line music environment and justify the 
establishment of a functional compulsory licensing regime that gives 
copyright users--and consumers--access to a complete library of sound 
recordings and musical compositions, while ensuring that copyright 
owners are fairly compensated. Finally, we note that there is a 
pressing need for Congress to address and clarify the rights of music 
consumers with respect to their ability to their use of new 
technologies. Whether through the application of the concept of ``fair 
use'' or through the establishment of clarifying exemptions and/or 
definitions, the law should distinguish those services that permit 
music consumers to store and playback the CDs that they purchase and 
that protect against activities that would allow third parties to 
access the music without purchasing it (such as file copying and 
sharing).

    Question. Mr. Richards: Could you explain how MP3.com tracks each 
listen for each song and accounts to the writers and artists whose 
music is accessed from your service? And do you think you have a model 
that would be useful for the publishers and recording artist 
representatives to adopt? Do you think this would afford artists the 
sort of transparency Mr. Henley and Ms. Morissette seek?
    Answer: MP3.com has made significant investments in the development 
and maintenance of a comprehensive infrastructure system that allows us 
to report activity on a song-by-song basis. In order to track each 
``playback'' of a particular song, we create a unique song ID which is 
affiliated with information relating to that song, including song 
title, artist name, the associated CD title and the CD's UPC, the 
identity of the label claiming the master recording right in the 
recording, the publisher claiming and/or administering the mechanical 
rights, and all of the payment terms associated with the song. MP3.com 
aggregates the activity log files at the song ID level on a quarterly 
basis and reports certain information (such as how many times the song 
was added to our servers, added to users' accounts, and/or streamed 
from users' accounts).
    MP3.com supports ``transparency'' in the form of disclosure of 
information to artists and writers and our tracking system permits us, 
with the rights-holders' permission, to share key statistics with the 
public and/or with artists and writers. For example, we currently post 
songplay and earnings information for those MP3.com artists who 
participate in our ``Payback-for-Playback'' program (a program that 
compensates artists who make songs available on the MP3.com website). 
We encourage you to visit our site and see the type of information made 
available. (Example: http://artiststats.mp3.com/artist--stats/44/
ernesto--cortazar.html).
    Question. Mike Farrace, Senior Vice President, at Tower Records 
testified that some record companies are requiring personal data from 
and about Towers' customers, prompting concerns by Tower Records about 
violating its own privacy policy, damaging the relationship with the 
customer, and ``maybe even resultjing] in Tower violating the law.''
    (A) What sort of personal data are record companies requesting from 
retail distributors, such as Tower Records, and other online 
distribution services to provide from or about customers?
    (B) Are record companies asking retail distributors to provide any 
personal data about customers who purchase CDs in brick-and-mortar 
stores, or have the requests for collection of customer data been 
limited to online music purchases?
    (C) Are retail distributors and online distribution services 
formulating or revising their privacy policies to accommodate requests 
from record companies to provide personal data from or about customers?
    (D) Are record companies requiring as part of their licensing 
agreements for digital music that they be provided access to customers' 
personal data?
    Answer: MP3.com is committed to protecting the privacy of its 
users. A copy of our privacy policy can be found at http://
www.mp3.com.privacy.Yhtml. While MP3.com receives personal information 
provided voluntarily by its users in connection with certain activities 
(e.g., initial sign-up for service, on-line purchases, surveys, 
contests), we do not sell, rent, or trade personal information with 
others. Some of our contracts with record labels request that we supply 
aggregate demographic information (to the extent that we collect such 
information) to help the labels better tailor their marketing messages. 
However, we have not been requested to share specific information about 
users and/or their accounts and we do not share such information.

    Question. Concerns have been expressed that ``copyright 
management'' measures being developed by copyright owners to control 
the distribution of their digital works may erode the first sale 
doctrine. If a customer pays for the personal use of a copyrighted 
work, the rights holder may use technological means to ensure that the 
work is not posted on a web site for use by others. Do you believe that 
the marketplace will sort out the scope of copyright management 
measures since customers who believe they are not getting what they pay 
for will simply stop buying?
    Answer: MP3.com shares concerns that consumers' rights with respect 
to their music purchases are being eroded. This concern goes beyond the 
erosion of the ``first sale doctrine"; even the right of a consumer to 
listen to his or her music purchases is being threatened. Specifically, 
the ``My.MP3.com'' service permits purchasers of recorded music to 
``store'' their purchases in digital ``lockers'' and then to play back 
their purchases over any Internet-connected device. The owners of the 
sound recording and musical composition copyrights have argued, and one 
federal court has agreed, that the storage of recorded music in such 
lockers and the ``personal performances'' of the recordings in those 
lockers, constitutes infringement. It is critical that Congress clarify 
the rights of consumers to utilize new technologies to store and play 
back the music that they purchase.

    Question. The Copyright Office issued a Notice of Inquiry on March 
9, in response to a petition by the RIAA, stating that: ``there is 
considerable uncertainty as to interpretation and application of the 
copyright laws to certain kinds of digital transmissions of prerecorded 
musical works. It is also apparent that the impasse presented by these 
legal questions may impede the ability of copyright owners and users to 
agree upon royalty rates under section 115. . .'' 66 Fed. Reg. 14099, 
141101 (2001).
    (A) Do you agree with this statement and, if so, please explain how 
the uncertainty over the legal questions presented in the petition are 
affecting voluntary licensing agreements for new online music services?
    Answer: We strongly agree that the uncertainty surrounding the 
interpretation and application of the copyright law to streaming audio 
services in general, and to ``personal'' digital ``locker'' services 
such as My.MP3.com in particular, impedes the ability of copyright 
owners and users to agree upon royalty rates under Section 115. The 
music publishers cite the licensing agreement reached between MP3.com 
and the Harry Fox Agency as evidence that the marketplace is working. 
In fact, however, that agreement was entered into only after MP3.com 
was sued by the publishers. This litigation alleged that the ``server'' 
and ``buffer'' copies that are a necessary incident of the operation of 
the My.MP3.com streaming audio personal digital music locker service 
infringed the publishers' reproduction and distribution rights. 
Although it is unlikely that the publishers could have established that 
such ``copying'' had caused them any actual economic harm, the risk of 
crushing ``statutory'' damages forced My.MP3.com to enter into 
licensing agreements despite its disagreement with the publishers' 
interpretation of Section 115. The risk of statutory damages, 
particularly where the underlying legal issues themselves are in 
dispute, skews the ``negotiation'' of royalty payments in favor of the 
copyright owners.

    Question. (B) In 1995, the Digital Performance Right in Sound 
Recordings Act expanded the scope of the mechanical license, under 17 
U.S.C. Sec. 115, to include the right to distribute,, or authorize the 
distribution of, by digital transmission both hard copy phonorecords 
and ``digital phonorecord deliveries'' or ``DPDs.'' DPDs are defined in 
the Act but a subset of DPDs, called ``incidental DPDs,'' which are 
also subject to the mechanical licensing process, are not defined. One 
of the issues before the Copyright Office is to determine what is and 
what is not an ``incidental DPD.'' Is this a question that the 
Copyright Office or the Congress should determine in the first 
instance?
    Answer: MP3.com believes that it may be appropriate for the 
Copyright Office, in the first instance, to consider what is and what 
is not an ``incidental DPD'' and has filed comments to that effect with 
the Copyright Office. (Copies of MP3.com's filings with the Copyright 
Office are attached hereto for your convenience). The outcome of the 
Copyright Office's consideration of this issue likely will help define 
whether, and to what extent, further Congressional action is necessary. 
However, whatever the outcome of the Office's consideration of the 
``incidental DPW'' issue, MP3.com believes that Congressional action 
will be necessary to clarify the rights of consumers to use 
``personal'' digital music locker services to enjoy their purchased 
music over Internet-enabled listening devices.

    Question. (C) The Copyright Office is currently considering the 
applicability of the section 115 mechanical license to two new services 
for delivery of digital music: ``On-Demand streaming'' (which permits 
users to listen to real-time streamed music they want when they want 
it) and ``Limited Downloads'' (which permits users to download music 
for listening for only a limited time). According to the Notice of 
Inquiry, these types of services were not ``anticipated'' when the 
Congress expanded the scope of section 115 to cover digital 
transmissions. Is legal uncertainty over the applicability of section 
115 to these new services having any effect on the deployment of such 
services and, if so, please explain what that effect is?
    Answer: As noted above, MP3.com, which offers music purchasers 
``on-demand'' streaming by means of a digital music ``locker'' service, 
was sued for copyright infringement by the music publishers. As a 
result of that litigation (and litigation brought by sound recording 
copyright owners), MP3.com was forced to shut down its service. As 
detailed in our written testimony submitted to the Committee, MP3.com 
has not been able to fully relaunch its My.MP3.com service, despite 
having agreed to pay tens of millions of dollars to various record 
labels and to the music publishers represented by the Harry Fox Agency. 
In particular, our ability to provide consumers with access to all of 
the music in their purchased music lockers is being frustrated both by 
the uncertainty surrounding the application of Section 115 and the 
absence of a practicable mechanism for invoking the Section 115 
compulsory license.

    Question. (D) various music publishers filed suit in December, 
2000, against UMG for copyright infringement alleging that UMG was 
copying sound recordings on servers for its new online music 
subscription service, Farmclub.com, and stating that: ``UMG recently 
obtained a judgment from this court that the operator of another 
Internet music service, MP3.com, Inc., had willfully infringed UMG's 
sound recording copyrights by placing copies of those sound recordings 
on its public servers--precisely what UMG has done here without 
plaintiff's permission.'' Would clarifying the scope of the mechanical 
license under section ll S of the Copyright Act in the context of such 
new online music services help avoid the undue delay and undue 
distraction from litigation?
    Answer: The most important action that can be taken to avoid the 
undue delay an undue distraction that results from litigation over the 
use of new on-line tools, such as streaming audio digital music locker 
services, is for the Copyright Office to clarify its rule (37 CFR 
Section 255.6) ``deferring'' the establishment of rates and terms for 
``incidental DPDs.'' Such clarification can and should provide a ``safe 
harbor'' mechanism whereby copyright users could obtain the protection 
of the statutory license while the scope of Section 115 is being 
clarified. Again, however, MP3.com wishes to note that, in the long 
run, Congress will have to clarify not only Section 115, but also other 
provisions of the Copyright Act that allegedly are implicated by audio 
streaming services in general, and by ``purchased'' digital music 
locker services in particular.

    Question. The record companies have announced new online music 
services, including MUSICNET and Duet, which will provide competing 
business-to-business platforms for music subscription services that 
will cross-license music and offer the services on a non exclusive 
basis. As Hilary Rosen stated in her testimony, the record companies 
recognize the need to ``ensure that online distribution enhances rather 
than undermines the commercial viability of our retail partners. 
``Thus, the non-exclusive nature of these new platforms is important. 
Do you believe that it is also important for the record companies to 
make digital music available to those competing retailers capable of 
offering secure and accountable downloads, on a non-discriminatory 
basis that does not price them out of any competitive opportunity or 
give them substantially less attractive non price terms?
    Answer: The issue of non-discriminatory licensing arises not only 
with respect to ``downloads,'' but also with respect to ``on-demand'' 
streaming. Section 114(h) of the Copyright Act should be extended to 
apply to all ``interactive'' services.

                                

Responses of Richard D. Parsons to questions submitted by Senator Hatch

    Question 1: For all panelists (especially Mr. Parsons, Mr. Ken 
Berry, Mr. Murphy and Mr. Richards and Mr. Henley and Ms. Morissette): 
One argument we have heard in favor of a compulsory license is that 
music has so many pieces to license and there have been substantial 
disputes between the record labels, the publishers and the technology 
companies like MP3. com about how to get the publishing rights cleared 
in the volume demanded by online offerings. Some have suggested that a 
stumbling block to getting the labels to license sound recordings is 
that they may not have the rights from the artists to grant these 
rights. I understand there may even be problems with the MusicNet 
offering to some degree because of these impediments. Would any of you 
be interested in commenting on this particular problem and suggest ways 
to remedy it?
    Answer: As this question addresses two different copyrights, the 
copyright in musical compositions and the copyright in sound 
recordings, I will need to divide my answer into two parts.
    With respect to the copyright in sound recordings, the clearance 
issues are not complicated and we do not expect that they will present 
any significant stumbling block to the availability of music for use on 
subscription and other Internet-based services.
    With respect to the copyright in musical compositions, the 
resolution of issues to allow the administratively convenient and 
economic licensing of music publishing rights is well under way and 
does not require Congressional intervention at this time. In 
particular, these matters should not prevent the timely launch of the 
MusicNet service in the second half of this year. The clearance issues 
that have arisen involve interpreting the Copyright Act. We are hopeful 
that the Copyright Office pursuant to a rulemaking proceeding will 
resolve them in due course. In this regard, on March 9, the Copyright 
Office published a Notice of Inquiry and comments were submitted on 
April 23. Reply comments are due on May 23. The Copyright Office may 
very well decide that a compulsory license under Section 115 of the 
Copyright Act already obtains. This would be the case if on-demand 
streaming (``On-Demand Streaming'') is determined to be an incidental 
digital phonorecord delivery (``iDPD'') and time- or use-limited 
downloads (``Limited Downloads'') are determined to be iDPDs or 
rentals. It is also possible that mechanical compulsory licenses 
already secured by record companies for the manufacture and 
distribution of physical records also cover On-Demand Streaming and 
Limited Downloads. This matter maybe resolved in Mayor June by summary 
judgment in The Rodgers and Hammerstein Organization, et. al. v. UMG 
Recordings, Inc., et. al., a case pending before the United States 
District Court, Southern District of New York. Thus, the issues 
relating to On-Demand Streaming and Limited Downloads, which are the 
services to be provided by MusicNet, are well on their way to being 
resolved and any Congressional intervention would be premature.

    Question 2: For all panelists: Mr. Hank Barry argues that we have 
created compulsory licenses in the past, for publishing rights in music 
and in rebroadcast of television programming because it was difficult 
to clear the rights to the myriad creative interests involved in making 
up a broadcast day. Would anyone like to explain why that analogy does 
or does not obtain in the online music and entertainment world?
    Answer: Once again, I must make a distinction between musical 
compositions and sound recordings.
    We would have no problem with a mechanical compulsory license for 
use of musical compositions in On-Demand Streaming and Limited 
Downloads. As I pointed out in my answer to Question 1 above, it may 
already exist under Section 115 of the Copyright Act. The mechanical 
compulsory license for musical compositions is a bedrock concept in the 
U.S. music publishing business; indeed music publishers have favored 
retaining it in the law. In fact, a mechanical compulsory license first 
appears in the Copyright Act as enacted in 1909.
    On the other hand, in the U.S. record business a compulsory license 
for sound recordings has been the rare exception, not the norm, and is 
completely inappropriate in this instance. There is no need for so 
drastic a remedy. First, the marketplace is already working. In the 
last 18 months, Warner Music Group (``WMG'') has entered into content 
agreements with a subscription service, three digital locker services, 
seven streaming video services and five Internet radio services. 
Second, particularly in the Internet space, a sound recording copyright 
owner must have leave to determine how and when his, her or its works 
are used. A sound recording, unlike a musical composition which is not 
enjoyed by itself except in printed form, is a consumer product. The 
potential for cannibalization of physical sales and permanent downloads 
by subscription business models is high. Security is also a significant 
matter. Substitutability and copy protection issues endemic to the 
Internet pose great risks for record companies. Accordingly, sound 
recording copyright owners must have the ability to structure their 
relationships with Internet-based music services in order to take these 
essential concerns into account. Third, the worldwide nature of the 
Internet makes a U.S. compulsory license impractical at best. Fourth, 
commercial models are still evolving. Last year, permanent downloads 
were thought to be the future of the music business. This year they 
look less promising and the subscription model is in vogue. The ``one 
size fits all'' approach implicit in a compulsory license regime is 
manifestly unsuitable for a nascent and rapidly evolving marketplace.

    Question 3: For all panelists: I have heard a number of 
entertainment companies say acceptable protection for online content 
simply does not exist yet, that existing Digital Rights Management and 
watermarks, wrappers, or encryption, is simply not good enough to 
protect valuable content. Yet we have a number of technology companies 
here today who believe that they have struck a solution, and now we 
have announcements of online initiatives from all five major labels, 
which suggests the technological protections have developed recently. 
Would any of you care to comment on that state of technological 
protection for content?
    Answer: Progress has been made in the development of copy-
protection technologies and we have been working with technology 
providers for both online music and film content. We no longer see the 
lack of reliable copy protection technologies as a gating factor to the 
launch of Internet-based content businesses. That being said, 
protecting content on the Internet poses several challenges. Among 
these are the very structure of the Internet as a completely 
decentralized network with no single ``command center'' or server and 
the fact that the computer environment is designed to facilitate, not 
thwart, the reproduction and dissemination of data files.
    It is clear that no single technology will provide a complete 
solution. Rather, it is necessary to employ a combination of encryption 
and watermarking tools, coupled with enforceable rules regarding 
copying and secondary transmissions. In addition, hardware and computer 
companies must ultimately build support for protection technologies 
into their products in order for these systems to be viable. While no 
content protection technology will be ``bullet proof' and battling 
hackers will be an ongoing reality, we are working with our technology 
suppliers to ensure that systems will be upgradeable and renewable so 
as to quickly address and frustrate such attacks.

    Question 4: For all panelists: The premise of this hearing is that 
digital content is coming soon to digital devices to be enjoyed by 
consumers soon. Based on our discussion today, how soon is soon, and 
when will the promise become reality?
    Answer: As mentioned in my answer to Question 2, WMG has already 
provided its content to many Internet-based music services, among them 
the MusicNet service. MusicNet is still on schedule for a public launch 
in the late summer/early fall of this year. In fact my company has long 
been a leader in the introduction of new digital devices. Although I 
may be accused of being too literal, I should point out that WMG has 
been releasing digital devices (i.e., CDs) since 1983. In March of 
1997, Warner Home Video was the first to release motion pictures in the 
U.S. in DVD form, a digital device vastly superior to consumer 
videocassette. In fall of 2000, WMG was the first to release sound 
recordings in the U.S. in DVD Audio form, an exciting new digital 
device that improves on the CD by providing higher fidelity and six-
channel surround sound.

    Question 5: For all panelists: Is there any point you feel should 
be raised or that you would like to further respond to the completeness 
of our record?
    Answer: No.

    Question 6: Mr. Parsons, Mr. Ken Berry and Ms. Rosen: Do record 
companies have problems granting blanket licenses to third parties for 
digital distribution of an artist's recordings or settling lawsuits 
because of agreements with artists, such as ``coupling'' restrictions 
in their recording agreements (coupling is compiling an artist's 
recording(s) together with master recordings by other artists) such 
that the record companies would need the artist's approval to do so? 
Does a record company have the rights to distribute an artist's 
recording absent the accompanying artwork without an artist's approval 
under most recording agreements? If they don't, how can they do so via 
digital distribution?
    Answer: Because we sometimes have agreements with third parties 
that restrict our rights, WMG cannot grant rights for digital 
distribution with respect to every single sound recording that it owns 
and/or controls without exception. Nonetheless, WMG can (and does) 
grant rights with respect to every single sound recording that it owns 
and/or controls subject only to third-party restrictions. Typical 
recording agreement provisions that restrict ``coupling'' or artwork 
use would not prohibit the use of sound recordings or their associated 
artwork in current digital distribution models. It would be rare for a 
recording agreement to prevent a record company from settling lawsuits 
with copyright infringers.

    Question 7: Mr. Parsons, Mr. Ken Berry, and Ms. Rosen: Has there 
been any discussion or consideration about the basis on which record 
companies will share with artist monies they receive from blanket 
licensing, damage awards, or equity/stock participations they receive 
from third party companies?
    Answer: Every recording agreement is different, so there can be no 
fixed basis upon which record companies compensate artists. WMG will, 
of course, abide by the terms and conditions of its recording 
agreements. In particular, as we have previously announced, WMG will 
share with artists the monies received by WMG in connection with its 
MP3.com settlement agreement in accordance with the terms of the 
applicable artist agreements.

    Question 8: Mr. Parsons and Mr. Ken Berry: At the April 3, 2001, 
Senate Judiciary Committee hearing on online entertainment, Napster's 
CEO Hank Barry discussed the licensing complexities related to music 
webcasts and limited downloads. According to Mr. Barry, the MusicNet 
music licensing deal, which is a joint venture between AOL Time Warner, 
EMI, BMG, and RealNetworks, may not allow companies to offer the type 
of online music services consumers desire if the planned MusicNet 
licenses do not include publishing rights. Mr. Barry queried whether 
MusicNet license would include these publishing rights. In response to 
Mr. Barry's comments, Senator Feinstein asked Mr. Parsons to respond. 
Mr. Parsons responded that, ``the full complement of rights to enable 
the streaming or downloading of our catalogues--EMI's, Warner Music, 
BMG's--is included in the license that we gave the MusicNet. ``Can you 
clarify for us whether the MusicNet licenses you have granted include 
all of the required publishing rights, and the distinguish for us 
whether you mean that you are granting all publishing rights your 
entities-control, or all rights your entities control related to sound 
recordings your companies control, and whether you have cleared 
publishing licenses from outside publishers of music on sound 
recordings you control or whether the new MusicNet entity will have to 
clear these rights of third party publishers?
    Answer: In essence, WMG's Subscription Services Agreement with 
MusicNet includes all of the required publishing rights. The agreement 
requires WMG to obtain mechanical licenses for musical compositions 
embodied in sound recordings owned and/or controlled by WMG to the 
extent that such mechanical licenses can be obtained by compulsory 
means under Section 115 of the Copyright Act. Accordingly, WMG has 
proceeded with the first wave of a large compulsory licensing program 
pursuant to which, at the end of April, WMG sent Notices of Intention 
to approximately 3,000 music publishers in order to obtain 
approximately 17,000 licenses for musical compositions embodied on 
approximately 13,000 sound recordings owned and/or controlled by WMG. 
Our current plan is for this licensing effort to continue. The 
Subscription Services Agreement does not grant MusicNet mechanical 
licenses for musical compositions controlled by Warner/Chappell Music, 
Inc. These licenses will also be obtained pursuant to WMG's compulsory 
licensing program. The Subscription Services Agreement requires 
MusicNet to obtain performance licenses for musical compositions 
embodied in sound recordings owned and/or controlled by WMG. These 
rights are easily secured on a blanket basis in the U.S. from ASCAP, 
BMI and SESAC.

    Question 9: Mr. Parsons and Mr. Ken Berry: This week has seen a 
handful of announcements in the digital media space. While 1 have seen 
this a step forward, I have heard some skepticism concerning these 
deals given the timing of the announcements in the relation to the 
committee's hearing and the relative lack of specificity. Accordingly, 
please answer the following questions with respect to the recently 
announced MusicNet deal.

    Question a: Does the deal allow for the immediate licensing for 
subscription download of EMI, Warner Music, and BMG's entire music 
catalogs?
    Answer: Yes, but not entire (see Question 6 above). WMG will be 
able to make available a substantial portion of its repertoire to 
MusicNet.

    Question b: At what specific date will the full MusicNet download 
service be made available to the entire public, rather than on a beta, 
regional, or ISP membership basis?
    Answer: See Question 4 above. The beta version will be ready as 
early as May.

    Question c: Will the MusicNet license include all necessary 
publishing rights and, if not, on what date will all publishing rights 
be available?
    Answer: See Question 8 above.

    Question d: Will MusicNet be technology neutral, or will it require 
licensees to implement a particular proprietary technology?
    Answer: There is nothing in the MusicNet transactional documents 
that ties MusicNet to a particular DRM or CODEC. Technology decisions 
will be made by MusicNet's management in the best interests of MusicNet 
and will be overseen by MusicNet's board. MusicNet at present has a 7-
member board (2 independent directors, 2 appointed by RealNetworks and 
1 appointed by each of EMI, BMG and WMG). Where there are interested 
directors, board decisions will be determined by a majority of the 
disinterested directors. In addition, WMG's Subscription Services 
Agreement with MusicNet permits MusicNet to make WMG's content 
available using any of along list of DRMs or CODECs.

    Question e: Will other ISPs enjoy the same licensing terms 
(including prices, catalog available, etc) as AOL and other ISPs with 
equity stakes in MusicNet enjoy, yes or no?
    Answer: Nothing in the MusicNet transaction would limit another 
ISP's ability to enjoy the same licensing terms as AOL. As described 
below, MusicNet will negotiate all content and distribution 
relationships on an arm's-length basis.
    MusicNet's deals with content companies (including EMI, BMG and 
WMG) will be negotiated by the CEO of MusicNet or another officer of 
MusicNet designated by the CEO (the ``Licensing Negotiator''). The 
Licensing Negotiator in the performance of his/her duties will report 
only to MusicNet's independent directors and the directors appointed to 
MusicNet's board by RealNetworks. The terms of content licenses are to 
be maintained in strict confidence by the Licensing Negotiator, 
MusicNet and its officers and employees, the independent directors and 
the RealNetworks directors. They may not be divulged to any third party 
(including EMI, BMG and WMG).
    MusicNet's deals with distribution companies (including AOL and 
RealNetworks) will be negotiated by the CEO of MusicNet or another 
officer of MusicNet designated by the CEO (the ``Distribution 
Negotiator''). The Distribution Negotiator in the performance of his/
her duties will report only to MusicNet's independent directors and the 
directors appointed to MusicNet's board by any stockholder that is not 
a party to and does not have an affiliate that is party to a 
distribution agreement. The terms of distribution agreements are to be 
maintained in strict confidence by the Distribution Negotiator, 
MusicNet and its officers and employees, the independent directors and 
the directors appointed to MusicNet's board by any stockholder that is 
not a party to and does not have an affiliate that is party to a 
distribution agreement. They may not be divulged to any third party 
(including AOL and RealNetworks).

    Question 10: Your testimony made clear that you do not believe 
compulsory music licensing for interactive services to be necessary or 
desirable, citing MusicNet and other recent licensing initiatives by 
major record labels as evidence that product is beginning to flow to 
the market. What is your reaction to the suggestion of a sort of ``Most 
Favored Nation ``statute, similar to the program access rules for 
subscription television licensing, that required large copyright holder 
entities that engage in cross-licensing of their catalogs to make the 
licensed materials available on essentially the same terms and 
conditions to, for example, similar internet-based music distribution 
or ``locker'' services?
    Answer: We do not believe that a regulatory mandate similar to the 
program access rules for subscription television licensing is either 
necessary or advisable for licensing music to interactive services. 
Television delivery services are much more uniform in their function of 
delivering programming to a consumer. The consumer experience of 
receiving a particular program from a cable operator versus a satellite 
operator, for example, is basically the same. In contrast, interactive 
digital music delivery services vary greatly. Some services just stream 
music for consumer listening. Others involve a storage or locker 
service for music that a consumer already owns. Still others offer 
consumers the ability to download music and keep a permanent copy. 
Furthermore, these services vary in the level of security that they 
offer to content suppliers. Given the variety of business models and 
the speed at which such models are changing and evolving, it would be 
impracticable and unwieldy to apply a ``Most Favored Nation''--type 
approach. Moreover, applying a ``Most Favored Nation'' concept to this 
arena would likely have the perverse consequence of discouraging music 
owners from licensing to start-up services, promotional services, or 
niche-market-oriented services, with the result of a smaller array of 
choices for consumers.

    Question 11: Mr. Parsons and Mr. Ken Berry (and perhaps Ms. Rosen): 
can any of you explain what relevance traditional artist royalty 
reductions like those for packaging, returns or free goods have in 
cyberspace, and why those are not savings available in cyberspace that 
can be shared by consumers and artists as well as labels? What 
assurance can you give Mr. Henley and Ms. Morissette that the royalties 
earned on interactive services granted in the Digital Performance 
Rights Act will be passed on to them in a fair and equitable way rather 
than recouped against recording costs or otherwise kept by the labels? 
If you believe they should be recouped, please explain why?
    Answer: Some traditional royalty reductions found in recording 
agreements will be relevant to the Internet space, although it is hard 
to predict at this time which ones they will be. I don't believe that 
returns will be a relevant concept in the Internet space. Free goods 
may be relevant, if, for example, we are actually giving away permanent 
downloads to incentivize online retailers or to obtain positioning. 
Packaging deductions may be relevant to the extent that, as in the 
physical world, they are employed to arrive at a royalty-per-unit that 
will be acceptable to both the artist and the record company.
    There appears to be a widespread public belief that a record 
company's profit margins in the Internet world will be higher than in 
the physical world. It is far too early to know this with any 
certainty. While we certainly hope the public is right, there are a 
number of facts at our disposal which challenge that assumption. First, 
a download is a less-fullyrealized consumer product than a CD as the CD 
includes artwork and the physical medium that makes the product 
portable. Therefore, it is highly likely that the price a consumer is 
prepared to pay for a download will be less than the price he or she is 
prepared to pay for its physical analog. Second, while there are no 
printing, manufacturing or physical distribution costs associated with 
a download, the distribution of downloads will implicate a whole new 
series of expenses including hosting costs, bandwidth delivery costs, 
content preparation costs and license fees attributable to security and 
digital rights management technologies. These expenses are roughly 
equivalent to any savings achieved by not having to print, manufacture 
and distribute a physical record. Perhaps, over time, the volume of 
digital transactions may drive efficiencies that lower costs and 
increase record company margins.
    In general, our recording agreements, as negotiated, provide that 
royalties otherwise payable to artists are applied in recoupment of 
certain payments made to or on behalf of artists such as recording 
costs, some video production costs, tour support and some independent 
promotion costs. This course of dealing, developed over many years, 
reflects the marketplace realities and the large investments that a 
record company makes in an artist's career. In this regard, our 
recording agreements don't make a distinction between royalties 
accruing from physical and non-physical distribution models.

