[Senate Hearing 107-905]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-905
 
 COMPETITION, INNOVATION, AND PUBLIC POLICY IN THE DIGITAL AGE: IS THE 
         MARKETPLACE WORKING TO PROTECT DIGITAL CREATIVE WORKS?
=======================================================================



                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 14, 2002

                               __________

                          Serial No. J-107-67

                               __________









         Printed for the use of the Committee on the Judiciary
                               __________

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85-758                         WASHINGTON : 2003
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                       COMMITTEE ON THE JUDICIARY

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

       Bruce A. Cohen, Majority Chief Counsel and Staff Director
                  Sharon Prost, Minority Chief Counsel
                Makan Delrahim, Minority Staff Director


















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of 
  Delaware.......................................................    40
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas.....    87
Cantwell, Hon. Maria, a U.S. Senator from the State of Washington    48
Edwards, Hon. John, a U.S. Senator from the State of North 
  Carolina.......................................................    55
Feinstein, Hon. Dianne, a U.S. Senator from the State of 
  California.....................................................    35
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......    11
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................    38

                               WITNESSES

Barrett, Craig R., Chief Executive Officer, Intel Corporation, 
  Santa Clara, California........................................    14
Hughes, Justin, Visiting Professor of Law, University of 
  California at Los Angeles, Los Angeles, California.............    28
Kraus, Joe, Founder, DigitalConsumer.com.........................    22
Parsons, Richard D., Chief Executive Officer Designate, AOL Time 
  Warner, Inc....................................................    41
Taplin, Jonathan, Chief Executive Officer, Intertainer, Inc., 
  Culver City....................................................    18

                         QUESTIONS AND ANSWERS

Responses of Mr. Kraus to questions submitted by Senators Leahy, 
  Thurmond, Biden and Hatch......................................    65
Responses of Mr. Taplin to questions submitted by Senators Leahy, 
  Biden, Thurmond, DeWine and Hatch..............................    84

                       SUBMISSIONS FOR THE RECORD

Felten, Edward W., Associate Professor of Computer Science, 
  Princeton University, Princeton, New Jersey, statement.........    89
Home Recording Rights Coalition, Gary J. Shapiro, Chairman, 
  Washington, D.C., statement....................................    93
Motion Picture Association of America, Jack Valenti, President 
  and Chief Executive Officer, Washington, D.C., statement.......   112
Recording Industry of America, Hilary Rosen, President and CEO, 
  Washington, D.C., statement....................................   120
Video Software Dealers Association, Encino, California, statement   125


















 COMPETITION, INNOVATION, AND PUBLIC POLICY IN THE DIGITAL AGE: IS THE 
         MARKETPLACE WORKING TO PROTECT DIGITAL CREATIVE WORKS?

                              ----------                              


                        THURSDAY, MARCH 14, 2002

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, chairman of the committee, presiding.
    Present: Senators Leahy, Biden, Feinstein, Durbin, 
Cantwell, Edwards, Hatch, Specter, and Brownback.

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

    Chairman Leahy. I appreciate you all being here. I just 
checked with Senator Hatch. He is delayed at another meeting 
and so we are beginning.
    This is not a paid promotion for Amtrak, but Mr. Parsons is 
not here because he has been spending several hours trying to 
fly down from New York. Of course, he could have been here a 
couple of hours ago if he had taken the train on a foggy 
morning. That is just a personal thing.
    When I first arrived in the Senate, television broadcasts 
were no longer just in black and white. Record players had high 
fidelity and the excitement of stereophonic sound. The personal 
computer, e-mail, high-definition television, CDs, DVDs, 
wireless communications devices and the Internet were yet to be 
released and now they are among our most ubiquitous tools. We 
talk to our friends, we use in our work, we keep in touch with 
our families, we listen to music, we watch a movie, we play a 
video game, and all of it is almost like second nature.
    Each new tool has spawned new opportunities, entirely new 
industries, new ways to package and sell products, and new ways 
for consumers to enjoy copyrighted works. It is no surprise 
that the intellectual property generated in this country is an 
economic engine that is the envy of the world.
    I would note that in the New York Times this morning Amy 
Harmon has an excellent article which actually covers much of 
what we are talking about--``Piracy or Innovation: Hollywood 
Versus High-Tech,'' with a picture of Stephen Jobs and Michael 
Eisner on it. I am going to put that in the record because it 
so well spells out and encapsulates some of the debate going 
on.
    There have been hearings recently in the Commerce 
Committee. I agreed with some of the things that the movie 
industry, Mr. Eisner and Mr. Valenti said, and I agreed with 
some of the things that the high-tech industry said. But I had 
significant disagreement with some of the things that Mr. 
Eisner and Mr. Valenti and some of the high-tech people said.
    I mention this because it points up the differences of 
opinion in both the members of the Senate and within the 
various industries. As the article by Ms. Harmon points out, 
there are these differences. I say this because until the 
differences are resolved, certainly no legislation will pass 
this year. I hope everybody will understand that. Those who 
have to advise their clients, you can advise them without a lot 
more consensus. No legislation will pass this year.
    The entertainment industry certainly has not fully made 
their case, but the high-tech industry hasn't either. And if 
you have a case where the cases haven't been made definitively, 
then I don't think the Congress can act.
    The challenge of protecting music and motion pictures and 
sound recordings and computer software and other copyrighted 
works in digital formats has been the focus of the Judiciary 
Committee's sustained attention over the past few years. I have 
worked in close partnership with Senator Hatch and other 
members of this committee to keep our copyright laws up to 
date.
    We want to protect the rights of creators. We also want to 
ensure that consumers enjoy a vast selection of new and 
different educational, entertainment, and other copyrighted 
products. We also appreciate, having focused on these issues 
for so long, that new technological developments pose new 
challenges about how to protect copyright works and create new 
business models to deliver those products to customers 
securely, and so forth.
    New technologies often initially at least appear to trump 
intellectual property protection, but we have also found in the 
end they many, many times open new opportunities for artists, 
new choices for consumers, and often business models have to 
change accordingly. Protecting intellectual property, which has 
been within the jurisdiction of this committee since 
establishment in 1816, under another Vermonter as chairman, 
involves far more than arcane legal issues and requires a 
careful balance among the rights and interests of consumers, 
creators and innovators.
    We were well aware of these new challenges in 1998 when 
Senator Hatch and I worked closely together on the Digital 
Millennium Copyright Act, the DMCA, to advance the goals of 
protecting digital copyrighted works and promoting the 
development of innovative technologies.
    At the time, this new law was praised by Jack Valenti, of 
the Motion Picture Association of America. Mr. Valenti is one 
of the most respected voices up here on Capitol Hill and he 
said that ``offering intellectual property the full weaponry of 
the law to protect voyages in cyberspace from thieves who have 
previously determined that stealing creative works is very 
rewarding and very low risk.''
    A core provision of the DMCA barred the unauthorized 
circumvention of technological measures used effectively by 
content owners to prevent unauthorized access to copyrighted 
works. It left to the private sector the important decisions of 
what technological protection measures to develop and use to 
protect digital works or whether to use any protection measure 
at all.
    Technology has been the bane of content owners who are 
rightfully dismayed at the rampant online piracy of valuable 
works. I can't overemphasize how concerned all of us are here 
to think of people with copyrighted works that are stolen. But 
technology has also been pivotal to their protection. Since 
passage of the DMCA, great progress has been made to develop 
technical tools to protect and manage digital rights.
    Multi-industry groups involving technology companies, 
consumer electronics companies, move studios and other content 
owners have developed technologies to protect digital content 
delivered to consumers on DVD and CD, over satellite, cable and 
broadband systems, and over the Internet.
    Content owners are using these new digital rights 
management tools to develop and experiment with new business 
models for delivery of content to consumers. In the past few 
months, new sites like Pressplay and Musicnet have offered 
legitimate sources for Internet users and music lovers to 
access music online, protected by digital rights management 
technology that has been chosen and suits the needs of the 
owners. Today, we are going to see Mr. Taplin's Web site for 
consumers to enjoy video on demand, also protected by digital 
rights management tools that fit his business model and protect 
the movies from unauthorized copying.
    But it is not a perfect world, and three significant gaps 
in protection of digital works remain. First, movie and TV 
programming owners are concerned about the theft of their 
digital works distributed in unprotected over-the-air 
broadcast, the so-called ``broadcast hole.'' This gap in 
protection has important policy implications, since the lack of 
copy protection for digital broadcasts poses the risk that 
high-quality, digital video content will only be available on 
cable or satellite, where digital rights management technology 
is available.
    Some content owners have warned that this could lead to a 
decline in high-quality content available on free over-the-air 
terrestrial broadcasts. The same multi-industry group that 
successfully developed the copy protection system used on the 
DVD is working on technical specifications for a ``broadcast 
flag'' that adds bits to broadcasts to prevent redistribution 
online.
    Second, content owners are concerned about the audio-visual 
content delivered ``in the clear'' to the analog sets that are 
a staple in American households. They are concerned about them 
being converted into unprotected digital format and posted on 
the Internet for free downloading. The most promising technical 
solution for this so-called ``analog hole'' appears to be 
watermarking copy control technology, and there have been a lot 
of multi-industry meetings on that.
    Finally, all content owners are concerned about peer-to-
peer distribution services that allow the downloading of vast 
selections of valuable content for free. The hard reality is 
that unless the content is protected at the outset of the 
distribution chain, I am not aware of any easy technical 
solution to stop online piracy over these systems, other than 
tough enforcement of the laws.
    So despite the strides that have been made over the past 
few years to find technical solutions that protect digital 
works in a variety of distribution channels and forms, some are 
now telling the Congress that progress in finding technical 
solutions to the remaining gaps in protection are at an 
impasse. As a result, they are seeking congressional 
intervention to give the information technology companies a 
limited time to find solutions, or else turn the entire job of 
developing digital rights management systems over to a 
government agency. That strikes me as wrong-headed.
    In an era when technology is changing so fast, to think 
that we are going to, by government fiat, determine what that 
is going to be, we will be back to the same kinds of things 
that slowed the development of good TV reception and a lot of 
other things.
    As I cautioned when the Hatch-Leahy distance education bill 
passed last summer, the copyright owners are a diverse group 
and some may want more flexibility. A government-mandated 
technical standard may produce a one-size-fits-all technology 
that may not suit the purposes of all content owners and may 
end up stifling innovative new technologies and 
implementations. Such a technology will not pass the U.S. 
Senate. There is no guarantee that the government agency will 
select the best technology to become the American standard, or 
in any shorter time period than the voluntary, industry-led 
process currently underway.
    America's creators, innovators and consumers have and will 
continue to gain a great deal if the private sector works 
cooperatively to ensure that digital content can be distributed 
efficiently and securely. In my view, the private sector is 
best situated to guarantee that innovation, both technological 
innovation and creative innovation, continues without 
limitation or inhibition.
    I remember some of the communications systems that our 
Government has put together for everything from Air Force One 
on through, and great talk about the millions of dollars spent 
and good they were, and usually they were about one-quarter as 
good as what they could have bought off the shelf in any 
company in America.
    Government regulators are simply not close enough to the 
marketplace to be in the best position to craft the kinds of 
standards that will protect the vital and vibrant asset that is 
given to consumers around the globe by America's entertainment 
and copyright industries.
    So we will keep on working on this. Senator Hatch and I 
would ask that senior executives at media, information 
technology and consumer electronics companies get more involved 
in the discussions underway about digital rights management 
systems and make sure that the people participating in those 
talks meet on a regular basis. We urge you to make sure that 
they have the appropriate level of seniority, know-how and 
experience to keep the negotiations moving forward and not 
simply have negotiations for the sake of having negotiations.
    You may want to have monthly conference calls with your 
peers, whatever works best, but have people that can actually 
give an answer. I hope you will be in touch with each industry 
sector leader to make sure that we are doing something that is 
timely, consumer-friendly, technically feasible, and cost-
effective. Ms. Rosen and Mr. Valenti and others have been 
briefing us about these discussions for years. I have taken 
part in some of them. I would hope you could send Senator Hatch 
and me regular updates on what you are doing.
    We have set up a new page on the committee Web site to post 
these progress reports. You see them over on that screen, and I 
would hope that people would use them. It is called 
``Protecting Creative Works in a Digital Age'' and it can be 
found at www.judiciary.senate.gov. Senator Hatch and I have 
worked hard on this and we want your comments.
    For those are following this debate, we have also provided 
links to relevant legislation and committee hearings. We have 
an e-mail address where comments may be sent and we are going 
to post some of these comments. I am doing this to make this as 
available as possible, not just for those who are within this 
room, but whether they are sitting in Provo, Utah, or Bethel, 
Vermont, or anywhere else, they can do it.
    [Information on the committee Web site follows:]




    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    [The prepared statement of Senator Leahy follows:]

                   Statement of Senator Patrick Leahy

    When I first arrived in the Senate television broadcasts were no 
longer just in black and white and record players had high-fidelity and 
stereophonic sound. The personal computer, email, high-definition 
television, CDs, DVDs, wireless communications devices and the Internet 
were yet to be created. Now these are among the ubiquitous tools we use 
today to do our work, talk to friends and family, listen to music, 
watch a movie, or play a video game. Each new tool has spawned new 
opportunities, entirely new industries, new ways to package and sell 
products, and new ways for consumers to enjoy copyrighted works. It is 
no surprise that the intellectual property generated in this country is 
an economic engine that is the envy of the world.
    Challenge of New Technologies. The challenge of protecting music, 
motion pictures, sound recordings, computer software and other 
copyrighted works in digital formats has been the focus of the 
Judiciary Committee's sustained attention over the past few Congresses. 
I have worked in partnership with Senator Hatch, and other Members of 
this Committee, to keep our copyright laws up to date to protect the 
rights of creators and ensure that consumers enjoy a vast selection of 
new and different educational, entertainment and other copyrighted 
products.
    We appreciate, having focused on these issues for so long, that new 
technological developments pose new challenges about how to protect 
copyrighted works and create new business models to deliver those 
products to consumers securely, cost-effectively, and conveniently. New 
technologies may initially appear to trump intellectual property 
protection, but in the end they open new opportunities for artists and 
new choices for consumers. Protecting intellectual property, which has 
been within the jurisdiction of this Committee since its establishment 
in 1816, involves far more than arcane legal issues and requires a 
careful balance among the rights and interests of consumers, creators, 
and innovators.
    DMCA. We were well aware of these new challenges in 1998, when I 
worked closely with Senator Hatch on the Digital Millennium Copyright 
Act, ``DMCA,'' to advance the complementary goals of protecting digital 
copyrighted works and promoting the development of innovative 
technologies. At the time, this new law was praised by Jack Valenti of 
the Motion Picture Association of America as ``offering intellectual 
property the full weaponry of the law to protect its voyages in 
cyberspace from thieves who have previously determined that stealing 
creative works is very rewarding and very low risk.'' (Testimony before 
the Senate Foreign Relations Committee, September 10, 1998). A core 
provision of the DMCA barred the unauthorized circumvention of 
``technological measures'' used effectively by content owners to 
prevent unauthorized access to copyrighted works. The new law left to 
the private sector the important decisions of what technological 
protection measures to develop and use to protect digital works--or 
whether to use any protection measure at all.
    DRM Progress. Technology has been the bane of content owners, who 
are rightfully dismayed at the rampant online piracy of valuable works, 
but it is also pivotal to their protection. Since passage of the DMCA, 
great progress has been made to develop diverse technical tools to 
protect and manage digital rights in various media. Multi-industry 
groups, involving technology companies, consumer electronics companies, 
movie studios and other content owners, have developed technologies to 
protect digital content delivered to consumers on DVD and CD, over 
satellite, cable and broadband systems, and over the Internet.
    Content owners are using these new digital rights management tools 
to develop and experiment with new business models for delivery of 
content to consumers. Just in the past few months, new sites like 
Pressplay and Musicnet have offered legitimate sources for Internet 
users and music lovers to access music online--all protected by digital 
rights management technology that has been chosen and suits the needs 
of the owners. We will also see today Jonathan Taplin's Web site for 
consumers to enjoy video-on-demand, also protected by digital rights 
management tools that fit his business model and protect the movies 
from unauthorized copying.
    DRM Gaps. This is not a perfect world, however, and three 
significant gaps in protection of digital works indisputably remain. 
First, movie and TV programming owners are concerned about the theft of 
their digital works distributed in unprotected over-the-air 
broadcasts--the so-called ``broadcast hole.'' This gap in protection 
has important policy implications since the lack of copy protection for 
digital broadcasts poses the risk that high-quality, digital video 
content will only be available on cable or satellite, where digital 
rights management technology is available. Some content owners have 
warned that this could lead to a decline in high-quality content 
available on free over-the-air terrestrial broadcasts. The same multi-
industry group that successfully developed the copy protection system 
used on the DVD, is working on technical specifications for a 
``broadcast flag'' that adds bits to broadcasts to prevent 
redistribution online.
    Second, content owners are concerned about the audio-visual content 
delivered ``in the clear'' to the analog TC sets that are a staple in 
American households being converted into unprotected digital format and 
posted on the Internet for free downloading. The most promising 
technical solution for this so-called ``analog hole'' appears to be 
watermarking copy control technology--and this solution is also the 
subject of multi-industry meetings.
    Finally, all content owners are concerned about peer-to-peer 
distribution services that facilitate the downloading of vast 
selections of valuable content for fee. The hard reality is that unless 
the content is protected at the outset of the distribution chain, there 
is no easy technical solution to stop online piracy over these systems, 
other than tough enforcement.
    Problems with Legislated Mandates. Despite the great strides that 
have been made over the last few years to find technical solutions to 
protect digital works in a variety of distribution channels and forms, 
some are now telling the Congress that progress on finding technical 
solutions to the remaining gaps in protection are at an ``impasse.'' 
(Testimony of Peter Chernin, at hearing before Senate Commerce 
Committee, February 28, 2002, at p. 91; testimony of Michael Eisner, 
id., at p. 92). As a result, they are seeking congressional 
intervention to give the information technology companies a limited 
time to find solutions or else turn the entire job of developing 
digital rights management systems over to a government agency. This 
strikes me as wrong-headed.
    As I cautioned when the Hatch-Leahy distance education bill, the 
TEACH Act, S. 487, passed the Senate last summer, ``copyright owners 
are a diverse group, and some owners may want more flexibility and 
variety in the technical protection measures available for their works 
than would result if the government intervened too soon and mandated a 
particular standard or system.'' (Congressional Record, June 7, 2001, 
S. 5990). A government-mandated technical standard may produce a one-
size-fits-all technology that may not suit the purposes of all content 
owner and end up stifling innovative new technologies and 
implementations. There is no guarantee that the government agency will 
select the best technology to become the American standard or in any 
shorter time period than the voluntary, industry-led process currently 
underway, to the long-term disadvantage of both content owners and 
technology companies.
    Marketplace Solutions. America's creators, innovators and consumers 
have and will continue to gain a great deal if the private sector works 
cooperatively to ensure that digital content can be distributed 
efficiently and securely. Deployment of effective anti-piracy tools to 
fill the remaining gaps in coverage is critically important because the 
absence of such tools may affect the development of new product 
offerings--whether for broadband or consumer products.
    In my view, the private sector is best situated to guarantee that 
innovation--both technological innovation and creative innovation--
continues without limitation or inhibition. Government regulators are 
simply not close enough to the marketplace to be in the best position 
to craft the kinds of robust standards that will protect the vital and 
vibrant asset that is given to consumers around the globe by America's 
entertainment and copyright industries.
    Monitoring of Progress by Committee. These are important issues, 
and this Committee will remain fully engaged, as we have in the past, 
in protecting the rights and interests of content owners and consumers, 
while fostering technical innovation. To assist us in that effort, 
Senator Hatch and I would ask the senior executives at media, 
information technology, and consumer electronics companies to get more 
involved in the discussions underway about digital rights management 
systems, and make sure that the people participating in those talks 
meet on a regular and frequent basis. We urge you to make sure that 
they have the appropriate level of seniority, know how and experience 
to keep the negotiations moving forward in a productive, timely manner. 
For example, you may want to have a monthly conference call with your 
peers where you talk about the progress of the various working groups--
and help break through the inevitable roadblocks. We hope that you will 
also be in touch with each industry sector leader to make sure that 
solutions are not only consensus-based, technically feasible and cost 
effective, but also timely and consumer friendly. Jack Valenti, Hilary 
Rosen and others have been briefing us about these discussions for 
years. We would ask that leaders from the content and information 
technology companies send us regular updates every two months to keep 
us posted on the state of the negotiations for finding solutions to the 
remaining gaps in protection for digital content, and how the interests 
of consumers are being addressed.
    These progress reports are important not just for this Committee 
but for many stakeholders, including Internet users and consumers of 
digital content. The Committee has set up a new page on the Committee 
Web site to post these progress reports. The page is called 
``Protecting Creative Works In A Digital Age: What Is At Stake For 
Content Creators, Purveyors and Users?'' It can be found at 
[www.judiciary.senate.gov]. For those who are following this important 
debate, we have also provided links to relevant legislation and 
Committee hearings. We hope to hear from many stakeholders, consumers 
and Internet users on this issue and, particularly, as progress reports 
are made and posted. We will have an email address where comments may 
be sent and portions of those comments will be posted for perusal on 
the site.
    We appreciate that complicated problems do not lend themselves to 
quick and easy solutions, and we stand ready to help move these private 
sector discussions to a timely conclusion. We know that legislation may 
be necessary to implement some of the intra-industry agreements that 
are reached and we want to be in a position to move promptly and 
thoughtfully when the time is ripe.