                                

Responses of Richard D. Parsons to questions submitted by Senator Leahy

    Question 1: Mike Farrace, Senior Vice President, at Tower Records 
testified that some record companies are requiring personal data from 
and about Tower's customers, prompting concerns by Tower Records about 
violation its own privacy policy, damaging the relationship with the 
customer, and ``maybe even resulting] in Tower violating the law.''

    Question a: What sort of personal data are record companies 
requesting from retail distributors, such as Tower Record, and other 
online distribution services to provide from or about customers?
    Answer: In general, WMG does not request personal data from retail 
distributors and online distribution services with respectto their 
customers. In fact, as a practice, we do not request and have not 
received such data from any retail distributor or online distribution 
service. (For the purposes of this question, I am assuming that you 
mean ``online distribution services'' to be the Internet analog to 
``brick-and-mortar.'')

    Question b: Are record companies asking retail distributors to 
provide any personal data about customers who purchase CDs in brick-
and-mortar stores, or have the requests for collection of customer data 
been limited to online music purchases?
    Answer: There is only one situation where WMG asks ``brick-and-
mortar'' stores to provide personal data about customers who purchase 
CDs. Certain chains such as Newbury Comics and CD World have ``frequent 
shopper card'' programs that provide discounts to high-volume 
customers. In applying for such cards, the customers provide certain 
personal data to the stores and agree to let the stores share some of 
that data with record companies. WMG gets limited demographic data from 
these stores with respect to such customers' purchases (e.g., age and 
gender), but not the names of the customers.

    Question c: Are retail distributors and online distribution 
services formulating or revising their privacy policies to accommodate 
requests from record companies to provide
    personal data from or about customers?
    Answer: I don't know. This question would best be addressed to Mr. 
Farrace.

    Question d: Are record companies requiring as part of their 
licensing agreements for digital music that they be provided access to 
customers' personal data?
    Answer: In some of WMG's agreements with digital music services, 
WMG may be provided with limited access to customers' personal data 
provided that such data is legally obtained by the relevant service and 
is in accord with such service's ``privacy policy.'' For example, in 
WMG's digital download fulfillment agreements with companies such as 
Liquid Audio and RioPort, WMG may be provided with the names, e-mail 
addresses and zip codes of purchasers of WMG content, provided, that 
the customer has explicitly consented to have such information made 
available to WMG via an ``opt-in'' process that informs such customer 
of how such information will be used. In WMG's typical music locker 
service agreements such as with MP3.com and Echo, WMG may be granted 
the ability to solicit customers to purchase WMG products and may also 
be granted access by such services to general information pertaining to 
individual customers. In most, if not all, of WMG's agreements with 
digital music services, WMG is provided with aggregated customer 
demographic data on a no-name basis and only so long as providing such 
information does not run awry of the applicable service's ``privacy 
policy.'' Finally, when WMG runs contests, e-mail blasts and other 
promotions through Internet music services such as ARTISTdirect or 
MP3.com, consumers may be given the option to learn more about a 
particular WMG artist or another WMG artist by providing certain 
personal data (e.g., an e-mail address) and clicking ``ok.''

    Question 2: Jack Valenti testified that within four to six months, 
several movie studios plan to use the Internet to transmit movies to 
American homes in encrypted form, but that more protection may be 
needed, ``some of which might require congressional legislation. ``In 
the Digital Millennium Copyright Act (DMCA), the Congress has provided 
protection for technological measures that effectively control access 
to copyrighted works and barred the manufacture, import or sale of 
products or services primarily designed to circumvent such 
technological measures. 17 U.S.C. Sec. 1201 (a)(I) & (2). Please 
describe the circumstances where additional protection may be warranted 
and the areas not already covered by the DMCA where additional 
legislation may be requested.
    Answer: The DMCA, along with the balance of U.S. copyright law, 
currently functions well in the Internet environment. The recent court 
decisions in the DeCSS and the Napster cases recognize the importance 
of granting legal protections to copyrighted works and technical 
protection measures on the Internet. We do not believe additional 
legislation is needed at this time. Nevertheless, as the technical and 
business digital landscape evolves, the law may need to change with it. 
In particular, as we move to delivering more of our content online, 
including films, legislation may be needed at some point in the future 
to supplement the cross-industry efforts among the content, consumer 
electronics, computer and online service provider industries to ensure 
adequate security to support these new business models and delivery 
channels.

    Question 3: Concerns have been expressed that ``copyright 
management'' measures being developed by copyright owners to control 
the distribution of their digital works may erode the first sale 
doctrine. If a customer pays for the personal use of a copyrighted work 
the rights holder may use technological means to ensure that the work 
is not posted on a web site for use by others. Do you believe that the 
marketplace will sort out the scope of copyright management measure 
since customers who believe they are not getting what they pay for will 
simply stop buying?
    Answer: Much confusion has surrounded the issue of the first sale 
doctrine and its application to the online world. The first sale 
doctrine distinguishes possessory personal property rights from 
copyrights. Under the first sale doctrine, the owner of a tangible copy 
of a work may transfer possession of (e.g., sell, lend or give away) 
that particular copy to another person. Two persons cannot have 
simultaneous possession of the particular copy and the first sale 
doctrine does not permit additional copies of the work to be made. 
Thus, if someone buys a CD and then gives it to a friend, the first 
sale doctrine applies to that activity. However, if the purchaser buys 
the CD and then rips it into an MP3 file and e-mails that file to a 
friend, the first sale doctrine has been exceeded. This is because the 
purchaser has made a copy of the work, rather than simply transferring 
possession of an existing copy.
    The question poses an example of a consumer who pays for the 
personal use of a copyrighted work and the possibility that the owner 
of the copyright in the work might apply technical measures to prevent 
the consumer from posting the copy of the work to a website for use by 
others. In this example, the posting of the copy by the consumer would, 
even in the absence of technical measures, not be permitted under the 
first sale doctrine. Such a posting would involve unauthorized 
reproduction of the work and unauthorized distribution of the 
additional copies, enabling the consumer to retain his or her copy 
while simultaneously giving copies away to many others. Hence the 
application of copyright management measures to prevent or discourage 
this type of activity in no way erodes or undercuts the first sale 
doctrine.
    We believe that the application of ``copyright management'' 
measures will actually facilitate a wide array of content offerings to 
consumers at varying price points. And we agree that the marketplace 
will sort out the scope of such measures based on what consumers find 
acceptable. If consumers find that they are getting value for what they 
pay for, then, they will accept technical measures. Indeed, the 
experience of DVD--with its technical protections for motion picture 
content--bears out this principle; consumers have embraced DVD faster 
and more enthusiastically than any other format, including CD and VHS, 
both of which were unprotected.

    Question 4: Retailers of music, movies, video games and other 
copyrighted works have expressed concern about whether copyright 
management measures and end user licensing agreements will erode the 
ability of retailers and distributors to distinguish themselves from 
one another in meaningful ways with the potential of stifling 
competition among retailers, since those measures may set uniform 
prices, policies and terms for online distribution of digital works.

    Question a: Please explain whether you believe that uniform 
copyright management measures and user licensing agreements carry the 
potential risks for competition identified by retailers?
    Answer: Copyright management measures, in terms of technical 
protection measures, should have no detrimental impact on legitimate 
retailers and distributors and their ability to compete. Measures 
employed to prevent unauthorized access or unauthorized reproduction or 
distribution operate so as to be transparent to all legitimate uses by 
a consumer. Thus, for example, the high-quality viewing experience that 
the consumer gets with DVD is in no way impaired by the fact that the 
motion picture content on DVD is encrypted. The application of this 
technical protection to DVD has had no negative impact on retailers' 
and distributors' abilities to compete and distinguish themselves in 
pricing and promotion.
    It is not entirely clear what that term ``end user licensing 
agreements'' is intended to mean--whether (i) licensing agreements 
directly between record companies and consumers or (ii) the terms that 
record companies may require retailers to abide by in selling product 
to end consumers. In either case, such agreements would pose no threat 
to competition.
    As for the first scenario, consumers will naturally continue to buy 
records where it is convenient to do so. That means they will continue 
to go to retailers that provide a full range of music (and can offer 
service and an attractive price), rather than record companies that 
only have a limited selection. Moreover, record companies have an 
interest- in the promoting and selling their product broadly, so they 
have an on-going interest in maintaining a healthy network of 
retailers. Thus, retailers should continue play a central role in 
making digital music available to consumers (just as they have in sales 
of CDs whether in traditional stores or through websites), and direct 
purchases from record companies are likely to remain a relatively small 
portion of transactions.
    As for the second scenario, retailers may need to abide by certain 
restrictions to protect copyrights (for example, if the record company 
and music publishers have been able to grant rights to a retailer only 
for a particular country--such as the United States--then the retailer 
would need to take steps to assure that it does not make the recording 
available outside of that territory). But just as such competition has 
flourished among ``brick-and-mortar'' retailers while respecting such 
copyright restrictions, it should do so among online retailers as well.

    Question b: Would variation in the terms for pricing, use policies 
and terms for the distribution of digital works provide flexibility for 
different distribution models and give the consumer the maximum number 
of choices?
    Answer: Certainly. Record companies have an interest in exploring a 
number of different models for making digital music available to 
consumers--in terms of price, format (stream versus download), and 
packaging. Ultimately, the range of choice will be determined by 
consumer preferences, the extent of retailer ingenuity, and 
practicality.

    Question 5: The Copyright Office issued a Notice of Inquiry on 
March 9, in response to a petition by the RIAA, stating that: ``there 
is considerable uncertainty as to interpretation and application of the 
copyright laws to certain kinds of digital transmissions of prerecorded 
musical works. It is also apparent that the impasse presented by these 
legal questions may impede the ability of copyright owners and users to 
agree upon royalty rates under section 115. . . ``66Fed Reg. 14099, 
141101 (2001).

    Question a: Do you agree with this statement and, if so please 
explain how the uncertainty over the legal questions presented in the 
petition are affecting voluntary licensing agreements for new online 
music services?
    Answer: Yes, I do agree with the statement. In order to give you 
some idea as to the significance of the problem, I will focus on On-
Demand Streaming alone and set aside Limited Downloads, which may be 
even more complicated.
    At present, a service that provides On-Demand Streaming to 
consumers doesn't know whether it needs to obtain mechanical licenses 
in musical compositions embodied on sound recordings. If the service 
fails to obtain mechanical licenses (even though there is uncertainty 
as to whether it is required to do so), it risks being pursued as a 
copyright infringer. If the service wishes to cover itself by obtaining 
mechanical licenses (even though such licenses may be unnecessary), it 
is unclear whether those mechanical licenses must be negotiated 
directly with a myriad of publishers or whether the licenses can be 
secured under Section 115 of the Copyright Act. Either process--direct 
negotiation or invoking Section 115--is extremely burdensome from an 
administrative point of view. In the case of direct negotiation, the 
service may end up inadvertently committing to an uncommercially high 
rate. By invoking Section 115, the service may obtain mechanical 
licenses but runs the risk that the rate, as later determined, will be 
uneconomic.

    Question b: In 1995, the Digital Performance Right in Sound 
Recordings Act expanded the scope of the mechanical license, under 17 
U.SC Section 115, to include the right to distribute, or authorize the 
distribution of, by digital transmission both hard copy phonorecords 
and ``digital phonorecords deliveries'' or ``DPDs. ``DPDs are defined 
in the Act but a subset of DPDs, called incidental DPDs, ``which are 
also subject to the mechanical licensing process, are not defined. One 
of the issues before the Copyright Office is to determine what is and 
what is not an ``incidental DPD. ``Is this a question that the 
Copyright Office or the Congress should determine in the first 
instance?
    Answer: This is clearly a question for the Copyright Office. First, 
the question falls squarely within the Copyright Office's authority and 
proficiency. As long recognized by Congress and the courts, it is the 
job of the Copyright Office to interpret the Copyright Act and function 
as an expert advisor on issues of copyright law. Second, time is 
pressing and the Copyright Office rulemaking process that is already 
underway will resolve this question more far more quickly than Congress 
or the courts.

    Question c: The Copyright Office is currently considering the 
applicability of the section 115 mechanical license to two new services 
for delivery of digital music: ``On-Demand Streaming'' (which permits 
users to listen to real-time streamed music they want when they want 
it) and ``Limited Downloads'' (which permits users to download music 
for listening for only a limited time.) According to the Notice of 
Inquiry, these types of services were not ``anticipated'' when the 
Congress expanded the scope of section 115 to cover digital 
transmissions. Is legal uncertainty over the applicability of section 
115 to these new services having any effect on the deployment of such 
services and, if so please explain what that effect is?
    Answer: Given the ambiguities surrounding the mechanical licensing 
of musical compositions, the administrative burdens and economic risks 
in launching an Internetbased music service are extremely high., These 
ambiguities will dissuade all but the mosthighly-motivated companies 
from attempting to develop or invest in the development of such a 
service.: Even those that choose to proceed will be hampered 
considerably by the enormity of the rights clearance process. This 
marketplace cannot thrive unless the Copyright Office resolves the 
uncertainties.

    Question d: Various music publishers filed suit in December, 2000, 
against UMG for copyright infringement alleging that UMG was copying 
sound recordings on servers for its new online music subscription 
service, Farmclub.com, and stating that ``UMG recently obtained a 
judgment from this court that the operator of another Internet music 
service, MP3.com, Inc., had willfully infringed UMG's sound recording 
copyrights by placing copies of those sound recordings on its public 
servers--precisely what UMG has done here without plaintiffs 
permission.'' Would clarifying the scope of the mechanical license 
under section 115 of the Copyright Act in the context of such new 
online music services help avoid the undue delay and undue distraction 
from litigation?
    Answer: The effect of the Copyright Office's commencing a 
rulemaking proceeding regarding the application of the mechanical 
compulsory license of Section 115 to certain digital music services 
will be to reduce the potential for future litigation, streamline the 
rights clearance process and accelerate the proliferation of digital 
music services.

    Question 6: Hillary Rosen has testified that RIAA member companies 
have committed to licensing Napster once the service operates in a 
fashion that respects copyrights and Napster has an agreement with 
Bertelsmann to help develop this system. What is the current status of 
Napster's efforts to develop a technological upgrade to digital rights 
management system that is secure and addresses the needs of artists and 
copyright owners addresses the rights of artists and copyright owners? 
Has Napster been able to share a new technological approach with (a) 
the court; (b) with artists or (c) with copyright owners? When does 
Napster expect to be able to introduce the new technological model?
    Answer: We don't know the current status regarding Napster's 
efforts to develop a secure system, we are not aware whether Napster 
has shared any new technology approach with the courts or artists and 
we don't know when or if Napster will be introducing a new 
technological model. Napster would best answer those questions. In 
February and March of this year, Napster executives communicated on 
several occasions with WMG executives concerning Napster's intention to 
implement an acoustic fingerprinting technology intended to ``screen 
out'' unauthorized sound recordings.

    Question 7: The recording companies have announced new online music 
services, including MusicNet and Duet, which will provide competing 
business-to-business platforms for music subscription services that 
will cross-license music and offer the services on a nonexclusive 
basis. As Hilary Rosen stated in her testimony, the record companies 
recognize the need to ``ensure that online distribution enhances rather 
than undermines the commercial viability of our retail partners. 
``Thus, the non-exclusive nature of these new platforms is important. 
Do you believe that it is also important for the record companies to 
make digital music available to those competing retailers capable of 
offering secure and accountable downloads, on a non-discriminatory 
basis that does not price them out of any competitive opportunity or 
give them substantially less attractive non price terms?
    Answer: As stated above, the MusicNet service will be offered on a 
non-exclusive basis to various distributors including portals and music 
portals and certainly to online retail sites. WMG's Subscription 
Services Agreement with MusicNet is non-exclusive and WMG would be able 
to provide its content directly to any such distributor that itself 
wishes to build a subscription infrastructure. It is certainly 
important for WMG to make its content widely available to those 
companies that are in a position to provide opportunities for the 
promotion or sale of such content. The price or non-price terms 
relating thereto will be negotiated on an arm's-length basis in 
accordance with all applicable laws.

                                

   Responses of Hilary Rosen to questions submitted by Senator Hatch

    Question 1: One argument we have heard in favor of a compulsory 
license is that music has so many pieces to license and there have been 
substantial disputes between the record labels, the publishers and 
technology companies like MP3.com about how to get the publishing 
rights cleared in the volume demanded by online offerings. Some have 
suggested that a stumbling block to getting the labels to license sound 
recordings is that they may not have the rights from their artists to 
grant these rights. I understand there may even be problems with the 
MusicNet offering to some degree because of these impediments. Would 
any of you be interested in commenting on this particular problem and 
suggest ways to remedy it?
    Answer: It is true that licensing in the music business is 
complicated. This is especially true with respect to musical 
compositions, because music publishers and songwriters have chosen to 
bifurcate the licensing of their rights, with performing rights 
organizations like ASCAP, BMI and SESAC licensing performance rights 
and The Harry Fox Agency licensing reproduction and distribution. There 
is of course, already a compulsory license for the reproduction and 
distribution of musical works. However, the Copyright Office 
regulations implementing that license prescribe procedures that are not 
well suited to Internet licensing. We have asked the Copyright Office 
to simplify these procedures to facilitate the launch of subscription 
digital music services, and we believe the Office has the ability to 
make significant improvements in these procedures within the existing 
statutory framework.
    With respect to sound recordings, the recording industry is moving 
rapidly to adapt to licensing at Internet speed. If any artist 
contracts limit the ability of labels to make some recordings available 
electronically those issues will be worked out between the individual 
label and artists. To date, such limits have not prevented record 
companies from making the vast majority of the songs in their catalogs 
available for licensing. If artists choose not to work with labels to 
make their songs available for electronic distribution, I respect their 
decision, however it is clear that if consumers arc not offered 
legitimate versions, they will find pirate versions of the music they 
want.
    It is easy to launch an infringing service that makes no effort to 
see that creators and copyright owners are compensated, and may even be 
consciously ignorant of the recordings being distributed. Launching a 
legitimate service requires more effort and infrastructure. Right now, 
record labels are moving as quickly as they can to open new outlets for 
recordings by launching new services, partnering with distributors and 
licensing their catalogs for various kinds of Internet use. As part of 
this effort, they are creating the infrastructure necessary to support 
legitimate Internet music services, including libraries of encoded 
recordings, databases of rights information, and royalty distribution 
systems, as well as determining whether there are limits on the 
electronic distribution of certain of their recordings. This effort 
cannot be completed overnight, but once it has been done for one 
Internet licensing deal, every subsequent deal, and the launch of every 
subsequent service, will be easier and faster.

    Question 2: Mr. Hank Barry argues that we have created compulsory 
licenses in the past for publishing rights in music and in rebroadcast 
of television programming because it was difficult to clear the rights 
to the myriad creative interests involved in making up a broadcast day. 
Would anyone like to explain why that analogy does or does not pertain 
in the online music and entertainment world?
    Answer: The compulsory licenses identified in the question arose 
from situations nothing like we have today in the case of Internet 
music services. The other compulsory licenses--for cable and satellite 
retransmission and mechanical reproduction--arose not because it was 
difficult to obtain copyright ``clearance,'' but because copyright 
owners were granted new rights covering existing but peripheral uses of 
their works, and there was a real concern that copyright owners would 
not make their copyrighted works available to existing users.
    The mechanical compulsory license came about at a time when the 
core business of music publishers was selling sheet music, after the 
Supreme Court held that copyright owners had no right to exclude piano 
roll makers from manufacturing copies of their works in the form of 
piano rolls. Congress reversed that decision, but having heard that 
music publishers might grant exclusive rights to one piano roll 
manufacturer, Congress decided to limit the right to mechanical 
reproduction with a compulsory license so that musical works would 
continue to be available to all potential users. Thus, music publishers 
never had an exclusive right to mechanically reproduce their works and 
instead have developed their business around the compulsory license. 
Indeed, publishers have so embraced the compulsory license that they 
insisted that the compulsory license be retained and extended to 
electronic music delivery in 1995.
    Similarly, the cable compulsory license came about at a time when 
cable . television was not nearly so commercially significant as 
broadcast television, after the Supreme Court held that copyright 
owners had no right to stop cable retransmission of broadcast signals. 
In granting copyright owners rights with respect to cable 
retransmissions, Congress limited those rights with a compulsory 
license, so that cable systems would not need permission to continue to 
make broadcast signals available to their subscribers. Once a cable 
compulsory license was in place, and satellite systems were denied the 
right to be considered ``cable systems,'' the satellite compulsory 
license naturally followed.
    By contrast, reproduction and distribution of sound recordings are 
the core rights and core business of record companies. Unlike these 
other compulsory licenses, a compulsory license to reproduce and 
distribute sound recordings would take away the most important existing 
rights record companies have in their sound recordings and threaten the 
core business of record companies--distributing copies of their 
recordings in whatever media consumers then demand. There is no problem 
with the availability of sound recordings that would warrant this 
unprecedented action. Record companies are licensing their sound 
recordings for use on the Internet regularly and have signed dozens of 
deals already. Recently, record companies have formed two competing 
joint ventures, MusicNet and Duet, that intend to amass catalogs of 
recordings as large as they can and make them available on a 
nonexclusive basis for Internet distribution. In short, there is no 
question that sound recordings are being made available.
    Furthermore, a compulsory license might not be economically 
significant so long as electronic distribution accounts for a miniscule 
percentage of record sales. However, if electronic music delivery 
becomes as commercially significant as we all hope it will, a 
compulsory license could dramatically affect the economics of the 
industry and the bargains between artists and record labels. Record 
companies make business decisions, and strike agreements with artists, 
based on the income record labels can expect to receive from selling 
recordings under exclusive rights of reproduction and distribution. If 
there were a compulsory license for electronic distribution, as 
electronic distribution became more important, the royalty provisions 
of the compulsory license increasingly would determine the economics of 
the record business. The government should not force any industry to 
have its profitability determined every five years by three 
arbitrators. Doing so would be unfair, a dramatic departure from the 
precedents cited by Mr. Barry, and quite possibly a violation of the 
Constitution or U. S. treaty obligations.
    Finally, the American recording industry is the most vibrant 
national recording industry in the world. A compulsory license on sound 
recordings would give away our cultural heritage and one of America's 
best trade assets.

    Question 3: I have heard a number of entertainment companies say 
that acceptable protection for online content simply does not exist 
yet, that existing Digital Rights Management and watermarks, wrappers, 
or encryption, is simply not good enough to protect valuable content. 
Yet we have a number of technology companies here today who believe 
that they have such a solution, and now we have announcements of online 
initiatives from all five major labels, which suggests the 
technological protections have developed recently. Would any of you 
care to comment on the state of technological protection for content?
    Answer: The technology for protecting copyrighted works is 
developing nicely. One interesting development in the last year or two 
has been that the software and technology companies--responding to the 
demands of the marketplace--have started to focus on developing methods 
of promoting legitimate commerce by protecting rights, rather than 
methods of recklessly disseminating other people's content without 
their consent. RIAA is encouraged by this newfound enthusiasm for 
rights management and protection technologies.
    Record labels, among other copyright owners, have formed 
partnerships with technology companies to create and implement creative 
and flexible methods for enabling the electronic distribution of 
copyrighted works in ways that are easy for consumers to use, while 
providing appropriate protection to copyright owners. Content owners 
have a variety of technologies to choose from to meet their needs and 
offer services that meet consumers' needs, and we expect more and more 
progress in this area.

    Question 4: The premise of this hearing is that digital content is 
coming soon to digital devices to be enjoyed by consumers soon. Based 
on our discussion today, how soon is soon, and when will the promise 
become reality?
    Answer: The answer to the question of ``How soon?'' is that digital 
music content is here now. All of the major record companies have made 
digital downloads available to consumers, and record companies have 
licensed streaming by interactive and noninteractive webcasters. Record 
labels have made deals allowing Internet services to construct 
compilation compact discs, and for ``kiosks'' that further the 
distribution of digital music. Although not yet ``here,'' MusicNet and 
Duet subscription services will be launched later this year, and more 
new and exciting services will follow as record labels continue to seek 
new outlets for electronic distribution of their recordings.
    Criticism of the industry for not making enough recordings 
available online through enough different outlets faster is unfair. The 
recent economic downturn and shakeout in the technology sector 
illustrate that very few companies have figured out how to run 
profitable businesses distributing content online. Production and 
promotion of material that consumers want is expensive, and large scale 
online distribution is expensive too. Over the last few years, some 
companies were able to finance content production and distribution for 
a time through equity investment in a superheated stock market, but for 
the production and distribution of content to be sustainable, there has 
to be a profitable business model. Record companies should not be 
blamed for not finding enough profitable ways to distribute recordings 
online five years ago, when even today very few businesses have found 
sustainable business models for online distribution.

    Question 5: Is there any point you feel should be raised or that 
you would lie to further respond to for the completeness of our record?
    Answer: The marketplace is working to bring digital music to 
consumers now. And the market forces that are bringing artists, record 
labels, technology companies and online services together to satisfy 
consumer demand really are the ideal solution for everyone involved. 
Only the marketplace provides the flexibility to experiment with 
service offerings, business models and contractual arrangements to 
adapt to consumer demand. By contrast, regulation would make it more 
difficult to take advantage of opportunities offered by new 
technologies and to meet the evolving demands of consumers. This is 
because any regulatory framework would create barriers to offering 
services other than those envisioned by the regulations and hamstring 
record labels and online services in developing and offering innovative 
services in response to consumer demand. It is for similar reasons that 
Congress has been reluctant to regulate the Internet in general. 
Digital music services should not be the exception to this wise rule. 
Because the market for digital music is nascent, it is critical that 
digital music services develop and adapt while the market matures 
without the heavy hand of government regulation.

    Question 6: Do record companies have problems granting blanket 
licenses to third parties for digital distribution of an artist's 
recordings or settling lawsuits because of agreements with artists, 
such as ``coupling'' restrictions in their recording agreements 
(coupling is compiling an artist's recording(s) together with master 
recordings by other artists) such that the record companies would need 
the artist's approval to do so? Does a record company have the right to 
distribute an artist's recording absent the accompanying artwork 
without an artist's approval under most recording agreements? If they 
don't, how can they do so via digital distribution?
    Answer: Artist contracts vary from label to label and artist to 
artist. My general understanding is that the vast majority of artist 
contracts do not contain limitations that would prevent record 
companies from licensing their recordings for digital distribution, 
with or without the associated cover art. And where such limitations 
exist, we can all be certain that discussions are or will be taking 
place between those labels and individual artists. Such limits have not 
prevented record companies from making the vast majority of the songs 
in their catalogs available for licensing, nor from settling the major 
labels' case against MP3.com.

    Question 7: Has there been any discussion or consideration about 
the basis on which record companies will share with artists monies they 
receive from blanket licensing, damage awards, or equity stock 
participations they receive from third party companies?
    Answer: Section 114 of the Copyright Act provides the answer to 
this question. A record company's receipts from the statutory license 
are to be allocated in accordance with the statute, and in other 
respects, artists are to be paid in accordance with their contracts. 
Moreover, record labels recognize that their relationships with artists 
are critical to their success, and so sometimes renegotiate contracts 
or make other payments to artists even when not required. For example, 
all ofthe major labels we represented in the MP3.com case have stated 
their intention to pay artists their fair share of those damages. 
Universal has publicly announced that it will pay its artists half of 
the damages it received from MP3.com.

    Question 8: Hank Barry of Napster referred in his testimony to the 
RIAA's pending petition before the Copyright Office that a compulsory 
license is precisely what's needed in order to permit RIAA's members 
secure necessary rights from music publishers. Could you elaborate on 
the meaning of your petition and explain why, in your view, such relief 
should not be afforded to other parties seeking to obtain other 
copyright rights from your member companies or clearing publishing 
rights in the manner you suggest in your petition? Could you also 
further elaborate your point about distinguishing the ``core 
distribution right'' from the other compulsory licenses cited as 
precedent, including the mechanical license you seek to take advantage 
of?
    Answer: The characterization of our Copyright Office petition in 
this question is incorrect. A compulsory license is not needed; one has 
existed for almost a century and been fully embraced by the copyright 
owners whose works are subject to it. Indeed, it is the music 
publishers, not the record companies, who insisted that the compulsory 
license be extended to electronic delivery in 1995, because music 
publishers have structured their business practices around the 
compulsory license and have consistently opposed efforts to eliminate 
the compulsory license in international treaty negotiations. The only 
question is how that license applies to certain types of digital music 
services. RIAA's petition asks that the Copyright Office initiate a 
rulemaking to clarify how the mechanical compulsory license applies to 
two types of music delivery methods, ``OnDemand Streams'' and ``Limited 
Downloads.'' Uncertainty concerning that question has been a 
significant impediment to the launch of subscription music services by 
record companies and their licensees. The petition also asks the Office 
to promulgate interim rules with streamlined procedures for obtaining 
mechanical licenses, because the Office's existing regulations require 
a procedure that is poorly suited to Internet licensing, and more 
cumbersome than it needs to be given the authority Congress has given 
the Office to make rules to implement the compulsory license. Whatever 
relief record companies might receive from this Copyright Office 
proceeding would apply to anyone seeking to clear publishing rights by 
relying on the existing mechanical compulsory license. A more complete 
statement of our views on these issues is set forth in RIAA's attached 
comments on the Copyright Office's Notice of Inquiry.
    By contrast, we believe that a compulsory license for the 
reproduction and distribution of sound recordings is unnecessary and 
unwise. The marketplace is working to bring digital music to consumers 
now. Record companies are licensing their sound recordings for use on 
the Internet regularly and have signed dozens of deals already. A 
fundamental underpinning of the market for sound recordings is the 
record companies' exclusive reproduction and distribution rights. These 
are ``core'' rights because they are existing rights covering the core 
business of record companies--distributing copies of their recordings 
in whatever media consumers then demand. The industry has developed in 
reliance on the fact that record labels have the exclusive right to 
reproduce and distribute their records. These rights have encouraged 
record labels to discover and promote new artists and take risks, 
knowing that if they do discover an artist that the public likes, they 
can make creative and business decisions about how to commercialize 
that artist's recordings to make a fair profit on their investment. 
Without exclusive rights, recordings would become a commodity, and 
record companies would be far less willing to take chances and record 
new material, and to make a promotional investment, if others could 
skim the cream of their catalogs and sell the most popular recordings 
for the same compensation to the copyright owner as less popular 
recordings. Thus, taking away the most important rights record 
companies have in their sound recordings would cause great disruption 
to the recording industry, which could only limit the variety of new 
music availabie to the public and reduce the opportunities available to 
artists.
    Creation of a compulsory license for sound recordings now would be 
very different from creation of the mechanical compulsory license in 
1909. Music publishers never had the exclusive right to reproduce and 
distribute recordings of their songs; the grant of that right in 1909 
was limited by the compulsory license. Before that time, the core 
business of music publishers was publishing sheet music. Thus, in 1909, 
creation of the mechanical compulsory license only provided incremental 
revenue to publishers, and caused no disruption of the music publishing 
industry. As the sale of records eclipsed the sale of sheet music, and 
the compulsory license has become the dominant source of revenue for 
music publishers, the modern publishing industry has grown up around 
the compulsory license and fully embraced it. That is obviously not 
true of the recording industry, which always has enjoyed exclusive 
rights with respect to its recordings. Congress should not risk the 
vitality of the most vibrant national recording industry in the world 
by creating a compulsory license now that goes to the heart of the 
industry's existing rights and business.

    Question 9: During your testimony you displayed for the Committee 
the home pages of a number of current web-based music services, which 
your member companies, you testifed, have already licensed. The 
implication of your statement appeared to be that such licensing 
activity has already gone on a long way to satisfy consumer demand. 
Would you please, for the record, provide the Committee with details as 
to which services your members have licensed, whether they had 
officially launched by the date of your testimony and, if so, 
approximately how many ``customers'' they each had at that point. Could 
you also detail, please, whether the licenses generally provided these 
services required the service provider to furnish customer data to the 
licensor and, if so, what kind of data?
    Answer: Attached is the list of websites and services licensed by 
RIAA members, as presented in Hilary Rosen's testimony. All of these 
sites had launched before the date of the hearing presentation. Please 
note that this is a list of just some of the services and sites that 
our companies have licensed. The RIAA is not involved in its members' 
licensing deals because each company negotiates its agreements 
individually. We therefore do not have a comprehensive list of all 
licensed services and do not possess specific information about what 
kind of data, if any, is provided under such agreements.
    Licensed Music Sites
www.2ksounds.com
www.akoo.com
www.aolmusic.com
www.artistdirect.com
www.clickradio.com
www.ecastinc.com
www.echo.com
www.e-qreetings.com
www.farmclub.com
www.hob.com
www.ichoosetv.com
www.intertainer.com
www.launch.com
www.liquidaudio.com
www.listen.com
www.loudeve.com
www.moontaxi.com
www.mp3.com
www.mtvi.com
www.musicbank.com
www.musicbrigade.com
www.musicchoice.com
www.net4music.com
www.oen.com
www.ondemanddistribution.com
www.radiowave.com
www.real.com
www.rioport.com
www.soundbuzz.com
www.starmedia.com
www.streamsaves.com
www.supertracks.com
www.touchtunes.com
www.vidnet.com
www.vahoomusic.com

    Question 10: Your testimony made clear that you do not believe 
compulsory music licensing for interactive services to be necessary or 
desirable, citing MusicNet and other recent licensing initiatives by 
major record labels as evidence that product is beginning to flow to 
the market. What is your reaction to the suggestion of a sort of ``Most 
Favored Nation'' statute, similar to the program access rules for 
subscription television licensing, that required large copyright holder 
entities that engage in cross-licensing of their catalogs to make the 
licensed materials available on essentially the same terms and 
conditions to, for example, similar internet-based music distribution 
or ``locker'' services?
    Answer: A government-mandated ``most favored nation'' (``MFN '') 
requirement would be a straightjacket on the marketplace for digital 
music. We also believe it will stifle technology rather than encourage 
innovation. The Internet provides nearly limitless opportunities for 
digital music distribution, and with these opportunities come a 
similarly limitless number of ways bargains may be struck among 
artists, record labels, and digital music services. Deals might combine 
online licensing with bricks and mortar retail opportunities. A 
transaction might take advantage of a particular consumer niche, 
involve a less popular musical genre, or launch an innovative strategy. 
And labels often strike special promotional deals. It would be very 
difficult to attempt to structure a government-mandated MFN requirement 
that recognized any of this complexity, and it would be a bad idea to 
try.
    If an MFN requirement were imposed, record companies could never 
take chances, experiment with new ideas, support new services, 
structure special deals, or reach out to niche markets. Knowing that a 
concession in any one deal would become the least common denominator 
for all other deals, record companies would be forced to establish 
standard terms from which they could not deviate in individual 
instances without consequences across all their deals. Thus, the result 
of an unprecedented MFN requirement would be to stifle competition and 
business creativity; limit the flexibility of artists, record labels 
and service providers to offer consumers innovative digital music 
services; and ultimately, limit consumer choice.

    Question 11: We all worked together on a return to the status quo 
on the status of sound recordings as works-made-for-hire. Do any of you 
have any thoughts on how we might further revise the law to avoid 
litigation on that issue in the future?
    Answer: As hard as we worked to return the works-made-for-hire 
issue to the status quo, litigation over the issue may be unavoidable. 
Work for hire provisions have been included in recording agreements, 
and in agreements between artists and their producers and musicians, 
for decades. At the moment that recordings were created pursuant to 
those agreements, authorship was determined, and certain rights vested, 
based on the law that existed at the time. Congress may not have the 
legal authority to change those rights, such as by determining that 
someone who had been an author for decades no longer is, and indeed 
never was. Participants in the recording industry reached their 
agreements based on their understanding of the law as it was when they 
made their deals. It would not be fair to upset their expectations 
retroactively. (Notably, the 1999 amendment clarifying that sound 
recordings are eligible for work made for hire treatment did not 
purport to be retroactive.)
    Each contract, and the circumstances surrounding the creation of 
each recording, are unique. This means that, at least until there are 
some precedents in this area, courts will likely have to make case-by-
case determinations of who is the author of a particular recording--
whether it be the record label alone because of a work made for hire 
agreement, the featured recording artist alone (either because of a 
work made for hire agreement or an interpretation that the featured 
artist is the sole author), or some combination of the label, featured 
artist, producer, background musicians and vocalists, engineers and 
technicians. The desire to create a new provision parsing out creative 
contributions among participants and determining a new definition of 
who the creator might be simply proves the point we made all along 
during the dispute last year. Avoiding disputes among all these 
contributors to the creation of a recording is exactly the reason we 
believed, and still believe that sound recordings are eligible for work 
made for hire treatment; any other result inevitably will lead to 
litigation among claimants to rights in successful recordings. Since it 
would be impossible in our view to develop a statutory definition of 
the rightful creator (in some cases, it might be the producer, in some 
cases the musicians, in others the featured artists and in others the 
royalty artist or artists, etc.) these issues are best left to 
contract. The only thing the statute should articulate is whether or 
not sound recordings are eligible to be considered works for hire. The 
decision to create a work for hire has always been left to and should 
continue to be left to individual creative participants. Creative 
participants may freely decide whether or not to agree that their 
contribution is a work for hire or not. They have been making this 
decision for decades already in their recording agreements.

                                

                       SUBMISSIONS FOR THE RECORD

Statement of American Federation of Musicians of the United States and 
                     Canada, Steve Young, President

    As the President of the nation's largest organization representing 
musicians--the American Federation of Musicians with over 100,000 
members--I have one important message for the members of this 
distinguished Committee, the representatives of the business community 
who will be speaking today, and all the fans of music, on-line music 
services, and music file sharing who are gathering in Washington to 
listen and to express their views:
                      Please remember the artists!
    All the varied forms of music loved by ardent music fans, all the 
highly-successful businesses created by the recording industry, and all 
the online music services that are trying to emerge in this new digital 
era have one thing in common: they depend, utterly, on the creative 
energy of the artists who make the music.
    If those artists--including royalty artists, session musicians, and 
background vocalists--cannot make a decent living by making and 
recording music, this nation's staggeringly rich output of artistically 
varied, high-quality recorded music will not be able to continue. There 
will be less music for fans and music lovers.
    Before we as a nation decide what the new models for music 
distribution should be, it would be wise to examine the old models and 
consider how they can be improved to enhance the ability of artists to 
survive and create.
    Most musicians who record music toil for many years but do not 
become rich celebrities known throughout the nation. Artistic talent, 
hard work, and loyal fans do not guarantee great financial success. 
Many incredibly talented musicians may make only a modest living.
    Musicians who record under the industry-wide collective bargaining 
agreement negotiated by the union receive scale wages for their time in 
the studio (including pension contributions), and Special Payments 
Funds payments based on record company contributions and a formula tied 
to industry-wide sales. These Special Payments Fund payments are a 
critical part of the musicians' compensation structure, especially for 
those who do not have royalty contracts with a record label. If record 
sales decline, they will decline also. Most musicians cannot afford 
such a loss.
    Musicians who obtain royalty contracts from the record companies 
also derive important income from the sales of their records--if their 
records sell enough to recoup the costs of making the record in 
accordance with the terms of their royalty contracts. Royalty artists 
should be able to choose whether or not they want to offer their music 
via online services that may reduce the sales of their recordings.
    One thing historically missing from the income of all musicians 
whether royalty artists or session musicians--is compensation for the 
commercial broadcast of their recorded works. Because historically 
there was no performance right in sound recordings, musicians received 
no income from that form of exploitation of their work. The American 
Federation of Musicians always believed that to be a great injustice, 
and lobbied for years for amendments to the law. At the dawn of the 
digital era, the American Federation of Musicians fought for the 
creation of the Digital Performance Right in Sound Recordings Act, 
which became law in 1995. The union fought for, and that Act 
established, the principal that musicians and vocalists should share in 
any income streams that derived from the new digital performance right.
    Artists must share in the revenue--that is the principal that the 
old and new business forms must recognize. That is also the principal 
that music lovers and fans must embrace--artists must have an income, 
if there is to be art.
    Whatever old business models remain and whatever new business 
models emerge, the future of our artists depends on their ability to 
earn a decent income, one that shares in all the income streams their 
creative works generate. I hope and believe that music fans will 
willingly pay for music in order to support the artists whose work they 
love.
    Please remember the artists!

                                

 Statement of American Federation of Television and Radio Artists, Ann 
                Chaitovitz, Director of Sound Recordings

                              Introduction

    My name is Ann Chaitovitz, and I am the Director of Sound 
Recordings for the American Federation of Television and Radio Artists 
(AFTRA). On behalf of the over 80,000 performers and newspersons in 
AFTRA, I appreciate the opportunity to submit this testimony on behalf 
of performers because new technology presents many challenges, as well 
as many opportunities, for performers. As a result of this Committee's 
leadership and our country's intellectual property laws, America 
creates the pre-eminent entertainment in the world and entertainment 
product is our leading export. In order to continue producing the 
finest and most sought after artistic creations in the world, the U.S. 
must ensure that artist incentives to create are nurtured, artists are 
fairly compensated for the exploitation of their work and that present 
and future streams of income are shared with the creators.
    Music, motion pictures and other entertainment products are 
marketed to the world by major American industries with many 
contributors and participants. But individual artists--singers, 
musicians, writers, actors and other creators--are at the heart of the 
success of these major industries. It is the talent, training, 
dedication and creative verve of these individuals that make the 
original works of art upon which our successful industries are based. 
The artistic community now faces one of its most serious challenges. 
New technological services enable people to obtain these artistic 
creations without payment of any sort to the creators and owners of 
those products. Should this trend continue, inevitably sales will 
decrease and the direct income earned by artists will be reduced 
significantly. That reduction in earnings will also decrease or even 
eliminate performers' health and pension benefits.
    AFTRA supports the development of new technologies. Technology will 
allow our members' creative talents to be disseminated to an ever-
increasing audience and that, we believe, benefits everyone. AFTRA, 
however, also strongly believes that the new technologies should not 
result in detriment to our members and that these new methods of 
dissemination should provide compensation to copyright owners and 
creators of sound recordings.

          American Federation of Television and Radio Artists

    AFTRA is a national labor union representing over 80,000 performers 
and newspersons that are employed in the news, entertainment, 
advertising and sound recording industries. Our membership includes 
television and radio performers and approximately 15,000 singers, rap 
artists, narrators and other vocalists on sound recordings (``Singers 
''), including roughly 4,000 Singers who receive payments for the sale/
distribution of each recording pursuant to a royalty contract 
(``Royalty Artists '') and 11,000 singers who are not signed to a 
royalty contract (``Background Singers ''). On behalf of the 15,000 
Singers that it represents, AFTRA negotiates the AFTRA National Code of 
Fair Practice for Sound Recordings (the ``Sound Recordings Code ''). 
The Sound Recordings Code has been signed by an approximately 1200 
record labels, including all of the major labels. Under the Sound 
Recordings Code, signatory record companies are required to contribute 
amounts to the AFTRA Health and Retirement Funds on behalf of the 
Singers who perform on a recording. Those contributions are based upon 
a percentage of each individual Singer's earnings. The AFTRA Health 
Fund provides health benefits to Singers who reach certain threshold 
levels of earnings upon which contributions are made by the record 
labels. The AFTRA Retirement Fund provides pension benefits to Singers 
based upon the amount of the individual Singer's earnings throughout 
his/her career. In short, the health and pension benefits that each 
Singer receives are dependent upon the amount of earnings on which 
employer contributions are made.
    In addition to bargaining and administering the Sound Recordings 
Code, AFTRA also actively participates in all facets of public policy 
development effecting our membership, frequently pursuing national and 
international legislation and treaties that protect Singers' rights, as 
well as joining issues in litigation that are critical to our 
memberships' interests.

                          Singer Compensation

    Many people harbor misconceptions about the music industry and 
performers and how performers are paid. Basically, as the name implies, 
in addition to the small session fee required by the Sound Recordings 
Code, Royalty Artists receive a royalty for the sale or distribution of 
each recording and do not receive a fee for making an album. In fact, 
the Royalty Artist must pay for all of the production costs of the 
album, 50% of the independent promotion costs, 50% of the costs of 
videos and 50-100% of the tour costs. Artists often pay these costs 
with the help of an advance from the record company. However, artists 
must pay back their advances before they receive any royalty shares 
earned by their albums. This is called ``recoupment.'' Taking into 
account all the deductions, royalty artists generally receive between 
$0.80 and $2.40 for each recording sold, depending on the level of 
success of the artist when the royalty contract is signed. What often 
is not understood is that the artist does not receive any of this 
royalty money until the recording company has recouped these costs. It 
usually takes two or three years before even a successful artist 
receives his or her first royalty payment. As Sheryl Crow stated in a 
response to a question from Congresswoman Bono at a May 2000 House 
Judiciary Committee hearing, she did not receive any money until after 
her record had sold ``three or four million copies.'' And, very few 
records ever sell this many units. As an example, in 1999, nearly 
39,000 recordings were released, but only 3 singles and 135 albums--
0.35%--were certified as selling three million units, and notably, many 
of these records had been selling over a number of years before finally 
reaching the three million unit sales mark in 1999. And, 77% of the 
39,000 recordings sold less than 1000 units.
    Under the Sound Recordings Code, background singers receive a 
session fee for their work in the recording studios and also additional 
payments if the records on which they perform reach certain sales 
plateaus. However, most records never meet any of these plateaus. Thus, 
all Singers are compensated based on the sales of their recordings, and 
any decrease in record sales volume would directly and adversely impact 
both Royalty Artists and Background Singers. The decrease in earnings 
that would result from any decrease in recording sales volume will 
result in a corresponding decrease in the pension that a Singer would 
receive upon retirement and, further, may jeopardize a Singer's 
eligibility for individual and family health coverage altogether.

                               The Future

    In a society that treasures creative work, the artists' incentives 
to create should not be thwarted by the advent of new technologies. 
Many professional singers struggle to earn a living from their recorded 
performances. Even for those relatively few singers who have successful 
careers, almost all spent years struggling economically while they were 
honing their craft, building their careers and trying to obtain a 
recording contract. These singers deserve to have their work protected 
and be compensated whenever anyone exploits it by whatever means, 
analog or digital, new technology or old. However, digital product and 
new technology presents a more serious threat to creators' livelihood 
because millions of people may have free access to a work. If Congress 
permits this piracy, American artists will suffer, and we risk not only 
our ability to continue creating worldrenowned masterpieces but also 
our balance of trade.
    Again, we appreciate the opportunity to submit this testimony and 
look forward to working with the Committee and its staff as it 
addresses these copyright issues that are fundamental to our 
membership.

          american federation of television and radio artists

    AFTRA urges Congress to protect recording artists from piracy of 
their works
    Washington, D.C., April 3, 2001--The artistic community now faces 
its most serious challenges as new technological services enable people 
to obtain their artistic creations without payment to the creators and 
owners of these products. If this trend continues, sales will decrease 
and the income earned by artists will be reduced significantly, also 
decreasing or even eliminating performers' health and retirement 
benefits, according to testimony by the American Federation of 
Television and Radio Artists at today's hearings before the Senate 
Judiciary Committee in Washington.
    In its testimony before the Committee, which is considering Online 
Entertainment and Copyright Law, AFTRA, which represents 80,000 
performers and broadcasters, including 15,000 singers, addressed the 
many misconceptions about the music industry and performers, and how 
they are paid. In addition to the small session fee required by the 
AFTRA Contract, Royalty Artists receive a royalty for the sale of each 
recording, but they ``do not receive a fee for making an album,'' said 
Ann Chaitovitz, AFTRA's Director of Sound Recordings.
    ``In fact,'' said Ms. Chaitovitz, ``the Royalty Artist must pay for 
all of the production costs of the album, 50% of the independent 
promotion costs, 50% of the costs of videos and from 50% to 100% of the 
tour costs. Artists often pay these costs with the help of an advance 
from the record company. However,'' Ms. Chaitovitz said, ``artists must 
pay back their advances before they receive any royalty shares earned 
by their albums.'' Sheryl Crow has stated that she did not receive any 
money until after a recording had sold ``three or four million 
copies.''
    ``Few records ever sell this many units,'' Ms. Chaitovitz told the 
Committee. ``In fact 77% of the 39,000 recordings released in 1999, for 
example, sold less than 1,000 units.''
    ``While AFTRA supports the development of new technologies,'' Ms. 
Chaitovitz said, ``digital product and new technology presents a 
serious threat to creators' livelihood because millions of people have 
free access to a work. If Congress permits this piracy, American 
artists will suffer, and we risk not only our ability to continue 
creating world-renowned masterpieces but also our balance of trade.''
    AFTRA has contracts with 1,200 recording companies, including all 
of the major labels.

                                


                                                      April 2, 2001

Jim Griffin
CEO, Cherry Lane Digital
Museum Square
5757 Wilshire Blvd., Suite 401
Los Angeles, CA 90036

    Dear Jim:

    We have reviewed your White Paper ``IMPASSE: TECHNOLOGY, POPULAR 
DEMAND, and TODAY'S COPYRIGHT REGIME.'' We are two professional 
economists expert in markets, organization, strategic behavior and 
growth. Central to our research is the role of innovation in fostering 
growth and prosperity. Our current endeavor focuses on the 
determination of the system of property rights most favorable to 
production and diffusion of intellectual innovations. This has lead us 
to support a strong protection of the right of creators to sell their 
work, because this is crucial to provide the financial incentives 
needed to assure a continued flow of artistic creations and 
innovations. However, we are highly skeptical about the need for 
restrictive copyright protection after the first sale. The points you 
make in your paper are similar to those we have made in our own 
research: we endorse the recommendations you make. If implemented, they 
would open the way to a more efficient and socially useful system for 
copyrights protection and distribution of artistic products. Allow us 
to elaborate briefly on the most relevant issues.

              Curtailment of the digital delivery of music

    You argue persuasively that the current copyright law, as applied 
by the courts, will lead to the curtailment of digital delivery of 
music. You also argue, and we find this crucial, that the current 
situation of impasse is not sustainable, that it is damaging both to 
American consumers and the overall economy, and that, due to continuous 
technological advances in this area, a substantial reconsideration of 
copyright legislation is urgently needed. We also agree with you in 
calling attention to the anti-trust problems generated by the ongoing 
attempt of the ``majors'' to coordinate in establishing a music-
delivery business and to collude in preventing the entry of independent 
competitors. Vigorous competition, especially following major 
technological breakthroughs such as the Internet is crucial in 
stimulating innovation and in providing better products at lower 
prices. In the long run the new delivery technology should lower 
barriers to entry and lead to cheaper and more varied music (and arts) 
accessible to a wider audience. Current efforts by the majors, if 
successful, may severely tilt the playing field in their own favor. 
This would prevent new companies from providing such services and stop 
superior delivery technologies from being adopted. Encouraging 
innovation by new companies such as Napster instead strengthens the 
technological leadership upon which the increasing wealth of American 
households is built.

                           Transactions costs

    Quite correctly, you compare the reduction of transaction costs 
achievable through peer-to-peer networking to the increase in such 
costs caused by ongoing byzantine attempts to control, monitor and 
neutralize the economic impact of the Internet technology upon 
established monopolies. Economists widely recognize the effort by 
incumbents to suppress new technology as one of the most significant 
social costs of market concentration. In the long run, such efforts are 
seldom successful. Still, they delay the social benefits of new 
technology in the meanwhile, and lead to the development of wasteful 
and undesirable black markets. Incumbents' efforts not only increase 
current transaction costs but also paralyze future progress: newer 
products and techniques are always fed by the ongoing adoption and 
experimentation of previous ones.

                                Fair use

    You observe that efforts to prevent piracy also prevent fair use. 
This is one of the most insidious consequences of overprotecting 
intellectual property. Fair use constitutes the core of consumer 
sovereignty. Producers of any kind, and those of intellectual property 
in particular, always profit from greater market power, and for this 
reason have always argued against fair use. Congress and the Supreme 
Court have wisely resisted this pressure, recognizing that eliminating 
fair use serves no broad economic purpose and thwarts the copyright 
laws' goal of maximizing the use and enjoyment of protected work. Given 
that Napster and related technologies have had little impact on the 
profits of the majors, it is hard for us to avoid the conclusion that 
much of what is being sold as an effort to prevent piracy is in fact an 
effort to prevent fair use and so increase future monopoly power. We 
are especially concerned about the economic consequences of adding copy 
protection to multi-use devices such as computers. Complex software and 
hardware invariably have bugs. While buggy VCRs and DATs pose little 
threat to economic growth, the loss of data and time from buggy 
hardware and software in computers can lead to significant economic 
harm.

                          Statutory licensing

    Your paper supports consideration of statutory licensing, correctly 
pointing out that these schemes are already widespread under 
circumstances similar to those involving Napster. Indeed, the music 
industry itself is arguing for statutory licensing for music broadcast 
over internet radio. Statutory licensing seems to us a sensible middle 
ground between the extreme copyright protection demanded by the 
currently dominant firms and a competitive system based only on the 
right of first sale. While, in our view, it will not be the final 
answer to the momentous problems generated by ongoing technological 
innovation, it does constitute an important step in the correct 
direction. We want to emphasize that mandatory licensing will reduce 
incentives to piracy and the black market generated by the current, 
unsustainable, status quo.
    Overall then, we support your effort and that of Napster to improve 
existing copyright law to better ``promote the progress of science and 
the useful arts.''
            Best Regards,

                                            Michele Boldrin
                                             Professor of Economics

                                            David K. Levine
                               Armen Alchian Professor of Economics

                                

                   Statement of Broadcast Music, Inc.

    Broadcast Music, Inc. (``BMI'') is a music performing rights 
licensing organization (``PRO'') that represents approximately 350,000 
affiliated songwriters, composers and publishers, in licensing the 
public performing right in approximately 4.5 million musical works, 
including many thousands of foreign works through BMI's affiliations 
with over 60 foreign PROs. BMI has been a proponent of strong copyright 
protection for the rights of authors and creators for decades. BMI 
believes that copyright must be protected on the Internet in order to 
foster the creation of music. To this end, BMI participated in the 
negotiations that led to the U.S. signing of the WIPO Copyright Treaty 
and the subsequent enactment of the Digital Millennium Copyright Act of 
1998. These laws adopted new technological protections for copyrighted 
works online and clarified the copyright responsibilities of Internet 
service providers in order to make a more stable environment for the 
commercial delivery of music and other copyright content in the online 
world.
    BMI has been a pioneer in licensing copyrights on the Internet and 
in digital transmission technologies. In April 1995 BMI announced the 
first commercial copyright license for music on the Internet, a blanket 
public performing right license with On Ramp, Inc. Since that time, BMI 
has entered into license agreements with over 1,000 web sites, 
including such well known sites as Yahoo!broadcast.com, NetRadio, 
Spinner.com, MP3.com, Emusic.com, GetMusic.com and FarmClub.com. Since 
the beginning BMI's Internet license has covered the public performing 
right involved in both the downloading of music files as well as the 
streaming of music either on demand or as part of archived or regularly 
scheduled programming. BMI's licensing experience has proven that 
licensing is an effective solution to the problem of protecting 
creators' and copyright owners' rights and ensuring copyright owners 
obtain commercial reward for the widespread exploitation of their works 
by online music users.
    BMI has embraced new digital technologies that facilitate the 
licensing of online transmissions of musical works. Last year BMI 
announced a new ``Digital Licensing Center'' that allows users to 
obtain BMI licenses through a simple click-through system available on 
BMI's award-winning web site, BMI.com. These efforts will make 
licensing particularly accessible and easy for small webcasters. BMI is 
also utilizing digital technologies to enable its licensees to submit 
reports and statements online, permitting faster processing of 
information that will permit a dramatic increase in the speed of 
payment of royalties to writers and publishers.
    One of the most compelling aspects of the Internet is its 
international scope. BMI has responded to the challenges posed by the 
dimensionless nature of cyberspace by negotiating pioneering global 
rights agreements with over 20 foreign PROs, including the major 
European societies. As a result of these agreements, BMI now can offer 
users seamless licenses that cover transmissions of BMI's repertoire of 
works that cross national boundaries.
    Peer-to-peer file sharing services like Napster are only the latest 
in a long line of challenges presented to the music industry and the 
copyright community by the Internet. BMI is pleased that the courts 
have recognized that unauthorized peer-to-peer file sharing constitutes 
copyright infringement. Unregulated by law, the Internet has the 
potential to become the largest ``swap meet'' for piracy of copyrighted 
works in history. Napster has announced its intention to reformulate 
its service as a licensed subscription music transmission service. BMI 
has been engaged in good faith negotiations with Napster over the terms 
of a BMI blanket license for peer-to-peer file sharing.
    BMI has a long history of licensing both free over the air 
broadcast and subscription cable music transmission services. For 
example, BMI has successfully concluded industry-wide negotiations with 
the television industry for promotional use web site licenses for 
hundreds of television broadcast stations, and with the radio industry 
for interim licenses for radio signal streaming online. In BMI's view 
Napster's service shares numerous characteristics of broadcasting and 
cable transmissions, and if peer-to-peer music transmissions online are 
allowed to be ``free'' on the basis of a misguided notion of ``fair 
use,'' in the long run established markets for public performance of 
music will be jeopardized. BMI is hopeful that its negotiations with 
Napster will bear fruit, and does not believe that a compulsory license 
for the public performance of copyright musical works is necessary or 
appropriate.
    Peer-to-peer transmissions of music involve a number of different 
copyright rights for which Napster must seek licensing. For example, in 
addition to the public performing right in the musical work, such 
transmissions also involve the public performance right in pre-recorded 
sound recordings that contain those musical works. The reproduction and 
distribution rights in Section 106(1) and (3) in copyrighted musical 
works and sound recordings (so-called ``mechanical rights'') are also 
implicated by transmissions that result in copies, as the Ninth Circuit 
found. The recording industry has taken steps to license necessary 
rights to webcasters, generally, and the music publishers have as well 
with respect to mechanical rights.
    It takes time for licensing practices to be developed. This is 
especially so in an environment where the business models are changing 
as often as the technology improves. The Berne Convention requires that 
copyright owners be given adequate time to develop mechanisms for 
licensing before exemptions or compulsory licenses are legislated, 
particularly where substantial vested commercial interests are at 
stake. BMI supports the Committee's interest in the oversight of the e-
commerce in copyrighted works, and believes that the proper approach is 
to allow the market place to work under the auspices of the DMCA to 
foster a wealth of entertainment product for consumers in the 21st 
century.