    Chairman Leahy. I turn to Senator Hatch and ask him for his 
comments.

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

    Senator Hatch. Well, thank you, Mr. Chairman. We have long 
worked together on legislation dealing with copyright and other 
intellectual property laws. We have all worked hard to balance 
the interests, and done so in a bipartisan fashion. You have 
cited the landmark Digital Millennium Copyright Act, which 
clarified the application of copyright law to the digital world 
in a way that fostered the growth of technology and which sets 
the floor upon which today's discussion really builds.
    Our intellectual property laws govern property rights that 
inhere in the creative work we enjoy over the Internet, over 
the television, radio, cable and satellite systems. Copyright 
and other intellectual property laws give creators the 
incentive and protection they need to make their movies and 
music and stories and artworks available to us.
    In making intellectual property policy, technology 
continues to challenge us, but we have attempted to meet those 
challenges. In passing the Digital Millennium Copyright Act 
just three years ago, we sought to ensure that copyright owners 
would make their works available on the Internet by clearly 
applying the protection of copyright law to the digital world 
in a way that also allowed technology to grow and develop.
    Our committee also worked with the Commerce Committee to 
take advantage of new technology to make local television 
signals available over satellite in the Satellite Home Viewer 
Improvement Act--an advantage I hope will not be undermined by 
anticompetitive mergers.
    This hearing today discusses issues related specifically to 
additional technological protections for copyrighted content 
transmitted over digital networks and the Government's role. 
There are precedents for legislation in this area. 
Specifically, the Audio Home Recording Act required all home 
audio recording device makers to conform to the Serial Copy 
Management System, which allowed unlimited first-generation 
copying of music but stopped second-generation copying. The 
Digital Millennium Copyright Act included a provision adopting 
the so-called Macrovision standard for copy protection of 
analog videotapes in all video cassette recorders, while 
ensuring that certain programming continues to be freely 
available for copying by television viewers.
    The lesson, I think, is we have been here before and we 
have met the challenge when technology has thrown down the 
gauntlet. I think it is your preference, however, as well as 
mine, that the market work these issues out, if it can. On the 
other hand, when it cannot, Congress can facilitate a 
resolution that ultimately benefits consumers and creators, the 
studios, and technology companies.
    With respect to market resolution of the specific issues at 
hand, there seems to be something approaching consensus on the 
technology and use of the so-called ``flag'' in digital 
broadcasts that can allow digital home recording of broadcast 
programming, but will stop further redistribution of those 
recorded programs outside the home network to the general 
public via the Internet.
    Plugging the ``analog hole,'' as it is commonly referred 
to, is more problematic, but likely solvable. This is the 
problem that occurs when a digital file is converted to an 
analog signal for viewing or listening and loses any digital 
instructions that may have been included in the original 
digital packet. Finally, there is almost no consensus on a 
technical or policy front with regard to Internet file-sharing 
or general Internet distribution.
    While philosophically we agree that the market, with its 
business and technical expertise, ought to try to solve these 
issues, I think there is a useful role for Congress, too, in 
reaching or implementing creator- and consumer-friendly 
agreements in at least three ways.
    First, we can help set deadlines and push for agreement 
where there may be deadlocks that ultimately hurt both artists 
and consumers. Second, we can help set balanced objectives and 
priorities. And, third, we can codify consensus policies or 
minimum standards.
    The growth of broadband opportunities for many of our 
constituents is stalled, and it may be helpful for Congress to 
encourage all parties to get agreement when it is best for the 
markets, consumers and artists. I also believe it is necessary 
for Congress to help ensure that consumer expectations will be 
more fully respected than they might otherwise be in private 
agreement.
    For example, I would like to be certain that as new 
controls are placed on digital content that consumers are 
allowed to make legitimate personal copies, as they have done 
before, and use those copies as they have been accustomed to 
doing. Music fans want to take their music with them in the 
car, on the beach, to a party. Movie and sports fans want to 
watch on their big screens, not just on their computer 
monitors.
    Now, let me state clearly as we discuss consumer rights and 
expectations that we all should not forget that consumers will 
have nothing to enjoy if there was not the incentive for 
artists and creators to develop entertainment content and share 
it with us.
    Moreover, as the HDTV market has demonstrated, without 
digital content there will not be sales of digital electronic 
devices. As with many things, this is a balancing act, but if 
there is one thing Congress does regularly, it is balance 
interests, sometimes not very well.
    Consumers want rich content. To get the creators of that 
rich content to share it in emerging interactive digital 
systems, they must be assured that destructive misuse will not 
undermine their businesses. On the other hand, consumers also 
want to use and enjoy that content with the advanced ease, 
superior quality, and enhanced enjoyment that the new digital 
systems will allow.
    In another context, Mr. Chairman, I have said that if the 
media and technology companies will focus on the people at the 
two ends of their networks--the artists and the audience--they 
can benefit for everybody from end to end. We can learn from 
the lessons of the Napster case. This has been a cautionary 
tale to those who would leave the issues to the law of the 
jungle and protracted litigation.
    I should also say that you certainly don't want litigation 
right now with our courts literally half empty in certain 
circuits. I just couldn't resist.
    Chairman Leahy. I agree with you. I wish you had allowed 
some of those nominees to go through during the six years you 
were chairman.
    Senator Hatch. We never had a situation as bad as it is 
now.
    I should also say you certainly don't want litigation right 
now. This is something I would like to see us avoid. But I 
sincerely hope the ongoing music industry conflicts will not be 
replicated in the video context, which has been avoided to some 
degree by the slow rollout of broadband.
    However the issues of the Napster case are resolved--I have 
been calling for years for a market-based, fair resolution to 
those issues--that case may suggest that some involvement by 
Congress is necessary to ensure that technology and 
intellectual property work together for consumers and creators.
    Finally, we must remember that the Internet is 
international. As ranking member of the International Trade 
Subcommittee of the Finance Committee, I know too well that 
intellectual property is our number one export, and we need to 
do all we can to ensure that our trading position remains 
strong and that our trading partners work with us in using 
digital networks as avenues for legitimate trade. We must 
continue to ensure that foreign countries will provide adequate 
and effective protection and that their laws are not eroded as 
they face new challenges posed by new technologies.
    In conclusion, I also want to reemphasize my and Chairman 
Leahy's interest, and others on this committee, in call for 
ongoing informational updates from the negotiating parties and 
for input from everyone who has an interest in these issues via 
our Web site. I want to encourage the parties--the content 
community and the information technology community--to continue 
and redouble your efforts to find common ground. These are 
complex issues and with the right resources I am confident that 
you can resolve all of these problems.
    I think it would be helpful for us to get a variety of 
views and regular updates on the ongoing private discussions. I 
should say that if this drags on to the point where it hurts 
intellectual property, creators and consumers, then I think we 
here on the committee will introduce balanced legislation.
    So, Mr. Chairman, I look forward to the testimony today and 
I want to thank all of those who are testifying.
    Chairman Leahy. Thank you very much.
    Our first witness will be Craig Barrett. He is Intel's 
chief executive officer. Mr. Barrett had a very distinguished 
career as a teacher, an author and academic. I understand, Mr. 
Barrett, that you are the author of a college textbook on 
materials science that is used today throughout the country. So 
we feel very fortunate to have you here, and please go ahead. 
Your whole statement, of course, will be made part of the 
record, but go ahead and hit us with the points you want us to 
remember.

 STATEMENT OF CRAIG R. BARRETT, CHIEF EXECUTIVE OFFICER, INTEL 
                          CORPORATION

    Mr. Barrett. Certainly, Senator. If I had a digital 
recorder here today and I could have recorded yours and Senator 
Hatch's comments and then obtained your copyright license to 
play it back into the record, that would suffice to give my 
present position.
    I really have four points I want to make. First of all, the 
high-tech or information technology industry does care about 
intellectual property and copyrighted content. It is the basis 
of our industry, it is the lifeblood of our industry.
    Second, the industries--the IT industry, consumer 
electronics industry and the content industry--are working 
together in a voluntary, consensus fashion to create 
technological solutions to copyright protection. I think that 
that process can continue effectively without broad Government 
mandates and will be the most effective way to move the 
technology forward and to protect content.
    Third, I think you will continually hear that the basis for 
content protection is really protection at the source. Once 
content is delivered in a free, streaming digital format into 
the Internet, it is very difficult to recall it or protect it, 
and I will make a few comments about that later on.
    Fourth, I completely agree with both of your comments that, 
in fact, this is a complicated issue where we have to worry 
about protecting intellectual property as well as protecting 
the rights and expectations of consumers as we move from an 
analog to a digital world. So there has to be some balance 
between content protection, copyright protection and consumer 
expectations, where we have educated consumers in the analog 
world as to what to expect. And now we move into a digital 
world and they probably carry the same expectations with them.
    Just a very few expansive comments on those four points. 
First, the high-tech industry probably loses four times the 
dollar content that the content industry or the movie industry 
and the music industry loses on an annual basis to piracy. The 
estimates are $11 to $12 billion a year for the high-tech 
industry, primarily in software licenses which are pirated. 
That compares to about $3 or $3.5 billion for the content 
community. I think that gives a relative measure of how 
important it is to our industry to protect intellectual 
property.
    Second, the IT industry has devoted an extensive amount of 
time, hundreds of millions of dollars, hundreds of man-years of 
effort, working with the consumer electronics industry and the 
content industry to promote technical solutions to copyright 
protection.
    I have in front of me, if you would care to look at them, 
about three or four inches of technical specifications which 
are in the industry. These cover DVD audio, recordable media, 
and protecting content over home networks. You can go into any 
consumer electronics store such as Circuit City today and buy 
either content or equipment which conforms to these 
specifications. So over the last six years, we have been doing 
much more than just talking about the issue. Technical 
solutions are in the marketplace today.
    The basis for these technical specifications are really 
protection of content at the source, and then simply not 
passing content on to equipment or facilities that do not 
respect the rights of the content owners. So if the equipment 
doesn't honor the rules, then the content doesn't move.
    In the six years that the copy protection working group, 
comprised of the IT, consumer electronics and content 
industries, has been working, we have addressed many issues. As 
you pointed out accurately in your opening statement, we are 
working on terrestrial high-definition TV broadcasting and a 
probable solution there, including a flag to monitor that 
content and to protect that content. On solving the analog 
hole, we expect to have solutions proposed and tested within 
the next few months. And perhaps the biggest issue is the one 
you mentioned, which is the peer-to-peer issue of moving 
unprotected content from computer to computer. I will make a 
few comments about that later on.
    This morning, I am pleased to be seated next to Mr. 
Parsons' chair, and hopefully he will show up in a few minutes. 
Being seated next to Dick is important from the standpoint that 
AOL Time Warner and Intel have worked very closely together in 
terms of technological protection of content over the years.
    We firmly believe that copyright technical solutions are 
forthcoming from the technical working group. We firmly believe 
that in some instances there very well need be narrow, mandated 
Government involvement here, such as the ability to encrypt or 
put a flag in digital TV signals. But primarily we believe the 
consensual process among our industries is working, as 
evidenced by the technology we have already put in the 
marketplace.
    I would like to make a few comments about the peer-to-peer 
piracy issue. Again, the core issue here is protecting content 
at the source. It is very difficult to protect unencrypted 
content once it is just a digital stream on the Internet, and 
completely stopping the piracy of unprotected content is very, 
very difficult for the mere reason that it is impossible to 
determine the difference between lawful content--home movies, 
home audio--on the Internet and copyrighted content on the 
Internet.
    There is no solution to this problem today, although the 
industry is working toward possible solutions. I believe there 
is no silver bullet here. It will be a combination probably of 
legal solutions, business solutions, technology solutions and 
legislative solutions.
    There have been suggestions made that digital devices could 
continuously monitor content streaming on the Internet and only 
respond or only play protected copyrighted content back, 
authorized content. I think this solution is a bit simplistic. 
As I mentioned, there is no way to tell the difference between 
unprotected copyrighted content and legal home content once it 
is nothing more than a stream of ones and zeroes on the 
Internet.
    Chairman Leahy. If people think their computers crash now--
--
    [Laughter.]
    Mr. Barrett. Let alone that, but the mere prospect of 
trying to monitor all the content that flies on the Internet, I 
think, carries with it some severe limitations. There is a 
technical limitation. This would mean you would have to have in 
digital format all the copyrighted content in the world. You 
would then have to compare the streaming information on the 
Internet to that database of copyrighted content, and once you 
found a match do something with it. I am not sure what you 
would do once you found it. You could deny service.
    Chairman Leahy. I think you go back to what you said 
earlier that if you can't protect content at the source, then--
--
    Mr. Barrett. It is a tough issue if you don't protect it at 
the source.
    Chairman Leahy. I might want to come back to that more. I 
just want to make sure we give everybody a chance to testify 
while all members are here, and I am going to come back to the 
points you were making and I do want to go to Mr. Taplin.
    Mr. Barrett. Certainly.
    [The prepared statement of Mr. Barrett follows:]

     Statement of Craig R. Barrett, Chief Executive Officer, Intel 
                              Corporation

    I appreciate the opportunity to discuss the IT industry's work to 
create effective tools to protect copyrighted digital content. In sum, 
my message is this: we care about piracy, we are providing solutions to 
solvable problems, and those solutions come best through a voluntary, 
consensual process--not regulatory mandates.

IT is working to protect content and reduce piracy

    Some in the content community have suggested that the IT industry 
does not care about reducing piracy of copyrighted works, that we 
actually promote piracy to grow our industry. Nothing could be further 
from the truth. We place the highest value on protecting intellectual 
property, and have worked in countless forums over decades to support 
and defend IP rights. We know that without adequate protection, content 
owners will not make their content available over digital networks. 
Piracy for the high-tech industry means losses of about 12 billion 
dollars a year; for the content owners, it is about 3.5 billion a year. 
It is a plague for all of us. That is why our industry has spent 
hundreds of millions of dollars of our own money, and has devoted the 
time of hundreds of engineers, to developing solutions.

Good progress has been made

    This work--carried out in close cooperation with Hollywood studios 
and consumer electronics companies--has now extended over six years. It 
has resulted in new technologies for the protection of content made 
available through DVD'S, pre-recorded audio media, and ``secure 
network'' systems such as cable and satellite. We are moving forward 
with specifications for protecting over-the-air digital television 
broadcasts, which we expect to be finalized around the end of this 
month. These new tools, when used properly, protect content ``at the 
source''--when it is created--and prevent piracy in any environment, 
including the Internet. Content is simply not passed on to devices that 
don't honor the rules. These technologies are available and in use 
today to protect content delivered to home networks.
    In addition, we are now jointly studying watermark technologies 
that may help with the so-called ``analog hole'', which can be 
generally understood as analog outputs on consumer electronic devices. 
Content ported through these outputs could be reconverted to 
unprotected digital format. Watermarks may provide a means to ensure 
that protection rules survive as content transitions to analog, 
outputs.
    I want to emphasize that, during these six years of work, there has 
not been a single protection issue put forward by the content community 
that we have not responded to with solutions. And those solutions are 
successful: many of our partners in this work--such as AOL-Time/Warner, 
who I am pleased to appear with today--are moving forward to take 
advantage of these new protection technologies to bring protected 
digital products to market.
    AOL-Time/Warner and Intel are in agreement that where there are 
identifiable, effective solutions to specific problems that would 
require limited government action to implement--as in the case of 
digital television broadcasting--then limited directives have a useful 
and productive role to play. As Dick has stated, we are developing a 
joint statement of principles on these points. But consensus here is 
the key.

Peer to peer: IT cannot police the Internet

    As I have said, the solutions we have developed thus far work when 
the content is protected from the source. However, when we look at the 
explosive growth of peer-to-peer networks, combined with the ready 
availability of unprotected content, we are faced with a wholly 
different problem. Completely stopping the piracy of unprotected 
content--whether it consists of older creative works that have already 
been uploaded to computers, movies recorded off a theater screen with a 
camcorder, or copies of new films stolen from studios by employees--is 
beyond the reach of what known technologies can do. No single 
solution--technical, legal, legislative, or business--exists to fully 
address this form of piracy.
    Some content providers suggest that all digital devices could 
continuously examine all data downloaded from the Internet and analyze 
it to sort out copyrighted from uncopyrighted material. We don't think 
this would work. First, once unprotected content is digitized, absent a 
watermark that can carry embedded usage rules (which must be attached 
to the source file), your home movies look no different to a computer 
than a Hollywood film would. Thus, this approach would require either 
forbidding access to unprotected content by the PC--including home 
movies--unless you submit your home movies for review and 
certification; or, it would require the creation of an online database 
of copyrighted works against which suspect content could be compared. 
This would be analogous to the creation of a worldwide fingerprint 
database, only orders of magnitude more difficult.
    Beyond these considerations, there are serious consumer privacy 
concerns about any technology that would ``look'' at everything you 
send or receive over the Internet or require review and approval for 
home movies and other personal content. Our company suffered a 
substantial consumer backlash from a much more benign technology, the 
processor serial number, because of the possibility of consumers being 
tracked through that identifier. Here we are talking about actually 
screening transmitted content without consent, which in other contexts 
we would consider a gross invasion of privacy.
    I mention these difficulties not as a justification for piracy, but 
simply to illustrate the complexity of the problem. Solving it will 
require hard work from all relevant industry sectors.