                                

  Statement of Hon. Maria Cantwell, a U.S. Senator from the State of 
                               Washington

    I want to thank Chairman Hatch and Senator Leahy for calling this 
hearing. The delivery of online music has become the testing ground for 
how the marketplace and the law can work to bring new entertainment 
services to the consumer.
    The business of distributing music online is quite young. There is 
little history guiding its development.
    What we can learn from history is that as every new medium 
developed--the printing press, radio, television--industries touched by 
new media were rocked--and ultimately revolutionized.
    Legitimate secure online music services will be fantastic for 
consumers and good for the economy. Unfortunately, the public discourse 
has been diverted from where I believe the discussion should occur: 
rather than identifying ways to bring the music industry, online 
distributors and others with technological solutions together to 
resolve legal and practical questions of rights, licensing and 
distribution, many are focused on only one approach: Napster.
    Clearly, Napster is evidence that there is extremely high consumer 
demand for online music delivery. But in focusing on Napster, we see 
the battle lines--without any sense of the productive lines of 
communication.
    Indeed, there are significant concerns on both sides of the debate. 
But this doesn't mean that there have to be winners and losers. It 
means simply that there are issues that we need to work through in a 
thoughtful way. We will all benefit from the growth in the market that 
will result.
    From the perspective of the entertainment industry, in the earlier 
days of online music it looked as though a few new companies were 
coming into the economy, taking the entertainment industry's ``goods,'' 
and building businesses at their expense. Indeed, many of these claims 
are legitimate. I respect the importance of intellectual property 
rights and recognize the risk digital delivery poses. Issues of 
copyright and security are of utmost importance in this discussion. The 
threat to the music industry will become a threat to the viability of 
the Internet, if copyright is not respected.
    From the point of view of some in the online community, the 
entertainment industry is simply entrenched and afraid of new 
technologies. This is a vigorous young industry developing 
extraordinarily exciting new ways to bring entertainment and 
information to consumers. And although the public discourse may reflect 
otherwise, most of those in this space are legitimate businesses trying 
to develop new markets in this new medium. And we must encourage an 
environment in which these businesses will flourish.
    I would observe, that when compared with other policy arising as a 
result of the creation of the Internet, substantial progress has been 
made in the past few years. There are substantial inroads being made in 
bringing legitimate music distribution online.
    But all of these businesses need to be building relationships. We 
need to be getting people to work together. Right now, it simply looks 
like everybody is in the ``online music sandbox,'' a lot of sand is 
flying, but there is not much of an effort to play together.
    There are legitimate business and technological issues that we 
collectively need to consider. Without question, some of the issues are 
arcane or technical. But we need to continue to work our way through 
them.
    There are three ways we can approach this: (1) everybody makes the 
effort to work it out; (2) keep holding hearings such as this one in 
the hope that hearings will pressure the parties to compromise and work 
together; or (3) legislate the framework.
    From my perspective, we need to keep moving forward to find the 
solutions that will bring music to consumers in a manner that will 
allow them to listen to music where they want, when they want. The 
environment should be secure, so the artists and other copyright 
holders are paid for their work, and the costs to the consumer should 
be reasonable.
    Our job is to preserve the profitability that the entertainment 
industry has built--and take advantage of new business models and new 
media. We need to create a competitive environment that will give the 
consumers the flexibility they want in obtaining their entertainment.
    We need to work together to build on the successes of each of these 
industries. I hope we can focus on how we can encourage solutions that 
bring to consumers the services that they want, and continue the 
enormous contribution to our economy that entertainment brings.
    The differences I hear here seem to be marginal when I think of the 
alternatives to working together--there are such sites as BearShare, a 
Gnutella service, ready to compete with Napster. I know that when 
creative minds decide to accomplish something, they can. I hope that 
you will all sit down, set a realistic time-line, and work to achieving 
ubiquitous music delivery through legitimate channels.
    I look forward to your testimony.

                                

Statement of CenterSpan Communications Corporation, Frank G. Hausmann, 
                     Chairman and CEO, Portland, OR

    Chairman Hatch and Members of the Committee, CenterSpan 
Communications is pleased to be able to provide its views regarding the 
important focus of today's hearing. Today's technology, as well as new 
technologies that will undoubtedly be created over the next few years, 
will indeed enable all individuals to have access to high-quality 
digital culture, media, and entertainment on-demand 24/7 from nearly 
any location through a variety of wired and wireless digital devices. 
The challenge that confronts the Committee is to determine whether the 
current state of copyright law empowers or detracts from our ability to 
fulfill that potential. The question that faces you is whether 
statutory change is required - and, if change is to be made, how to 
balance the maintenance of incentives that ``promote the Progress of 
Science and the useful Arts'', the goal set forth in Article I of the 
Constitution, against the technological developments that can undermine 
the ``exclusive Right to their respective Writings and Discoveries'' 
envisioned by that founding document.

                           Executive Summary

 CenterSpan's Scour Exchange is the first secure and legal 
        service for peer-to-peer (P2P) distribution of interactive 
        audio and video entertainment.
 P2P is both the origin and the future of the Internet.
 Contrary to the impressions generated by the Napster 
        controversy, P2P systems are not inherently infringing or non-
        secure. P2P offers ``viral marketing'' benefits far beyond 
        those available in central server systems. In addition, a P2P 
        distributed environment offers substantial cost savings with 
        respect to storage and bandwidth requirements necessary to 
        support games, music and video.
 Existing digital rights management (DRM) technologies provide 
        sufficient security to address the legitimate concerns of 
        copyright owners.
 A legislated fair use ``safe harbor'' may be desirable in the 
        future, but in the near-term the marketplace should be 
        permitted to let DRM technologies provide the optimal balance 
        between affected parties.
 New or expanded compulsory licenses for interactive media may 
        be appropriate for ``streaming'' distribution that is analogous 
        to commercial
 broadcasting, but not for ``downloading'' which enables the 
        provisioning of permanent copies and represents the entire 
        future of how digital content will be sold and distributed.
 The first sale doctrine is not meaningful or applicable in the 
        digital environment.
 Consumers may require enhanced legal protections to assure 
        that when they participate in beneficial P2P systems their 
        legitimate privacy expectations are respected. They should not 
        be subjected to unsolicited marketing and spamming from third 
        party commercial entities.
 We look forward to working with the Committee as it addresses 
        critical copyright and related public policy issues for digital 
        media in the twenty-first century.

                           Company Background

    My name is Frank G. Hausmann. I serve as President, CEO, and 
Chairman of the Board of CenterSpan Communications Corporation, 
headquartered in Portland, Oregon. CenterSpan is a NASDAQ-listed (stock 
symbol: CSCC) company as well as an Intel Capital Portfolio Company. 
CenterSpan is a developer and marketer of secure peer-to-peer Internet 
software solutions for communication and collaborative information 
sharing. My professional background consists of extensive computer 
industry experience.
    Our major focus is the delivery of interactive digital 
entertainment. In May 2000 we launched Socket, a P2P Internet gaming 
application. In December 2000 we purchased the 4.5 million-customer 
list and other assets of Scour Exchange (SX) at bankruptcy auction for 
$9 million in cash and stock. SX was a pioneering P2P system for the 
delivery of audio and video, but its failure to comply with copyright 
law resulted in a barrage of litigation and subsequent bankruptcy.
    Just last week, we launched the Beta test version of the new Scour 
Exchange service. SX is now the first secure and legal P2P ``digital 
distribution channel'' supporting the delivery of audio and video 
entertainment. To date, more than 370,000 people have pre-registered to 
participate in the free Beta test. We intend to use the Beta test to 
finetune SX's offerings and technology, and anticipate the rollout of a 
tiered-price subscription service during the second half of this year. 
We plan to offer different service options depending on the type, 
quantity, and ``use rules'' of content that subscribers wish to access. 
Eventually, SX will also support e-books, photos and graphics. Our 
proprietary market research, as well as extensive conversations with 
all segments of the digital entertainment world, convinces us that 
there will be substantial consumer demand for such a service--provided 
that it offers the right combination of ease of use and content.
    In February 2001, CenterSpan established a Digital Media and 
Entertainment Group. The joint executive team of Michael Kassan and 
Howard Weitzman runs this Los Angeles-based unit. Mr. Kassan formerly 
served as President and Chief Operating Officer of Western Initiative 
Media Worldwide, a division of the Interpublic Group; in 1997 he was 
named by Advertising Age as one of the top media executives in the 
United States. Mr. Weitzman was formerly a senior executive with 
Universal Studios and a wellrespected entertainment attorney for over 
30 years. Both of these accomplished executives came to CenterSpan from 
Massive Media Group, a developer of digital rights management (DRM) 
based applications and services for the entertainment and advertising 
markets. Together, they bring to CenterSpan an understanding of DRM 
technologies, and of the entertainment, media, and advertising sectors 
that is invaluable to our future growth. SX has already acquired 
licensed audio and video content from a variety of sources for use in 
the Beta test, and is currently in discussions and negotiations with 
record labels, movie studios, and other content owners to obtain top 
content for the launch of the fee-based service later this year. We are 
very optimistic that we will be able to secure a depth and variety of 
entertainment offerings sufficient to provide a compelling and 
rewarding experience for SX subscribers.

                 P2P: Origin and Future of the Internet

    CenterSpan embraced the P2P marketplace out of our belief that 
peer-to-peer networks and applications are both the origin and the 
future of the Internet. The Internet's fundamental support of a widely 
dispersed and virtually limitless number of participants, coupled with 
the transmission of digital information through packet switching that 
breaks up messages and content and sends it between users via multiple 
routes, was chosen to assure the maintenance of communication 
regardless of attacks on any single component of the system. The result 
is the most robust, resilient, and useful communications system in 
history.
    CenterSpan believes that Internet media business models that rely 
solely on content distribution from central servers, and do not support 
or further dispersal by individual users, will not be as successful in 
the marketplace. Most such systems are unable to take advantage of the 
``viral marketing'' that occurs when fans enthusiastically promote and 
share their secure digital entertainment files with others. Where video 
and gaming content is concerned, the significant storage and bandwidth 
requirements are best and most efficiently met through the dispersal of 
content to end-users within a P2P environment. In effect, P2P systems 
enable consumers to choose to make a portion of their hard drive 
storage and bandwidth available for other users to share.
    It is unfortunate that Napster has created the public impression 
that P2P networks only support illegal distribution of inherently non-
secure content. Nothing could be further from the truth. The courts 
have determined that Napster's original design is in substantial 
violation of our copyright laws, and it is under mandate to comply with 
the Ninth Circuit's injunction and cease its infringing activities. 
Napster has publicly stated its intent to develop a legal, 
subscription-based P2P system. On February 13, 2001, when the Ninth 
Circuit Court of Appeals issued its decision, I applauded that ruling 
and stated, ``The rights of copyright holders must be protected in the 
new digital distribution paradigm. . .. The new Scour Exchange respects 
and protects copyrights and provides content owners with mechanisms to 
control the distribution and use of their material while profiting from 
it.'' The Committee can rest assured that SX will demonstrate that 
respect for copyrights through required licensing and the utilization 
of advanced DRM technologies are completely compatible with the 
distributional and cost advantages of P2P systems.

                          Public Policy Views

    The Committee is now engaged in a dual enterprise. Your first 
objective is to determine the current state of digital entertainment 
technology and applicable law. Your task is to determine whether near-
term legislative intervention is required to protect the goals of 
copyright law and the rights of copyright holders while promoting the 
further development of digital distribution of music, movies, and other 
genre of entertainment and culture. As so often before, you must 
balance traditional legal values with new technology that, depending on 
its use or misuse, may promote or undermine the progress of science and 
the useful arts.
    CenterSpan welcomes the opportunity to contribute to that process 
going forward. We believe that what we have already learned in 
developing the first legal and secure P2P system, as well as what we 
expect to learn from SX's Beta test and transformation into a fee-based 
subscription service, can be of substantial value to your 
deliberations.
    We find ourselves in substantial agreement with the sentiments 
expressed in the February 14 Senate floor remarks of Chairman Hatch and 
Senator Leahy in response to the Ninth Circuit's Napster decision. We 
concur with Chairman Hatch's call for ``an open and competitive 
environment in the production and distribution of content on the 
Internet'', as well as for ``a marketplace resolution to. . .digital 
music controversies''. And we are in concert with Senator Leahy's 
observations that ``the availability of new music and other creative 
works. . .depends on clearly understood and adequately enforced 
copyright protection. . .. copyrights may not be ignored when new 
online services are deployed. The Internet can and must serve the needs 
not only of Internet users and innovators of new technologies, but also 
of artists, songwriters, performers and copyright holders''. Each day, 
CenterSpan/Scour Exchange is fully engaged in the digital marketplace 
as we seek to legally obtain, and technologically secure, diverse 
content to offer to the public. We are confident that we can 
effectively compete and provide new benefits for consumers, creators, 
and copyright owners, so long as we have a supportive legal framework 
that sets forth nondiscriminatory and clearly understood principles for 
all market participants.

 we are therefore pleased to share our views on some of the key public 
           policy and technical questions that confront you:
 Security: We believe that current DRM technologies do provide 
        sufficient protection to satisfy the legitimate concerns of 
        copyright holders. CenterSpan has designed its system to 
        eventually support a variety of DRM solutions.
 Fair Use: CenterSpan would support the consideration of 
        legislation to carve out a fair use ``safe harbor'', should it 
        become apparent that the marketplace is not sufficiently 
        sensitive to this key protection of informed discussion, 
        criticism, and debate. For the time being, the marketplace is 
        the best place to determine the reuse limitations supported by 
        DRM technologies and is most likely to set the optimal balance 
        between the desires of consumers, the needs of scholars and 
        commentators, and the legitimate concerns of content owners.
 Compulsory licenses: CenterSpan believes it is worthwhile for 
        Congress to consider the establishment of new or expanded 
        compulsory licenses to facilitate the digital distribution of 
        interactive media content over the Internet. If you take this 
        path, it may be useful to distinguish between those forms of 
        ``digital distribution'' that are analogous to broadcasting, 
        versus those that are more akin to ownership of a CD or DVD. 
        Digital content may be distributed via ``streaming'' or 
        ``downloading''. CenterSpan's view is that streaming is 
        analogous to radio and broadcast television, while downloading 
        represents the next generation distribution channel of digital 
        copies. This distribution channel facilitates the sale or use 
        of permanent or quasi-permanent content, subject to the 
        consumer's fair use transfer to other devices, be they in the 
        home or auto, or a portable device that may be carried on their 
        person. In our view, compulsory licensing may be more 
        appropriate for streaming media that allows for listening or 
        viewing but does not provide for the retention of a permanent 
        copy.
 First sale doctrine: It is our view that the first sale 
        doctrine is not meaningful or applicable in the digital 
        environment. The doctrine makes sense for analog media, such as 
        used books or records. But there is simply no way to adequately 
        assure that an individual selling a ``used'' digital file has 
        not retained a perfect digital copy for continued use. Whatever 
        loss may occur from the absence of a first sale right in the 
        digital environment should be more than offset by the lowered 
        costs and vastly broader selection of content made possible by 
        Internet distribution.
 Privacy: We applaud the continuing efforts of Chairman Hatch, 
        Senator Leahy, and other members of the Committee to assure 
        that citizens' concerns about online privacy are adequately 
        addressed. If consumers believe that the use of online 
        technologies and services is at odds with their expectations of 
        personal privacy, then the growth of Internet commerce will 
        suffer. While one's listening and viewing habits may not raise 
        the same level of concern as medical and financial data, we 
        note nonetheless that Congress saw fit to make it illegal for 
        video rental stores to reveal the records of individual 
        consumers.

    P2P systems inherently raise unique privacy questions and 
challenges. A consumer who subscribes to any P2P entertainment service 
agrees to make a portion of their computer's hard drive viewable by and 
accessible to other subscribers. Thus, they have a clear expectation 
that their collection of digital media will be revealed to third 
parties, even if their identity is safeguarded. However, they may not 
contemplate that unauthorized commercial third parties can gain similar 
access and can use the information they obtain for a variety of 
marketing, promotional and other purposes. Even where such activities 
violate the P2P provider's terms of service, as they would 
CenterSpan's, they are difficult for the P2P service to detect and 
deter.
    CenterSpan's own privacy policy prohibits the sharing of personally 
identifiable customer information with third parties, except for that 
information required to facilitate payment transactions. We will not 
allow our customers to be subjected to unwanted solicitation and 
spamming from unauthorized commercial third parties. Therefore, we 
encourage the Committee to consider whether new legal protections 
should be put in place to assure that the privacy expectations of P2P 
system users are fully respected.

                               Conclusion

    CenterSpan appreciates this opportunity to share its views, market 
experience, and plans for the P2P future with the Committee. We look 
forward to working with you in the months ahead as you strive to assure 
that the legal and policy structure for digital media in the twenty-
first century is fully relevant and strikes the proper balance between 
the rights and interests of all participants in this exciting and 
rapidly evolving sector.

                                

       Statement of Lawrence E. Feldman, Esquire, Jenkintown, PA

                           I. Vantage Point:

    I am a lawyer from Pennsylvania with over twenty years experience 
in general civil litigation. I also represent ``catalog artists'' (that 
is, artists no longer under contract to the record companies) in two 
class actions against the record industry Chambers v. MP3.com, UMG el. 
al., SDNY 2000 (involving current internet use of old recordings of the 
1950's through 1995 by music industry without payment; on appeal after 
dismissal by Judge Rakoff;) and Moore a AFTRA, Time Warner, et. al. 
(ND.ALA 1993); (on-going RICO and ERISA suit against the record 
industry for illegal pension reporting practices in connection with the 
AFTRA health plan ). I am also one of many firms involved in In Re 
COMPACT DISC MINIMUM ADVERTISED PRICE ANTITRUST LITIGATION MDL Docket 
No. 1361, and other litigation, including copyright and trademark 
litigation. I also assist musicians in running and maintaining internet 
websites, and I own several internet webservers. I am a former 
professional performing and recording musician (electric violin, 
guitar, banjo, mandolin, keyboards). My on-line resume is at http.//
leflaw.com/leflawnet/firmresume.htmll; there is an on-line article on 
digital music and record companies at http://mp3.com/news/227.html; on-
line article on AFTRA class action at http://www.addicted.com.au/MNOTW/
lofi/970821/970821--971.shtml.
    I am not an entertainment lawyer or music industry lawyer per se. I 
consider myself a self-funded public interest lawyer and litigator. I 
represent no music or record companies, although I do represent 
webcasters.
    Among the artists I represent, several have specifically endorsed 
the positions taken herein. They are:

 Carl Gardner of the Coasters (``Yakety Yak'', ``Charlie 
        Brown'', ``Love Potion Number 9'')
 Bill Pinkney of the Original Drifters (co-founder of the 
        Drifters in 1953; voice of ``White Christmas'' in Home Alone 
        (1991); Bill is a veteran of the Normandy invasion, and a 
        Bronze star recipient.
 Damon Harris (Temptations 1971-75) (``Papa was a Rolling 
        Stone'')
 Lester Chambers of the Chambers Brothers (``Time Has Come 
        Today'', ``People Get Ready'')
 Tony Silvester of the Main Ingredient (``Everybody plays the 
        fool'').

    Others have expressed support for the general notion of copyright 
reform and mistrust of the record industry, as outlined below. I will 
supplement this list prior to the April 3, 2001 hearing.

                 II. Reason for Speaking to Committee:

    A. Lack of a voice in copyright legislation for the recording 
artist who must depend on sale of recorded music to survive; 
specifically records, tapes and compact discs, since their contracts 
obviously provide no compensation for digital performances.
    B. Continual misrepresentation by the RIAA to this committee and 
elsewhere that 1) they represent the interest of recording artists 2) 
they represent the interest of the ``American'' recording industry, 
since they represent mostly foreign corporations who do business in 
this country, and should have no voice in matters involving U.S. 
legislation or the U.S. Constitution.
    C. Alarm that the Congress has given the RIAA an official role in 
fiscal and fiduciary matters involving webcasting royalties, because of 
their historical indifference to the plights of artists and consumers, 
their demonstrated inability to accurately account for their copyright 
registrations as well as their royalties due thereon, their recently 
exposed conduct in the Work for Hire lobbying effort, and their 
historical abuse and lack of concern for older artists, and their 
historical connection to organized crime.
    D. Alarm that the Copyright Act is now, because of the two major 
RJAA - driven revisions of 1995 and 1998, one of the single biggest 
threats to privacy and freedom from searches and seizures, as evidenced 
by recent ``Napster raids'' in U.S. and Belgium, and prosecution of 
Jeff Levy in 1999 for running a music server. The RIAA says that the 
artists support this conduct. The artists at large do not.

                             III. Message:

    Most authors and artists who you have heard of don't own the 
copyright registration certificate to their works. Usually the 
copyrights are held by a record label or publisher instead, since the 
artists' contract have historically contained a clause requiring them 
to assign all rights to the company. So when you hear a song by your 
favorite band being used to sell beer and cars on television, chances 
are that they didn't have anything to do with the endorsement: they 
don't own or control their own songs, or even get compensated at all, 
because the record company does.
    Juxtaposed against this reality is the constitutional provision 
``Congress shall have power. . . .to promote the progress of science 
and useful arts, by securing for limited times to authors and inventors 
the exclusive right to their respective writings and discoveries.'' 
Article I, section I Clause 8 is not merely a grant of power to 
congress. It is also a limitation of that power. The Framers, who had 
just fought a war with England, were mistrustful of government 
sponsored monopolies like the Statute of Anne, which they saw as a 
limitation of the common law perpetual rights of authors, so they made 
it a constitutional drafting priority to make sure that Congress' 
intrusion to secure such perpetual rights of authors and inventors be 
limited in time, and be for the benefit of authors and inventors. It 
was not, as the RIAA says at their website, because copyright is more 
important than the First Amendment. It was that the limitation of 
copyright was more important than the First Amendment. Wheaton a Peters 
8 Pet. 591 1834, 
    In 1995 Congress enacted a statute, the Digital Performing Rights 
in Sound Recording Act, that gives exclusive rights in digital 
performances to the legal copyright owner, without providing any 
concomitant i ight of payment to the equitable owner (the artist is the 
equitable owner of the copyright under 17 USC 501(b), ) who has no 
royalty provision in his contract to cover such uses, especially if his 
contract predates 1996, which most do.
    Copyright is a bundle of rights. Congress created a new right and 
gave it to the copyright holder in 1995'without even stopping to think 
that the artist will no longer benefit because of prior assignments. 
The record industry's institutionalized greed and callousness is 
illustrated by the recent payment of ``statutory copyright infringement 
damages'' in excess of 200 million dollars, plus stock and warrants and 
future license fees from Mp3.com, a well known website, to the record 
companies, in litigation spearheaded by the RIAA for on-line use of my 
clients names, music, and likenesses with no payment to the artists 
thus far. When the artists try to sue for a declaration of rights and 
royalties involving the same conduct, we were unceremoniously shown the 
door in Chambers v. Mp3.com, et. al., currently on appeal.
    I believe that, as a start, the following amendments are needed:
    1. The Copyright Act, 17 USC 5O1b should be amended to (a) give the 
artist rights to sue copyright holders in federal court for an 
accounting of profits or to determine title to copyright; (b) with the 
rebuttal presumption that a 45% split, the rate already in the statute 
for webcasting, was per se reasonable for uses not set out specifically 
in the artist contract. Present law of New York is that there is no 
federal jurisdiction for such an action (Keith v Scruggs, SDNY 1981), 
and many courts seem willing to let the prior assignment of copyright 
stand, without any compensation for new uses; (c) that any action for 
statutory infingement damages use the same 45% split to the artists, 
whether the suit be on the compilation copyright or the underlying 
copyrights; (d) provide that fiduciary standards control the 
relationship of copyright holder and artists, and that breach of 
fiduciary duty is a ground for recission of the assignment.
    2. Artist Fair Use--An artist may use a copyrighted work on which 
he performed or contributed copyrightable material, in any manner 
listed in section 106, so long as its primary purpose is to promote the 
career or reputation of the artist. Automatic fee shift against any 
copyright holder who sues an artist for infringing a work in which he 
performed or contributed and does not prevail. Record companies have 
threated action against artists who use their own material on the 
internet.
    3. That digital internet performance rights do not apply to any 
pre-1996 recordings. The industry should go back and renegotiate with 
the catalogue artists. Otherwise, it is tantamount to a taking without 
just compensation.
    4. Provide for automatic termination of transfer of sound recording 
copyrights, without formalities. The Work for Hire controversy is not 
yet settled. Artists should have the masters back. .Artists need this 
protection. Its like a trust for their old age, since the pension 
system is so flawed up because of collective bargaining agreement 
provisions regardinw, health and welfare by the AFTRA Llnion which 
couples health coverage with royalty payments.
    5. The RIAA (or Soundexchange or AARC or other incarnations) should 
not he collecting money for artists under the DCMA or the Audio Home 
Recording Act. Appoint a reputable accounting firm, without specific 
music industry ties, or someone the musicians trust.
    6. Enact a FEDERAL RECISSION OF COPYRIGHT ASSIGNMENT ACT as 
amendment to 17 USC 501. The United States District Courts should have 
original jurisdiction over actions to rescind an assignment or license 
of copyright, or any of the bundle of rights within the purview of 17 
U.S.C. 106, in which a plaintiff is a creator of the copyright whose 
assignment or license is sought to be rescinded, and it is claimed that 
any conduct of the assignee towards the creator renders the assignee 
unfit to be a registrant of a federal copyright, within the standards 
of Article I section 1 Clause 8 of the United States Constitution. It 
should also be part of the Copyright Act that failure to publish or 
distribute copyrighted material for at least two years shall be a prima 
facie case of abandonment of copyright, resulting in a reversion to the 
artists/grantors.
    I would be honored to submit drafts of this and other related 
proposed legislation, if the committee requests.

                                

  Statement of the Future of Music Coalition, Jenny Toomey, Executive 
                                Director

                                Summary
    The Future of Music Coalition is a not-for-profit think tank that 
advocates for new business models, technologies or policies that will 
advance the cause of artists. We firmly believe that the music industry 
as it exists today is, at a very basic level, anti-artist, and that any 
serious examination of a digital future must take into account the 
structures in place in our analog present. While the final solutions to 
the challenges in this space will be driven in many ways by technology 
and the market, there are a number of critical policy decisions in 
front of Congress that could make a significant difference in the lives 
of artists. These include:
1. Competition for collection and distribution of the digital royalty
2. Direct payment of the digital royalty to the artist
3. Fostering of non-commercial space on the radio and on the Internet
4. Ensuring artists have the right to keep their recordings in print
    The Future of Music Coalition remains eager to work with any 
organization that shares our concern for improving the conditions for 
artists in these exciting times.

                              Introduction

    More often than not, the debate over digital music distribution has 
left artists and their representatives sitting on the sidelines. Even 
today's hearing has omitted many of the organizations that have been 
driving the debate and have stood alone in proposing concrete and 
coherent solutions to the questions that the Senate is posing. The 
Future of Music Coalition (FMC), for example, took the unique step of 
bringing together more than 600 hundred music industry leaders, 
technologists, consumers, musicians, academics and composers (including 
Senator Hatch) to discuss these very issues this past January at 
Georgetown University. Unless the Senate and other governmental 
organizations include artist organizations, like the FMC, in public 
discussions about the future of digital music, the public cynicism that 
has made peer to peer a phenomenon will continue to grow.
    Increasingly, the public believes that artists are not compensated 
fairly. This perspective is then used as a justification for file 
sharing of copyrighted materials. If the average teenager believes that 
their favorite artists will not receive compensation for their 
creations, it gives them the excuse to use peer to peer file-sharing 
services that have no mechanism in place to compensate the artist. This 
is the crux of an enormous problem.
    The Recording Industry Association of America (RIAA) has a 
confusing track record. It has publicly stated that the organization 
does not represent the interests of artists, but rather the interests 
of the major record companies. It has also stated that it is trying to 
protect recording artists and their creations through litigation 
against Napster and MP3.com. Still there has been no public explanation 
as to how the recording artists will participate in the large sums that 
have been generated by the settlements and/or judgements from these 
cases.
    The Senate must ask the difficult questions: how are the artists 
being paid now and how will they be paid in the future? In other words, 
each time that a settlement is reached or a new lawsuit is filed, the 
Senate must ask: how will the artists be compensated when there is a 
final adjudication? Prospectively, the Senate should look at each of 
the digital music distribution issues and conflicts through this prism 
of artistic compensation.

                          The System is Broken

    Any serious examination of the digital future of downloadable music 
needs to take into account the fact that the music industry in America 
is fundamentally broken. In 1999, less than 1 percent of the total 
number of albums released sold more than 10,000 copies.\1\ Commercial 
radio airplay is often sold to the highest bidder through a shadowy 
network of ``independent radio promoters,'' \2\ while attempts to 
create new non-commercial Low Power FM stations have been gutted by 
Congress.\3\ The dreams of stardom chased by many are met head on with 
the sad reality that an estimated 75 percent of releases from major 
labels are not even currently in print, leaving artists with a huge 
debt to the record companies that they have no means to pay back. 
Meanwhile, technology companies seem content to roll out new business 
models and technologies without giving serious thought to how these 
technologies will impact artists' traditional revenue streams.
---------------------------------------------------------------------------
    \1\ 11David Segal, ``They Sell Songs the Whole World Sings: Mass 
Merchants Offer Convenience, Less Choice,'' Washington Post, February 
21, 2001, Page Al.
    \2\ Eric Boehlert ``Pay for Play,'' Salon, March 14, 2001.
    \3\ Stephen Labaton, ``Congress Curtails a Plan for Low-Power Radio 
Stations,'' New York Times, December 19, 2000, A1.
---------------------------------------------------------------------------
                         Elevating the Artists

    The Future of Music Coalition is a not-for-profit think tank whose 
sole mission is to elevate artists into the middle of this debate. The 
FMC aims to increase knowledge about the current industry and advocate 
in favor of specific solutions--including policy solutions and business 
models--that will improve artists' ability to succeed in a notoriously 
(if not artificially) constrained industry. We strongly believe that an 
artists' agenda and a consumers' agenda are one and the same.
    Ultimately, the new music industry will be defined in relation to 
innovations in technology and the marketplace. It is important to 
recognize that neither of these forces are neutral ones. There are a 
number of critical policy decisions that will determine how the market 
evolves and artists need to participate in those decisions. The FMC 
proposes four simple steps that will not only increase artist 
compensation but will also grow the size of the music market thereby 
creating new jobs and new sources of capital for investment. Each of 
these proposals will not only effectively create new opportunities in 
our industry but they will also enhance the shareholder value of each 
of the publicly traded major record labels. This is truly an 
opportunity to nurture and to grow the recording industry and the 
performing artists that make it all possible.

            1. competition in collection of digital royalty

    SoundExchange is the name of an organization created by the 
Recording Industry Association of America (RIAA) that is poised to 
become the sole mechanism by which all webcasting royalties will be 
collected and dispersed to all musicians. The Future of Music Coalition 
believes that artists must have the right to choose between competing 
collection agencies, similar to the robust competition between ASCAP, 
BMI and SESAC for analog performance royalties.
    The Future of Music Coalition has stated a number of reasons why 
SoundExchange should not be the sole collector:

A. It is partisan.
    It is clearly inappropriate to force independent musicians who have 
consciously worked outside of the major label system, and who compete 
with that system daily, to now go to an organization that was created 
by the major labels in order to collect their independently generated 
royalties.

B. The data is too valuable.
    It is also our opinion that the transfer data (i.e. who is playing 
what songs, how many times, etc.) is valuable and should not be owned 
or controlled by the RIAA.


C. The RIAA cannot be trusted to represent artists' interests.
    We believe that if the major labels are allowed any discretion in 
the manner by which webcasting royalties are collected, divided and 
paid out they will certainly exert influence in a way that benefits 
themselves and their constituents. Here it might be wise to remember 
the recent ``work for hire'' controversy which implicated the RIAA for 
requesting (and getting passed) a ``technical amendment'' which changed 
the substance of the Copyright Act to the detriment of recording 
artists. This change allowed record companies to claim ownership of 
sound recording copyrights FOREVER when previously these copyrights 
reverted to the creators after 35 years.
    Thankfully the ``work for hire'' clause was identified, fought and 
ultimately repealed due to the efforts of a coalition of recording 
artists and musicians' rights groups. Still we think it would be unwise 
to allow such recently identified ``foxes'' as the RIAA or their agents 
at SoundExchange to be the sole guardian of the newly established ``hen 
house'' of digital royalties.

   2. direct payment of artists' 45 percent of webcasting royalties 
                            through the dmca

    The language of the Digital Millennium Copyright Act needs 
clarification to ensure artists are paid their royalties directly.
The Problem:
    As it stands now, some parties believe the DMCA language states 
that the entire 100 percent of any webcasting royalty should be paid 
first to the copyright owner (usually the label) who is then required 
to pay 45 percent to the performer and 5 percent to the unions.
    Other parties suggest that ambiguity in the language of the DMCA 
implies that artists should be paid their 45 percent directly.
The Solution:
    To eliminate further confusion and to guard the artists' right to 
their 45 percent share of the webcasting royalty, the FMC proposes an 
amendment to the Digital Millennium Copyright Act (DMCA). Modeled after 
the so-called writers' share paid by ASCAP, BMI and SESAC, the FMC 
amendment would establish that recording artists be paid directly their 
45 percent share of all Digital Performance Royalties for Sound 
Recordings (DPRSR). The FMC believes that this is the first step in 
acknowledging recording artists as stakeholders in the use of music on 
the Internet.

Why should this be done?
    As it stands the digital webcasting royalties are set to be 
administered exclusively by SoundExchange, a partisan collective 
created by the labels. Recently SoundExchange offered to pay the 
artists their 45 percent share directly--but only for the first year.
    The FMC believes this is a smoke screen of false generosity. It is 
hardly a foregone conclusion that the money is currently controllable 
by the labels. If the law was meant to state that the artists get paid 
their 45 percent directly in perpetuity, who are SoundExchange to offer 
the same deal for a diminished period of only one year?
What is at stake?

            A. Fear of Cross Collatoralization.

    If these royalties go first to the copyright owner, the labels may 
then attempt to cross collatoralize this new money against any of the 
artists' accumulated label debt. If royalties are diverted in this 
manner, the overwhelming majority of major label artists would not see 
any webcasting royalties whatsoever.

            B. Fear of Obfuscation.
    As it stands very few artists who work through the major label 
system pay off their ``expenses'' and earn royalties. Oftentimes those 
artists that do recoup only learn of that fact after auditing the 
label. It would be dangerous to subject webcasting royalties to the 
same non-transparent formula that already underserves musicians in the 
terrestrial world.

            C. The Future is Interactive--we should plan for that now.
    FMC believes that it is critical that the stakeholders work 
together to attempt to make these statutory licenses apply to both 
interactive and non-interactive web uses. Impending technological 
advances (Tivo, etc.) already allow for interactive uses of non-
interactive streams on the back end. Thus it is fair to suggest that 
the future of music and all ``innovative'' business models will be 
interactive.
    If we do not address the issue of a fair statutory rate for 
interactivity now, we run the risk of a future where only non-
interactive and dated business models pay the fair 45 percent statutory 
rate to creators. While all other interactive and forward-thinking 
business models pay artists in a manner that is subject to the same 
nebulous contractual rate that pays artists far less.
    Here it is important to remember that artists' contract royalty 
rate is not statutory, transparent nor is it public. Traditional 
contract royalties begin at a much smaller ``11-13 percent'' and allow 
for that royalty amount to be further diminished through a process of 
unfair deductions that are standardized within the industry.
    To understand this royalty reduction, multiply an I 1 percent 
royalty rate by 85 percent for a ``free goods'' deduction. Then 
multiply it by 75 percent for a ``packaging'' deduction. Then multiply 
it again by 75 percent for a ``new media'' deduction. After this 
process of deduction, an 11 percent royalty is effectively reduced to 
less than 6 percent.
    Non-interactive webcasting royalties pay artists 45 percent. 
Interactive webcasting royalties are subject to contracts. They pay 
artists 6 percent. At a difference of 39 percentage points, clearly, 
artists stand to fare far better under a statutory rate than one that 
is contractual. Therefore FMC suggests that it would greatly benefit 
the majority of artists if the statutory rate were applied to both 
interactive and non-interactive webcasting licenses.

    3. support for non-commercial speech in broadcasting and on the 
                                internet

    In general, music is programmed for one of two reasons: to 
aggregate the largest possible audience in hopes of charging larger 
rates to advertisers (the commercial model) or because a piece of music 
is important enough that a broadcaster thinks it should be shared with 
its audience (the non-commercial model). Obviously, artists and 
consumers benefit from the widest number of possible outlets for their 
music.
    Therefore, beyond taking a look at potentially illegal ``pay for 
play'' practices in commercial radio, or creating new community-based 
platforms like Low Power FM, there needs to be a means by which less 
expensive (or graduated) licenses can be granted to community based 
webcasters in the same manner that the performing rights 
organizations--BMI, ASCAP, SESAC--license community based terrestrial 
stations at a less expensive rate.
    While it is critical that webcasters compensate creators for the 
value of their music, we should recognize the important contribution 
that community based stations make in exposing music fans to a broader 
variety of music.

Why is this important?
    In order to webcast legally, a majority of independent Internet 
radio programmers have signed the Statutory Licensing Agreement and 
agreed to back pay royalties at the ``statutory rate'' from the date of 
that signature, once the rate is established.
    It has been over two years since some of these webcasters have 
signed the agreement yet the rate is still undecided! There are obvious 
and grave concerns among independent and community based webcasters 
that they will be forced out of business on the day that they are 
presented with a back-dated bill that is beyond their means.
    If this happens the FMC fears we will soon find the infinite space 
of the World Wide Web dominated by the same hit-driven, bottom-line 
mentality that currently dominates the finite terrestrial bankwidth and 
underserves the majority of musicians and consumers.

Consolidation of the Terrestrial Bandwidth
    The commercial radio bandwidth is no fiend to the majority of 
musicians, nor, for that matter, the majority of consumers. In 2001, 
the overwhelming consolidation of the commercial radio ownership has 
concentrated control of terrestrial radio into very few dominant 
hands.\4\ The predominance of supper-duopolies (more than 7 radio 
stations in a market owned by one company) and the resulting drive to 
create additional super-duopolies, has resulted in reductive, 
consolidated, market-driven programming and far less bankwidth space 
for niche or independent broadcasting on the radio dial. Both of these 
factors have had a grave impact on the ability for musicians to get 
their music in front of a listening audience.
---------------------------------------------------------------------------
    \4\ Lydia Polgreen, ``The Death of Local Radio'', Washington 
Monthly, April 1999.
---------------------------------------------------------------------------
Concentration of radio playlists
    Commercial radio playlists seem dominated by a ``once-removed'' 
process of independent radio promotion that requires overwhelming 
investment to place songs on commercial radio. If this is true, then 
over 80 percent of musicians who do not choose to release records 
through the major label system are effectively locked out of the 
publicly owned but commercially licensed airwaves. It would be a 
disservice to artists and consumers to see this same unfair structure 
replicated on the web through a process of prohibitively expensive 
webcasting and licensing fees.

          4. ``automatic'' license for out-of-print recordings

    Major labels commonly acknowledge that a majority of their back 
catalog is currently out of print. This phenomenon harms both 
musicians, who lose potential record sales, and consumers who find 
their variety of musical choices artificially diminished.
    In order to address this problem, record contracts in some 
countries contain ``reversion clauses'' which allow for the return the 
copyright to the creator (musician) if a title has remained out of 
print for an established period of time. Reversion clauses frame the 
relationship between artist and label as an equal one where both sides 
have responsibilities and accountability.
    In the United States there is no such reversion clause and, 
therefore, very little recourse for musicians who have signed away 
their copyrights to a label that is unwilling to keep those records in 
print.
    In order to address this problem FMC is advocating for the creation 
of a compulsory or ``automatic'' license to enable musician signatories 
(or their heirs) the unquestionable legal right to license their back 
catalog sound recordings (at a fair statutory rate) from labels that 
have allowed these recordings to go out of print.

Copyright as Ante
    It is standard industry practice to require musicians to sign away 
the rights to their copyrights in order to participate in the major 
label system. This means that ultimately musicians will have little to 
no control over the availability of their records for sale. Since 
mechanical royalties paid to artists from record sales make up a large 
portion of musicians' income, it seems wholly unfair that they would 
have no recourse when their records are purposefully allowed to remain 
out of print.

Artists and Recoupment
    Danny Goldberg of Artemis Records recently indicated that most 
major label artists need to sell more than 200,000 copies in order to 
pay back their debt to the label.\5\ However, according to Soundscan 
data, only 1 percent of records released in 1999 sold more than 10,000 
copies,\6\ a number far short of Mr. Goldberg's projection. Using these 
statistics we can assume that the overwhelming majority of major label 
musicians are in debt to their labels. Understanding that major labels 
routinely let artists' material fall out of print, as noted above, 
there are even fewer opportunities for artists to recoup.
---------------------------------------------------------------------------
    \5\ Danny Goldberg, ``The Ballad of the Mid-Level Artist,'' Inside, 
2000, http://www.tonos.com/appl/connect/commentary/jsp)/danny--
goldbery--1.jsp
    \6\ Segal, ``They Sell Songs.''
---------------------------------------------------------------------------
Napster's Newest Fans
    In the physical world, record store and warehouse shelf-space is 
finite and valuable but the virtual marketplace does not have the same 
physical limitations.
    The fastest growing demographic segment using Napster are adults 
over the age of 24. Research reports have confirmed that one of the 
major reasons that they are doing so is to access commercial recordings 
that are no longer commercially available. The FMC believes that 
allowing recording artists to make all of their recordings available to 
the public will lessen the public dpendence on Napster, stimulate new 
record sales, and help achieve our goal of putting more money into the 
pockets of both recording artists and record labels.

                               Conclusion

    Clearly, the music technology space is a difficult area for policy 
makers to negotiate, with evolving technologies and market forces 
shifting constantly. That being said, the future of Music Coalition has 
identified four specific areas of concern that Congress should address:
1. Competition for collection and distribution of the digital royalty
2. Direct payment of the digital royalty to the artist
3. Fostering of non-commercial space on the radio and on the Internet
4. Ensuring artists to have the right to keep their recordings in print
    We firmly believe these four major items will make a tremendous 
difference to the lives of artists nationwide, and we look forward to 
collaborating with other interested parties to help build the structure 
that will sustain a middle class of musicians in America.

                                

   Statement of Jim Griffin, Founder and CEO, Cherry Lane Digital & 
                 OneHouse LLC, Los Angeles, California

  AT IMPASSE: Technology, Popular Demand, and Today's Copyright Regime
    The Internet has fostered the creation of new music delivery 
services that provide Americans with unprecedented access to a broad 
catalogue of music. Consumers have responded enthusiastically. 
Continuing to meet this popular demand is clearly in the public 
interest, yet the future availability of these services is now in 
jeopardy. It would be unfortunate both for the American public as well 
as for copyright holders if peer-to-peer delivery of music were to be 
suppressed. If encouraged by appropriate legislation, these services 
can be configured in a manner that fully protects the interests of 
rights holders by ensuring them a steady stream of royalties. Moreover, 
consistent with the goals of the Copyright Act, these popular delivery 
services offer the potential for unprecedented growth in the creation 
and enjoyment of music.
    In effect, the Internet is shifting the music marketplace from one 
for products to one for delivery services. Technological advances have 
fostered similar transitions in other markets in the past, and each 
time, the nation has opted to adjust its copyright laws as needed in 
order to enable competitive delivery services to face off against one 
another in the marketplace. Each time, consumers and copyright holders 
alike have benefited from the resulting expansion in the production and 
enjoyment of original works.
    In passing the Digital Millennium Copyright Act in 1998, Congress 
recognized the need for legislation to foster the Internet's potential 
for broad dissemination, at the time and place chosen by the user, of 
all forms of original work. But the existing scheme for protecting and 
encouraging the dissemination of copyrighted material is inadequate for 
the changed market environment wrought by the new online world. 
Legislation enabling the continued development of online music delivery 
services, while fully protecting the interests of copyholders, is now 
needed.
    The earlier statutes intended to encourage the use of prior 
generations of new delivery services should guide the way. Some of 
these statutes were designed to address problems created by high 
transactions costs when new technology offered the potential to deliver 
original works to multitudes of users. Some were intended to promote a 
nascent technology that might not, without statutory encouragement, 
have taken hold. Some were designed to help identify a reasonable price 
when the marketplace was inefficient at doing so. All were intended to 
promote the underlying goals of our copyright regime--to encourage the 
creation and broad dissemination of original works. These statutes 
provide a variety of examples of solutions that serve the interests of 
both rights holders and the public.

  1. public demand for digital music delivery services is strong and 
                                growing.

    ``Music has been at the forefront of the Internet explosion, and 
for good reason: The Internet offers tremendous opportunities for the 
music business as well as for everyone who loves music.'' \1\ Because 
music is easily transmitted in digital form, the Internet has promoted 
the development of new music delivery services, bringing the American 
public convenient access to much more, and more varied, music than has 
ever been possible before. The public response has been overwhelming.
---------------------------------------------------------------------------
    \1\ A&MRecords, Inc. v. Napster, Inc., Complaints Sec. 35 (N.D. 
Cal. 1999).
---------------------------------------------------------------------------
    Napster has grown with unprecedented speed. First available in 
1999, its software has now been downloaded over 71 million times. Its 
appeal is broad--though designed by a college student and popular with 
teenagers, half of its users are over 30 years old, and they are evenly 
divided between men and women.\2\ Its peak of 1.8 million simultaneous 
users is within striking range of AOL's reported peak of 2.2 million 
simultaneous users. And its more than 10 million hits from unique 
addresses per day is significantly greater than the fewer than 7 
million unique address visits that eBay and the Walt Disney Internet 
Group attract per week.\3\
---------------------------------------------------------------------------
    \2\ July 11, 2000, Testimony of Hank Barry, CEO of Napster, Inc., 
before the Senate Judiciary Committee.
    \3\ See Niels en/NetRating service report for week ending 3/18/01.
---------------------------------------------------------------------------
    Another software program for distribution of music and other 
digital files was originally posted on a website affiliated with AOL in 
the spring of 2000. It was removed after a single afternoon, but in 
just those few hours, 10,000 copies were downloaded, and today the 
decentralized file-sharing Gnutella software is enjoying ever-widening 
usage. It is also rapidly becoming more user-friendly. And there are 
many other means of obtaining access to music through the Internet, 
including Aimster, Bearshare, iMesh, and Spinfrenzy.
    The advent of online music delivery services has and will fuel 
sales of music both as a new delivery service and in ``hard copy'' 
form. Many Napster users are willing to pay a monthly fee for continued 
access to the service.\4\ And many online music listeners report 
sampling new music using Napster or another such service, and then 
purchasing a CD of the music they liked.
---------------------------------------------------------------------------
    \4\ Pay to play, PC MAGAZINE at 67, April 24, 2001.
---------------------------------------------------------------------------
    Napster and similar services are racing to fill an entirely new 
market for services offering the customized delivery of music, a market 
just recently enabled by technological innovation. As with the 
invention decades ago of radio service for delivering plays and music, 
and then of television service by means of broadcast and later cable 
and satellite delivery, for delivering video performances and events, 
digital music service has transformed the nature of the market for the 
underlying copyrighted content. This transformation can be suppressed 
only at enormous cost to consumers and to copyright holders, who should 
benefit from the greatly expanded delivery of their works that the 
services promise. The American public's demand for music delivery 
services will continue to grow. It is in the public interest, and in 
the interests of rights holders, to satisfy that demand. But the demand 
cannot effectively be met under the current statutory scheme.

  2. digital music delivery services may be sharply curtailed despite 
                       widespread popular demand.
    Adverse court decisions now threaten the continued availability of 
digital music delivery services.\5\ Moreover, market forces, which 
might be expected to engender a new means of meeting the popular 
demand, are being thwarted by a variety of obstacles. Legislation is 
needed to resolve the impasse.
---------------------------------------------------------------------------
    \5\ See, e.g., A&M Records, Inc. v. Napster, 239 F.3d 1004 
(9th Cir. 2001) (finding a prima facie case of direct 
copyright infringement); UMG Recordings, Inc. v. MP3.Com, Inc., 56 
U.S.P.Q.2d 1376 (S.D.N.Y. 2000) (holding MP3 infringed copyright 
owners' rights).
---------------------------------------------------------------------------
    For two reasons, the marketplace cannot and will not provide a 
solution. First, the music industry, long known for close coordination 
among its major players,\6\ has with one notable exception chosen to 
work to retain control of music distribution, refusing to deal with 
entities that threaten that control even if in the process substantial 
popular demand for music is left unsatisfied.\7\ Five companies--AOL-
Time Warner, EMI, Sony, BMG, and Universal--control about 85% of the 
market for pre-recorded music.\8\ These companies are collectively 
known as the ``majors.'' The remainder of the music industry is made up 
of much smaller companies referred to as ``independents'' or 
``Indies.'' As reflected by their collective market share, the majors 
dominate the distribution of prerecorded music and have done so for 
decades.\9\
---------------------------------------------------------------------------
    \6\ See, e.g., Federal Trade Commission, Press Release, Record 
Companies Settle FTC Charges of Restraining Competition in CD Music 
Market, (May 10, 2000) available at http://www.fte.gov/opa/2000/05/
dcpres.htm (``The Federal Trade Commission announced today that it has 
reached separate settlement agreements with . . . the five largest 
distributors of recorded music who sell approximately 85 percent of all 
compact discs (CDs) purchased in the United States to end their 
allegedly illegal advertising policies that affected prices for CDs. 
The proposed agreements would settle FTC charges that all five 
companies illegally modified their existing cooperative advertising 
programs to induce retailers into charging consumers higher prices for 
CDs, allowing the distributors to raise their own prices. ''); Federal 
Trade Comnussion, Analysis to Aid Public Comment on the Proposed 
Consent Order; In the Matter of Sony Music Entertainment, Inc., In the 
Matter of Time Warner, Inc.,--In the Matter of BMG Music, d. b. a. 
``BMG Entertainment''; In the Matter of Universal Music &c Video 
Distribution Corp. and UMG Recordings, Inc.,--and In the Matter of 
Capitol Records, Inc., d.b.a. ``EMI Music Distribution'' et al., (Sept. 
2000) available at http://www.ftc.gov/os/2000/09/musicstatement.htm 
(``The market structure in which the distributors' MAP provisions have 
operated also gives us reason to believe that these programs violate 
Section 5 of the FTC Act as practices which materially facilitate 
interdependent conduct. The MAP programs were implemented with an 
anticompetitive intent and they had significant anticompetitive 
effects. In addition, there was no plausible business justification for 
these programs. '') (hereinafter ``Analysis To Aid Public Comment ''). 
The individual FTC complaints and agreements containing consent orders, 
as well as additional materials, are available at http://www.ftc.gov/
os/2000/05/index.htm. See also United States v. Time Warner Inc., et 
al., 1997 WL 118413 (D.D.C. 1997) (Justice Department investigation 
into a series of joint ventures and other coordinated conduct among 
producers of prerecorded music both domestically and abroad; no 
antitrust challenge brought).
    \7\ With the exception of Bertelsmann AG, the majors have refused 
to license their copyrighted music to Napster. Bertelsmann has 
conditioned its willingness to license on Napster's developing a 
technology that would ensure payment of royalties every time a song is 
shared. Until Napster introduces that technology, as it plans to do 
this summer, Bertelsmann remains a plaintiff in the infringement suit. 
See Record label settles out of court with Napster, San Jose Mercury 
News, January 26, 2001, at http://www.mercurycenter.com/svtech/news/
indepth/docs/napster012601.htm/; Kevin Featherly, Major Indie Label TVT 
Records Buries Napster Hatchet, BizReport, January 26, 2001, at http://
www.bizreport.com/daily/2001/01/20010126-7.htm. Universal's CEO has 
said that his company would license a royalty-paying peer-to-peer 
service, but Universal has not negotiated any such arrangement with 
Napster to date.
    \8\ See Analysis To Aid Public Comment, supra n.6 (``The five 
distributors together account for over 85 percent of the market . . . 
'').
    \9\ See Analysis To Aid Public Comment, supra n.6 (the five major 
music companies ``collectively dominate this market ''); R. 
SCHULENBERG, LEGAL ASPECTS OF THE MUSIC INDUSTRY 3 (1999) (``[T]he 
music industry is dominated by a small number of entertainment/
communications conglomerates. At the end of 1998, these were 
Bertelsmann, EMI-Capitol, Universal Music Group, Sony, and Time Warner, 
and only one, Time Warner, was U.S. owned. '').
---------------------------------------------------------------------------
    The majors' dominance extends beyond the distribution of pre-
recorded music into both music publishing and the signing and promotion 
of new artists. While music publishing is less concentrated than sales 
of pre-recorded music, the music publishing businesses owned by the 
five majors control a high percentage of the most valuable song 
copyrights. Indeed, the two largest music publishing companies, those 
owned by AOL-Time Warner and EMI, alone control the rights to millions 
of songs.\10\ Although literally thousands of musical copyright owners 
are not affiliated with any of the major music publishing companies--
including a number of independent music publishing companies--the 
catalogues of song copyrights owned by these entities pale in 
comparison to those of the major music publishing companies.
---------------------------------------------------------------------------
    \10\ Warner/Chappell Music, Inc.: A Company Profile, http://
www.warnerchappell.com/cgi-bin/WebObjects/wcmusic/awc/About.woa/wa/
ArticlePage.wo?articleId=443. (``From perennial favories such as `Happy 
Birthday,' `Rhapsody In Blue,' `Winter Wonderland' and the ballads of 
Cole Porter to the hottest hits of recent years by such megastars as: 
R.E.M., Michael Jackson, Elton John, Sheryl Crow, Jewel and Madonna, 
Los Angeles-headquartered Warner/Chappell Music, Inc. now ranks as the 
premiere music publishing company in the world.'' and ``The company's 
exhaustive catalog of songs spans the classical, standard, pop, 
country, Broadway, foreign, movie and television score and current hit 
categories . . .. ''); Warner/Chappell--Song Search, http://
www.wamerchappell.com/WebObjects/wcmusic/ss/index.html. ``Warner/
Chappell is home to more than a million songs . . . .''; Seagram Muisc 
Unit, Universal, Makes Pact to Acquire Rondor, 2000 WL-WSJ 3038939 
(Aug.3, 2000).
---------------------------------------------------------------------------
    Similarly, the labels owned by the major music companies are 
capable of offering the most lucrative recording deals and, therefore, 
typically sign the most promising new artists to recording contracts. 
Few artists succeed in a big way without the backing of a major label, 
since the majors' expansive resources and high market shares give them 
considerable influence over the primary promotional vehicles in the 
music industry, including radio and cable television channels like MTV 
and VH1.\11\ For artists, the majors collectively control the gateway 
to the top.
---------------------------------------------------------------------------
    \11\ John Sutton-Smith, Easy Bider, Hits Magazine (July 18, 1997), 
at http://www.warnerchappell.com/cgi-bin/WebObjects/wcmusic/awc/
About.woa/wa/ArticlePage.wo?articleId=281. ``Certainly we can always 
afford not to go for an act, because when you're the size of the major 
music publishers, no one act has a material impact on the bottom 
line.'' Les Bider is the Chairman and CEO of Warner/Chappel Music 
Publishing.
---------------------------------------------------------------------------
    Where a small number of large firms comprise an industry their 
interests will frequently align and, very often, so will their business 
decisions and strategy. And parallel, and even interdependent, decision 
making has long been a hallmark of the music industry. Such behavior 
can be a natural outgrowth of market concentration and may occur even 
without what might be deemed collusive activity in violation of the 
antitrust laws. Even if it is not illegal, however, such ``non-
competitive'' behavior still harms consumers, because it enables each 
of the majors to safely ignore consumer demand, confident that its 
competitors will do the same.
    The ongoing litigation against Napster allows the music companies 
to watch one another's business plans even more closely than usual. 
Their joint participation in the litigation, although likely shielded 
from antitrust challenge by the Noerr-Pennington defense,\12\ provides 
each company with a picture window on the others' strategies for 
dealing with the online world. Each time they consider and discuss the 
relief they are seeking in the litigation, and as they evaluate 
Napster's billion-dollar settlement offer, each firm necessarily 
reveals its own plans and goals for the digital marketplace.
---------------------------------------------------------------------------
    \12\ See Eastern Railroad Presidents Conference v. Noerr Motor 
Freight, Inc., 365 U.S. 127 (1961); United Mine Workers v. Pennington, 
381 U.S. 657 (1965).
---------------------------------------------------------------------------
    The majors know that the public wants the ability to access the 
full range of music, not just the music of one or two companies, from a 
single source. As they are reported to have written in another context, 
``[t]o be compelling to consumers . . . a service must offers tens or 
hundreds of thousands of songs . . .'' \13\ They cannot themselves 
offer a single joint site for antitrust reasons. But as long as most of 
them remain united, they can prevent the success of any unaffiliated 
service by refusing to license their songs. They are insulated from 
market pressures by virtue of their coordinated behavior. Only if 
several were to defect would the others have to follow in order to 
remain competitive.
---------------------------------------------------------------------------
    \13\ Jeffrey Benner, Record Industry Plays Both Sides, WIRED NEWS, 
March 16, 2001, at www.wired.com/business/ 0,1367,42426,OO.htm1(March 
16, 2001) at 13.
---------------------------------------------------------------------------
    Why would the majors choose to prevent the development of popular 
digital delivery services, despite the demonstrated ability of such 
sources to increase public demand for music? Napster, as the innovator 
of peer-to-peer music file sharing technology, has earned a ``first-
mover'' advantage over other companies in the digital delivery of 
music. As a threshold matter, the majors do not want to enable Napster 
to earn a financial reward for this innovation, but would rather try to 
recapture the advantage for themselves. More importantly, they fear 
increasing competition from independent labels. Napster does not have 
an interest in what, or whose, music is shared on its service--with 
Napster's service, independent music is as readily available as the 
majors' music. And Napster is not only a vehicle for the delivery of 
music, but also an open venue for the exchange of opinions and 
recommendations about music, entirely free of the majors' control. For 
the major music companies, which dominate older music promotional 
channels, this would be a dramatic change. They do not want to lose 
their historical influence and concomitant ability to direct consumers' 
attention, and purchases, to their own artists and labels.
    Thus, it is in the majors' collective interest to regain control of 
music distribution from upstart entities such as Napster, even after it 
transitions to a royalty-generating service. The concentrated structure 
of the music industry and the increased coordination facilitated by 
their joint participation in litigation enable them to assure 
themselves that most are pursuing a strategy that protects them all. 
Absent intervention by Congress, adverse court decisions and the 
coordinated resistance of four of the leading record companies will 
deprive consumers of digital distribution technology in the future. A 
unique opportunity for consumers to enjoy a fantastic range of original 
work, in a context that ensures full compensation to rights holders, 
will be lost.
    Another reason that the unassisted marketplace will not meet the 
public demand for digital music delivery services is uncertainty over 
pricing. Customized music delivery is a wholly new service-based 
approach to content delivery, and it does not fit neatly into the 
current copyright regime. If the various legal issues are not soon 
addressed by legislation, considerable additional litigation is likely 
to ensue, regarding fair use, first amendment rights, and more; as a 
result, absent legislation, the pricing picture is not likely be 
clarified anytime soon. In this environment, it will be difficult if 
not impossible for new services to succeed, and their failure would 
leave public demand for these services unmet.