Broad government mandates are not a solution

    Nevertheless, there are content providers who urge upon us a 
pervasive system of government regulation to implement these ideas, and 
advocate the development of an ``open'', mandatory standard that would 
implement this Internet surveillance. It is suggested that this 
surveillance could be accomplished with an ``eighty cent chip''.
    This is pie-in-the-sky, back-of-the-envelope cost estimating that 
has no relation to the realities of our industry. There are at least 
three fundamental issues, which are ignored in this scenario.
    First, as I have said, their is no known technical solution to the 
peer-to-peer piracy of unprotected content, and thus direct costs of 
any future solutions cannot be estimated.
    Second, broad regulatory mandates would place all of the monetary, 
product performance costs, and loss of consumer goodwill on the 
shoulders of the IT industry. In the end, regulatory mandates for an 
unspecified technology of unknown cost amounts to a compulsory license 
imposed upon the IT industry.
    Third, and most important, there are the hidden costs of slower 
innovation, diversion of investment capital, and lost ground in the 
global race for technological leadership that would follow from the 
insertion of a bureaucratic process into our product design work. These 
are costs that we cannot afford to pay.

The DMCA: balancing copyrights, innovation, and consumer expectations

    In short, our message is that the marketplace has largely worked, 
in precisely the manner envisioned by the DMCA. The DMCA generally 
rejected mandates in favor of consensual standards. It also granted 
powerful new enforcement tools to content owners to give strength to 
the technical solutions arrived at in inter-industry efforts. Having 
been given this direction by Congress, we in the IT industry have come 
through with effective content protection tools that are available 
today, at reasonable cost--certainly for new digital media products.
    In all of this, however, we cannot lose sight of the consumer. 
Pursuit of maximum control is not the highest value; there are other 
values at stake, most importantly consumers' expectations for lawfully 
using both technology and content for personal use. The challenge is to 
permit the consumer flexibility and portability in his or her home and 
personal environment, yet prevent unlawful reproduction and 
redistribution. Balance is the key, but finding that balance can at 
times be difficult. Consider these examples:

         ``Cul-de-sac'' technologies that do not allow content 
        to be played on different digital devices. I have here an 
        example of that: the ``SACD'', which is not playable in a PC. 
        This is designed to thwart the customer's ability to make 
        playlists of individual songs or download the songs to a 
        portable player in a protected environment, and it amounts to a 
        limitation on the right to make audio copies, which is 
        recognized in the law.
         The accommodation of legitimate fair use of content. 
        One good example of this problem, which this Committee has 
        grappled with, is fair use of content in the distance-learning 
        environment.

    Congress needs to give careful consideration to the question of how 
consumer expectations for using technology and content, which developed 
in an analog era, will be preserved in the digital age.

    Chairman Leahy. Jonathan Taplin is the CEO of Intertainer, 
which offers broadband video on demand film services in 35 
markets, including Vermont and Utah. In some ways, I would like 
to hear about Mr. Taplin's earlier career when he was road 
manager for Bob Dylan and The Band, but I would suspect that 
that would have to be the source of an off-the-record hearing.
    Mr. Taplin. With pleasure.
    Chairman Leahy. Mr. Taplin, go ahead.

    STATEMENT OF JONATHAN TAPLIN, CHIEF EXECUTIVE OFFICER, 
                       INTERTAINER, INC.

    Mr. Taplin. Thank you, Mr. Chairman and members of the 
committee. I really welcome the opportunity to come before you 
this morning to discuss the protection of copyrighted works in 
a world of digital media.
    I have been fortunate enough since I graduated from 
Princeton in 1969 to work with a lot of great artists, 
including Bob Dylan and The Band, George Harrison, Martin 
Scorsese, Gus Van Sant, Wim Wenders, the Coen Brothers, and so 
I really take seriously the notion that protection of artists' 
rights are important.
    Because I have been around the entertainment business for 
quite a long time, I have seen the entertainment companies say 
that the audio cassette was going to kill the record industry, 
that the video cassette was going to kill the movie industry, 
and now that digital distribution of content is going to kill 
both industries.
    I must say that the company I lead today, Intertainer, 
started in 1996 with the notion that digital broadband networks 
would be the conduit for on-demand delivery of the best of 
American and world culture into the home. We have been able to 
realize that vision and in the last few years we have, in fact, 
earned the trust and licensed content from many of the leading 
Hollywood media companies.
    Even though in the last year some of the major studios have 
withdrawn these content licenses, today Intertainer's service 
features content from 65 different media companies, including 
major studios such as Warner Brothers, DreamWorks, MGM, and 
television networks such as NBC, ESPN, Discovery Channel, PBS, 
BBC and the A&E Network.
    We have this content because the content owners trust us to 
protect it, and the content is all digitally encrypted at the 
source and protected by a commercially available digital rights 
management system that is part of the Microsoft Windows Media 
Player. A similar DRM system built by InterTrust is also 
offered with a real media player. It is my belief that 
continually innovating new DRM systems are being continually 
improved, including ones from Intel and other players in the 
world.
    I think that the fact that every week my company gets 
brought a new DRM system, a new encryption technology, says 
that the technology industry is willing to spend the money to 
build these tools. The thing that is interesting is that they 
are continually getting better. In fact, the motion picture 
engineering group Ampeg has a new XRML interoperability 
standard that most of the major companies have signed on to. So 
I think there is continuous innovation in this world.
    I think that the bigger problem for myself, my company and 
many people in this industry is that we have been told that 
broadband won't grow until content gets on the network, and so 
we have a kind of classic chicken-and-egg problem here.
    The problem for me is not with content. We have over 70,000 
hours of content that we can put out on the network, but it is 
more like if you imagine picking up your telephone and every 
other time you couldn't get a dial tone. That is equivalent to 
what is happening in broadband today. Essentially, networks are 
being over-subscribed, so that the average user has no idea of 
the quality of the service that he is getting.
    So, for me, I need a service of 500 kilobits per second, 
and I will just quickly show you what it looks like at 500 
kilobits per second. I will play a movie here off my service. I 
am asked to confirm the purchase and then I can take it to full 
screen. I need this 500-kilobits-per-second service and I need 
it to be consistent. If, on a bad night, a user gets 96K based 
on thinking that they have got a broadband service, that is a 
real problem.
    I think the fact that less than 6 percent of the optical 
fiber that was laid down in the tech boom of the last four 
years is in use should concern not only investors in Cisco, 
Nortel, Lucent, and Intel, but also educators, medical 
professionals, and every artist interested in reaching an 
audience with film, a song, or a game.
    With the right regulatory guidance, we could offer 
interactive DVD-quality video on demand service to almost every 
home and classroom in the country by the end of 2003. This 
service could retrain workers in their homes, provide 
inexpensive video conferencing, allow doctors to have access to 
specialists for consultation, and provide an open platform for 
the film makers and musicians of the country to reach their 
audience without having to pay most of their income to 
gatekeepers.
    So in the end I am very hopeful and I have a lot of 
optimism that we will have--we have spent as a country $1 
trillion on optical fiber and we are either going to use it or 
we are going to lose it. The fact that every third day some 
optical fiber company goes into bankruptcy says to me that we 
have to figure out a way, having built the information highway, 
to put the on and off ramps onto it.
    Thank you very much.
    [Video shown.]
    Chairman Leahy. That was fascinating. What is the movie?
    Mr. Taplin. It is called ``Art of War.'' It is a Warner 
Brothers movie.
    Chairman Leahy. I just want to make sure I understand the 
technology. Is that movie being streamed out in real time or 
are you downloading it?
    Mr. Taplin. We are using open IP networks, either DSL 
modems or cable modems, in college dormitories. We believe 
there are about 21 million computers that I would call 
residential computers--that is, excluding the office market--
that have access to a potentially 500-kilobit or better 
network.
    The problem is simply a matter of this over-subscription 
and it is a fairly simple issue. The networks are trying to 
sign on as many customers at $49.95 as possible without making 
the purchase of another optical fiber loop in the local loop.
    Chairman Leahy. Yes, that is a problem. In rural areas, it 
is a problem when they do the same thing on the satellites and 
you suddenly get overloaded.
    Mr. Taplin. Yes, it is an over-subscription matter. I mean, 
we all know what happened on 9/11 in New York City. If everyone 
wants to pick up the phone at the same time, there is no phone 
service. The problem obviously with broadband is that is what 
happens every day.
    [The prepared statement of Mr. Taplin follows:]

          Statement of Jonathan Taplin, CEO, Intertainer, Inc.

    Mr. Chairman, Senator Hatch, members of the committee, I welcome 
the opportunity to come before you this morning to discuss the 
protection of copyrighted works in a world of digital media. I have 
been fortunate enough in my career to work with many great artists and 
so I take seriously the responsibility of making sure that the artist 
profits from his efforts. I started out in 1969 after graduating from 
Princeton as the tour manager for Bob Dylan and The Band. I produced 
George Harrison's Concert For Bangladesh. I've produced films with 
Martin Scorsese, Gus Van Sant, Wim Wenders and The Coen Brothers and as 
an investment advisor I was involved in the two biggest media 
transactions of the 1980's: Disney and Viacom.
    The company that I lead today, Intertainer, was started in 1996 
with the notion that digital broadband networks would be the conduit 
for on demand delivery of the best of American culture into the home. 
My vision is to enable Americans to have instant access to the immense 
library of film, television and music content that this country's 
artists have been producing for decades. The early films of Charlie 
Chaplin; the gospel performances of Aretha Franklin; all the wonderful 
artistic work that formed my real education was waiting in dusty vaults 
to be digitized and experienced by a new generation. Over the last five 
years, we at Intertainer have in fact earned the trust of and licensed 
content from many of Hollywood's leading media companies. Today, the 
Intertainer service features content from 65 different media companies 
including major movie studios such as Warner Bros., DreamWorks and MGM 
and television networks such as NBC, ESPN, The Discovery Channel, PBS, 
The BBC, and A&E. In addition, we also feature concerts and music 
videos from all of the affiliate labels under the Warner Music Group 
and EMI banners. As you know, over the past several years these and 
other record companies have experienced indoctrination by fire in terms 
of digital piracy. But with Intertainer, Americans who have sufficient 
broadband connection speeds can watch recent theatrical releases, 
classic films, concerts, television shows and much more with a 
completely legitimate, secure service that offers an excellent user 
experience, as well as a new revenue stream for content owners. This 
unprecedented digital delivery of premiere Hollywood content would only 
be possible if the content owners felt that their product was being 
rigorously secured and that the end-user was getting a high quality 
viewing experience. As you can see from this demonstration of the 
service, Intertainer represents the convergence of secure digital 
delivery and broadband connectivity to give American consumers a new 
way to control and enjoy their entertainment.
    This content is all digitally encrypted and protected by a 
commercially available digital rights management system that is bundled 
into Microsoft's popular Windows Media Player. A similar DRM system 
built by Intertrust is offered with another leading digital media 
player from Real Networks. It is my belief that these and other DRM 
systems that are available and in use today are continually improving 
their encryption scheme and that they already provide artists and 
copyright holders with a powerful tool to sell their content in a 
digital world with a high degree of security. I don't believe that 
either Microsoft or Intertrust would argue that the DRM systems are 
absolutely uncrackable, but I do know that both organizations have been 
able to respond very quickly to attacks and change the encryption, thus 
rendering the hack unusable. In addition, my company is continuously 
exposed to a steady stream of entrepreneurs showing us new DRM products 
in development, which I believe is a strong indication that the 
traditional innovation that has come out of the US software industry 
will continue to develop more mature digital rights management 
products. The genius of the Digital Millennium Copyright Act is that it 
encourages this innovation while providing legal protection for the 
copyright holders.
    I realize that there is considerable discussion going on in 
Congress about the need to legislate an open-standards digital rights 
management solution, but it is my strong belief that Congressional 
intervention is not necessary. As I've outlined, the marketplace is 
already working aggressively to meet the need for effective DRM 
solutions. A government-mandated solution would take considerable time 
to develop and implement, and in the meantime, content owners may seize 
the opportunity to withhold content from legitimate services such as 
mine until the new standard is adopted. Certain media CEO's will tell 
you that unless you mandate a foolproof copy protection system, they 
will never put their content on digital broadband networks. I have 
another point of view on this. Historically, open standards solutions 
are behind the curve in terms of attracting the capital and talent to 
keep them bullet proof. Private companies, in the interest of 
competition and innovation, are more incented to constantly refine and 
improve their products in order to maintain market share. With an open-
standards solution, the inability to formulate a rapid response to 
inevitable security breaches is a fatal flaw. The system is working 
right now. Premiere Hollywood content is being digitally distributed 
and secured right now. A federally mandated open-standards solution 
would put a halt to DRM innovations and possibly cripple services like 
Intertainer.
    Mr. Chairman and members of the committee, I would argue that a 
standard for digital rights management is not the source of our digital 
piracy problems. It is my steadfast belief that the private sector 
already has developed DRM solutions that are more than adequate, and 
that technology companies will bring DRM innovation to a fever pitch 
once a more fundamental, underlying issue is addressed. That issue is 
the standardization of the broadband industry. What we have here is a 
classic chicken and egg scenario multiplied several times over: content 
owners will not allow their content to be legitimately digitally 
distributed until the digital rights management issue is sufficiently 
addressed; the technology companies in the DRM space are not maximizing 
their resources to further innovate because there is a dearth of 
legitimate content being made available for digital distribution over 
the Internet; digital content, particularly long-form streaming video 
content, can only be enjoyed with a high-speed, broadband Internet 
connection; consumers need an incentive, such as compelling content, to 
switch from their current dial-up modems to high-speed broadband 
services offered by DSL and cable modem providers; consumers who do 
decide to move up from a 56k modem to a broadband service are often 
frustrated because there is no guaranteed minimum connection speed for 
broadband subscribers, therefore many of today's broadband customers 
can't even take advantage of so-called broadband services.
    To further illustrate this point, imagine picking up your telephone 
and not getting a dial tone on random occasions. Imagine still that you 
perceived that as normal. That's the experience of today's broadband 
Internet user, who has no guaranteed minimum connection speed and often 
finds that their high-priced, high-speed service is scarcely crawling 
above dial-up. Is this the fulfillment of the broadband promise? Many 
broadband providers are out in the marketplace today advertising the 
revolutionary benefits consumers will realize with these fast 
connections. Benefits such as distance learning, video conferencing, 
and access to enormous libraries of entertainment instantly available 
with the click of a mouse. But content providers looking to stonewall 
digital distribution until they find a way to become the digital 
gatekeepers will say that those vast entertainment libraries accessible 
via broadband services will never be made available to the citizens of 
this country until the digital rights management issue is addressed. 
Some studios that licensed to us in the past using our existing DRM 
system have indeed withdrawn their licenses in the last year and 
created a classic supply demand squeeze. My contention is that the DRM 
issue is being addressed; it's the distribution network for this wealth 
of digital content that needs attention.
    The fact that less than 6% of the optical fiber that was laid down 
in the tech boom of the last four years is in use should concern not 
only investors in Cisco, Nortel and Lucent, but also educators, medical 
professionals and every artist interested in reaching an audience with 
a film, a song or a game. With the right regulatory guidance we could 
offer interactive DVD quality video on demand service to most every 
home and classroom in the country by the end of 2003. This service 
could retrain workers in their homes, provide inexpensive video 
conferencing, allow doctors to have access to specialists for 
consultation and provide an open platform for the filmmakers and 
musicians of the country to reach their audience without having to pay 
most of their income to gatekeepers.
    To achieve this transformation the FCC would simply have to mandate 
a truth in advertising policy in regards to broadband. Today if you buy 
broadband service from your local telephone company, cable company or 
ISP you are offered ``up to 1.5 MBPS''. You are not told what the 
minimum level of service is. Broadband providers are 
``oversubscribing'' their networks in order to maximize profits on 
broadband service. But to deliver advanced video services a minimum of 
750 KBPS is required to the home for VHS video quality. For DVD quality 
a minimum of 1 MBPS is required.
    I have to confess that I have a great deal of optimism for what a 
world of on demand media might look like. A few years ago, Bruce 
Springsteen wrote a song that typifies many Americans' view of 
television . . . ``57 Channels and Nothing On''. Going forward our 
country has a choice of two visions of what our media culture might 
look like. One might be 500 channels (owned by 6 corporations) and 
nothing on. The other might allow consumers easy on-demand access to a 
world of unique artistry of such power and grace as would melt the 
heart. I believe that the same innovative spirit that allowed me to 
show you ``Shrek'' running over a telephone line this morning will 
continue to improve the current protection of all forms of digital 
intellectual property. While I believe that Congress can play a major 
role in moving us towards the world of digital abundance, trying to set 
a national encryption policy is surely not the way to get there.

    Chairman Leahy. Joe Kraus is the cofounder of Excite.com 
and a new consumer organization called DigitalConsumer.org. He 
graduated in the early 1990s from Stanford and he borrowed the 
huge venture capital sum of $15,000 and built the Internet 
search engine Excite, which later became Excite At Home.
    Mr. Kraus, we are delighted to have you here. Please go 
ahead, sir.