    3. When faced with similar problems in the past, Congress has 
enacted legislation to foster development of new delivery services 
while ensuring that the interests of copyright holders are protected.
    With some frequency over the past century, new technology has 
enabled the creation of new delivery services for copyrighted works, 
while at the same time creating new inconsistencies and inefficiencies 
in the existing copyright regime. Each time,
    Congress has responded by enacting legislation that encourages the 
maximum development of the new delivery services, but also protects the 
interests of rights holders.
    Each of these examples can be best understood as a Congressional 
response to the transformation, through new technology, of a market for 
protected works sold in the form of products into a market for the sale 
of services delivering those works to consumers. Each time, Congress 
has acted to protect the rights of copyholders in the works themselves, 
while ensuring competition among services that deliver those works.
    The Supreme Court has written, ``[f]rom its beginning, the law of 
copyright has developed in response to significant changes in 
technology. . . . Repeatedly, as new developments have occurred in this 
country, it has been the Congress that has fashioned the new rules that 
new technology made necessary.'' \14\ Not every technological change, 
of course, necessitates a corresponding change in the copyright laws. 
Indeed, were this the case, Congress would get very little accomplished 
other than amending the copyright laws. When, however, in light of new 
technology, the boundaries of existing copyright law are inadequate to 
promote the widespread distribution of works that the copyright regime 
encourages, Congress fashions an appropriate legislative solution.\15\ 
``Sound policy, as well as history, supports . . . [the courts'] 
deference to Congress when major technological innovations alter the 
market for copyrighted materials. Congress has the constitutional 
authority and the institutional ability to accommodate fully the varied 
permutations of competing interests that are inevitably implicated by 
such new technology.'' \16\
---------------------------------------------------------------------------
    \14\ Sony Corp. of America v. Universal City Studios, Inc., 464 
U.S. 417, 430-31 (1984). In a footnote, the Court gave examples of 
technological changes that resulted in Congress passing new copyright 
rules, including a number of statutory licenses:
    Thus, for example, the development and marketing of player pianos 
and perforated rolls of music, see White-Smith Music Publishing Co. v. 
Apollo Co., 209 U.S. 1, 28 S.Ct. 319, 52 L.Ed. 655 (1908), preceded the 
enactment of the Copyright Act in 1909 . . . the development of the 
technology that made it possible to retransmit television programs by 
cable or by microwave systems, see Fortnightly Corp. v. United Artists, 
392 U.S. 390, 88 S.Ct. 2084, 20 L.Ed. 2d 1176 (1968), and Teleprompter 
Corp. v. CBS, 415 U.S. 394, 94 S.Ct. 1129, 39 L.Ed.2d 415 (1974), 
prompted the enactment of the complex provisions set forth in 17 U.S.C. 
Sec. 111 (d)(2)(B) and Sec. 111(d)(5). . ..''
    Id at n.11. Notably, in both of these instances Congress' response 
was the creation of statutory licensing systems rather than merely the 
creation of new rights.
    \15\ In Sony Corp. the Supreme Court explained that:
    The judiciary's reluctance to expand the protections afforded by 
the copyright without explicit legislative guidance is a recurring 
theme. Sound policy, as well as history, supports our consistent 
deference to Congress when major technological innovations alter the 
market for copyrighted materials. Congress has the constitutional 
authority and the institutional ability to accommodate fully the varied 
permutations of competing interests that are inevitably implicated by 
such new technology. In a case like this, in which Congress has not 
plainly marked our course, we must be circumspect in construing the 
scope of rights created by a legislative enactment which never 
contemplated such a calculus of interests. In doing so, we are guided 
by Justice Stewart's exposition of the correct approach to ambiguities 
in the law of copyright: `The limited scope of the copyright holder's 
statutory monopoly, like the limited copyright duration required by the 
Constitution, reflects a balance of competing claims upon the public 
interest: Creative work is to be encouraged and rewarded, but private 
motivation must ultimately serve the cause of promoting broad public 
availability of literature, music, and the other arts. The immediate 
effect of our copyright law is to secure a fair return for an 
`author's' creative labor. But the ultimate aim is, by the incentive, 
to stimulate artistic creativity for the general public good. ``The 
sole interest of the United States and the primary object in conferring 
the monopoly,'' this Court has said, ``lie in the general benefits 
derived by the public from the labors of authors.'' When technological 
change has rendered its literal terms ambiguous, the Copyright Act must 
be construed in light of this basic purpose.''
    Id. at 431 (citations omitted, emphasis added).
    \16\T3Id.
---------------------------------------------------------------------------
    One example of an earlier Congressional compromise designed to 
encourage maximum use of a new technology for delivery of copyrighted 
work is the Audio Home Recording Act of 1992.\17\ Under the AHRA, 
manufacturers of ``digital audio recording devices'' are required to 
include technology that prevents serial copying.\18\ Manufacturers of 
these devices and of ``digital audio recording media'' must pay 
predetermined royalties into a general fund that is, in turn, 
distributed to holders of certain copyright interests in music.\19\ The 
quid pro quo under the AHRA is that manufacturers and consumers are 
granted statutory immunity from suits for copyright infringement.\20\ 
The AHRA provides for full use of consumer audio tape recording 
technology, while ensuring a royalty stream for rights holders.
---------------------------------------------------------------------------
    \17\ U.S.C. Sec. 1001 et seg.; H.R. Rep. No. 873 (1), 
102nd Cong., 2d Sess. 13 (1992).
    \18\ 17 U.S.C. Sec. 1001(11), 1102.
    \19\ Id. at Sec. Sec.  1003-07.
    \20\ See 17 U.S.C. Sec. 1008.
---------------------------------------------------------------------------
    The legislation grew out of litigation filed by music publishers 
and songwriters in 1990 against Sony Corporation, which had begun 
marketing DAT recorders. Negotiations aimed at achieving a non-judicial 
solution soon followed, and ultimately a proposal was presented to 
Congress as the basis for legislation. The AHRA is the embodiment of 
the compromise reached among the interested parties.\21\

    \21\ See generally H.R. Rep. No. 873(1), 102nd Cong., 2d 
Sess. 11-13 (1992) (``House Report''), reprinted in, 1992 U.S. Code 
Cong. & Admin. News (U.S.C.C.A.N.) 3581-3583; S. Rep. No. 294, 102d 
Cong., 2d Sess. 30-45 (1992) (``Senate Report'').
---------------------------------------------------------------------------
As explained by the U.S. Copyright Office in its amicus brief in the 
        Napster case:
Beginning in the 1980s, consumer electronics firms began to develop 
        tape recorders and other consumer recording devices that employ 
        digital audio recording technology. Unlike traditional analog 
        recording technology, which results in perceptible differences 
        between the source material and the copy, digital recording 
        technology permits consumers to make copies of recorded music 
        that are identical to the original recording. Moreover, a 
        digital copy can itself be copied without any degradation of 
        sound quality, opening the door to so-called `serial copying'--
        making multiple generations of copies, each identical to the 
        original source. The capability of digital audio recording 
        technology to produce perfect copies of recorded music made the 
        technology attractive to the consumer electronics industry, 
        which anticipated substantial consumer demand for tape 
        recorders and other recording devices equipped with digital 
        recording technology. However, the same capability was a source 
        of concern to the music industry, which feared that the 
        introduction of digital audio recording technology would lead 
        to a vast expansion of `home taping' of copyrighted sound 
        recordings and a corresponding loss of sales.\22\

    \22\ Brief for the United States as Amicus Curiae, at 5, A&M 
Records, Inc. v. Napster (9th Cir. Mar. 21, 2001), available 
at http://www.loc.gov/corpright/docs/napsteramicus.html (Nos. 00-16401 
& 00-16403).
---------------------------------------------------------------------------
    Two main benefits flow to the music industry from the AHRA. First, 
manufacturers of ``digital audio recording devices'' are required to 
incorporate into their products technology that prevents serial 
copying.\23\ Second, manufacturers of ``digital audio recording 
devices'' and ``digital audio recording media'' must pay predetermined 
royalties into a general fund to be distributed to copyright 
holders.\24\ The quid pro quo under the Act is that manufacturers and 
consumers are granted statutory immunity from suits for copyright 
infringement, and consumers are granted immunity for the 
``noncommercial use'' of digital audio recording technology.\25\
---------------------------------------------------------------------------
    \23\ 17 U.S.C. Sec. 1001(11), 1102.
    \24\ 17 U.S.C. at Sec. Sec. 1003-07.
    \25\ 17 U.S.C. Sec. 1008.
---------------------------------------------------------------------------
    The AHRA does not create a statutory license, but it achieves a 
parallel outcome. The interests of copyright holders are served through 
a system of royalty payments, and the public interest is served by 
giving consumers the greater access to delivery of protected work that 
the new technology has enabled. Under the statutory scheme, there is 
competition in the production of players and tapes by means of which 
consumers can customize their music listening. Each copyholder is 
assured of royalties from distribution of the music delivery service--
the sales of tape players and blank tapes. Copyholders cannot, however, 
thwart the delivery process.
    In addressing different new delivery services, Congress has adopted 
varying solutions. In these cases, the marketplace did not provide a 
complete answer, and Congress acted to establish a government sponsored 
or facilitated licensing or royalty scheme, or to foster development of 
the new delivery service in some other way.
    In 1909, in recognizing for the first time the right of a copyright 
owner to authorize mechanical productions of music, such as piano 
rolls, Congress also acted to prevent creation of a threatened monopoly 
by a piano roll firm that had entered into exclusive agreements with a 
number of leading music companies.\26\ The 1909 statute provides that 
if the copyright holder has allowed mechnical reporductions. Payment of 
royalties is required. The statutory procedures required by thelicense 
provision are fairly time-consuming and burdensome, so most mechanical 
licenses are now negotiated privately and directly between the rights 
holder and the licensees. While these agreements often do not 
conformexactly to the statutory provisions, the statute generally 
provides an outline for the negotiated license and the statutory rate 
imposes an upper limit on fees that copyright holders are able to 
charge.\27\
---------------------------------------------------------------------------
    \26\ 17 U.S.C. Sec. 1 et seg., and as amended.
    \27\ See A. KOHN AND B. KOHN, ON MUSIC LICENSING 656-68 
(2nd ed. 1996).
---------------------------------------------------------------------------
    There are many other examples of legislation designed to solve 
licensing issues arising from a new form of delivery. For over a 
decade, jukebox operators had a statutory license for the songs their 
machines played. Earlier, jukebox operators had enjoyed immunity from 
infringement claims, in part as a result of an early court ruling. The 
1976 Copyright Act removed this immunity and replaced it with a 
statutory license and minimum royalty per performance, both of which 
were administered by the Copyright Office. Congress later amended the 
statute to replace the statutory license/royalty scheme with a 
requirement that the copyright holders and jukebox operators negotiate 
a private license in good faith, under the oversight of the Copyright 
Office.\28\
---------------------------------------------------------------------------
    \28\ Shubha Ghosh, MP3 v. the Law: How the Internet Could (But 
Won't) Become Your Personal Jukebox, Gigalaw.com (July 2000), at http:/
/www.gigalaw.con/articles/ghosh-2000-07-p3.htm1.
---------------------------------------------------------------------------
    Also in 1976, Congress enacted a statutory license for cable 
services that retransmit broadcast television signals. This legislation 
was an effort to forge a compromise between copyright owners of 
television programming and operators of cable companies. Beginning in 
the 1950s, cable companies picked up transmission signals from 
broadcasters and retransmitted them, initially to local homes and 
later, with improved technology, to distant locations. This practice 
undermined the exclusive agreements between broadcasters and copyright 
holders, arguably to the detriment of the latter. In two cases, 
nonetheless, the Supreme Court refused to find that the cable companies 
were infringing upon the copyright holders' rights.\29\ Congress 
responded with a compromise embodied in the 1976 Copyright Act's cable 
license provision. Congress acknowledged the copyright owners' 
interests in their broadcasts and determined that the cable companies 
should pay royalties for their use.\30\ In addition, Congress 
determined that transactions costs would be onerous if the cable 
companies were required to negotiate separately with each rights 
holder. Congress resolved both issues by means of a statutory license, 
found in section 111 of the 1976 Copyright Act.\31\ As leading 
authorities on copyright law have explained, one of Congress' initial 
reasons for implementing the cable compulsory license was to foster the 
growth of the thennascent cable industry,\32\ a purpose that has been 
very effectively accomplished.
---------------------------------------------------------------------------
    \29\ Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 
390 (1968); Telepromtper Corp. v. CBS, 415 U.S. 394, 409 (1974).
    \30\ H.R. Rep. No. 1476, 94th Cong., 2d Sess. 89, 
reprinted in 1976 U.S.C.C.A.N. 5659, 5704.
    \31\ 18 U.S.C. Sec. 2318 (1996).
    \32\ See 2 M. B. NIMMER AND D. NIMMER, NIMMER ON COPYRIGHT 
Sec. 8.18[A1, 8-197 (1994).
---------------------------------------------------------------------------
    In 1988, Congress enacted the Satellite Home Viewer Act (``SVHA '') 
to enable secondary transmissions by satellite carriers of primary 
transmissions for private home viewing by owners of satellite dishes. 
The SVHA created a statutory temporary license for this purpose.
    Satellite carriers had began to market dishes to home users as the 
cost of dish technology came down. Home users were able to receive 
unauthorized signals directly from satellites, avoiding copyright fees. 
Although the courts did not find that satellite carriers were 
infringing copyright owners' rights--they were, instead, ``passive 
carriers''--Congress responded by creating a system of statutory 
licensing. This legislation follows the same rationale as the cable 
compulsory license: it allows a new delivery technology to grow and 
supports a new industry.\33\ The statutory license extended only to 
home users who would not have access to programming if they could not 
use the satellite dish to pick up a signal; serving the interests of 
these otherwise unserved consumers was a major purpose of the 
legislation.\34\
---------------------------------------------------------------------------
    \33\ H.R. Rep. No. 887(1), 100th Cong., 2nd 
Sess. 1988, 1988 U.S.C.C.A.N.5577).
    \34\ See H.R. Rep. No. 887(1), 100th Cong., 
2nd Sess. 1988, 1988 U.S.C.C.A.N.5577.
---------------------------------------------------------------------------
    The advent of webcasting services created a series of new copyright 
issues. Prior to the passage of the Digital Performance Rights in 
Sounds Recordings Act of 1995 (``DPRSRA '') there had been no 
recognition in the U.S. copyright laws of an exclusive right of public 
performance for owners of sound recording copyrights. ``While composers 
of music are given the right to publicly perform their work, owners of 
sound recording copyrights generally are not. Therefore, when a song is 
played by a radio station--and, until now, when it was played on 
Internet radio or via webcast--the composer of the song receives a 
royalty payment from the radio station, while the owners of the actual 
recording receive nothing.'' \35\ The DPRSRA created the first limited 
public performance right in sound recordings.\36\ It also amended the 
1976 Copyright Act to provide a statutory right to perform a sound 
recording publicly by means of a digital audio transmission.\37\
---------------------------------------------------------------------------
    \35\ David Wittenstein and M. Lorraine Ford, ``The Webcasting 
Wars'' JOURNAL of INTERNET LAW (Feb. 1999), available at http://
www.gcwf.com/articles/journal/jil--feb99--2.html.
    \36\ 17 U.S.C. Sec. 115 (1996).
    \37\ Id. There are limitations on this right. The DPRSRA granted 
the new license for subscription transmissions only, and exempted 
regular radio broadcasts and other nonsubscription transmissions. 
Wittenstein and Ford, supra n.35. It also excluded any `interactive 
service,' that is, any service that enables a member of the public to 
receive, on request, any particular sound recording of his or her 
choice. Such a service must negotiate a voluntary license directly with 
the rights holder, which is free to refuse a license.
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    All of these statutory schemes fostered the development of new 
delivery services, all of which have since proved successful in the 
marketplace. In the early days of many of them, however, there were 
sharp disputes about whether the new services should be permitted, and 
claims were made that copyright holders should be empowered to suppress 
them. It should be remembered that in Sony, supra n.14, the Supreme 
Court came within one vote of effectively outlawing video cassette 
recorders, which in the end have increased the viewing of movies 
substantially and have generated billions of dollars for the holders of 
movie copyrights.

    4. Congress then enacted the Digital Millennium Copyright Act of 
1998, which, among other things, protects the American public's ability 
to customize delivery of original work, while again protecting the 
interests of rights holders
    Three years ago, Congress recognized that the copyright laws needed 
amendment if the full potential of the Internet was to be realized. 
Congress enacted the Digital Millenium Copyright Act (``DMCA '') of 
1998 in part to foster the public's ability to obtain protected content 
over the Internet, when and wherever it wishes. To achieve this end, 
Congress granted Internet Service Providers some protection from 
liability for the unauthorized transmission of protected content by 
means of their services. A Senate Committee summarized the purpose of 
these provisions:

Copyright laws have struggled through the years to keep pace with 
        emerging technology from the struggle over music played on a 
        player piano roll in the 1900's to the introduction of the VCR 
        in the 1980's. With this constant evolution in technology, the 
        law must adapt in order to make digital networks safe places to 
        disseminate and exploit copyrighted materials. The legislation 
        implementing the treaties, Title I of this bill, provides this 
        protection and creates the legal platform for launching the 
        global digital online marketplace for copyrighted works. It 
        will also make available via the Internet the movies, music, 
        software, and literary works that are the fruit of American 
        creative genius. Title II clarifies the liability faced by 
        service providers to transmit potentially infringing material 
        over their networks. In short, Title II ensures that the 
        efficiency of the Internet will continue to improve and that 
        the variety and quality of services on the Internet will 
        expand.\38\

    \38\ S. Rep. 105-190, 105th Cong., 2nd Sess. 
1998 at 2. (The Digital Millennium Copyright Act of 1998) (footnotes 
omitted).
---------------------------------------------------------------------------
    In order to protect the ability to customize delivery of content--
to maximize its ``option value''--the DMCA ``provide[d] certainty for 
copyright owners and Internet service providers with respect to 
copyright infringement on-line.'' \39\
---------------------------------------------------------------------------
    \39\  Id.
---------------------------------------------------------------------------
    The DMCA contains four distinct safe harbors, which under certain 
conditions protect Internet Service Providers, including services such 
as Napster, from liability for copyright infringement.\40\ The 
centerpiece of three of the safe harbors is a notice and takedown 
scheme that provides for the Internet Service Provider to block access 
to or distribution of infringing content upon receiving notice from a 
copyright holder that access and distribution are unauthorized. Unless 
the Internet Service Provider has independent knowledge of infringing 
content on its system (as defined by the statute), it is entitled to 
rely upon the notice provisions.
---------------------------------------------------------------------------
    \40\ Title 11, Sec. 512.
---------------------------------------------------------------------------
    With limited exceptions, the DMCA places the duty to police 
infringement upon the copyright holder. This policy is essential to 
prevent imposition of private restraints on content by Internet Service 
Providers, the entities generally least equipped to decide which 
content should be permitted to flow through the Internet. Placing the 
responsibility on the copyright holder is also justified because the 
copyright holder often may not object to the sharing of its copyrighted 
content online, and indeed may benefit from the wide and inexpensive 
dissemination of its content to the public over the Internet.
    In the peer-to-peer environment, the Internet Service Provider, 
such as Napster, does not maintain a copy of any content, but only 
provides the means for sharing the content directly among its users. 
Napster itself does not upload or download content, but rather any 
sharing of files occurs directly, peer-to-peer, at the user level. The 
peer-to-peer service provider does not even see the content being 
shared among its users. The technology provides the Internet Service 
Provider with only a transitory, real-time, catalogue of file names, 
written by its users, that can be accessed by anyone logged on to the 
service at that moment. Napster's real-time catalogue is maintained 
automatically, without human intervention, and changes from minute-to-
minute depending on who is logged on and what files these users have 
labeled for sharing.
    The DMCA expands the public performance right in sound recordings 
to include digital audio transmissions in webcast services that 
resemble traditional ``terrestrial'' radio broadcasts. It also grants a 
statutory license for the use of sound recordings in connection with 
Internet services under certain circumstances. As with the DPRSRA, one 
of the criteria for receiving a statutory license under the DMCA is 
that the webcasting service be ``noninteractive.''

    5. In enacting each of these statutes described, Congress addressed 
pricing problems unsolved by the marketplace, including among other 
problems transactions costs issues and the need to encourage nascent 
technologies, while at the same time furthering the underlying goals of 
the copyright laws.
    One of the foremost reasons Congress has amended copyright 
legislation in the ways just described has been to eliminate, or at 
least diminish, the transactions costs associated with the introduction 
of new services. Through Napster's technology, for example, millions of 
consumers now can have access to a service providing a virtually 
limitless number and variety of songs. But the rights holders number in 
the thousands, if not the tens of thousands, for they include not only 
the record companies, which hold the rights to most of the sound 
recordings, but also the music publishers, which hold the rights to use 
the underlying words and music. While the majors all have affiliated 
publishing houses that own substantial catalogues of songs, ownership 
of publishing rights is substantially less concentrated than ownership 
of the rights to sound recordings. Individual licensing each time a 
song is accessed would necessitate a preposterous number of individual 
transactions. This is exactly the type of problem that statutory 
licensing can help solve.
    Congress has also adopted legislation where necessary to ensure 
that a newly developing industry will have an opportunity to flourish. 
Napster and other peer-to-peer technologies are in their infancy, and 
their full potential for music delivery is not yet known. They 
certainly hold substantial promise. Absent Congressional intervention, 
however, the problems currently plaguing development of online music 
delivery may never be fully resolved. In that event, the growth of 
digital music delivery services will be stunted if not smothered 
altogether, and the enormous popular demand for these services will be 
frustrated. Congressional action is needed to enable this new 
technology to realize its potential.
    Finally, the copyright laws are ultimately intended to serve the 
interests of the public in the dissemination of original work. All of 
the statutes described here were intended to foster that goal. In each 
case, the statutory scheme provided for more distribution rather than 
less, while preserving the interests of the rights holders.
    The list of services for which licenses and royalty payments are 
regulated or facilitated by the government is long. The manufacturer 
and the distributor of a phonograph record pay a statutory rate that is 
set not by the marketplace but by the Licensing Division of the 
Copyright Office. This office also issues licenses for the secondary 
transmission of cable signals, for secondary transmissions by satellite 
carriers of network and superstation signals for home viewing, and for 
the distribution of digital audio recording devices and media.\41\ A 
similar scheme could solve some of the problems presented today. It 
would address transactions costs problems and pricing uncertainties. It 
would encourage further development of the new services, while also 
protecting the interests of copyright holders.
---------------------------------------------------------------------------
    \41\ United States Copyright Office: A Brief History and Overview, 
available at www.loc.gov/copyright/docs/circla.html4.
---------------------------------------------------------------------------
    Technology like Napster's presents a unique opportunity for 
consumers to participate in what is, essentially, a vast music library 
containing an incredible variety and number of songs. Peer-to-peer 
technology puts consumers in charge, since the service's musical 
content is determined by the tastes of its constituents--there is no 
filter blocking works that are less ``popular'' or less ``commercial.'' 
A service like Napster's, moreover, presents a platform from which 
artists who are not affiliated with a major label may become 
successful. Contrast this model with the controlled and limited digital 
distribution services that the majors have proposed, and it is clear 
that the public will be the loser if use of technology like Napster's 
is restricted.