      STATEMENT OF JOE KRAUS, FOUNDER, DIGITALCONSUMER.ORG

    Mr. Kraus. Thank you. Chairman Leahy, I am glad you 
mentioned Amy Harmon's piece in the New York Times this 
morning. I do think it outlines the issue well. However, it is 
not just Hollywood versus technology. As Walt Mosberg's piece 
in the Wall Street Journal pointed out this morning, there is a 
third actor in this play and that third actor is the customer, 
the consumer.
    Chairman Leahy. In fact, we will put Mr. Mosberg's column, 
one I read every time, part of the record.
    Mr. Kraus. Thank you.
    That consumer legally buys digital media and expects to use 
it in flexible ways, and it is these consumers whom we hope to 
represent and who we hope have a seat at the table where 
decisions are being made that affect their daily lives.
    So my name again is Joe Kraus and I am cofounder of 
DigitalConsumer.org. We are new consumer advocacy organization 
comprised of executives, entrepreneurs, innovators and 
consumers who want to protect a consumer's personal use rights 
in the digital media world.
    Before I begin the substance of my testimony, I want to 
make sure I stress one point. I am a proponent of intellectual 
property. I am a technology entrepreneur and I started a 
company and made money from strong intellectual property 
protection. So simply put, I am an IP believer, but I am 
concerned about recent trends.
    Historically, our country has really enjoyed a balance 
between the rights of citizens and the rights of copyright-
holders. Generally speaking, rights-holders have the exclusive 
right to distribute and profit from the distribution of 
artistic works. Consumers who legally acquire these works are 
then free to use them in certain non-commercial ways.
    For example, we are all used to buying a CD and making a 
tape of it. We are all used to buying a CD and listening to it 
in our car, making a tape to listen to in our car. We are used 
to recording a football game so we can watch it after our 
child's soccer practice. So essentially we are used to having 
flexible use as to how we use the media we acquire.
    But unfortunately this balance has really shifted 
dramatically in recent years, much to the detriment of 
consumers, but also entrepreneurs and the risk capital markets, 
and let me give you some examples, starting with the consumer.
    This past Christmas, I bought my dad a DVD player and 
within two weeks I got a phone call and he said, it is broken. 
I said, why do you think it is broken? He said, well, when you 
put the DVD in--and as he had been accustomed to with his 
videotapes, when the movie previews came up he went to skip 
through them, but now the DVD player wouldn't let him. I told 
him that his DVD player wasn't broken, but that existing law 
made it illegal to create a DVD player that would skip through 
content flagged as ``must watch.'' He didn't know what I was 
talking about.
    Similarly, my mom bought an MP3 player recently. In early 
February, I got a phone call from her saying my MP3 player is 
broken. When I asked why, she said that she had been putting 
CDs on her MP3 player, but that a couple of the CDs she bought 
recently didn't seem to transfer. I told her she probably had 
some of those new copy-protected CDs. She asked what that meant 
and I explained that while she was granted the right in the 
1992 Audio Home Recording Act to make personal-use copies of 
CDs she bought----
    Chairman Leahy. Somebody has got an important phone call. 
If they would like to leave to take the phone call, we will 
allow that.
    Go ahead.
    Mr. Kraus. Sure.
    So I explained that while she was granted in 1992 the right 
to make personal-use copies of those CDs, in 1998 her ability 
to do so was taken away if record companies tried to prevent 
the making of those personal-use copies. As you can imagine, 
she didn't know what I was talking about.
    So now I have a big ``x'' marked on my calendar waiting for 
the phone call from my parents when the new digital television 
standards are implemented because the standards clearly 
envision a market where a network broadcaster like Disney's ABC 
gets to decide what programs my parents are allowed to record 
and which ones they aren't. And I can just hear them saying, 
Joe, why can you record the nightly news but not ``Everybody 
Loves Raymond''?
    So the solutions the content industry have advanced to date 
have been more effective at preventing my mom from copying her 
legally-bought music to her MP3 player than at diminishing 
major commercial piracy operations in China and Taiwan.
    I agree with Professor Felten's written testimony that copy 
protection isn't breakable by my mother, but it is very 
breakable by many people with computer backgrounds. So when we 
debate how we prevent illegal copying, my parents, unbeknownst 
to them, are losing their historic personal-use rights. I think 
this is wrong and cannot continue unabated.
    I want to stress also that the cloud around personal use 
rights affects not only consumers but the capital markets as 
well. Major media companies have used lawsuits and attempts to 
stop or delay consumer electronics devices that deal with 
personal use. It began with the VCR, continued with the MP3 
player, and most recently is occurring with the ReplayTV 
personal video recorder.
    When new consumer electronics introductions yield new 
lawsuits from the media companies, these lawsuits inhibit 
investment. Geoff Yang, head venture capitalist at Silicon 
Valley-based Redpoint Ventures and lead investor in Tivo, which 
is a personal video recording company, put it this way: ``Given 
the current state, I can't see how we could invest in another 
revolutionary consumer technology such as Tivo, given the cloud 
currently surrounding personal use of the media people already 
own.''
    Our organization therefore is advocating a set of 
principles we call the Consumer Technology Bill of Rights. It 
is a proposal we hope this committee will seriously consider, 
as it is simply an attempt to positively assert the consuming 
public's personal use rights. These rights aren't new. They are 
historic rights granted in previous legislation and court 
rulings which over the last four years have been whittled away.
    These include the right to time shift, to record a 
television program and watch it later, and the right to space 
shift, to copy a piece of music from a CD to a Walkman or MP3 
player, or to make a mixed tape. The full list of rights can be 
viewed at our Web site www.digitalconsumer.org, and I am happy 
to provide a written list to anyone who would like to read 
them.
    Under the guise of preventing illegal copying, I believe 
Hollywood is using the legislative process to create new lines 
of business at the consumer's expense. The goal is to create a 
legal system that denies consumers their personal use rights 
and then charge those consumers additional fees to recoup them.
    After years of successful litigation and legislative 
efforts, many in the entertainment industry are back in 
Washington asking for more changes to the law. All the while, 
services have been developed and technologies have been 
developed that eliminate fair use rights for consumers, your 
constituents.
    Many in the copyright community don't admit that there are 
such things as fair use rights, and this denial persists 
despite 30 years of congressional action and Supreme Court 
rulings affirming. And while I am not a lawyer, and I don't 
play one on TV, I do know this much: Consumers believe they 
have personal use rights and they expect Congress to ensure 
that they are safeguarded.
    Copy protection, especially overseas piracy for illicit 
sale, is an important issue. But before this committee 
considers yet another change in the law at the behest of the 
copyright owners, I would respectfully urge you to ensure that 
the interests of the consumer are ensured.
    Chairman Leahy. Mr. Kraus, you probably agree with Mr. 
Barrett that if it is not protected initially, then you 
probably have lost your ability to protect.
    Mr. Kraus. I agree with that, and I would point people to 
Professor Felten's testimony, a respected security expert from 
Princeton University, who said that a government standard that 
mandates secure technology is like a government standard for 
teleportation technology. It is not going to be possible, and 
any totally secure system isn't possible to build, in my 
opinion, and certainly in the opinion of greater experts than 
me. Protecting it at the source is most likely the only way.
    [The prepared statement of Mr. Kraus follows:]

          Statement of Joe Kraus, Founder, DigitalConsumer.org

    Chairman Leahy and members of this committee, good afternoon. My 
name is Joe Kraus and I am a co-founder of digitalconsumer.org. We are 
a new consumer advocacy organization comprised of executives, 
entrepreneurs, venture capitalists and consumers who want to protect a 
consumer's personal use rights in the digital media world.
    Before I begin the substance of my testimony I want to stress one 
point: I am a proponent of intellectual property. I am a technology 
entrepreneur. In 1993 I started a company called Excite which after 7 
years became the third most trafficked site on the Internet. My 
professional success depended upon strong intellectual property 
protection. I am an IP believer.
    However, I am concerned about recent trends. Historically, our 
country has enjoyed a balance between the rights of copyright holders 
and the rights of citizens who legally acquire copyrighted works. 
Generally speaking, rights holders have the exclusive right to 
distribute and profit from artistic works. Consumers who legally 
acquire these works are free to use them in certain noncommercial ways.
    For example, we're all used to buying a CD and making a tape of it 
to listen to in our car. We're used to making mixed tapes of our 
favorite music. We're used to recording the football game so we can 
watch it after our child's soccer practice. We're used to buying a book 
and lending it to a friend. Essentially, we're used to having a 
reasonable degree of freedom as to how we use the media we buy.
    It's important to emphasize that these rights are embodied in 
legislation and court decisions. Congress and the courts have carefully 
crafted a deliberate balance between media companies and ordinary 
citizens.
    Unfortunately, this balance has shifted dramatically in recent 
years, much to the detriment of consumers, entrepreneurs and the risk 
capital markets.
    Let me give you some examples, starting with the consumer.
    This past Christmas I bought my dad a DVD player. Within two weeks 
I got a phone call. ``It's broken'' he insisted. When I asked why, he 
said that he put a DVD in and as he had become accustomed to doing with 
his video tapes, when the movie previews came up, he went to skip 
through them. But now, the DVD player wouldn't let him. I told him that 
his VD player wasn't broken but that existing law made it illegal to 
create a DVD player that would skip through content that the media 
companies flagged as ``must watch''. Needless to say he didn't know 
what I was talking about.
    Similarly, my mom bought an MP3 player recently. In early February 
I got a phone call from her saying ``my MP3 player is broken''. I asked 
why. She said that she had been putting CDs on her MP3 player but that 
a couple of the CDs she recently bought didn't seem to transfer. I told 
her she probably had some of the new ``copy protected'' CDs. She asked 
what that meant. I explained that while she was granted the right in 
the 1992 Audio Home Recording Act to make personal use copies of CDs, 
in 1998 her ability to do so was taken away if the record companies 
tried to prevent the making of those personal use copies. Needless to 
say, she didn't know what I was talking about either.
    I now have a big X marked on my calendar waiting for the phone call 
from my parents when the new digital television standards are 
implemented. The standards currently envision a market where a network 
broadcaster like Disney's ABC gets to decide what programs my parents 
are allowed to record and which ones they aren't. I can just hear them 
saying ``Joe, why can we record the nightly news but not `Everybody 
Loves Raymond?' ''
    While I understand the desire of the content industry to prevent 
illegal copying, I believe it would be a disservice to the hundreds of 
millions of law abiding consumers in this country if the debate over 
preventing illegal copying suddenly stripped them of their ability to 
record TV shows they've paid for in their cable bill or copy CDs 
they've bought onto their MP3 players to listen to them in the gym.
    The solutions that the content industry has advanced to date have 
been more effective at preventing my mom from copying her legally 
bought music to her MP3 player than at diminishing major commercial 
piracy operations in China and Taiwan. As we all know, copy protection 
isn't breakable by my mother, but is very breakable by many people with 
computer backgrounds. In addition, I believe that the effect of denying 
citizens their personal use rights is to drive consumers toward illegal 
downloading. If I buy a CD that I can't put on my MP3 player, but I can 
illegally download a song that I can take anywhere, which one am I 
going to choose?
    In the debate over how we prevent illegal copying, my parents, 
unbeknownst to them, are losing their historic personal use rights. 
This is wrong and cannot be allowed to continue unabated.
    The cloud around personal use rights affects not only consumers but 
innovation and the capital markets as well.
    My business partner, Graham Spencer, is a computer programmer. Much 
of his time is spent getting different software systems to talk to one 
another. The act of examining a legally acquired computer program or 
hardware device for the purpose of analysis, debugging, or 
compatibility has traditionally been considered a ``fair use.'' 
However, the same laws that are depriving consumers of their fair use 
rights are also being applied to programmers. The result is a chilling 
effect on software and hardware innovation. The problem is severe 
enough to have attracted the attention of some of the country's best 
software engineers.
    In addition, major media companies have used lawsuits in attempts 
to stop or delay consumer electronics devices that deal with personal 
use; it began with the introduction of the VCR, continued with the MP3 
player and most recently is occurring with the ReplayTV personal video 
recorder. These devices were all designed to make it easier for 
consumers to enjoy the media they paid for.
    However, when new consumer electronics introductions yield new 
lawsuits from the media companies, these lawsuits inhibit investment. 
Geoff Yang, head venture capitalist at silicon-valley based Red Point 
Ventures and lead investor in Tivo, a personal video recording 
technology company, puts it this way: ``given the current state of the 
DMCA, I can't see how we could invest in another revolutionary consumer 
technology such as TiVo given the cloud currently surrounding personal 
use of the media people already own. This issue must be resolved before 
venture investment to seed the consumer technology future can 
continue.''
    Our organization therefore is advocating a set of principles we 
call the ``consumer technology bill of rights''. It is a proposal we 
hope this Committee will seriously consider as it is simply an attempt 
to positively assert the consuming public's personal use rights. These 
rights aren't new; they are historic rights granted in previous 
legislation and court rulings which have over the last four years been 
whittled away. These include the right to ``time-shift''--to record a 
television program and watch it later; and the right to ``space 
shift''--to copy a piece of music from a CD to a walkman or MP3 player 
or to make a mixed tape. The full list of rights can be viewed at our 
web site, www.digitalconsumer.org or I'm happy to provide a written 
list to anyone who would like to read them.
    Clarifying, asserting, and defending personal use rights is good 
for consumers and good for investment. Citizens will have a simple, 
comprehensible set of laws that re-establish rights that they used to 
have. And, investors will have clarity on those areas that are safe for 
capital without the risk of litigation.
    Finally, there has been some talk lately of a need to create a 
government mandated open standard for digital rights management in 
order to ensure interoperability for consumers. I think a government 
standard would be harmful to consumers and innovators for several 
reasons.
    First, a government mandated standard is not necessary to ensure 
interoperability. The market demands interoperability and has no need 
for the government to insist on it. Examples abound. There is no 
government mandate for CD player interoperability, yet all CDs play in 
all CD players. Likewise for DVDS. Consumers don't tolerate the lack of 
interoperability and as a major market force, they demand it. 
Therefore, interoperability will occur as a natural effect of the 
market. (Although no standard has yet emerged for secure digital music, 
this is due at least in part to the fact that the existing technologies 
are too burdensome for the consumer. Once a suitably user-friendly 
technology has emerged, consumers are likely to embrace it.)
    Second, government mandates are bad for innovation generally 
because they assume that the government is able to predict all possible 
fair and legal uses of technology or content. The very definition of 
innovation is the discovery of something new and unexpected; by 
mandating a set of legal uses and criminalizing all others, the 
government makes innovation difficult.
    Third, overly protective copyright laws themselves contribute to 
technologies that do not interoperate. Interoperability depends on 
being able to examine data formats, and as long as such examination is 
criminalized, companies will be restricted in their ability to create 
compatible products.
    Finally, if the government decides to mandate an open standard, 
there is no guarantee it will truly remain open. Microsoft has a 
history of ``embrace and extend'' policies where an open standard is 
adopted and then modified or extended in order to introduce proprietary 
features which licensing vendors are encouraged to exploit. The new 
``expanded standard'' meets the basic criteria of the open standard, 
but if this expanded standard is used to its fullest, it will have 
features that the original open standard cannot understand; therefore, 
the open standard becomes less and less effective. Examples of this 
behavior include the Java programming language, the HTML page layout 
standard, and the Kerberos security technology.
    Overall, I encourage Congress to remain wary of any solution where 
it is asked to ``mandate'' standards in the technology industry. 
Technological innovation moves too quickly and unpredictably to be 
constrained in this way. In addition, consumers already exert market 
forces to ensure a reasonable outcome.
    Under the guise of ``preventing illegal copying'' I believe 
Hollywood is using the legislative process to create new lines of 
business at consumers' expense. Their goal is to create a legal system 
that denies consumers their personal use rights and then charge those 
consumers additional fees to recoup them.
    After years of successful litigation and legislative efforts, many 
in the entertainment industry are back in Washington asking for more 
changes to the law. All the while, they have been quietly developing 
services, technologies and products that eliminate fair use for their 
customers, your constituents. Many in the copyright community will not 
admit that there is such a thing as fair use. They will not admit that 
once consumers have legally purchased media that they should be free to 
engage with it in a wide variety of personal uses. This denial persists 
despite 30 years of Congressional action and Supreme Court rulings 
affirming consumers' fair use rights. And, while I am not a lawyer, I 
do know this much: consumers believe they have personal use rights and 
they expect Congress to insure that they are safeguarded. Copy 
protection, especially overseas piracy for illicit sale, is an 
important issue. But before this Committee considers yet another change 
in the law at the behest of the copyright cabal, I would respectfully 
urge you to insure that the interests of the consumer are insured.
    Thank you very much for the time to address this committee today.

    Chairman Leahy. I should note for the record we have 
material from Gary Shapiro, of the Home Recording Rights 
Coalition; Jack Valenti's statement; Hilary Rosen's statement; 
the Video Software Dealers Association; and Professor Felten's 
statement, all of which will be part of the record.
    Of course, Senator Hatch and I have the Web page we 
unveiled today, so others can comment.
    I would say on the side that when you mention not being 
able to flip through previews, frankly I am offended by the 
arrogance of Hollywood doing that. Especially if I paid for a 
DVD and what not, I want to go and watch what I want to watch 
on it. It is as bad as paying $8 to go into a theater with the 
sound-proofing of tissue paper and a screen smaller than my TV 
set, and you have got to sit there and watch 20 minutes of ads, 
and then they sometimes wonder why people don't go.
    Justin Hughes is a professor of law at UCLA Law, where his 
research and teaching interests focus on intellectual property 
law. He has also been with the U.S. Patent and Trademark Office 
focusing on Internet-related intellectual property issues, 11th 
Amendment immunity issues, and intellectual property law in 
developing countries.
    We are pleased to have you here, and when you finish I will 
turn first to Senator Feinstein for questions and then to 
Senator Specter for questions.

    STATEMENT OF JUSTIN HUGHES, VISITING PROFESSOR OF LAW, 
            UNIVERSITY OF CALIFORNIA AT LOS ANGELES

    Mr. Hughes. Thank you, Mr. Chairman and members of the 
committee, for inviting me here to talk today about the 
continuing saga of copyright and digital technologies. By way 
of disclosure, I should say that, technically speaking, I am an 
employee of the State of California, which means that my salary 
is paid by both Intel and Disney, Viacom and Qualcomm, 
technicolor and technology-start-ups. So in my testimony there 
is probably something for everyone to hate.
    I think that we all agree that there is an enormous problem 
today with unauthorized copying and distribution of digital 
versions of copyrighted works. The worst part of the problem is 
still outside the United States and is traditional physical 
media piracy. Then comes piracy from peer-to-peer network 
systems that respect no national borders--Napster, Gnutella, 
Free Net, and the many variations of Fast Track software. As 
broadband proliferates, owners of audio-visual works are 
understandably worried about being Napster-ized.
    Now, recently there have been proposals that the Government 
should mandate specific copy control technologies to be 
concluded in all digital devices, and the thought seems to be 
that industry should negotiate agreement on the technological 
controls and then the Federal Government should make those 
controls a matter of law. I have three concerns I want to focus 
on today about that idea.
    The first is that Congress should be cautious in how much 
it is willing to defer to the policy decisions and legislative 
drafting of private parties. An agreement brokered in industry 
negotiations and then blessed by Congress may fail to address 
the concerns of consumers. Users of copyrighted works have 
distinct privileges under copyright law, fair use primary among 
them. Now, I admit sometimes academics overblow fair use rights 
and privileges, particularly as they extend to making non-
transformative copies of works, but I agree with Mr. Kraus that 
those rights exist and that they are real.
    The 1998 Digital Millennium Copyright Act reflects 
Congress' reasonable concern for fair use in the digital 
networked era. The DMCA specifically provides that it does not 
affect fair use, and section 1201(a) was specifically crafted 
to make sure that the prohibition on digital lock-picking would 
not extend to controls for control of copying, precisely 
because some copying constitutes fair use.
    In that same spirit, I think that if there has to be any 
additional regulatory structure--and I say additional--imposed 
on digital network systems to protected copyrighted works, it 
should be one that focuses on stopping unauthorized 
distribution over the Internet and leaves alone what some 
people have called the ``home net.'' Whether it is a broadcast 
flag or water-marking or any other technology, if it is 
mandated by law, it may be necessary to determine exactly how 
much non-commercial, non-transformative copying a person can do 
in their home.
    My second concern is one that, Mr. Chairman, you and the 
ranking minority member have already expressed, and that is 
government just isn't very good at mandating technology. And I 
don't particularly think that private industry is very good 
sometimes at mandating technology, and the ease with which 
various encryption systems have been hacked is demonstrative of 
that. But I think that government technocrats and bureaucrats, 
having been one, are even worse at that mission.
    Related to that, my third concern is that the government 
mandate of any specific technology to protect copyrighted works 
would be a dramatic reversal of Congress' approach to the 
digital world to date. To date, Congress has wisely understood, 
this committee in particular, that government should not try to 
pick technological winners and losers.
    In that spirit, the DMCA wisely includes a no-mandates 
provision, making clear that consumer electronic, computer, and 
telecommunications equipment does not have to be designed to 
respond to any particular technological measure. I think that 
that hands-off approach of not designating technology for the 
Internet is one Congress has pursued in many areas, not just 
copyrighted works. One example I give in my written testimony 
is the e signatures bill.
    Related to this, I have the concern that if we change our 
policy direction now, we will have a hard time explaining it 
internationally. Having been one of those people who went 
around the world explaining the virtues of the Digital 
Millennium Copyright Act and its hands-off approach to the 
Internet, I would hate to be an American diplomat who had to go 
around explaining why we had suddenly decided that everything 
had to be done a completely different way. It makes us look, to 
put it frankly, a little clueless.
    If I can conclude, there are tough decisions to be made in 
copyright policy, and those decisions may not be too far down 
the road. Many of the people in this room remember the hearing 
on Napster and other peer-to-peer file-sharing systems which 
this committee held in 2000. At that hearing, Chairman Hatch 
posed a couple of hypotheticals to Hilary Rosen, head of the 
recording industry.
    Chairman Hatch asked, if he made a tape copy of a CD to 
play in his car, would that be a fair use? He then asked, if he 
made a copy of a CD for his wife to play in her car, would that 
be a fair use? Ms. Rosen demurred from giving a direct answer 
to Senator Hatch's questions, and given her job I completely 
understand that.
    But let me answer those questions a couple of years later. 
Are those fair uses? My very theoretical, abstract, law 
professor answer is this: If the chairman of the Senate 
Judiciary Committee and the ranking minority member and the 
other members think something is a fair use, it is a fair use, 
or it is soon going to be. [Laughter.]
    And I close there for a very simple reason.
    Chairman Leahy. And we know that the ranking member and I 
always agree on these things. [Laughter.]
    Mr. Hughes. Always agree.
    So whatever legislation is introduced in other quarters, 
whatever negotiations are conducted privately, I think it is 
imperative that this committee not abdicate its traditional job 
in deciding the proper balance in copyright law for the 
interests of creators, distributors, consumers and citizens.
    Thank you.
    [The prepared statement of Mr. Hughes follows:]

 Justin Hughes, Visiting Professor of Law, University of California at 
                              Los Angeles

                              introduction
    Thank you, Mr. Chairman, Senator Hatch, and members of the 
Committee for inviting me to appear before you today to talk about the 
continuing saga of copyright and digital technologies. During the past 
few years, I've had the honor and pleasure of working with many people 
in this room on intellectual property and Internet issues, although 
these days I spend more of my time trying to teach the law Congress has 
written in this area.
    By way of disclosure, I should say that, technically speaking, I'm 
an employee of the State of California. Which means that my salary is 
paid by both Intel and Disney, Viacom and Qualcomm, Technicolor and 
technology start-ups. So, in what I'm going to say, there will probably 
be something for everyone to hate.

      I. Challenges to Copyright Holders and Appropriate Responses

    There is no question that we face an enormous problem today with 
unauthorized copying and distribution of digital versions of 
copyrighted works. Copyright holders face this problem and we all face 
this problem as an increasingly information and media driven economy. 
The worst part of this problem is probably outside the U.S. and is 
``traditional'' physical media piracy--as when you can buy a dozen CDs 
for $5 about 100 paces from the U.S. Embassy in Beijing. Then comes 
piracy from peer-to-peer network systems that respects no national 
borders--Napster, Gnutella, Free Net, and the many variations of Fast 
Track. Web-based piracy in the form of warz sites; that is, Internet 
piracy from hosted sites is another level of problem. Finally, there is 
a certain level of unauthorized activity done by people at home--
typically, until very recently, in the form of taping works onto 
cassettes and videocassettes.
    We need to distinguish among these different sorts of activity for 
two reasons. First, the problem of digital piracy of works--on physical 
media and through unauthorized networked distribution--does threaten 
the incentive system that copyright is supposed to create.
    But, second, a certain amount of unauthorized copying by private 
citizens--at home, for their own use, and not distributed beyond family 
and a small circle of friends--does not threaten the incentive system 
that copyright creates. And it does serve valuable goals in a civil 
society. In short, it should not be lumped with the other activities; 
it is not ``piracy''--indeed, much of this unauthorized copying has 
been expressly sanctioned by our highest court.
    To date, the efforts to fight digital piracy of copyrighted works 
has been twofold. First, head-on efforts to shut down unauthorized 
Internet distribution--as in the Napster litigation. Second, the 
content industry and the consumer electronics industry have worked 
together in private, voluntary, industry-led collaborations to design 
protection measures: measures to keep unauthorized digital copies of 
works from being captured, so there would be nothing illicit to 
distribute on the Net. These can be industry standards--as with the CSS 
encryption for DVDs--or competing technological approaches to security, 
such as the differing digital rights management (DRM) systems of 
RealNetworks and Microsoft.
    At times, these processes may not have produced the most consumer-
friendly protection protocols. There are some people who believe that 
encryption systems like CSS impinge upon ``fair uses'' under copyright 
law (I will say more about that shortly) .
    But at least these are not digital locks regimes designed by 
bureaucrats and enforced by diktat. The message now from some voices in 
the copyright community is that if the computer, electronics, and 
telecommunications companies are not cooperative enough in crafting a 
new round of standard control technologies, then the federal government 
should step in and mandate which particular security technologies must 
be deployed. The intent of some of these controls would--like streaming 
technology or CSS--be to prevent digital copies from being made by 
individuals. But unlike those existing digital locks, the design of 
future digital locks would be regulated by the government.
    I think that would be a troubling development. Congress should be 
cautious in how much it is willing to defer to the policy decisions--
and legislative drafting--of private parties. A member of the House is 
reported to have said that the House Subcommittee on Courts and 
Intellectual Property ``has a history of preferring that commercial 
disputes be resolved between the parties rather than through the 
legislative process, which may favor one interest group over another.'' 
1
---------------------------------------------------------------------------
    1 . . . Irina Y. Dmitrieva, I Know It When I See It.: Should 
Internet Providers Recognize Copyright Violations? 16 Santa Clara 
Computer & High Tech. LJ. 233, 246.(2000), citing NII Copyright 
Protection Act of 1995: Hearings on H.R. 2441 Before the Subcomm. on 
Courts and Intellectual Property of the House Comm. on the Judiciary, 
104th Cong., at 20 (1995)
---------------------------------------------------------------------------
    That's all good and well, but this risks being private resolution 
blessed by the legislative or regulatory process without any way to be 
sure that the private discussions took account of all the relevant 
social interests. How digital copyrighted works are distributed and 
used is a matter of enormous interest to consumers too. Users of 
copyrighted works have distinct privileges in the balanced scheme of 
the copyright law--fair use and the first sale doctrine chief among 
them. An ``agreement . . . brokered through private, voluntary, 
industry-led negotiations, and then blessed by Congress'' may fail to 
address those concerns. 2
---------------------------------------------------------------------------
    2 Testimony of Peter Chernin, President and CEO, News Corp., 
before the Senate Commerce, Science, and Transportation Committee, 
February 28, 2002, at 6.
---------------------------------------------------------------------------

                     II. The Importance of Fair Use

    Codified in 1976, but tracing its roots in American law back to at 
least the 1840s,3 17 U.S.C. Sec. 107 fair use is about as 
far from a bright line test as statutory law should wander. There is no 
question that what counts as ``fair use'' has changed over time. As 
reproductive technologies became more and more widely available to end 
users in the second half of the 20th century, fair use expanded to 
include a certain, undetermined amount of ``non-transformative'' 
copying for personal, non-commercial uses. On the only occasion when 
the Supreme Court considered non-transformative, private copying, it 
concluded in the Sony v. Universal Studios case 4 that at 
least one form of such copying--``time-shifting'' to watch a broadcast 
show at another time--was protected activity.
---------------------------------------------------------------------------
    3 In Folsom v. Marsh, 9 F. Cas. 342 (No. 4,901) (CCD 
Mass. 1841), Justice Story summarized earlier copyright cases in a 
distillation of ``fair use'' which sustained the judge-made doctrine 
until its 1976 codification: ``look to the nature and objects of the 
selections made, the quantity and value of the materials used, and the 
degree in which the use may prejudice the sale, or diminish the 
profits, or supersede the objects, of the original work.'' Id., at 348. 
There were considerably earlier cases in England permitting ``fair 
abridgements'' under the Statute of Anne, see W. Patry, The Fair Use 
Privilege in Copyright Law 6-17 (1985).
    4 Sony Corp. of America v Universal City Studios, Inc., 
464 U.S. 417 (1984).
---------------------------------------------------------------------------
    Let me say a few things about that Sony ``Betamax'' decision that 
one rarely hears.
    First, despite the clamor of some of academics, the right to make 
near perfect or perfect non-transformative copies of pop culture works 
is not at the core of our democratic freedoms. 5 It isn't 
even at the core of fair use. Some people forget that the Betamax 
decision was a 5-4 vote and the dissent thought that (near) perfect, 
non-transformative copying of audiovisual works was NOT fair use. That 
dissent included Justices Blackmun and Marshall--surely two of the last 
century's most vigorous defenders of free speech and all the values 
that make a civil democratic society worth living in.
---------------------------------------------------------------------------
    5 There is no reason to think that the Betamax 
majority's analysis would be any different between a near-perfect 
analog copy [as at issue] and a ``perfect'' digital copy.
---------------------------------------------------------------------------
    But, second, it's been a long time since the Betamax decision. 
Twenty years. A lot has changed in that time--lots of the factors which 
built the slim, five member majority have changed. Yet the studios have 
never challenged the Betamax conclusion that making non-transformative 
copies for ``time-shifting'' (a personal, noncommercial use in the 
home) is fair use. A whole generation of consumers is now accustomed to 
a certain amount of personal copying being a protected, legal activity.
    I think it's worth mentioning what is now an open secret. People at 
home make copies of TV programs for more than ``timeshifting.'' People 
build up libraries of their favorite series, they copy children's 
programs to play again and again for the kids; they even sometimes 
share these recorded programs on their clunky videocassettes with 
neighbors and colleagues. 6 [And this is often genuine 
``sharing'' as we are taught the concept as children, not Napsteresque 
``sharing'' in which a person gives without giving up anything.]
---------------------------------------------------------------------------
    6 Just last month, I got an all-faculty email requesting 
a copy of a PBS documentary. The email read, in part, ``I'm urgently 
trying to locate a videotape copy of the PBS Frontline documentary 
`Inside the Jury Room'. Is there anyone in the Law School who happens 
to have a copy that they can loan out for a few days? I just discovered 
that my copy has gone missing . . . .'' Admittedly, this was for an 
educational purpose, but it is exemplary of how people exchange, lend, 
and share recorded audiovisual works within small circles of family, 
friends, and colleagues.
---------------------------------------------------------------------------
    That's important for one simple reason--courts have identified 
customary practices as being relevant in determining what ``markets'' 
copyright holders are entitled to and, in turn, what kinds of copying 
may be fair uses. 7 Consumers have become accustomed to 
making some limited amount of non-transformative copies for personal 
use. This applies to all sorts of copyrighted works and across all 
sorts of machines and appliances.
---------------------------------------------------------------------------
    7 See, e.g. Williams & Wilkins Co. v. United States, 487 
F.2d 1345, 1381, et seq., (Ct. Cl. 1973) (recognizing customary 
practices in determining fair use of photocopying), aff'd by equally 
divided Court, 420 U.S. 376, 43 L. Ed. 2d 264, 95 S. Ct. 1344 (1975); 
New Era Publications Int'l v. Carol Pub. Group, 904 F.2d. 152, 157 (2d 
Cir. 1990) (discussing reasonable and customary practices of 
biographers in determining fair use); Maxtone-Graham v. Burtchaell, 808 
F.2d 1253, 1263 (2d Cir, 1986) (same); Rosemont Enterprises, Inc. v. 
Random House, Inc., 366 F.2d 303, 307 (2d Cir. 1966), cert. denied, 385 
U.S. 1009, 17 L. Ed. 2d 546, 87 S. Ct. 714 (1967)) (same). See also 
Lloyd L. Weinreb, Fair's Fair: A Comment on the Fair Use Doctrine, 103 
Harv. L. Rev. 1137, 1140 (1990)
---------------------------------------------------------------------------
    Having said that fair use has evolved in the past, the corollary is 
that we don't know where fair use will go in the digital future. But if 
we don't know where fair use will go, we definitely should not allow 
anyone to unilaterally determine that fair use should go away. There 
have always been a few people who, in Professor Brown's 1963 
description, ``treat fair use as though it were some grudging 
toleration of an annoying public.'' 8 That's wrong. Fair use 
and other limitations on the rights of copyright owners--like the first 
sale doctrine--are part and parcel of the social bargain of copyright.
---------------------------------------------------------------------------
    8 Copyright Law Revision, Part 3 Preliminary Draft for 
Revised U.S. Copyright Law and Discussions and Comments on the Draft 
171 (U.S. Government Printing Office, 1964).
---------------------------------------------------------------------------
    The 1998 Digital Millennium Copyright Act (DMCA) 9 
reflects reasonable concern for ``fair use'' in the digital, networked 
era. Section 1201(c)(1) expressly provides that the new law does not 
affect fair use under section 107 and the prohibition on ``digital lock 
picking'' in section 1201(a) does not extend to digital locks that 
control any rights or privileges of the copyright holder beyond 
``access''--precisely because some unauthorized uses will be fair uses. 
Only time will tell whether this arrangement in the DMCA workably 
preserves fair use, but the intent is clear.
---------------------------------------------------------------------------
    9 Pub. L. No. 105-304, 112 Stat. 2860 (October 28,1998).
---------------------------------------------------------------------------
    In that same spirit, the European Union has also recognized the 
importance of preserving ``personal uses'' and ``fair dealing'' 
limitations and exceptions from copyright liability under various 
European laws. The European Union's new Copyright Directive takes a 
slightly different tack from the DMCA, but with the same intent: under 
Article 6(4) of the Directive, if a member state of the European Union 
determines that digital locks deployed by copyright owners are 
inhibiting consumers ability to enjoy certain ``personal uses'' (what 
we would call fair uses), that country may take ``appropriate 
measures'' to ensure such uses are available to consumers. 10
---------------------------------------------------------------------------
    10 Directive 2001/29/EC of the European Parliament and of the 
Council of 22 May 2001 on the harmonization of certain aspects of 
copyright and related rights in the information society., Chapter III, 
Article 6(4).
---------------------------------------------------------------------------
    The smartest people in the audiovisual industry realize this too--
that a certain amount of non-commercial, personal copying definitely 
does not harm and may even benefit their businesses.

           III. Forcing Us To Define How Much Use Is Fair Use

    For this reason, if there has to be any regulatory structure 
imposed on digital, networked systems to protect copyrighted works, it 
should be one that focuses on stopping unauthorized distribution over 
the Internet and leaves alone what some people have called the ``home 
net''--the integrated system of personal computers, display devices, 
and audio equipment that private homes will increasingly have. 11 
The focus should be on technology that addresses commercial and 
commerce-substituting broadband distribution, not on technology that 
could be used to stop Aunt Mary from copying her favorite soap opera 
for herself or a friend.
---------------------------------------------------------------------------
    11 I think that Thomson Multimedia characterized this 
goal in similar terms, as ``full functionality in a Personal Home 
Network'' while gaining ``protection of digital content from widespread 
piracy.'' Testimony of James E. Meyer, Senior Vice President, Thomson 
Multimedia, before the Senate Committee on Commerce, Science, and 
Transportation, February 28, 2002, at 2.
---------------------------------------------------------------------------
    More importantly, if the copyright industries want particular 
security technologies mandated by law, then instead of pursuing 
private, industry negotiations, we should all be prepared to sit down 
and do what we have not been willing to do in this country: establish 
exactly how much unauthorized, personal use is fair use. Perhaps 
additional security protocols like broadcast flags and watermarking 
might be legally mandated at least for some machines and appliances if 
the content community is willing to accept a limited, defined zone of 
personal, private, unauthorized use of copyrighted works. That would be 
a system in which we defined a minimum amount of copying a private 
individual would be allowed to do for herself, her family, and her 
immediate social circle.
    This could be a kind of Audio Home Recording Act (AHRA) 12 
writ large--covering more appliances and broadly extending its basic 
ideas, including the recognition that consumers can make some digital 
copies for personal uses. There is, of course, an important lesson in 
the AHRA: Congress legislated, but the market decided to go another 
direction and the statutory technological mandate was a technological 
dead-end.
---------------------------------------------------------------------------
    12 17 U.S.C. Sec. 1001, et seq.
---------------------------------------------------------------------------

                     IV. A Sea Change From the DMCA

    Which brings me to a final, couple, broad concerns. While today's 
hearing is intended to be a general discussion of these issues, 
Senators Hollings and Stevens have recently proposed legislation on 
this topic, the Security Systems Standards and Certification Act 
(SSSCA). We might as well talk about this, because we all know nothing 
focuses a lobbyist, legislator, or staffer's attention in DC like a 
draft bill.
    In at least one version, the SSSCA would require the specification 
of ``certified security technologies,'' either by an industry-only 
forum or by the Secretary of Commerce. In either case, the particular 
security technologies would be specified in law (regulation) and all 
``interactive digital devices'' would be required to include such 
security technology--all to the goal of preventing the making of 
digital copies.
    As best as I can tell, the SSSCA's sweeping definitions would 
require specified technology to be built into every piece of software; 
PC, video card, hard drive, CPU, motherboard; PDA; DVD or CD player; 
and every monitor manufactured or distributed in our country. 13 
The security technology would be specified in a process that apparently 
has little or no safeguards for the traditional balance of copyright 
rights and privileges.
---------------------------------------------------------------------------
    13 Although the definition of ``interactive digital 
device'' in the SSSCA would appear to sweep in electronic keyboards, 
wristwatches, airplane control systems, and new generations of 
toasters, microwaves, telephones, and vacuum cleaners, the intent may 
be more limited, i.e. that security standards would be ``mandated for 
inclusion in all digital media devices that handle creative content.'' 
Testimony of Michael D. Eisner, Chairman and CEO, The Walt Disney 
Company, before the Senate Committee on Commerce, Science, and 
Transportation, February 28, 2002, at 3. Of course, that does not tell 
us whether it is devices intended to handle creative content or capable 
of handling creative content--which will someday, if not already, 
include your wristwatch and maybe your toaster.
---------------------------------------------------------------------------
    Moreover, the government's best intellectual property, information 
policy, and competition experts--at the USPTO, the Copyright Office, 
the Justice Department, and the science agencies--don't have a leading 
role in the ``specification'' process. It's hard to understand this. I 
think Congress ought to rely more on the expertise it pays for every 
year and less on the ``experts'' to be found at so many Washington 
fundraisers. 14
---------------------------------------------------------------------------
    14 In fact, prior legislative efforts have consistently 
recognized that the quickly evolving nature of the Internet requires 
continued monitoring by experts and Congress has wisely chosen to defer 
decision or keep issues open by mandating studies in expert agencies. 
The DMCA includes a series of such studies by the Department of 
Commerce and the Copyright Office. The Hatch-Leahy distance education 
bill (S. 487) passed the Senate last year with a required report from 
the USPTO on the efficacy and effects of technological protection 
measures for copyrighted works in use or development.
---------------------------------------------------------------------------
    But more importantly, the SSSCA or anything like it would represent 
a dramatic reversal of Congress' approach to the digital world. To 
date, Congress has wisely understood that the government should not try 
to pick technological ``winners'' and ``losers.'' Government should 
stay out of the business of imposing technological solutions to 
problems which move much faster than bills through Congress or 
regulations through the Federal Register.
    In that spirit, the DMCA wisely includes a ``no mandates'' 
provision, making clear that consumer electronics, computer, and 
telecommunications equipment systems do not have to be designed to 
respond to any particular technological measure. 15 The 
development of effective technological protection measures and their 
successful deployment was left up to the private sector. Congress' 
thoughtful effort to stop government from picking technological winners 
has extended far beyond intellectual property. For example, the E-
Signatures bill, the work of the Judiciary and Commerce committees in 
both houses, is technologically neutral. It does not pre-empt states 
passing their own electronic signatures legislation, except that 
pursuant to section 102(a)(2)(A), the federal law does pre-empt any 
state government that tries to pick a particular technological solution 
to the problem of electronic signatures, documents, and recordkeeping.
---------------------------------------------------------------------------
    15 17 U.S.C. Sec. 1201(c)(3). The only technological 
mandate in the DMCA concerns deployment of ``Macrovision'' technology 
for a legacy technology--analog video recordings.
---------------------------------------------------------------------------

             V. How Would We Explain This Around the World?

    I have another concern about such a quick revisiting of the issue 
of technological protection measures--just months after some of the key 
provisions of the DMCA have come online.
    Since the ratification of the WIPO Copyright Treaty (WCT) and the 
WIPO Phonograms and Performances Treaty (WPPT) in 1996, the United 
States has been at the forefront in advocating that countries ratify 
these international agreements and implement them through strengthening 
and improvement of domestic copyright legislation. Since the passage of 
the DMCA, the U.S. Government has held up the DMCA's balanced, hands-
off approach as a model for how countries should implement 
international copyright norms for the digital, networked age.
    If we suddenly do a volte-face and decide that government must 
mandate the particular security devices and protocols needed to protect 
copyright works, it gets considerably harder to tell other countries 
that we know what we're doing. Frankly, such a policy change could make 
us look a little clueless. Having been in many of these conferences, 
discussions, and negotiations, I can easily imagine a savvy technocrat 
from another country noting such a change in U.S. policy and asking 
hard questions about American understanding of this Internet 
phenomenon, this digital universe of our own creation.
    In short, there may be international reasons for such a change in 
policy to be a last option.