    6. While protection against piracy is more difficult in the online 
world, online technology also threatens consumers' ability to enjoy 
traditional `fair use `` rights and privileges.
    Much has been made of the difficulty rights holders face in 
preventing piracy of protected works in the digital world, where 
copying is easy and cheap, and produces copies of the same quality as 
the original. Massive efforts are now underway to develop new 
protections for copyrighted work, both through software and hardware 
devices.
    The online universe differs in important ways from the old one for 
consumers as well. In the ``old media'' universe, purchasers of 
copyrighted works were able to share, use, and copy for certain 
personal purposes some or all of the works they had purchased. In a 
recent examination of the impact of digital technology on the present 
copyright regime, a distinguished panel of experts concluded:

Fair use and other exceptions to copyright law derive from the 
        fundamental purpose of copyright law and the concomitant 
        balancing of competing interests among stakeholder groups. 
        Although the evolving information infrastructure changes the 
        processes by which fair use and other exceptions to copyright 
        are achieved, it does not challenge the underlying public 
        policy motivations. Thus, fair use and other exceptions to 
        copyright law should continue to play a role in the digital 
        environment.\42\

    \42\ Committee on Intellectual Property Rights and the Emerging 
Information Infrastructure, THE DIGITAL DILEMMA: INTELLECTUAL PROPERTY 
IN THE INFORMATION AGE 215 (2000).
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    In the online universe, it may become possible for providers of 
copyrighted material to track the delivery of every copy, and possibly 
to block the types of personal use of copyrighted materials that 
consumers have always enjoyed. Unless statutory protections are put in 
place, fair use rights and privileges may not survive in the digital 
environment. As leading commentators have recognized, consumers' loss 
of the traditional rights and privileges of fair use would be 
significant.\43\ It would constitute a sharp diminution of the benefits 
consumers receive when they purchase copyrighted work today.
---------------------------------------------------------------------------
    \43\ Jeffrey Garten, Intellectual Property: New Answers to New 
Problems, Business Week Online, April 2, 2001.
---------------------------------------------------------------------------
    The copyright laws, as authorized by the Copyright Clause in the 
Constitution,\44\ are intended to foster the creation and distribution 
of original works. Copyright holders are to be compensated for licenses 
because awarding compensation encourages them to create and disseminate 
their work. It is this goal of promoting the enjoyment and distribution 
of original work that has led to the various statutes described above, 
as well as to exceptions to the copyright law, such as fair use. 
Considered pursuit of a balanced copyright regime has served the nation 
well, fostering continuing creativity over the centuries. The 
underlying purpose of the nation's copyright regime should guide 
analysis of the action needed to adapt the nation's copyright regime to 
today's technology.
---------------------------------------------------------------------------
    \44\ U.S. Const., art. l Sec. 8, cl. 8.
---------------------------------------------------------------------------
    7. The current system of copyright protection needs to be adapted 
to reflect the transformation of the music marketplace, in the same way 
that Congress has adapted the laws in the past to reflect marketplace 
changes effected by new technology.
    Americans love music. Technology like Napster's offers music in a 
new form, as a service the consumer can adapt to his needs and tastes. 
Yet this technology may be suppressed. This is not what the copyright 
laws were intended to do. Rather, they are designed to accomplish the 
opposite result--to foster the wider creation and dissemination of 
original work.
    Moreover, technology is rapidly evolving. The music industry's 
current strategy of trying use the courts to chase down each new 
service is doomed to failure, although in the process substantial 
moneys will be spent and the potential for wider delivery of music will 
be largely unrealized. In the end, a new legal environment will have to 
be devised.\45\ If it is done sooner rather than later, millions of 
dollars in litigation expenses will be saved, copyright holders will 
receive more compensation, and the public will benefit from access to 
new music delivery services.
---------------------------------------------------------------------------
    \45\ See Hal Varian, Economic Scene: The Internet Carries Profound 
Implications for Providers of Information, New York Times, July 27, 
2000.
---------------------------------------------------------------------------
    The issue for Congress is how to ensure that Internet technology is 
fully harnessed in the public interest, while the interests of 
copyright holders are protected. Many times in the past Congress has 
successfully addressed technological change, each time adapting and 
amending the copyright laws to best achieve their underlying goals in 
the changed circumstances that the new technology has created. It now 
faces the challenge again.

    8. Conclusion: statutory licensing is fair and needed to enable new 
music services to meet public demand.
    Public demand for new digital music delivery services is powerful 
and growing daily. These services will be difficult to suppress 
entirely, but without Congressional action they will be tightly 
restricted. Millions, perhaps billions, of dollars will be spent in the 
struggle over their future. Market forces will not resolve the problem, 
just as they have not resolved problems arising from earlier 
transformational technological developments in the delivery of 
copyrighted material. The large music companies, with one exception, 
have chosen to stand together against the new music services, knowing 
that they can thereby maintain, at least for a time, their control over 
the distribution of music products and the selection of new talent. 
While the new services have to negotiate with each major independently, 
the majors have worked together against the new services, filing a 
joint lawsuit through their trade association, jointly working on new 
security technology, and jointly presenting their viewpoint to the 
public. Through their joint efforts, they have been in a position to 
observe one another closely and retain confidence that most of them, at 
least, will remain in the traditional alliance.
    In addition, market problems obstruct the continued development of 
the new music services as they transition to a fee-based structure. 
High transactions costs associated with individual licensing of each 
service subscriber and each sharing of a song, as well as pricing 
uncertainties associated with a wholly new technology, will make 
survival difficult for the new services in the absence of a clear and 
known legal framework. Congressional assistance, along the lines of 
prior legislation, is thus essential.
    I recommend a licensing regime requiring that songs released for 
public distribution be licensed to the new digital music services as 
well. Consumers subscribing to these services would pay fees, from 
which royalty payments would be remitted to rights holders. Such a 
compromise mirrors multiple prior compromises, in legislation spanning 
most of the twentieth century. The interests of copyright holders would 
be fully protected. The interests of consumers would be protected. And 
the outcome would be consistent with the primary goal of our copyright 
regime since its inception--the greater production and wider enjoyment 
of original works.

                                

      Statement of National Association of Recording Merchandisers

    The topic of this hearing: ``Coming Soon to a Digital Device Near 
You'' should have been old news by now. Music retailers and wholesalers 
have been ready, willing and able to deliver secure online 
entertainment since 1999. It should have come already, and if it had, 
frustrated consumers would not have given Napster and other such peer-
to-peer music copying services the popularity they enjoy today.
    The members of the National Association of Recording Merchandisers 
(``NARM'') are retailers and distributors of sound recordings. We have 
played a central role in building the modern music business by 
partnering with record companies to advertise, merchandise and sell 
their products, by promoting new artists, by helping fight sound 
recording piracy, and most of all, by listening to consumers. Each of 
our retail members strive to be responsive to consumers in terms of 
price, service, selection, and many other areas that serve to draw 
customers and distinguish one retailer from another. Retailers bring 
these competitive urges to the Internet where new competitive elements 
are introduced, such as ease of site navigation and responsiveness to 
consumer privacy.
    Our members are responsible for the vast majority of all sales of 
pre-recorded music, and thus are well positioned to provide lawful 
access to music by downloading or streaming. Over 80% of our retail 
members have websites, and they are eager to be a part of digital 
distribution. The question this hearing has been called to ask is 
important: why isn't it happening?
    The short answer is because record companies, in their zeal to stop 
Napster-type file sharing, have taken the position that they can trust 
no one except other copyright owners. They have, therefore, ignored the 
opportunity which sits right in front of them.
    The greatest Napster-related problem retailers have is not the free 
music on Napster. Retailers have a long history of competing 
successfully with free goods. We compete with (but welcome) free music 
over the radio, with libraries, used CDs, and personal-use copying. We 
recognize that these secondary channels have their place in society, as 
not everyone is willing or able to pay full price for a new CD. Our 
national interest in the widest possible dissemination of creative 
works is the only basis for Congress to have conferred copyright 
protection in the first place.
    Retailers also compete with the free music coming from the record 
companies themselves: their record clubs routinely offer ``12 CDs for a 
penny'' promotions. With 8 million members per club, that's over 160 
million albums--over 1.6 billion song files given away just to gain 
market share.
    So if we are that good at competing with free music why are we 
here? We are here because the careful balance copyright law struck as 
part of the public bargain to encourage creation and dissemination of 
these works has been upset, and it must be restored as soon as 
possible.

                         The Copyright Monopoly

    This balance been upset in several ways, all of which depend on the 
unique characteristics of the copyright monopolies enjoyed by the major 
record companies. Copyright law secures to authors or artists, for 
limited times, certain exclusive rights. For purposes of this hearing, 
the most important exclusive rights are the right of reproduction, 
distribution and public performance. When exercised by individual 
recording artists, each of these rights will encourage broad 
reproduction, distribution and public performance of their works 
because such are the avenues by which artists can be compensated, and 
thereby encouraged to continue their creative endeavors. Because each 
author depends heavily upon the willingness of others to reproduce and 
distribute their works, each author has an incentive to offer 
reasonable terms. For example, music retailers would simply refuse to 
carry the works of an individual recording artist if that artist 
demanded an unreasonable price, or imposed unreasonable terms and 
conditions on how the sound recording could be merchandised or sold. 
However, when artists assign these rights to corporations that have 
amassed multi-billion dollar collections of these rights, so that just 
5 corporations control 80% percent of all of the sound recordings in 
the world, the ability of retailers to resist unreasonable terms is 
greatly diminished. No retailer can refuse to carry Destiny's Child, Yo 
Yo Ma or Ricky Martin for long--even if Sony Music embeds them with 
advertising and links to its own online store.
    Until recently, record companies could not control the distribution 
of copies of their sound recordings once title passed to another. 
Retailers and consumers were free to sell, lend or even give away 
lawfully made copies. Today, copyright owners have the power to make a 
sound recording ``time out'' after a certain number of plays or after a 
certain amount or time, the power to prevent a sound recording from 
playing on one device if it was first played on another, the power to 
make inoperable a sound recording received by gift, unless the person 
receiving it pays for it again. In short, thanks to digital technology, 
copyright owners today enjoy such a high level of control over their 
works that they hardly need copyright law at all.
    NARM contends, however, that copyright law never permitted such a 
high level of control because it was against the national interest to 
confer it. Doctrines of ``fair use'' and ``first sale,'' which have 
been codified into law should not be done away with unilaterally 
through technology. Rather, they should be viewed as the embodiment of 
important legal principles intended to protect the public welfare and 
further the national interest.
    The following are the matters we consider to be of greatest 
concern:

                                 Access

    Every retailer need not stock every sound recording, but because 
the five major record companies account for over 85% of all sound 
recordings, every retailer must at least offer some sound recordings 
from every major record company or go out of business. In the past, 
record companies needed access to virtually every retailer, since 90% 
of all sound recordings are sold through retailers. The digital future 
will turn bleak, however, if record companies can control who will get 
to compete in digital delivery, and reserve this market for themselves. 
Thus far, record companies have shown the most interest in cross-
licensing digital rights to each other, or to companies they control or 
in which they have invested. They have withheld rights from retailers 
who are perfectly capable of offering secure, compensated digital 
downloads, but who they no longer see as partners, but as competitors. 
We estimate that over 99% of the repertoire owned by copyright holders 
today remains off limits to legitimate retailers who are trying to 
compete with peer-to-peer file sharing.

                            Consumer Privacy

    Today anyone can walk into a record store, pay with cash, and not 
have to reveal their identity to the store. If a retailer is too nosy, 
a consumer can simply take their business elsewhere. Online, because a 
credit card and other personal information are required, most retailers 
have created privacy policies which let consumers know, in advance, 
what happens to the information the store collects. Of concern to us is 
that, thanks to digital technology, record companies are routinely 
engineering ways to learn the identity of the consumer, even without 
the knowledge or consent of the retailer who delivers the download. The 
data can be sold or used by the record company to market directly to 
the retailer's own customer. The retailer's own privacy policy will be 
meaningless. The consumer will wonder why a particular company with 
which they do no business seems to know so much about their music 
tastes.
    As Congress debates whether to impose minimum consumer privacy 
regulations upon online merchants, one thing should be non-negotiable: 
No online merchant should be forced to give up its customers to its 
suppliers. There is no question that secure digital distribution can 
prevent piracy without destroying privacy. There is absolutely no 
reason to allow copyright owners to leverage their copyrights into data 
mining.

                Antitrust Concerns: Vertical Restraints

    Never before have we seen the kinds of vertical restraints on music 
retailers that are today being thrust upon them by copyright owners. 
Retailers are being asked to sign license agreements that would 
effectively extend the copyright monopoly to every aspect of the retail 
channel. One popular approach, referred to as ``agent retailing,'' 
allows the retailer to offer the record company's music for consumer 
download, but the record company--not the retailer--sets the price, 
determines the warranty, dictates the replacement policy for defective 
downloads, selects which sound recordings will be offered, specifies 
how the download will be marketed and advertised, and even determines 
what it will look like on the retailer's web page. Such models raise 
serious antitrust concern because the retail level of distribution is 
the only place where true competition for copyrighted materials takes 
place.

               Antitrust Concerns: Horizontal Restraints

    After efforts to operate retail stores offering their own products 
exclusively failed, the record companies learned what retailers have 
known all along: Consumers do not go shopping by record label, but by 
artist and genre. The music business is not like selling batteries. You 
can't sell Ricky Nelson to someone who wants Ricky Martin.
    Since they could not compete with retailers individually, record 
companies are increasingly operating in concert, setting up joint 
ventures among themselves and seeking cross-licenses with each other--
to the exclusion of competitors. The likely framework for such ventures 
can be predicted by taking a look at record club licenses. The two 
existing record clubs are owned and operated by the major record 
companies, who crosslicense to each other the right to make each 
other's records. The licenses are on extremely favorable terms, and 
penalize artists by treating a large percentage of the licensed copies 
as ``promotional'' copies. The $2.50 licensed copy looks and sounds 
just like the $12.50 copy sold to the retailer because it is 
manufactured in the same factory using the same masters. The only 
significant difference is that by selling a ``license'' to reproduce, 
record companies hope to avoid their obligation under the Robinson-
Patman Act to not discriminate in their ``sales'' of like products to 
similarly situated retailers.
    Today, in the online world, a similar web of interrelationships 
among the major record companies is being spun which guarantees that no 
retailer can do business online without competing with an entity 
jointly owned and controlled by the major record companies. Consider 
the following: Bertelsman owns CDNow, which has strategic relationships 
with Sony and Time Warner. Sony and Time Warner are in negotiations to 
cross license films for digital distribution. Sony has also announced a 
joint venture with UMVD for a music subscription service called Duet. 
AOL Time Warner, EMI, BMG all own a piece of MusicNet. Bertelsman and 
UMVD have a joint venture site called ``Get Music''. All five major 
music companies became major shareholders in ArtistDirect. The major 
home video companies are working together on video-on-demand projects 
like MovieFly.

                 Copyright Law: The Right to Advertise

    It has long been understood that retailers of copyrighted goods 
enjoy the right to reasonably copy portions of the works, display them, 
and publicly perform them, where the purpose is to promote the sale of 
the works in question. Notwithstanding the copyright owner's exclusive 
right to publicly display a work, there is no question that booksellers 
can publicly display the books and magazines offered for sale. Just as 
the bookseller may allow patrons to leaf through and read books in the 
store without purchasing them, so too may a music retailer allow 
patrons to listen to the music in the store. Just as the bookseller may 
post a sample of a book's text on the Internet, so, too, may a retailer 
post a sound clip.
    Today, all of that is changing. Our members are reporting efforts 
by copyright owners to prohibit these forms of advertising without a 
license. The only effective way for retailers to advertise even pre-
recorded sound recordings over the Internet, for physical distribution, 
is to post an image of the artwork and offer a 30-second or so sound 
clip as a sample. BMI has taken the novel position that a 30-second 
sound clip, considered the industry norm within the bounds of fair and 
sensible use, is illegal absent authorization from the copyright owner. 
Some record companies are demanding that retailers get their permission 
even to post the graphics of the CD itself. There cannot possibly be 
any diminution in value to the copyright owner when retailers promote 
the lawful sales of the copyright owner's own works. The sole purpose 
for this seemingly irrational behavior appears to be to gain greater 
control over distribution. Indeed, at least one record company has 
offered to license these uses at virtually no cost, yet requiring a 
written acknowledgment that a license is required, and reserving for 
itself the right to withhold authorization to show graphics or offer 
30-second samples of any songs it chooses. Absolute and total control 
over distribution appears to be the sole objective.

           Copyright Law: Preservation of First Sale Doctrine

    Such total control over distribution is something Congress has 
historically insisted must never fall into the hands of copyright 
owners, because ``the policy favoring a copyright monopoly for authors 
gives way to the policy opposing restraints of trade and restraints on 
alienation.'' M. Nimmer, D. Nimmer, Nimmer on Copyright, Sec. 8.12[A]. 
Congress has provided that notwithstanding the distribution right, the 
owner of a lawfully made copy or phonorecord is entitled, without the 
consent of the copyright owner, to sell or otherwise transfer title or 
possession of that copy. 17 U.S.C. Sec. 109(a).
    Initially, copyright owners resisted the notion that Section 109(a) 
applied to digital works. They eventually acknowledged that the first 
sale doctrine continues to apply in the digital world,\1\ but now add 
the caveat ``in the absence of licensing or technological restrictions 
to the contrary.'' \2\ In other words, this federal right will exist in 
the digital world only as long as they permit it. NARM believes that it 
is preposterous to contend that a federal right as important as the 
first sale doctrine, established first by the courts and later codified 
by Congress, can disappear at the whim of the copyright owner either by 
use of licensing restrictions or a line or two of computer code. Yet, 
that is exactly what they intend to do: nullify a federal statutory 
right. Sony has decreed that anyone who purchases The Writing's On the 
Wall, a CD by Destiny's Child, installs it in their computer's CD-ROM 
drive and fails to return it to Sony within seven days after buying it 
from a record store, has lost their federal right to sell it or 
otherwise transfer title.\3\
---------------------------------------------------------------------------
    \1\ Report to Congress: Study Examining 17 U. S. C. Sections 109 
and 117 Pursuant to Section 104 of the Digital Millennium Copyright 
Act, U.S. Department of Commerce, National Telecommunications and 
Information Administration, March 2001, Part IV.
    \2\ Id., n. 101.
    \3\ The Sony Music Entertainment License Agreement is contained in 
the readme.txt file that accompanies the music files on the same CD. An 
excerpt showing the pertinent language is attached to this Statement. 
Another company's license agreement used for a download is also 
attached.
---------------------------------------------------------------------------
               Copyright Law: Selling What You Don't Own

    At bottom, technology is allowing copyright owners to enforce 
``licenses'' of rights they do not own, and to use rights they do own 
as leverage to require members of the public to give up their statutory 
rights.
    We have already heard one recording industry speaker talk about a 
future in which a consumer can select from a number of choices, and 
``maybe just choose to buy a license to listen to the music.'' On its 
face, such a statement may sound like consumers would be given more 
choices, but in reality, choice is being taken away. Copyright owners 
have never had the exclusive right to listen to music, and therefore 
have no right to sell licenses to listen. For example:

The reproduction right: A copyright owner may license the right of 
        reproduction, but it is an abuse of that right to demand 
        payment in the form of consumer data, to license it 
        discriminatorily so as to insure that some retailers fail while 
        others succeed, or to cross-license it among the other 
        copyright monopoly holders to the exclusion of retail 
        competitors.
The distribution right: A copyright owner may license another person to 
        distribute copies and phonorecords of its works, but it is an 
        abuse of that right to require that those who obtain lawful 
        ownership in the chain of distribution give up their statutory 
        right under 17 U.S.C. ' 109(a) to sell or otherwise transfer 
        title or possession without the copyright owner's consent, or 
        to license the distribution subject to technological 
        restrictions that prevent the owners from exercising those 
        rights.
The right of public performance: For a copyright owner to sell someone 
        permission to listen to the copyright owner's music is like 
        selling a license to read a book separate from the book itself. 
        Even when a copyright owner licenses to someone the exclusive 
        right of public performance, the copyright owner has no right 
        to dictate who can watch the performance. There is no exclusive 
        right of private performance of a work, much less an exclusive 
        right to listen to a private performance.

    Congress should stand firmly in favor of confining exploitation of 
copyrights strictly to the those rights conferred by Congress, and 
subject to the limitations imposed by Congress. It must not allow 
copyright owners to use technology and contracts of adhesion to limit 
consumer and retailer rights, nor to simply take control where Congress 
has clearly denied it.
    Retailers do not need the permission of record companies to sell 
pre-recorded sound recordings. They have the right to set their own 
prices, choose their customers, play the sound recordings in the store 
and stream short samples online, all without the authorization of the 
copyrights owners. Those rules should apply equally in the online 
world, but instead, copyright owners are licensing what they don't own, 
and enforcing those licenses by use of technological restrictions. If 
they are unwilling to abide by the Copyright Act in letter and spirit, 
it may be up to Congress or the courts to tell them, like the Fourth 
Circuit did in Lasercomb America, Inc. v. Reynolds, 911 F.2d 970 
(4th Cir. 1990), that they will lose their power to enforce 
their copyrights until they stop leveraging their copyright power into 
areas beyond the limits set by Congress.

                               Conclusion

    Today, we are asking that the first sale doctrine be respected for 
digital downloads just as it is for pre-recorded copies; that all 
retailers be allowed equal access to retail each record company's music 
library; that each retailer be allowed to compete on price, service, 
and privacy; that no retailer be required to get the copyright owner's 
permission to advertise the products they sell; and that no consumer be 
required to become part of the copyright owner's data mine as part of 
the price for listening to music. If our demands to the copyright 
community for freedom to compete, for freedom to advertise what we 
sell, and for freedom to protect our customers' privacy are not met, 
tomorrow we may be asking Congress for something more: We may be asking 
for antitrust investigations of these unfair trade practices, and for 
fair but compulsory licenses to make secure downloads and digital 
transmissions.
    NARM's retail members are confident that, given half a chance, they 
could offer the public a superior product and service to that offered 
by free peer-to-peer file copying. Although some record companies are 
beginning to respond to the concerns of retailers, the record 
companies, as a whole, are giving them no chance at all.
    NARM is the principal trade association for retailers and 
distributors of sound recordings. Its approximately 1,000 members are 
engaged in all aspects of music distribution to the consumer. For 
further information, please contact Pamela Horovitz, NARM's President, 
at (856) 596-2221.

            sony music entertainment inc. license agreement

    This legal agreement between you as end user and Sony Music 
Entertainment Inc. concerns this product, hereafter referred to as 
Software. By using and installing this disc, you agree to be bound by 
the terms of this agreement. If you do not agree with this licensing 
agreement, please return the CD in its original packaging with register 
receipt within 7 days from time of purchase to: Sony Music 
Entertainment Inc., Radio City Station, P.O. Box 844, New York, NY 
10101-0844, for a full refund.

1. LICENSE; COPYRIGHT; RESTRICTIONS.
    You may install and use your copy of the Software on a single 
computer. You may not network the Software or otherwise use or install 
it on more than one computer or terminal at the same time. The Software 
(including any images, text, photographs, animations, video, audio, and 
music) is owned by Sony Music Entertainment Inc. or its suppliers and 
is protected by United States copyright laws and its international 
treaty provisions. You may not rent, distribute, transfer or lease the 
Software. You may not reverse engineer, disassemble, decompile or 
translate the Software.
---------------------------------------------------------------------------
    SOURCE: Destiny's Child CD, The Writing's On The Wall, readme.txt 
file
---------------------------------------------------------------------------
SCHEDULE A--Business Rules
    In the absence of contrary Business Rules provided with a Content 
offer, the following default Business Rules shall apply to all UMG 
Content:
    1. You may only download Content to a portable device that is (i) 
compatible with the InterTrust Technologies Corp. digital rights 
management system, (ii) compliant with the requirements of the Secure 
Digital Music Initiative (SDMI), and (iii) compliant with UMG's content 
security requirements.
    2. You may not copy or ``burn'' Content onto CDs, DVDs, flash 
memory, or other storage devices (other than the hard drive of the 
computer upon which you installed the Software). In the future, UMG may 
permit you to make these types of copies of UMG Content to certain 
SDMI-compliant storage media.
    3. You may not transfer your rights to use any particular copy of 
Content to another. For example, you may not transfer your rights to 
another at death, in divorce, or in bankruptcy. This is not an 
exclusive listing; it is only a set of examples. Notwithstanding this 
Business Rule, you may email a Content Reference to another consumer to 
enable that consumer to purchase his or her own rights in Content.
    4. You may not transfer or copy Content (with the rights you have 
purchased) to another computer, even if both computers are owned by 
you. You will be able to copy locked Content to another computer, 
whether that computer is owned by you or not, but the rights you have 
purchased to use that Content will not travel with the copy. In the 
future, UMG may permit you to make these types of transfer of UMG 
Content along with the rights you have purchased.
    5. You may not print the photographic images, lyrics, and other 
non-music elements that are distributed with Content.
    6. When you purchase the right to unlimited use of Content, the use 
rights associated with that Content terminate upon your death.
    7. There is currently no free UMG Content. All rights must be 
purchased. The only exception to this rule is that 30 second audio 
clips may sometimes be made available by UMG without charge.
    8. UMG may revoke your rights to use Content pursuant to the terms 
of the foregoing License Agreement; in the case of a violation by you 
of the License Agreement; in cases of suspected fraud by you or 
another; in cases of a suspected security breach by you or another; in 
order to forestall or remedy any legal exposure to UMG or its 
affiliated companies; and in other situations in which UMG in its 
judgment believes it advisable to do so in order to protect Content, 
the Software, and/or UMG and its affiliated companies.