                               Conclusion

    There are tough decisions to be made in copyright policy. And those 
decisions may not be too far down the road. How the first sale doctrine 
survives in a digital world, how fair use evolves, how geography-based 
arrangements for royalties are transmuted into the Internet--all these 
issues are as important as they are fascinating.
    Many of the people in this room remember the hearing on Napster and 
other peer-to-peer file sharing systems which this committee held in 
2000. At that hearing, Chairman Hatch posed a couple hypotheticals to 
Hillary Rosen, head of the RIAA. Chairman Hatch asked, if he made a 
tape copy of a CD to play in his car, whether or not that would be a 
fair use. He then asked if he made a copy of a CD for his wife to play 
in her car--would that be a fair use? Ms. Rosen demurred from giving a 
direct answer to Senator Hatch's questions and--given her job--I 
completely understand that.
    But let me answer those questions, a couple years late. Are those 
fair uses? My very theoretical, law professor answer is this: if the 
Chairman of the Senate Judiciary Committee and the ranking minority 
member think something is a fair use, it is probably a fair use or soon 
will be.
    And I close there for a very simple reason--whatever legislation is 
introduced in other quarters, whatever negotiations are conducted 
privately, this committee should not abdicate its traditional job in 
deciding the proper balance in copyright law of the interests of 
creators, distributors, consumers, and citizens.
    Thank you.

    Chairman Leahy. No legislation will pass this year until we 
have had a chance to look at it.
    I promised the Senator from California, who is trying to 
juggle two different matters, that I would let her go first for 
questioning. Then, unless the ranking member has come back, we 
will go to Senator Specter.

  STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE 
                      STATE OF CALIFORNIA

    Senator Feinstein. Thanks very much, Mr. Chairman. I 
appreciate that. I would like to just make a couple of informal 
comments.
    This is an issue which impacts California dramatically. We 
have a large IT industry. Mr. Barrett spoke on behalf of the 
computer industry. We have a very large entertainment industry. 
We have a very large biotech industry, pharmaceutical industry, 
all of which are really based on copyright and patent 
protection.
    That is really where this country, as I see it, has made 
its mark in the world. We have been on the innovative edge of 
new discoveries constantly, and these new discoveries have been 
protected by both copyrights and patents.
    In the 10 years I have been on this committee, I see this 
as perhaps the most serious infringement on copyright 
protection that I have seen and I want to just very briefly 
explain why, because unless something is done cooperatively and 
inclusively of all of the industries involved, I think we are 
going to be forced to simply watch the massive theft of 
copyrighted works of all kinds all around the world until the 
thrust to really create disappears. I think it is that serious 
a situation.
    Over the past weekend, my chief counsel went online to 
verify the statements made to us about how easy it is to get 
copyright material on the Internet, and he did verify it. This 
is a ten-cent CD-ROM containing a full-length version of the 
movie ``Shrek,'' downloaded using the file-sharing program 
Morpheus. ``Shrek'' was just released on DVD last November. It 
is running on HBO right now. It quickly became the best-selling 
DVD of all time, but apparently someone on the Internet was 
able to defeat the copy protection on the DVD and put the movie 
online because my staff was able to download a perfect copy of 
``Shrek'' for free in just a few short hours.
    As an example that is even more problematic, my staff was 
even able to download a full-length copy of ``A Beautiful 
Mind.'' This is a movie up to Best Picture of the Year. It is 
still in theaters. It is not even out on video yet, but he was 
able to get it for free and download it in two-and-a-half hours 
using the file-sharing program G Nucleus.
    So as I see it, Mr. Chairman, this is Napster times ten 
because nobody can shut these services down. The software 
operates in a decentralized way and the content resides and 
passes not through one central server, but everywhere on the 
Internet. These file-sharing services have already had an 
impact on the music industry, allowing by some accounts the 
illegal download of billions of music files every month, and 
widespread movie piracy is just around the corner.
    Now, that is the bad news. The good news is this: I have 
had a chance to talk to two people. One of them has Mr. 
Valenti, who has indicated his industry's concern. The other is 
yesterday Mr. Barrett was nice enough to come in and share his 
industry's concern.
    The good news here is that both parties, as I see it, are 
willing to sit down and try to work out some protection 
measure, which I think can certainly be done technologically, 
to protect copyright. I think this is extraordinarily important 
because I think it is really related to the creative strength 
of this Nation. And if the creative strength of the Nation 
can't be protected by legal tools developed just for that 
purpose, then really where are we?
    So I want to ask my first question, if I might, to Mr. 
Barrett. Mr. Barrett, how much time do you think it will take, 
assuming parties are well-meaning and assuming you can sit down 
at a table and you can work something out?
    Mr. Barrett. Well, Senator, over the last six years a 
number of solutions have been worked out, as I think you know, 
in terms of DVDs and audio and pre-recorded content. We are 
coming up with solutions for digital TV terrestrial broadcasts, 
the analog hole.
    The peer-to-peer issue is a difficult issue. I think there 
is no silver bullet. I think there will be a combination 
solution which includes most probably legal solutions such as 
shutting down unauthorized distributors, technical solutions 
such as watermarks protecting at the source, business solutions 
such as offering content through business operations, such as 
Intertainer and others, at reasonable prices that consumers are 
willing to pay, and most probably some targeted legislative 
solutions.
    The difficulty, as I explained to you when we met 
privately, is, in fact, that once ``in the free'' digital 
content is on the Net, it is very difficult to differentiate it 
from legal content on the Net; that is, to differentiate 
between a home video and ``Lord of the Rings'' in terms of 
streaming bit count is very, very difficult. That is the 
problem that needs to be solved and that is why there is no 
silver bullet. That is why I think it will be a combination of 
legal, business, technology and legislative solutions.
    Senator Feinstein. Streaming bit count?
    Mr. Barrett. Well, streaming bits; that is what the 
Internet is, ones and zeroes.
    Senator Feinstein. So what you are saying is there is a 
partial solution, but not an entire solution?
    Mr. Barrett. Well, there is no solution today--first of 
all, I believe there has been no solution suggested by the 
content industry. If it had, it would have come to the Content 
Protection Technical Working Group. No proposed solution has 
come from that body. We would certainly be willing to look at a 
proposed solutions.
    The solutions that have been made in public but not taken 
to the Technical Working Group involve such things as 
monitoring all Internet content flow. In my opinion, that is 
the analogy to wiretapping all Internet communications. 
Especially in front of this committee, I don't think that it 
would find much approval, and certainly amongst the privacy 
constituents I think it would not find much approval.
    The other one is the situation that I mentioned earlier, 
which is to compare all bit streaming, assuming you ignore the 
privacy aspect, with a database of all copyrighted content, 
basically having a fingerprint of all copyrighted content and 
looking at every Internet message to see if it contains that 
fingerprint. I don't even know how to do that technically, let 
alone overcome the privacy issues.
    Mr. Taplin. Senator Feinstein, if I could just----
    Senator Feinstein. My time is up.
    Chairman Leahy. Go ahead.
    Mr. Taplin. Can I just address the one issue about ``A 
Beautiful Mind?''
    Senator Feinstein. Yes.
    Mr. Taplin. Obviously, since that is a movie that has not 
been put on a DVD, so it is not commercially available, the 
only way that movie could have gotten in such a perfect form on 
the Internet is that someone stole it from a post-production 
house, which means that the movie studios themselves are being 
sloppy with their own protection of their content in the post-
production process.
    It means that someone took an output from a digital editing 
station or something like that, some assistant editor, and took 
it home and put it on the Internet. That is not an issue that 
any of these things that are being talked about would address. 
That is someone who stole a perfect digital copy from inside 
the movie studio and got it out there.
    Senator Feinstein. But then that is another problem because 
I think the movie companies can certainly protect themselves. 
On the other hand, the incentive then grows to steal this and 
to put it out on the Internet to make money.
    Mr. Taplin. If we had access to very larger libraries of 
content and could sell them for a reasonable price, which we 
are doing, I think the general consumer does not want to go to 
an illegally pirated site. And if you think about a combination 
of allowing much more content to come out legally with digital 
rights management technologies, we have been running for three 
years and have never been hacked, ever.
    If you put them out, the average consumer doesn't want to 
be a pirate, and then perhaps a little consumer education--
i.e., Don Henley or a few artists saying, hey, you are stealing 
my work if you are going to KazAA--might help.
    Senator Feinstein. I hope you are right about the average 
consumer. I am not so sure, though. But in any event, thank 
you.
    Mr. Barrett. My point was very much that it is a 
combination of a business solution, technology solution, and 
legal solution. I think all of those things have to work in 
tandem to protect the free content that makes its way to the 
Internet, whether it makes it from copying off a DVD or it 
makes it being stolen from a studio.
    Senator Feinstein. Thank you, Mr. Chairman. Thank you, Mr. 
Barrett. I appreciate the opportunity.
    Chairman Leahy. I thank the Senator from California. I know 
about the conflict she had today and I appreciate the amount of 
time she spent here.
    I turn to the senior Senator from Pennsylvania.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE 
                        OF PENNSYLVANIA

    Senator Specter. Thank you, Mr. Chairman.
    There is no doubt that we ought to do everything we can to 
protect intellectual property rights. When Mr. Barrett 
testifies that high-tech is losing $12 billion a year, the 
thought crosses my mind what can be done to protect high-tech's 
copyrights. And when we talk about $2.5 billion in losses for 
content from entertainment, that is a staggering figure.
    In reviewing the issues before this hearing, I am somewhat 
at a loss to figure out what this committee can do to make a 
constructive contribution. The legislation which is being 
circulated would require computer and consumer electronics 
manufacturers to embed copyright protection technology in all 
digital devices, from computers to compact disc players to 
video players. But the problem that I have is what does 
technology offer to meet that standard. As I review the 
literature, there are some technological devices, but as Mr. 
Barrett points out, if it is on the Internet there is nothing 
that has yet been devised.
    So what is the point, starting with you, Mr. Barrett, for 
Congress to get into this thicket and to require technology to 
solve a problem when the technology doesn't exist?
    Mr. Barrett. Well, I have a similar problem with that 
proposal that you read. I think that was from Senator Hollings' 
bill, or proposed bill. I don't think the technology exists to 
differentiate between lawful content, legally-produced home 
video, audio, what have you, and pirated content; that is, 
content which is not protected at the source such as we were 
just talking about.
    To differentiate between those on the Internet, you either 
have to outlaw legal content such that you could try to track 
down all content and do something with it, or you have to do 
the fingerprint analogy that I was mentioning. You would have 
to monitor all Internet communications and, on the fly, try to 
match content to see if it is copyrighted and unprotected and 
should not be allowed to pass.
    Senator Specter. Well, this hearing brings to my mind a 
hearing we had about 20 years ago on VCRs. I reminisced with 
Senator Biden. When he chaired the committee--I think it was 
about 1982--we were worried about what we were going to do 
there. We were going to have VCRs which didn't pick up the 
commercials and there were all sorts of concerns.
    I want to direct this question to you, Mr. Kraus, 
representing consumers here. As concerned as we are with 
intellectual property rights in the movie industry and high-
tech, we are perhaps even more concerned with the consumers. 
There are certainly more voters among the consumers.
    If we can develop technology which would meet this standard 
to have computer and consumer electronics manufacturers embed 
copyright protection technology in all digital devices, is it 
within the realm of technical possibility to have the 
technology such that it accomplishes that but allows consumers 
to use it for their own private purposes?
    Mr. Kraus. That is a good question. I don't know the answer 
directly because I am not familiar with the entire spate of 
technological solutions that are all being proposed.
    What I would advocate generally, though, is that we need to 
clearly define a set of consumer rights and then let the market 
adjudicate and decide what solutions best respect consumers' 
rights and copyright-holders' rights. Currently, consumers' 
rights aren't well enough defined to allow, I believe, the 
market to work successfully to develop technologies which 
respect both parties' rights.
    So that is what I happen to believe is an appropriate 
solution, is adequately defining consumers' rights. We already 
have adequate definitions of what the content owners' rights 
are. With those two rights in place, I believe the market will 
find technological solutions that can respect them.
    I wanted to also touch on the notion that the software 
industry has seen this movie before. As you have reflected on 
the VCR, you have seen this movie before. The software industry 
has been dealing with piracy for a very long period of time. As 
Mr. Barrett pointed out, $12.5 billion is lost to piracy per 
year in the software industry.
    In the mid-1980s, the software industry decided to impose 
strict copy controls on most software packages. What happened? 
It isolated and alienated paying customers. It didn't stop 
piracy. It actually made the paying customers more angry, and I 
would say we are currently seeing that movie again.
    We are implementing copy protection controls on consumer 
media, for which I understand the motivation, but in the end we 
are alienating the actual customers who then pay for that media 
and not actually having the impact on piracy that I think we 
would all like to see.
    Senator Specter. Let me come back to the legislation which 
is currently being circulated. I would be glad to get behind 
any legislation which would protect intellectual property 
rights. I am all for it, but the proposal to have the Secretary 
of Commerce come in, if there cannot be agreement among the 
parties to these kinds of controversies, really raises a 
question in my mind. Very frequently, the Congress does its 
best when it does nothing.
    Are we better off if we let the market work through and let 
the market seek the technological devices? If the market comes 
up with them, then there may be some inclination on the part of 
the parties themselves to resolve it. Very frequently, when we 
get into it, we cause more problems than we solve.
    Mr. Parsons, you have had a chance to catch your breath. 
What do you think?
    Mr. Parsons. Well, Senator, first of all let me start as I 
frequently find myself with my wife having to start, with an 
apology, and that is for being late to this hearing.
    Senator Specter. Mr. Parsons, we understand you came by 
air. If you had been on Amtrak, you would have been here on 
time.
    Mr. Parsons. If I had walked, I would have been here closer 
to the time than coming by air this morning.
    Chairman Leahy. I would tell the Senator from Pennsylvania 
and the Senator from Delaware, who are both strong supporters, 
as they should be, of Amtrak, that I had already put in a plug 
for Amtrak even earlier.
    Senator Specter. We may have some problems with the 
Hollings bill, but we have no problem with funding Amtrak, Mr. 
Parsons. [Laughter.]
    Mr. Parsons. I think the proper response is message 
received.
    I think, Senator, that the question you are raising about 
whether there is a helpful and useful role for the Congress 
here is the right one. Our view--and if I am going to be 
permitted in a minute to give my statement, I will expand on 
this a bit, but our view is that this is primarily an area that 
should be worked out in the marketplace; that the entertainment 
industry, the information technology industry, the consumer 
electronics industry and the software industry have got to get 
our act together and we have got to work hard to deal with 
these problems because it requires that degree of suppleness 
and flexibility.
    There are, we believe, a few areas where discreet, incisive 
help from the Government in the form of taking--we can take the 
ball to the five-yard line in some instances, and I will 
explain a little bit more of that in a minute, and to get it 
over the goal line we may need some help from the Government. 
But I don't think that this is a situation where government 
action should try, with a sword as opposed to a scalpel, to 
administer the surgery.
    I think we have work to do. We are doing a lot of work 
right now on a cross-industry basis, but there are a few 
discreet areas where some governmental assistance could prove 
helpful.
    Senator Specter. Well, thank you, Mr. Parsons. We are 
ready, willing and able to help out, but I think we have to 
know what the technology is if we are to legislate.
    I would like to come back later, Mr. Barrett, to this issue 
of the $12 billion which high-tech is losing. That is an 
intolerable situation. We want to protect your property 
interests so that you can continue to produce, and I think that 
if we can find the technology Mr. Kraus suggests we may be able 
to protect the consumer interests as well.
    Thank you very much. Thank you, Mr. Chairman.
    Chairman Leahy. Thank you.
    I know Senator Biden wants to leave. Do you want to say 
something?
    Senator Biden. Sixty seconds.
    Chairman Leahy. Sure.

STATEMENT OF HON. JOSEPH R. BIDEN, JR., A U.S. SENATOR FROM THE 
                       STATE OF DELAWARE

    Senator Biden. I want to explain that I promised the 
National Conference of Mayors I would meet with them at 11:30, 
and I will try to come back and I would ask that my questions 
be submitted to the panel if I am not back and just state that 
it seems to me there is a philosophical divide here. I want to 
make sure I understand it.
    It is one thing for us to be in a position where we make a 
distinction between what is inappropriately and illegally 
copied and what is legally and appropriately copied. That is a 
heck of a dilemma, but also in the case that we were faced with 
in the bad old days when I was chairman it was about whether or 
not we were going to force the consumer to have to listen to 
something, force them to listen to ads.
    This is about balancing equities here, consumers versus 
what is obviously an aggrieved party here. Whose responsibility 
it is remains to be seen, but I suspect--just so you know, we 
do have laws. If you all in the software industry and the 
computer industry were to manufacture those little wands and 
you could go up to the Texaco station and illegally get gas out 
at two o'clock in the morning, we would arrest you for that.
    If you were making keys that I brought in to you to get 
into other people's homes, we would arrest you for that. If you 
were taking little clickers into garages and me getting a hold 
of one and asking you to produce one with the same frequency, 
knowing it wasn't my garage, we would arrest you for that. We 
should think of arresting you maybe for some of the things you 
don't do, but that is a much larger question here and there is 
a balancing of equities here, unlike before. But I have an open 
mind on the Hollings bill and I will try to come back and hear 
what you all have to say.
    Thank you, Mr. Chairman. I know you have questions. By the 
time you finish, maybe I will be able to get back. Thank you.
    Chairman. Leahy. Thank you. That was 60 seconds.
    Senator Biden. No. It was probably 120, but it was close.
    Chairman Leahy. Mr. Parsons, we are delighted that you are 
here, and I do appreciate the fact that you went through a 
great deal to get here. Having sat frustrated on runways 
before, I know what that feels like. Jill Loesser has made sure 
that we knew you were coming, and you can feel free to give 
your statement now and then we will resume the questions, first 
with Ms. Cantwell and then Senator Hatch, and then I will ask 
my questions.