                                

            Statement of NWEZ.NET, Gloria Hylton, President

    Thank you for the opportunity to address this committee. I 
appreciate the chance to speak on behalf of the small independent 
webcaster. I feel our interests have not been represented in prior 
hearings on these issues of vital importance to our survival. I am not 
a lawyer and apologize in advance for any lapse in protocol in the 
following document and ask your indulgence and understanding as I try 
to enumerate our concerns and arguments.
    Here is an outline of the areas to be addressed in the body of this 
statement:
    I. An overall concern with the DMCA
    The inherent problems of allowing the RIAA and vested interests to 
frame and dominate copyright regulations on the Internet including 
discussion regarding:
     (1) `Individually' negotiated licenses; `Retroactive' royalty 
fees; Qualifications for a compulsory license; The illusion of `non-
interactivity'; Indirectly subsidizing engrained industries; 
Legislating technological discrimination; Determining appropriate sound 
recording copyright performance royalties (hereinafter referred to as 
sr royalties); The collection and distribution of sr royalties; DiMA 
and the DMCA;
    II. A brief historical overview of traditional business practices 
within the music industry and how this relates to the current state of 
affairs with copyright licensing on the Internet Background on NWEZ.NET 
and our mission/vision

                                Summary

    I. In 1998, with the passage of the DMCA, laws were enacted with 
serious ramifications for the emergent online entertainment 
marketplace. While I have no doubt Congress intended these laws ``. . 
.to promote the progress of science and useful arts. . .'' and that 
there are provisions within the act that do so, I argue that many 
provisions within this act have accomplished the exact opposite. I 
further argue that the provisions dealing with sound recording 
performance rights lobbied for by the RIAA were drafted so that the 
major labels could position themselves in a manner that would insure 
their continued control of the music industry and thwart companies 
posing any threat to that status. I believe the RIAA arguments offered 
to members of Congress in the DMCA hearings were intentionally 
misleading in much the same way the arguments for the now overturned 
`work for hire' amendment were misleading. I believe the ensuing 
actions taken by the labels in the digital arena have spoken much 
louder than their 1998 rhetoric.
    II. Areas in the DMCA or resultant of the DMCA that we believe 
should be addressed in regards to webcasting:
    (1) First and foremost, if webcasters are forced to pay sr 
royalties for the first time in the history of U.S. broadcasting, all 
webcasters should be assessed these rates on a fair and equitable 
basis. The RIAA should not be granted an anti trust exemption to 
negotiate `individual' webcasting licenses. While it is true that a 
blanket license to webcast is needed, the RIAA should not be able to 
grant these licenses on an `individual' basis. Standard blanket license 
guidelines with provisions for varying business models should be 
established and enacted. The current performance rights organizations 
ASCAP, BMI and SESAC have such licenses in place for songwriter/
publisher copyrights. These organizations have guidelines that are out 
in the open for anyone to examine, offering some insurance against 
preferential and biased licensing. On the other hand, the RIAA has been 
negotiating webcasting licenses in private, without public disclosure 
of the terms being reached. This arrangement has allowed a great deal 
of power to be wielded by the labels in the nascent webcasting field. 
Webcasters looking to secure investment capitol are desperate for a 
figure to place in their `RIAA Royalty' column. This puts them at a 
distinct disadvantage when negotiating deals. Most disturbing under the 
current arrangement, the labels can cut more favorable deals with 
companies they have equity stakes in (essentially making preferential 
deals with themselves) to the detriment of an open, fair and 
competitive marketplace. They can also negotiate to obtain equity 
stakes and/or promotional considerations from webcasters in exchange 
for licensing. The RIAA, for obtaining such advantages can in turn 
offer said webcasters lower up front royalty rates, excuse payment of 
upcoming `retroactive' royalty fees, and/or offer lenient application 
of the rules governing compulsory licensing. The labels can refuse to 
grant individual' licenses to those companies whose business models 
they dislike, creating a scenario whereby webcasters choosing not to 
`play ball' with the RIAA will find themselves competing against 
webcasters who have obtained unfair advantage in exchange for 
concessions they've yielded to the labels--concessions which may never 
be openly disclosed. You can see the inherent latitude for corruption 
within this arrangement. It is true that once the CARP panel sets 
general sr royalty rates (which coincidentally keeps getting pushed 
back) that all webcasters not making prior `individual' deals with the 
RIAA will be assessed these rates equally; however, we have no 
guarantee that there will be latitude within these rates for varying 
business models. I approached the copyright office with a desire to 
participate in the CARP proceedings and represent the interests of 
small, independent webcasters. I was informed that registering to 
participate in the CARP proceedings would make me financially 
responsible for paying the arbitrators a `yet to be determined and they 
could give me no idea of how much it would be' fee. Not having 
unlimited financial resources at my disposal I decided not to 
participate. I find it disheartening that in a government founded to 
represent `the people' the only people whose voices will be represented 
at the upcoming CARP proceeding will be those who can afford an 
undetermined entrance fee to be `in the room'. This naturally doesn't 
instill confidence in the fairness of the upcoming proceeding. 
Especially given such market deals' being offered for consideration by 
the RIAA as the one negotiated with the now defunct Soundbreak.com. 
Lisa Crane, the CEO who negotiated Soundbreak's licensing agreement was 
let go following the deal. She subsequently became a paid consultant, 
with the RIAA on her roster of clients. This is disconcerting to 
webcasters in the same way it was disconcerting to NARAS when Mitch 
Glazier, who authored the `work for hire' amendment was later hired by 
the RIAA. The inference is that the `market rate deals' being presented 
to the CARP panel are dubious at best. Nonetheless, once the CARP sets 
the standard rates for webcasters not negotiating individual' deals, 
these webcasters will be responsible for these fees retroactively back 
to the passage of the DMCA in 1998. This is particularly devastating to 
a nascent industry struggling to find profitability. I believe it is a 
deliberate attempt by the labels to control the entire webcasting 
industry. Perhaps this is what prompted Mark Cuban, founder of 
Broadcast.com, to sell his company and state on kurthanson.com, 
``What's the best business in the webcasting industry? Prepackaged 
bankruptcies to avoid the RIAA fees!'' Since `individual' webcasting 
deals are already in place, in lieu of adopting this suggestion I offer 
the following redress to this grossly prejudicial and industry 
crippling situation:
    SR Royalties should be applied from the time they're determined, 
not assessed retroactively. These royalties should begin when they are 
determined and be applied equally to all webcasting companies. 
Otherwise, those webcasters making `individual' deals may be excused 
from the `retroactive' charges, while those not making deals are forced 
to pay them. This effectively puts webcasters who do not deal with the 
major labels or whose business models are unappealing to the major 
labels out of business or at a distinct disadvantage. This goes against 
the very premise of our `free market' economy and gives the major 
labels mandated monopoly control over the entire webcasting industry. 
Arbitron statistics coming out of the NAB Convention show that 
households with broadband split their entertainment time equally 
between television, traditional radio, and the Internet. They also show 
that these households are equally likely to tune into a webcast-only 
station as a traditional radio station being rebroadcast on the 
Internet. They derive the conclusion that Internet radio will soon be 
able to sell advertising in the same way traditional radio does. Many 
players in this marketplace with oversized egos, budgets and spending 
patterns have come and gone. Those of us that have survived have done 
so through hard work and frugal spending. Do not punish us when the 
promise of profitability is only now on the horizon. It would be 
unfortunate if those building this business were forced out of business 
and webcasting were only viable for the huge corporate interests 
currently controlling the traditional music industry (and their 
`partners').
    The above commentary doesn't address the inherent problems of 
qualifying for a compulsory license to begin with. The variety of hoops 
a webcaster is required to jump through to be compliant for a 
compulsory license is arbitrary and unreasonable. Anyone conversant 
with webcasting realizes these regulations are onerous and a webcaster 
will most likely be unable to abide by these regulations in some way. 
This once again gives the RIAA negotiating power in the webcasting 
realm, as they are unlikely to monitor those webcasters making deals 
with them as closely as they will others. The threat of selective 
enforcement of these regulations is real. An argument could even be 
made that these regulations were intentionally drafted in a manner that 
makes compliance next to impossible. The most serious of these 
restrictions involves the limitation on the number of ephemeral copies' 
a webcaster can make to conduct webcasting operations. These 
restrictions are in stark contrast to land-based broadcasters, who are 
allowed to make as many ephemeral (digital!) copies as necessary to 
conduct normal broadcasting operations. I have a difficult time 
understanding the reasoning behind limiting a webcasters ability to do 
the same. These are copies strictly used by the webcaster themselves 
and are arguably `fair use'. Webcasters compliant for compulsory 
licenses are subject to many seemingly impossible regulations. For 
example, compliant webcasters are prevented under the `sound recording 
performance complement' from playing any four songs from a boxed set in 
a three-hour period. Does this mean every webcaster is responsible for 
knowing every combination of songs on every box set ever made and that 
their show hosts are responsible for memorizing these song combinations 
so they don't play them during any three-hour time span? Compliant 
webcasters cannot announce song titles prior to playing them, although 
their counterparts in traditional broadcasting regularly do so. 
Compliant webcasters are required to give the song title/artist name/cd 
title while the song is being played, although their counterparts in 
traditional broadcasting are not. Compliant webcasters cannot even 
engage in the time-honored tradition of taking `requests' from their 
listeners. To do so would be considered `interactive'. Traditional 
broadcasters are not expected to abide by the same rules of operations 
as `compliant' webcasters. This not only favors the old technology for 
streaming music over the new technology for streaming music, but also 
completely ignores the true potential of the webcasting experience--
where fans can interact directly with show hosts and even artists. To 
be compliant, a webcaster must essentially ignore those attributes of 
interaction inherent to the Internet that would attract and hold an 
audience and make his business successful. One could argue this is the 
intent of compulsory regulations to begin with, especially given that 
labels are gaining equity stakes in many webcasting companies which 
they conveniently then write `individual' licensing agreements for. 
(The fact that labels are able to obtain equity interest in webcasting 
companies at all is disconcerting to a layman like myself and smacks of 
conflict of interest--given the labels also license these entities and 
have a vested interest in what content is disseminated through them).
    The stranglehold definition of `interactive' being applied by the 
RIAA to webcasting not only unfairly discriminates against new 
technology but also completely disregards the reality of the digital 
realm. At this point in time if you tune into a webcasting station like 
NWEZ.NET you will find that your`stream' cuts out periodically due to 
`buffering' due to `net congestion'. It is therefore highly unlikely 
anyone would attempt to capture digital copies of current webcasts, no 
matter how `interactive' or `non-interactive' they were. If they did 
they would get some pretty awful copies. Copies made from your 
traditional broadcasting stations would be much better quality and 
easier to obtain. Having said that, however, I recognize that the 
coming prevalence of broadband connections combined with the continual 
advent of tivo-like consumer devices will eventually make it so any 
Internet programming anywhere will face potential capture and copy. 
This will be true for both interactive and non-interactive webcasts. 
Non-interactive webcasts could easily be saved in their entireties and 
later edited to get rid of unwanted material, essentially allowing the 
consumer to make them `interactive'. Given this certainty it is my 
belief that all blanket webcasting licenses should be considered to be 
`interactive.' No matter what you want to believe, the reality is that 
for all intents and purposes all broadcasts have the potential to be 
stolen, even in the analog world. HBO has no way of knowing if they are 
streaming a `performance' or a `copy' of a movie into a home. Whether 
they stream a performance or a copy is totally dependent on how the 
person receiving it behaves. If they hit record on their VCR then HBO 
just streamed them a copy even though they intended to stream them a 
performance. In much the same manner you can't legislate away drug use 
or prostitution, a thief will always find a way to steal if that's what 
they truly want to do.
    It's interesting to note, however, that just like the videocassette 
recorder brought about new revenue and actually benefited the industry 
that feared and fought it, the Internet has actually increased consumer 
demand and interest in music. In a related aside, Cd Baby, the largest 
retailer of unsigned artist cds on the Internet, reports that 1 in 20 
purchasers at Cd Baby buys a cd after hearing the band on Napster. This 
information is gathered in the section of the order form asking why the 
customer is buying the cd. This statistic surprised me because I would 
have imagined most Napster users were only interested in known major 
label acts. It seems to support the theory that many people use Napster 
more as a listening' and `pre-screening' device.
    If file sharing can be argued to potentially benefit recording 
artists it is difficult to imagine webcasting, interactive or not, 
hurting them. On the contrary, webcasting, like traditional 
broadcasting, offers recording artists and copyright holders beneficial 
promotional opportunities. Labels have traditionally paid to insure 
their products are heard over the airwaves. Cyberwaves are the airwaves 
of the future. We are all familiar with the previous payola' scandals 
in the music industry. It can be argued that `payola' still exists in 
the mainstream marketplace but has been officially removed by the 
advent of the independent promoter' who is paid to solicit label 
offerings to broadcasters and in turn pays broadcasters to secure 
spins.
    Why should webcasters now pay labels to offer them these same 
promotional opportunities? I believe the labels recognized the Internet 
as a way to continue to control what musical content is promoted, but 
without paying a middleman. In fact, now the promotional channels will 
have to pay them! At NWEZ.NET we frequently get grateful e-mails from 
unsigned artists receiving `cyberplay'. I just received an e-mail from 
a talented band based in London who sold a cd to a NWEZ.NET listener 
directed to their website after hearing their song on our station. This 
is the kind of activity I feel the RIAA fears. Artists currently have 
the ability to record and manufacture professional sounding product. 
The Internet offers them the opportunity to sell that product to a 
global market. Distributors like Cd Baby can ship and warehouse 
product. The missing link is promotion.
    If the Internet offers promotional opportunities to all artists via 
webcasting stations, without regard to their affiliation with a major 
label, this threatens the long-term existence of intermediaries like 
record labels. The ability of fans to directly contact recording 
artists and/or buy their product without the necessity of that artist 
going through the major label system is what I believe the industry is 
trying to avoid. Already we're seeing artists begin to organize via the 
Internet and reject traditional record label practices. The Rosenbergs 
are a wonderful example of this. This unsigned power pop band received 
notoriety for turning down the opportunity to go on farmclub (a major 
label and Internet cooperative venture) and perform alongside the well-
known band The Counting Crows. They took exception to the 23 page, one-
sided binding `potential' record label deal given to them prior to the 
appearance which gave the label many options to tie up the band if they 
chose to do so (including laying claim to their website!) The 
Rosenbergs shared this contract with fellow unsigned artists, warning 
them about the potential consequences of appearing on the show. 
Farmclub then changed their appearance stipulations as a result of the 
following publicity, to the benefit of all future unsigned artists 
appearing on the show. The Rosenbergs went on to sign a groundbreaking 
new record deal with a small UK-based label, Discipline Global Mobile, 
where they retain the rights to their sound recording copyrights and 
enjoy a band/label arrangement that is a fair partnership. Another 
example of an Internet success story is Emily Richards, who has made a 
good name for herself via MP3.Com. Richards had a more extensive tour 
last summer as an unsigned artist than No Doubt did on their first 
major label tour. MP3.Com is a prime example of an Internet company 
offering many advantages to artists previously excluded by the 
mainstream music industry. The labels have aggressively pursued 
lawsuits against MP3.Com and other innovative Internet music services. 
By garnering equity stakes in webcasting companies and making it 
prohibitive for companies not licensed by them to operate, the record 
labels are insuring their long-term existence and continued dominance 
in the music industry. Accordingly, copyright legislation that allows 
the established industry giants to bully their way to dominance in the 
new marketplace indirectly subsidizes those corporate interests and 
perpetuates their essentially monopolistic powers to the detriment of 
Internet entrepreneurs, recording artists, and the public at large.
    Along similar lines, it is blatantly unfair to assess sr copyrights 
to webcasters and not to traditional broadcasters. Why should the new 
medium for streaming music pay these royalties when the established 
medium for streaming music never has and is not slated to do so in the 
future? Simply because the NAB is a more powerful lobbying organization 
than the RIAA? This inequity illustrates the unfortunate influence huge 
corporations and their `collective' lobbying groups possess in 
affecting public policy. Sr royalties only apply to webcasters. 
Webcasters are essentially penalized for enabling the `progress of the 
arts through the new science of Internet technology', or, in effect, 
embodying the very intent of copyright. This, to spite the fact 
traditional broadcasters operate at a healthy profit and most 
webcasters have yet to break even. This gives traditional broadcasters 
yet another advantage over webcasters and allows them once again to 
play by different rules, essentially legalizing technological 
discrimination. I was happy to see the recent copyright office decision 
requiring traditional broadcasters to pay sr royalties when 
rebroadcasting their signals over the Internet. Naturally, if these 
fees are to be assessed in the digital realm at all they should be 
assessed to every webcaster, whether or not that webcaster also has a 
land-based station.
    Also along similar lines, sr royalty rates should be equitable to 
the royalty rates for songwriting/publishing. Rumor has it the RIAA 
will try to obtain 3-10 times the rate collected for songwriting/
publishing royalties for sr royalties. Why should the recording of a 
song be worth more than the creation of that song in royalty fees? 
Simply because the owners of the vast majority of sound recording 
copyrights have a large lobbying organization? The argument that labels 
invest a lot of money into recordings doesn't follow. Many new bands 
are signed on the basis of cds they've already recorded. My friend 
Bobby Gaylor was picked up by Atlantic after recording his own cd. 
Atlantic did not rerecord the cd but went with the recording `as is'. I 
guarantee you that unsigned artists aren't spending hundreds of 
thousands of dollars on cd production and many are ending up with 
product as radio ready as major label artists. I state this to 
illustrate that recording a professional quality cd doesn't have to 
cost hundreds of thousands of dollars.
    Another point of contention is who will collect and distribute 
these new digital royalties. I suggest the major labels should not be 
allowed to be the sole organization doing so. I would go further and 
suggest an independent accounting agency be put in charge of collection 
and distribution of these royalties to insure fair and open 
bookkeeping. Major label artists already complain of improper 
accounting of their artist royalties and difficulty in attempting to 
examine record label's books. It would therefore seem appropriate that 
labels not even be allowed to enter this marketplace. They have 
inherent conflicts of interest. I would also strongly suggest that the 
legislated artist cut of the sr royalty be further defined to insure 
artists receive direct payments in perpetuity. Otherwise, following a 
staged public relations year by the RIAA where artists are paid 
directly, artists may never see these monies due to the nature of 
record label recoupable' clauses.
    In another example of improper representation, DiMA, the 
organization meant to represent webcasters at the congressional 
committee hearing regarding the DMCA amendments, was ill prepared for 
the hearing at which it spoke. The organization had hastily organized 
only days prior to the event. While their intentions may have been 
good, this gave them a distinct disadvantage when arguing these issues 
with a wellresearched, well-established and extremely powerful lobbying 
organization, the RIAA. DiMA represented only 7 Internet companies at 
the time of the hearing, none of which were small independent 
webcasters. DiMA represented only 2 large webcasters, one of them being 
Broadcast.com, which had yet to have it's IPO. Seth Greenstein, the 
lawyer speaking on behalf of DiMA at the hearing, explained that DiMA 
could not afford the RIAA's threatened litigation should the DMCA 
amendments not pass. Both webcasters in DiMA were looking to attract 
investors and worried that potential problems with the RIAA might scare 
them off. I submit that DiMA was therefore unable to adequately 
represent the majority of webcasters at the time they spoke at the 
hearing and ceded these amendments be added to the DMCA. I was also 
told off the record (and therefore cannot confirm) by another party 
involved with the proceedings that the DiMA members involved in the 
hearing all secured certain allowances in exchange for not challenging 
the DMCA amendments. It is interesting to note that an attorney 
observing the negotiations taking place between the RIAA and DiMA (in 
regards to the DMCA) commented in a CNET article: ``It's a victory for 
the RIAA that the webcasters were willing to concede that the digital 
performance right does apply to them. I think the law weighed a little 
more heavily on the side of the webcasters, but the RIAA leveraged its 
commercial position to gain the concession by the webcasters.''
    III. The RIAA leveraged its commercial position to gain the 
concession by the webcasters at the hearings dealing with the DMCA 
amendments. It's to be expected. The RIAA continues to leverage their 
position in the digital marketplace.
    The major labels have always operated in a manner meant to control 
and manipulate the music industry to their advantage and to the 
detriment of the artists they supposedly represent and the public they 
supposedly serve. Recently they were found guilty of price fixing cds 
with their `minimum advertised pricing' policies with retailers, 
gouging consumers out of millions of dollars. We have all seen the VH1 
`Behind the Music' stories which chronicle the lives of recording 
artists who have little money to spite selling millions of records. We 
have read Courtney Love's rundown of major label math, which shows how 
a recording artist selling over a million records ends up owing their 
label money. Record label contracts are notoriously one-sided and 
difficult to break. While the RIAA claims to be representing recording 
artists, the majority of recording artists do not own their own sound 
recording copyrights. The RIAA tried to further extend their grasp over 
these particular copyrights with the `work for hire' amendment. This 
amendment was deceptively described to Congress as a means of 
protecting artist websites. The DMCA amendments were deceptively 
described as a means to facilitate webcasting. The major label rhetoric 
obviously cannot be trusted. The reasons they offer for the regulations 
they request are often far removed from their true goals. Major labels 
have historically dealt in unfair business practices such as `payola', 
with ties to organized crime. I beseech you to treat their arguments 
with the appropriate skepticism and remember that the RIAA's sole 
purpose for existence is to manipulate public policy to the advantage 
of the oligopoly that is the major label system.
    Recently, the RIAA has broken new ground in invading the privacy of 
our home computers to prosecute copyright offenders like the college 
student from Oklahoma whose computer was seized for file sharing 
violations. As a private citizen I request that you not lose sight of 
the importance of privacy issues when the RIAA requests more copyright 
controls. I also request that you consider the importance of fair use 
to the public good. I further request that you not allow a grasping and 
greedy industry to reign in the development of exciting technological 
advances. There are many rights in the balance of these copyright 
issues besides those of control.
    IV. NWEZ.NET is a mom and pop webcasting station based in 
California. We specialize in live shows that go out with both audio and 
visual streams and include an interactive chatroom. We are proud to 
offer programming outside the mainstream media box, giving 
opportunities to unsigned and specialty artists excluded from most 
traditional airwaves. All the show hosts at NWEZ.NET are allowed to 
choose their own musical programming. If you'd like more information on 
our station please visit us at http://nwez.net and click on the `About 
NWEZ' link.
    V. In conclusion, I call upon the sense of justice and fair play of 
the honorable Senators of the Judiciary Committee and ask you to 
provide a way for NWEZ.NET and stations like us to survive. Reexamine 
and revise webcasting provisions lobbied for by the RIAA and provide 
allowances for the reality of Internet webcasting. Do not allow current 
unreasonable compulsory licensing restrictions or punitive 
`retroactive' royalty payments to squash the promise of a more open, 
artist-friendly, and consumer-responsive marketplace. Do not allow the 
Goliath to slay the Davids. Thank you for your time and consideration.

                                

            Statement of Video Software Dealers Association

    The Video Software Dealers Association (VSDA) submits this 
statement for the record of the hearing on online entertainment and 
copyright law. We wish to make the committee aware of our concerns 
about business models for online entertainment that could undermine the 
first sale doctrine of copyright law and the public policies it serves, 
harm retail competition, and erode consumer privacy.

                   Video Software Dealers Association
 
   Established in 1981, VSDA is a not-for-profit international trade 
association for the $19 billion home entertainment industry. VSDA 
represents more than 2,000 companies throughout the United States, 
Canada, and 22 other countries. Membership comprises the full spectrum 
of video retailers (both independents and large chains). VSDA also 
includes the home video divisions of all major and independent motion 
picture studios, video game and multimedia producers, and other related 
businesses which constitute and support the home video entertainment 
industry.

                      Copyright Law and Home Video

    Copyright law, and particularly the first sale doctrine (codified 
at 17 U.S.C. 109(a)), provides the legal foundation that has 
facilitated the phenomenal growth of the home video industry over the 
past two decades. Section 109(a) provides that, notwithstanding a 
copyright owner's distribution right, the owner of a particular copy or 
phonorecord lawfully made under U.S. copyright law ``is entitled, 
without the authority of the copyright owner, to sell or otherwise 
dispose of that copy or phonorecord.'' The first sale doctrine gives 
retailers the right to rent and sell videos and video games without 
restriction by the copyright owner, and benefits society by promoting 
retail competition and maximizing distribution of copyrighted works.
    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 become. For an overwhelming majority of 
America's 250 million plus consumers, renting and buying prerecorded 
videocassettes, digital versatile discs (DVDs), and video games 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, approximately 15 million households already own 
a DVD player. It is estimated that almost 2.8 billion videotapes and 
DVDs were rented in 2000. Approximately onethird 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 2000 was a record $8.25 billion. An additional estimated 
$10.8 billion was spent purchasing videotapes and DVDs, with DVDs 
representing 32% of the total dollars spent.
    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 motion picture 
studios. Total revenue to the studios from video sales and rentals 
totaled $10.7 billion in 2000. Over the past several years, revenue 
from home video has accounted for more than half of the studios' gross 
domestic film revenue.
    Video retailing, while experiencing some of the consolidation and 
slowing of growth of a maturing industry, remains a vibrant enterprise. 
As of early 2000, there were 20,000 video rental specialty stores in 
the U.S. These stores included the major public chains such as 
Blockbuster, Hollywood Video, 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 8,000 
non-specialists, primarily supermarkets and drugstores, also rent video 
as a regular part of their business, and numerous other retail outlets 
sell prerecorded videos.
    Thus, the freedom to rent and resell videos guaranteed by the first 
sale doctrine has provided consumers with access to affordable, quality 
entertainment that they can enjoy in their homes, generated a 
tremendous revenue stream for the copyright owners, and created a 
thriving industry of primarily small, community-based businesses.

                   Threats to the First Sale Doctrine

    The benefits of the first sale doctrine to society, consumers, 
copyright owners, and video retailers are threatened by some of the 
trends in online entertainment. Unfortunately, the very same 
characteristics of digital formats that enable copyright owners to 
prevent the making of illegal copies and phonorecords can also 
unintentionally limit or purposefully suppress retail competition and 
prevent the owners of lawfully made copies from exercising rights 
Congress and the courts have granted to them.
    For example, access control technology can be used to prevent or 
control lawful use as easily as it can be used to deter copyright 
infringement. The use of such technological locks on lawful use are the 
digital equivalent of preventing anyone from reading a book unless they 
make a payment to the copyright owner every time they wish to do so. In 
addition, some contracts of adhesion (such as ``click-through'' end 
user license agreements) incant that a sale is not a ``sale'' but a 
``license'' that restricts the purchaser's ability to use and transfer 
ownership of the product. In a digital environment, ``click here to 
agree'' is a non-negotiable step in an automated transaction, leaving 
no opportunity to object.
    These concerns about the erosion of copyright law in online 
entertainment are not theoretical. Miramax is currently licensing the 
reproduction of the movie ``Guinevere.'' Despite the fact that anyone 
who downloads the movie is the owner of a lawfully made copy, and 
enjoys the federal right to transfer title or possession of their legal 
copy by sale, lease, or gift, the technology employed with the download 
ensures that the owner must watch the movie within 24 hours of 
unlocking it, after which the movie is rendered an inaccessible 500 
megabytes of code. The person who downloaded it still owns that copy, 
and still has the right to sell it or give it away, but no one can ever 
watch it again without paying the copyright owner again for that 
privilege.
    VSDA is opposed to any erosion in the rights provided by the first 
sale doctrine. We believe these mechanisms are not legitimate uses of 
technology but rather attempts to use technology to create heretofore 
unrecognized ``rights'' and to provide copyright owners' unprecedented 
control over the lawful use and distribution of copyrighted works-
control Congress has expressly denied to them in the Copyright Act.
    Video retailers recognize and support the rights of copyright 
owners to prevent infringement of copyrighted works. VSDA actively 
supported the enactment of the Digital Millennium Copyright Act (DMCA) 
and specifically the anti circumvention provisions in the understanding 
that these provisions were intended to deter piracy. We have supported 
the positions of copyright owners in Napster, Inc. v. A&M Records, D VD 
Copy Control Ass 'n, Inc. v. Bunner, and similar cases. VSDA also 
actively works with the Motion Picture Association of America to 
identify individuals that are infringing the copyrighted works of its 
members. Thus, we do not align ourselves with those whose apparent goal 
is to make meaningless the legal protections that copyright law 
provides to prevent piracy of covered works.
    At the same time, we cannot support those in the copyright owner 
community who apparently seek to disable the protections that copyright 
law provides to legal owners of lawfully made copies of copyrighted 
works. Copyright owners have taken the position that they are free to 
make the first sale doctrine inoperative through access control 
technology and end-user license agreements. Because the first sale 
doctrine furthers the important public policies of promoting 
competition and maximizing dissemination of copyrighted works, the 
rights it confers cannot be extinguished either by unilaterally imposed 
technological controls or agreement between the parties. To conclude 
otherwise would make the rights granted by the first sale doctrine 
merely contingent on the technological prowess or goodwill of copyright 
owners.
    A digital copy authorized by the copyright owner that is delivered 
by downloading onto a consumer's computer or portable storage medium 
(such as a writeable compact disc or DVD) is no different from a 
digital copy authorized by the copyright owner that is delivered in the 
form of packaged media (such as a prerecorded videocassette or DVD). 
Both are lawfully made copies and are fixed in tangible media. The 
first sale doctrine applies to both.
    Allowing consumers to exercise their right to rent or resell 
lawfully acquired digitally delivered works will not facilitate 
unlawful exhibition, reproduction, or distribution of copyrighted 
works.
    The technology exists today, through digital rights management, to 
facilitate the lawful distribution of such works while respecting the 
first sale doctrine and deterring piracy. In addition, the Ninth 
Circuit's decision in Napster, Inc. v. A&M Records demonstrates that 
copyright owners have adequate legal remedies at their disposal to 
address online piracy.

                           Antitrust Concerns

    Access control technology and end-user license agreements can also 
be abused to suppress retail competition by concentrating greater 
control over distribution in the hands of a small number of 
entertainment conglomerates, to the detriment of consumers and small 
businesses. It must be understood that entertainment products are not 
fungible. A consumer that seeks to view ``Gladiator'' will not be fully 
satisfied by substituting ``Traffic.'' 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 excessive access control technology and hidden 
or ``click-through'' end-user license agreements would deprive 
consumers of the value and flexibility that 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 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.
    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 direct distribution by copyright owners. Consumer choice 
and competition would be further eroded.
    More than 50 years ago, the Supreme Court in United States v. 
Paramount Pictures, 334 U.S. 131 (1948), struck down pooling 
arrangements and joint ownership agreements designed to give movie 
studios control over the distribution of motion pictures in theaters. 
It also struck down the ``block booking'' practices in which the motion 
picture studios refused to license one or more copyrighted movies 
unless another undesired copyrighted movie was accepted. In United 
States v. Loew's, Inc., 371 U.S. 38 (1962), the Supreme Court once 
again condemned block booking and related efforts to suppress 
independent distributor decisions. Online distribution of entertainment 
by copyright owners armed with restrictive technologies raises the 
potential for the types of anticompetitive behavior that the Supreme 
Court forbade in Paramount and Loew's.

                            Privacy Concerns

    Digital download systems that require consumers to surrender 
personally identifiable information or require retailers to provide 
information about their customers to copyright owners also raise 
concern. Such data mining mechanisms may violate the Video Privacy 
Protection Act (18 U.S.C. Sec. 2710) and force retailers to share their 
customer lists with potential competitors. Knowledge of which movies a 
consumer chooses to rent or buy from their local retailer, whether in a 
brick and mortar store or online, should remain off limits to third 
parties, including the owners of the copyrights in those movies.

                               Conclusion

    While VSDA is deeply concerned about the overreaching that appears 
to be part of some emerging business models for online entertainment, 
we do not call upon Congress to resolve this dispute at this time. 
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. We must proceed 
carefully lest we upset this well-crafted, time-tested balance. 
Accordingly, we do not currently support any revision of the first sale 
doctrine. The doctrine has proven itself and facilitated the best 
system for delivering movies and video games to the home available 
anywhere in the world-and greatly favored copyright owners along the 
way. Although congressional action may provide much-desired clarity, we 
believe that our differences with copyright owners should be resolved 
in industry-to-industry discussions, if at all possible. However, 
should copyright owners seek to eliminate effective competition from 
retailers and thereby deny consumers the widest access to movies and 
games at the lowest possible prices, we will seek prompt and decisive 
congressional action.
    Thank you for the opportunity to submit our views.

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