   STATEMENT OF RICHARD D. PARSONS, CHIEF EXECUTIVE OFFICER 
                DESIGNATE, AOL TIME WARNER, INC.

    Mr. Parsons. Thank you, Mr. Chairman. Again, apologies to 
you and the other members.
    Chairman Leahy. None necessary. There isn't a single member 
of this committee that hasn't been stuck on a runway at some 
time or another.
    Mr. Parsons. I want you to know that I have scrubbed off 
the side of our plane the logo, ``Leave time to spare, travel 
by air.'' It is Amtrak all the way.
    Chairman Leahy, Ranking Member Hatch, and members of the 
committee, I am actually very grateful for the opportunity to 
discuss an issue of great importance to my company, and I 
believe to our country. As the world's largest producer of 
information and entertainment, we at AOL Time Warner are also a 
leader in developing and utilizing digital technologies for the 
delivery of content in innovative ways. So we really sit on 
both sides of the issues that are being discussed today.
    Whether it is in the journalism of Time, Inc., Time 
magazine, CNN, or a movie like ``Harry Potter'' or in our music 
or our television programming, compelling content, we know, is 
what consumers want. But the continued availability of high-
quality content cannot be assured unless we can do it in a 
manner that is safe from piracy.
    This committee has a special awareness, and I believe a 
special competence, for not only understanding how essential it 
is to protect intellectual property, but for understanding the 
role that the Congress can play in that regard. Through the 
Digital Millennium Copyright Act, you helped establish needed 
and balanced legal protections for our industry.
    Digital technology offers significant benefits to content 
creators, to distributors, and above all to consumers. It makes 
possible a new level of reliability, variety and quality in the 
delivery of content. But this silver lining comes with a cloud. 
Along with breakthrough benefits, digital technology enables 
users to make unlimited, perfect copies, and distribute them 
globally with the click of a mouse.
    If I may, Mr. Chairman, I would like to show you an example 
of what we are talking about. This is a high-quality pirated 
version of ``Lord of the Rings'' that was available on the 
Internet literally hours after the theatrical release of the 
movie.
    [Video shown.]
    Chairman Leahy. I liked it better watching it at the Uptown 
Theater, but I got your point. I understand.
    Mr. Parsons. So did I, but it gives you some sense of the 
quality and vitality of what digital piracy can do in terms of 
capturing images and sounds and music, and enabling people to 
see it without having to go to the Uptown Theater.
    I read a story in the Times this morning that suggests that 
this is a battle between the entertainment industry and the 
tech industry, and that it is all about the entertainment 
industry's business model. I would submit that what is at stake 
here goes beyond copyright protection. It is a far broader 
question of property protection and notions which are 
fundamental to the functioning of free markets generally.
    If we as a society decide that there are certain areas 
where the rules against taking someone else's property without 
permission don't apply, we are not merely destroying the 
livelihood of a relatively few creative artists, or even 
subverting the economic rationale of a few large businesses. We 
are opening the door to economic anarchy that can undermine our 
markets.
    Now, at AOL Time Warner we have vigorously pursued the 
legal remedies that exist, but I must tell you litigation alone 
isn't enough. We need to protect intellectual property at the 
source and at all places where consumers have access to it, and 
to do so in a way that reflects the commitment of everyone 
involved to the development of meaningful protection for 
intellectual property even in the face of technological 
advance.
    Our goal is both to stop piracy and to offer consumers the 
easiest, most convenient access to digital content. We have 
worked with our colleagues in the information technology and 
consumer electronics industries over the past six years to 
develop content protections. And we have done a lot. We have 
accomplished a great deal in this cross-industry voluntary 
process and we are continuing to work together to meet new 
challenges.
    Sitting beside me today is Craig Barrett, whom you have 
already heard from, from Intel, which is one of the most 
committed and productive partners in our quest to protect 
content in the digital environment. Indeed, Intel along with 
other companies has spent considerable resources developing 
technical solutions which we have enthusiastically embraced. We 
look forward to continuing to work with Intel. In fact, we are 
collaborating with Intel to develop a written statement that 
articulates common principles to guide us. We hope to release 
that statement very soon.
    Some have asserted that new digital protection technologies 
will hamper consumers' ability to enjoy content in legitimate 
ways. The basic economics of our business plan plainly 
contradict such an assertion. The easier and more convenient we 
can make legitimate access, the greater the financial return. 
If we deny that access or make it burdensome or overly 
restrictive, consumers will either stay away or go elsewhere.
    We want those who purchase our products to be able to enjoy 
them in flexible, personalized and portable ways, and we 
believe in fair use. Under the content protection licenses 
negotiated to date, consumers will not only be able to continue 
to make analog home copies, but also to make protected digital 
copies of over-the-air broadcasts, basic cable, satellite and 
pay-TV offerings.
    We continue to make real progress in cross-industry content 
protection and are not calling for a broad government mandate 
of design requirements. Instead, it has become clear to us that 
some gaps exist that cannot be closed solely through license-
based voluntary protection systems, as I was saying to--he is 
gone now--Senator Specter. These gaps are treated at length in 
my written testimony and I won't burden the committee with a 
recitation of them here, but just touch on them quickly.
    There are really three, and on the first two I think we 
have made a lot of progress. The first is how to protect 
digital over-the-air signals that are in the clear and can be 
captured and copied. We think that we are working toward a 
definition of a broadcast flag that will mark those signals and 
keep them from being digitally reproduced, and that is an area 
where some government assistance may prove necessary.
    The second, which is the so-called analog hole or a 
situation where analog content which is in the clear can be 
then converted into digital unprotected content, we are working 
on and think we are making great progress in terms of 
watermarking techniques that once again might require some 
congressional legislation to enable us to get over the goal 
line. We have still got a little work to do.
    The third area, which is the most troublesome, is misuse of 
peer-to-peer file-sharing to traffic in copyrighted materials. 
This is the most difficult problem to solve. Indeed, to call it 
file-sharing is a misnomer. It really isn't sharing; it is the 
equivalent of online shoplifting.
    I think some of Senator Biden's examples aren't as far off 
the mark as they may have sounded to the uneducated ear because 
what this enables is for people to literally capture in digital 
format copyrighted materials and then share them with millions 
of people around the world, who will then have perfect copies 
for their use, all without respecting the rights of the owners 
of those copyrights.
    The pace and reach of this illegal activity continues to 
increase, unfortunately. New peer-to-peer services such as 
KazAA, Morpheus and Grokster are flourishing on the Internet. 
We have studies that show that at any given moment anywhere 
from half a million to a million people are simultaneously 
using one of these services and networks to find, reproduce and 
redistribute files, mostly in violation of the rights of 
underlying copyright owners--something on the order of 90 
percent.
    Now, no single approach, technical, legal, legislative or 
economic, can provide a solution, we feel. The active 
cooperation and committed participation of all industry 
sectors--the content sector, the consumer electronics sector, 
the computer and IT sector, and the service providers--will be 
necessary to develop a range of workable solutions.
    The main impetus will come from the business sector, and we 
endorse working cooperatively with our colleagues across the 
relevant industries. Yet, it is clear that at certain critical 
points our work must be complemented by targeted government 
action to support the solutions that the private sector 
develops, and to make them uniform in the marketplace.
    Chairman Leahy. You realize that those targeted government 
actions is where the rub is going to come in?
    Mr. Parsons. I do, I do, but I am confident that we can 
work together, first, as an industry. I love coming to talk to 
the Congress because it is all lawyers. It is like ``who has 
the burden of going forward?'' I think the industry, on a 
cross-industry basis, has the burden of going forward here, of 
developing a set of workable solutions that have the 
appropriate degree of flexibility.
    Chairman Leahy. I do, too, and I also think that the 
industry--as I said before you came in, I would hope that they 
would keep Senator Hatch and myself and the committee apprised 
of what you are doing.
    Mr. Barrett pointed out that people talk about economic 
losses to the software. What were the numbers you gave me, Mr. 
Barrett?
    Mr. Barrett. About $12 billion a year.
    Chairman Leahy. Twelve billion in piracy. The entertainment 
industry has piracy, too, but not of that amount, but both have 
an incentive. I want to protect the rights of producers and 
artists.
    I loved the movie ``Harry Potter.'' I enjoyed it as much as 
anything I have seen--I don't mean ``Harry Potter,'' but ``Lord 
of the Rings.''
    Mr. Parsons. Actually, both.
    Chairman Leahy. I liked them both, but ``Lord of the 
Rings''--I am a big Tolkien fan. I think I have read everything 
he has ever written, sometimes more than once, and I enjoyed 
that very much. But I also know that the company basically bet 
the farm in filming all three parts of the trilogy when they 
did it, and they should be protected in doing that.
    Now, they could have made a lousy movie and it goes down 
the tubes. That is their problem; that is business. But if you 
make a good one and they are going to make money, they ought to 
be able to get the advantage of it. At the same time, if Intel 
or IBM or anybody else makes software chips or whatever it 
might be and if they have spent the hundreds of millions of 
dollars to get there, they ought to be able to sell it.
    Now, somebody might not like what they make. They lose 
money; that is their problem. On the other hand, if they have 
got something that people really like, they ought to be able to 
make a profit on it and not suddenly find in other parts of the 
world or in our own country that somebody ripped it off and is 
selling it just for the cost of producing it, not the cost of 
developing it. As Mr. Barrett knows, there is a whale of a 
difference between the development costs and the production 
costs.
    Thank you, Mr. Parsons.
    [The prepared statement of Mr. Parsons follows:]

    Statement of Richard D. Parsons, CEO Designate, AOL Time Warner

    Chairman Leahy, ranking member Hatch, and members of the Committee, 
it is a pleasure to appear before you today and have the opportunity to 
speak about such an important issue. As the world's first Internet 
powered media and entertainment company, AOL Time Warner (``AOLTW'') is 
uniquely positioned to address the challenges and opportunities of the 
digital age. We have been a leader in developing digital technologies 
for delivering information and entertainment in new and innovative 
ways. Warner Bros. was the pioneer of DVD for video and Warner Music 
Group was the pioneer and first major record company to adopt the new 
DVD audio format. HBO was the first premium channel to offer nationwide 
high definition digital television. Time Warner cable has long been 
leading the way with digital video on demand. CNN.com offers a 24-hour 
news service over the Internet. And AOL is the world's leader in 
interactive services, Web brands, Internet technologies and e-commerce 
services with over 33 million subscribers.
    At AOLTW, we live with competing business models and interests 
every day. But we are certain of one thing: Compelling content, be it 
Harry Potter or an interactive textbook, is what consumers want. Good 
content fuels the creation of new distribution businesses and the 
innovation of new products and equipment. And the continued 
availability of high-quality content depends in this digital age on the 
ability to protect that content from piracy. Therefore, as you begin 
examining these issues, I urge you to be guided by the fundamental 
principle that guides our own business decisions: strong and effective 
protection of intellectual property in both traditional and new 
environments is essential.
    But this Committee knows that. You are experts on intellectual 
property protection, and through the Digital Millennium Copyright Act 
gave intellectual property owners important and balanced legal 
protections we rely upon as we innovate new digital business models. 
Digital technology offers significant benefits to content creators, 
distributors, and above all, consumers. It makes possible the delivery 
of higher quality in a wider range of formats and with greater 
reliability. Along with these benefits, however, it also poses 
substantial risks. Digital technology provides the ability to create 
quickly and easily an unlimited number of perfect copies, and allows 
for the global distribution of such copies with the click of a mouse. 
This obviously poses particularly damaging and challenging piracy 
risks. Our goal is both to stop piracy and to offer consumers what they 
want in terms of access to digital content. Before we get to the 
solutions, however, let me show you an example of the piracy we are 
facing--a high quality pirated version of Lord of the Rings that was 
available on the Internet while the movie was early in its theatrical 
release.
    We know that most consumers want to see continued creativity and 
are willing to pay a fair price for content. Unfortunately, right now, 
with the advent of services like Napster and more recent peer-to-peer 
file swapping sites, a generation of young people is growing up 
thinking it's all right to steal. At an average cost of $80 million per 
movie, that is simply not O.K.
    Therefore, protection of content must apply pragmatically in the 
real world and not depend solely on legal remedies to be pursued in the 
courtroom. Instead, it must reflect a commitment by all contributors in 
the value chain to develop robust marketplace alternatives that protect 
content while enabling technological advancement. In order to achieve 
such effective protections, we have reached out and worked with our 
colleagues in the information technology (IT) and consumer electronics 
(CE) industries over the past six years to develop various content 
protection technologies. We are far from done, but we have come a long 
way and are hard at work to meet the new challenges before us.
    I am pleased that sitting beside me today is Craig Barrett, from 
Intel. Intel has been one of the most dedicated and productive partners 
in the quest for protecting content in the digital environment. Indeed, 
Intel, along with other IT and CE companies, has spent considerable 
resources developing a number of technical solutions. We at AOLTW have 
enthusiastically embraced these solutions and we thank Intel for its 
past efforts and look forward to continuing to work together.
    Here's an idea of how much we have accomplished so far through 
collaborative industry work: an encryption system to protect DVD video, 
a technology to protect content passed through device-to-device 
connections in home networks, a technology to protect content as it 
moves from computers to display on a monitor, a technology to protect 
DVD audio, and a technology for making recordings for home use that 
inhibit the potential for digital piracy.
    The cornerstone of these cross industry efforts has been the 
following principle: to the greatest extent possible, copyrighted 
content delivered digitally should be protected with access control 
technologies, such as encryption, from the first point of distribution. 
Because the content is scrambled, only those devices and services that 
have the authorized keys may unlock it. To receive the keys, such 
devices and services must follow conditions regarding proper handling 
and usage of the content. These conditions are negotiated among 
technology providers, content owners and device manufacturers in 
license agreements, through a market-driven and voluntary process. 
Enterprising companies develop the technologies and the licenses are 
negotiated in private-sector negotiations. Content owners may choose 
whether or not to use any of the technologies, and product 
manufacturers are free to choose which, if any, of these access control 
measures they wish to enable on their devices in order to receive 
encrypted content.
    The technologies already developed and implemented by these private 
sector efforts have made possible new and attractive formats for 
delivering content to consumers. The DVD format stands out as a primary 
example. Consumers have enthusiastically embraced it and have adopted 
DVD much more quickly than any past format, including CDs for music and 
VHS for video.
    Some have asserted that content owners will use these new digital 
protection technologies to lock our content in some type of ``lock 
box,'' denying many consumers the ability to view or enjoy it. This is 
simply illogical. Our businesses thrive upon building as wide an 
audience as possible for our works. Others have hypothesized that the 
new content protection technologies will overreach and deny consumers 
any ability to make home copies. Again, they're wrong. Keeping 
customers satisfied just makes good business sense. We want those who 
purchase our content to have the ability to enjoy that content in a 
flexible and portable way in their homes. In fact, under the content 
protection licenses negotiated to date, consumers will not only be able 
to continue analog home copying, but also to make protected digital 
copies of over the air broadcast, basic cable and satellite and paid 
television such as HBO.
    We are proud to have made the strides we have to date. So, having 
made a good deal of progress in our cross-industry content protection 
efforts, what do we see as government's role? Simply put, it is filling 
the gaps. We are not calling for a broad government mandate of design 
requirements across the spectrum of products, devices and services.
    Instead, it has become clear that certain significant gaps exist 
that we cannot solve through license-based, voluntary protection 
systems since it is impossible to require all manufacturers to join the 
effort. These gaps occur when content is either initially delivered 
without access controls (i.e. ``in the clear''), or later converted 
into unprotected formats. Let me explain the first of these gaps: over 
the air broadcasts are delivered in the clear, with no access control. 
Therefore, there is no way to ensure through private sector technology 
licenses or any other contractual means that all devices which receive 
such content protect it against unauthorized digital reproduction and 
distribution.
    Significant work has been undertaken by industry to develop a 
method for identifying copyrighted broadcasts with a ``broadcast flag'' 
that accompanies the signal to indicate that the content should not be 
redistributed over the Internet. In order to ensure that devices that 
receive the broadcast signal obey the flag, there must be a legal 
requirement to detect and respond to it. We believe that such a 
requirement can be accomplished by narrowly focused government action. 
It appears that our partners in the CE and IT industries agree that 
this targeted government action is both necessary and desirable.
    An even more critical and systemic problem is what we call the 
``analog hole.'' Video content, even when delivered digitally in a 
protected manner, must be converted to an unprotected analog format to 
be viewed on the millions of analog television sets in consumer homes. 
Once content is ``in the clear'' in analog form, it can be converted 
back into a digital format which can then be subject to widespread 
unauthorized copying and redistribution, including over the Internet. 
This problem applies to all delivery means for audiovisual content, 
from DVDs to pay per view, to over the air broadcasts.
    One way to plug the analog hole is through the use of watermarks. A 
watermark is a way of embedding information in the content about its 
copyright status and permitted uses. The watermark is not perceptible 
to the consumer, but can be detected by devices. Furthermore, because 
the watermark is embedded, it is securely tied to the content and 
survives digital to analog to digital conversions. If devices that are 
capable of converting analog signals into digital form are designed and 
manufactured to detect and respond to the watermark, then the content 
can be appropriately protected.
    As with the broadcast flag, private industry efforts are underway 
to develop and select a consensus watermark. These efforts have been 
hampered, however, by patent disputes involving various parties that 
own watermark related intellectual property. Because a single watermark 
must be agreed upon, if private industry selection efforts fail, we are 
likely to turn to the government for guidance and assistance. Once a 
watermark is selected, some government action will be needed to require 
appropriate detection of and response to the watermark. In our view, 
effective government action can be narrowly focused on the particular 
devices or portions of devices that are capable of receiving an analog 
signal and converting it into digital. No broad mandate concerning the 
overall design of computers or consumer electronic devices is 
necessary.
    Now let me turn to an additional serious problem that remains to be 
addressed. The peer services and networks (including over the Internet 
and over broadband networks on college and university campuses) is 
rampant and exponentially growing. The popular unauthorized multiple 
reproduction and redistribution of copyrighted content over peer to 
term ``file sharing'' is a misnomer; this activity is equivalent to 
online shoplifting, in fact it's worse than shoplifting because it 
doesn't simply involve taking a copy for oneself, but distributing 
multiple copies throughout the world to others.
    AOLTW, along with the rest of the content industries, has pursued 
its legal remedies in a number of cases, most notably the Napster 
litigation. However, the pace of illegal peer-to-peer activity has 
grown considerably. A host of new peer-to-peer services, such as KazAA, 
Morpheus and Grokster, have flourished on the Internet. Studies have 
shown that at a given moment 500,000 to 1 million users are 
simultaneously making use of these services and networks to find, 
reproduce and redistribute files. If the past activity on Napster 
serves as any guide, approximately 90% of the activity on these 
services consist of unauthorized trafficking in copyrighted works.
    To date, the music industry has experienced the most dramatic 
impact from this digital piracy because sound recording files are much 
smaller and easier to copy and redistribute than are files of motion 
pictures and television programs. Record and CD sales were down 10% 
last year. In 2000, the top ten albums sold a total of 60 million 
units; in 2001 they sold 40 million units. And in 2000, 7 albums sold 
over 5 million units, whereas in 2001 none did. Because the world's 
largest music publisher, Warner/Chappell, as well as one of the five 
major record companies, Warner Music Group, are part of the AOL Time 
Warner family of companies, we are deeply concerned about the effects 
of peer to peer piracy on music.
    Advances in broadband and compression technologies mean that 
audiovisual works will soon be subject to such severe levels of online 
piracy, and that piracy of music will become even more extreme, unless 
this serious problem is brought under control. The Lord of the Rings 
clip I showed you earlier was downloaded from a peer to peer service.
    Solving this problem is the most complicated we have experienced to 
date. One contributing factor is the growing variety of increasingly 
decentralized peer to peer networks (e.g., Morpheus, Limewire, etc). 
Another is that content reaches peer to peer networks from a variety of 
sources including unprotected distribution (e.g. ``ripping'' from CDs), 
circumvention of protected content, and camcording from theater 
screens. No single silver bullet--technical, legal, legislative, or 
business--can provide a solution to this thorny form of piracy. The 
active co-operation and committed participation of all industry 
sectors--content, consumer electronics, computer, and service 
provider--will be necessary to develop a range, of solutions. 
Accordingly, content owners will need to share in the responsibility of 
finding the sources of unauthorized distribution. We do not yet know 
what type of government measures may be called for, but some assistance 
will likely prove necessary to supplement private sector efforts to 
bring this piracy under control and to create a more secure environment 
for content delivery.
    In conclusion, while the issues are complex, we believe that the 
lead must come from the private sector, complemented where needed by 
targeted government action. I believe that others share this vision, 
and hope that we can work together cooperatively with each other and 
with Congress to make it a reality.

    Chairman Leahy. Senator Cantwell has waited very patiently, 
and again I will not ask my questions yet, but I would like to 
give her a chance to ask questions. As I have noted before, we 
rely a great deal on her expertise in this field.
    Go ahead.

STATEMENT OF HON. MARIA CANTWELL, A U.S. SENATOR FROM THE STATE 
                         OF WASHINGTON

    Senator Cantwell. Thank you, Chairman Leahy. I think maybe 
somebody fell off their chair back there when they realized how 
much software piracy there was.
    I want to thank this distinguished panel for being here. I 
can't help thinking, Chairman Leahy, that this is a very 
different panel and set of information than we got probably 
from the Commerce Committee. I don't know if there is a way for 
these two panels to meet or information to be shared, but I 
would at least say that that information was at least as 
interesting as last night's Fox celebrity boxing match.
    Chairman Leahy. Did you watch that? [Laughter.]
    Senator Cantwell. I can't say that I did.
    Mr. Kraus. She taped it for later viewing.
    Senator Cantwell. I do think that there is some very 
interesting information being presented here this morning and 
it is very different.
    I would also like to note one other irony about this 
particular situation, and particularly as it relates to this 
committee, and that is not too long ago we had a similar 
hearing where the shoe may have been a little bit on the other 
foot, where some of the service providers and hardware 
manufacturers were coming in and saying we don't have enough 
content for these legitimate models, and when is the 
entertainment industry going to come forward and produce the 
kinds of agreements and the kind of content that we need to 
make these models work?
    In fact, Senator Leahy, you and Senator Hatch, I think, did 
an excellent job of looking and nudging, but restraining 
ourselves from at that point in time let's have a compulsory 
license and mandate that the content providers provide this 
much content to these service providers and to these hardware 
device people. So now the shoe is on the other foot, so I think 
it is very interesting.
    I think that I would warn the committee in making sure that 
we do not get government involved in a particular area where 
government is providing a solution and, in fact, picking 
technology winners and losers.
    I know we have entered into the record Walt Mosberg's 
column from this morning, but I think one paragraph of that is 
worth reading, where he says, ``So these media companies have 
legitimate problems. Unfortunately, they are trying to solve 
them with new laws and private industry pacts that would build 
copy protection mechanisms to every personal computer and 
digital recording and playback device on the market. That would 
mean severe limitations on consumers' long recognized right to 
unlimited personal, non-commercial use of legally purchased 
copyrighted material.''
    So I think that what we are really talking about here is 
the question about how we are going to come to this solution, 
how we are going to come up with a technology solution that is 
very hard to do. Ask the music industry. They had--I don't know 
what it was--2\1/2\, 3 years of SDMI in the process going over 
these very thorny issues. The Copyright Technical Working Group 
has been pushing through some of these same very tough issues 
and are trying to come up with the answers.
    I think it is important to think about where we are going. 
If we have had this much energy into what is really--I think, 
Mr. Parsons, you said it best, a complex set of solutions, and 
actually some very technical solutions yet to come. Where are 
we going to find the best answers to those technical questions? 
From a government agency or from competition within the 
industry? I am sure, as we speak, there are hundreds of 
developers out there working for a variety of different 
companies who will reap huge dividends when we actually do 
break through on some of these issues.
    [The prepared statement of Senator Cantwell follows:]

                  Statement of Senator Maria Cantwell

    I want to thank the Chairman for calling this hearing. The question 
of digital rights management is at the core of digital convergence and 
the process of developing standards will test every industry's ability 
to come together to fully benefit from the technologies that are so 
changing and improving products and services, and ultimately our 
culture and economy.
    We are in a transition, moving from an analog to digital world. 
Everyone is recalibrating--and it is a challenge.
    We in Congress have a responsibility to make sure that the 
appropriate balance is maintained--that owners and users of 
intellectual property have the appropriate rules to live by. The best 
way to maintain the balance is through consensus, not government 
mandates.
    For several years, the Content Protection Technical Working Group 
has been working to develop consensus-based copyright protections that 
balance the needs of content creators, equipment designers and 
consumers. I want to urge continued progress, not conflict; compromise, 
not mandates.
    I want to see industries continue to work together, to resolve the 
complex technical issues as rapidly as possible so we can move the ball 
forward on all the new services that are the promise of the Internet. 
This is not something the government can decide.
    Let me make a very important comment: piracy is abhorrent to me, 
and I am truly disturbed by the scale of music piracy.
    But technology serves many legitimate uses. As copy protections for 
movies and music are developed, these other uses must also be given 
consideration.
    As content protection standards are developed, we must assure that 
they facilitate, rather than interfere with the innovation; and 
facilitate, rather than interfere with the consumer's ability to fully 
enjoy new products and services.
    The question to me is not whether there should be copy protection, 
there must be.
    The real question is how protection standards should come about; 
whether technology standards should develop in the marketplace or 
whether the government should make the decision. The government should 
not be picking technology winners and losers.
    I look for-ward to hearing today from our witnesses on the progress 
the industries have made toward delivering the content and services the 
Internet promises to consumers.

    Senator Cantwell. A couple of things that concern me and I 
think speak to the complexity of the challenge of getting these 
solutions are some of the issues that are already out there on 
the table, and I guess I would like to direct my questions to 
those.
    First is the issue of the watermark. Mr. Kraus, you talked 
about this, but I want to make sure that I understand, in 
plugging the analog hole, exactly how that solution might work 
because there are a couple of things that I do now and there 
are a couple of things my colleagues do now and I am not sure 
we would be allowed to do them anymore.
    For example, when I am home in the State and often generate 
news, but yet fly back here to Washington, D.C., I don't always 
get to see it. So my staff will copy the six o'clock news, the 
stories that I am involved in, and because we have many 
stations throughout the State, thank God, that do cover the 
things that we do, they will compile that onto a CD and 
actually give that to me and give it to the other people in the 
delegation so that we can see how the coverage of our news 
events went. With a watermark solution, that kind of content 
could be blocked and that individual use may be prohibited.
    The second area, and I hope I am not going to get anybody 
in trouble here, but the Sunday morning shows are quite popular 
around here, but not everybody likes to spend their Sunday 
morning watching them. So, consequently, the Democratic network 
here, which is the network that runs on our Democratic TV 
through our offices--on Monday morning when we come back, all 
those Sunday shows are copied and put on a loop so that if we 
happened to miss those Sunday shows, we can come back and watch 
them in our office on our television set.
    Again, I think that the analog hole that we are talking 
about and a watermark solution would prohibit, if somebody 
implemented this watermark, us from doing that kind of 
activity. Is that correct?
    Mr. Kraus. The short answer is I do not know all of the 
details of the analog hole watermark fix, but I do know that as 
we sit here I do not believe that it is clear enough what a 
consumer's rights are such that any technical solution will 
make sure to respect them.
    Because there is significant disagreement about whether 
fair use exists or doesn't exist, or the extent to which fair 
use itself does exist for those who may agree that it does 
exist. I believe that, again, our organization is promoting the 
notion of a consumer technology bill of rights not as a way to 
mandate any technical solution, but rather to say that any 
technical solution that comes up must respect the intellectual 
property desires of the content creators, but also must respect 
the fair use rights of consumers.
    So, shortly put, I don't know all the details of the analog 
hole solution that are being proposed. My sense is a solution 
should be to clearly define consumers' rights in order to make 
sure that the market develops technological solutions that are 
satisfactory to both consumers as well as content providers.
    Senator Cantwell. Mr. Barrett, isn't that the challenge, to 
come up with a technical solution that protects content in what 
you want to, but allows that fair use, and that it is very hard 
to come up with digital bits that will do that?
    Mr. Barrett. Absolutely, but you could, for example, put 
into your flag or watermark that this content could be copied 
``x'' times only, and therefore promote some form of consumer 
fair use. Beyond those ``x'' copies, the rule contained in the 
watermark or the flag would basically not let it be copied 
again.
    I wouldn't pretend to proclaim whether or not the 
Democratic network here is legal or illegal in terms of 
redisplaying copyrighted work, but you can put rules into the 
system which would allow the consumer to, in fact, reproduce 
legal fair use consumer expectation copies of the content, but 
not allow unlimited copying of the content.
    Mr. Parsons. May I, Senator, because I do think the 
entertainment industry has a perspective on your question, and 
that is the things that are sort of anti-consumer in terms of 
the way consumers like to use and consume content that they 
have paid for or acquired legitimately are not good for the 
entertainment industry either. In other words, we want 
consumers to have easy and flexible use.
    So for things like copying broadcasts or any of the home 
uses that currently are available, you can tune the 
technology--as Mr. Barrett was saying, you can tune the flags 
or the watermarks to permit certain things and not to permit 
certain things. What we are seeking to do in these inter-
industry discussions is to fine-tune the technology so the 
kinds of things that you are talking about would continue to be 
permitted, but the things that are really sort of odious and 
disruptive of our ability and the artists' ability to monetize 
the fruits of their labor--namely taking those copies, posting 
them on the Internet, and then zipping it around the world to 
anybody and everybody who wants to share it--would be blocked.
    I mean, I think you can think of the home as a boundary 
limit. What goes on in the home and what you are currently 
permitted to do in the home, we can seek to tune the protective 
technology to allow you to continue to do that. But the sharing 
of this with massive numbers of other people is what needs to 
be interrupted.
    Senator Cantwell. I should just say I very much support 
strong piracy legislation and stopping piracy. It is critically 
important that we do that.
    I have, Mr. Chairman, one quick follow-up question that I 
just want to make sure that I understand. We have had some 
discussions with people--and maybe, Mr. Parsons or Mr. Barrett, 
you know the answer to this, but I think there is at least some 
dialogue and talk out there that maybe a possible solution to 
this is somehow picking a technology winner somehow, government 
would say, and that this ought to be a royalty-free standard.
    Is that something that we have discussed, because I don't 
quite understand that notion of a royalty-free standard in the 
sense that the content is all about protecting intellectual 
property? Somehow, these very bits that are going to protect 
that intellectual property are also intellectual property, and 
I don't know that the people who produced the content went to a 
better school or are smarter or something and their content 
should be protected and paid for, but the content that is the 
software bits somehow should be free. I am confused there.
    Mr. Barrett. I don't think you are confused. I think you 
understand the situation very well. [Laughter.]
    Chairman Leahy. I think the Senator understands it very 
well, too.
    Mr. Taplin. I would also say one thing about this idea of 
picking a winner.
    Senator Cantwell. So are people talking about royalty-free?
    Mr. Taplin. We have heard this, yes. You know, we work very 
closely with Warner Brothers and Chris Cookson, who is their 
senior technologist, and their idea is to not have a single DRM 
standard, but have multiple DRMs so that if one got hacked, the 
other could be replaced very quickly.
    I think the idea of having a winner technology that is a 
worldwide DRM standard would make it a target for every hacker 
all over the world. I would much rather have multiple companies 
competing in the marketplace to bring really robust 
technologies that companies like Warner's could easily switch 
out and constantly protect their content and stay one step 
ahead of the hackers.
    Senator Cantwell. Well, Mr. Chairman, I know we have to 
move on, but again I want to thank you and Senator Hatch for 
having this hearing and for the important role that the 
committee has played. I think that this committee has fostered 
a lot of dialogue and on both sides pushed the industry 
together to have dialogue, but has not mandated or sought to 
mandate compulsory licensing on either side, and I think that 
is important.
    Chairman Leahy. Thank you. Well, I thank the Senator from 
Washington State also for the contribution she has made not 
only today but in the preparation for this hearing.
    Senator Hatch, who has been good enough to try to juggle 
two different hearings this morning, is back, and rather than 
take my time on questions I yield to Senator Hatch.
    Senator Hatch. Thank you, Mr. Chairman. I appreciate it, 
and I appreciate having all of you here. I haven't been able to 
hear all the testimony, but I will read it all. We know that 
this is a very well-balanced panel.
    Mr. Parsons and Mr. Kraus, one of the reasons why online 
music fans have enjoyed the unlicensed music sites is that they 
have very deep offerings, including many hard-to-find, out-of-
print songs that are not economically viable in the brick-and-
mortar music world. It may be that they are not available on 
the major label-sponsored sites at this point because it is 
simply not worth the investment to clear the rights.
    While exploiting such music may not be worth the cost to 
major labels, there still may be fans who want it or the 
recording artist may find it worthwhile to exploit it online 
themselves, as a number of young artists do who haven't made it 
yet, and others as well.
    Would it make sense for us to work on a way to either more 
easily clear the rights for such music so that we could use it 
online or allow the original artists to take ownership of the 
recordings to exploit online themselves? If so, would you work 
with me on that?
    We will start with you, Mr. Parsons. It has been estimated 
there are millions of these tracks out there. Whether there are 
or not, I don't know, but there are supposedly millions of them 
that probably will never be heard, and if you took a battalion 
of attorneys you probably couldn't clear them all off, and the 
costs might be so great you wouldn't want to clear them off.
    Mr. Parsons. Well, I think the fact is that everything in 
anybody's catalog or library now in music has been digitized 
and is out there. It is all out there now.
    Senator Hatch. But it is not all licensed.
    Mr. Parsons. Only a small, small fraction of it is 
licensed, and that is the problem.
    Your question covered a lot of ground, Senator. Where you 
have an artist that hasn't been able to get exposure or hasn't 
been able to make a relationship with one of the music 
companies, or chooses not to because they feel that they have a 
different economic proposition or a different message to 
deliver and they want to have access to the Internet, we are 
all for that.
    The problem is that right now virtually all the music 
available in the world is in the clear, and it means that it is 
subject to being captured and distributed without respect to 
the artist's rights, the underlying copyright-owner's rights, 
if someone else wrote the music, and the rights of the 
recording companies that have invested in it.
    Now, as you know, because we have testified here before, we 
are willing and eager to work with you, and again on a cross-
industry basis, to find a paradigm where the rules of 
engagement, the rules of business conduct, can be observed in 
the Internet space and in the digital space as they are in the 
analog space. So we stand ready to do that.
    I don't know if I have answered your question because I 
don't know whether it was focused on rights of artists or 
rights of consumers.
    Senator Hatch. It is focused on both--the rights that you 
have, the rights that you want to keep, and the rights that 
really don't mean anything to you that you could give back to 
artists so that they could do whatever they wanted to with 
songs that literally are not going to do anything. Secondly, it 
is too expensive to clear all the copyrights. Wouldn't it be 
better to give those rights back?
    Mr. Parsons. But why isn't that a matter of negotiation? I 
think what you are talking about is artists who have existing 
relationships with music companies, where someone else now has 
a claim that could block them from exploiting music that never 
saw the commercial marketplace.
    Senator Hatch. I think what I am saying is that the labels 
hold many, many songs that are not available in stores, or 
never will be available for that matter, or even online. I 
think what I would hope is that out-of-print or hard-to-find 
songs could be made available to fans--there might be some fans 
out there--and give artists some value.
    Mr. Parsons. Listen, Senator, we entirely, and I 
personally, endorse that notion 110 percent. The Internet and 
digital technology is not just a threat; it is not just a bad 
thing. It is an opportunity. It is an opportunity to make out-
of-print or out-of-catalog or out-of-store music available to 
people who may not go to music stores so you can expand the 
market and you can offer deeper, richer product offerings and 
you can help the artists who made that music. But we need to 
find a way to do it so that----
    Senator Hatch. I think I am suggesting we ought to find a 
way to do it and we ought to do it really soon.
    Mr. Parsons. Well, we are happy to work with you, Senator. 
We have been toiling in that vineyard and I think we are making 
progress, but we are obviously not there yet.
    Senator Hatch. Thank you.
    Mr. Taplin. Senator Hatch, I would say also that that would 
apply to video as well.
    Senator Hatch. Sure.
    Mr. Taplin. We have seen the costs of storage of megabytes 
drop by almost 95 percent in the last 2 years, so that it would 
be technologically possible for us to put the whole 4,000-film 
library of Warner Brothers, many of which are no longer in any 
video store and no longer available on any network, and sell 
those to consumers for a reasonable price.
    It just seems to me there is such a wealth of artistic 
content in America that isn't getting exposed. Now, not only is 
storage cheap, but bandwidth is so cheap that it is possible 
technologically to do all this now.
    Senator Hatch. Mr. Kraus?
    Mr. Kraus. My perspective, Senator Hatch, I think is 
similar to yours, in that I believe this is really an issue of 
embracing the medium. So what do I mean by that? I would submit 
that while it is not the only driver of illegal music 
downloading, I believe that a major driver of illegal music 
downloading is the lack of choice and availability of 
legitimate alternatives.
    For example, on services like Pressplay and Musicnet 
currently, many of the songs that you download cannot be burned 
onto a CD for listening elsewhere. In addition, as you have 
pointed out, the catalogs themselves are very thin. I am sure 
that is being remedied. At the same time, I believe that that 
lack of choice and the lack of what you can do in the medium 
once you download it is one of the things that drives people 
toward illegal downloading services.
    Let me say that I know and fully respect that the content 
industry has every right to protect its intellectual property. 
Like I said in my testimony, I am a beneficiary of intellectual 
property myself. However, I want to contrast the approach and 
the statements being made with, I think, another existence 
proof, which is the software business.
    Mr. Parsons in his testimony mentioned--basically, I think 
we have heard many times a very doom-and-gloom approach that 
says if all of this is allowed to continue at uncontained rates 
that there is going to be no more content to be produced. I 
would submit the software industry itself as a counter-example 
of that.
    While there is a tremendous amount of piracy in the 
software industry, it is still a vibrant industry, and most 
software is distributed ``in the clear.'' So you have an 
industry which is offering digital download in software. I can 
go to most sites and download relatively any piece of software. 
The same file-sharing networks that are used to steal music I 
can steal software from.
    However, because there is consumer choice, consumers have 
legitimate options. I can go download, for example, an anti-
virus program directly from Symantec legally and I could 
download that and do with it on my computer what I wish. I can 
also download that same program illegally from Morpheus, KazAA, 
or Grokster.
    My argument here is that the software industry has embraced 
the digital download medium, has recognized that piracy will 
likely be a forever bane, and is dealing with it by going after 
the pirates and shutting them down. We have an alternate 
approach currently, and I hope that will change, and I hope 
that will change by defining clearly what a consumer's rights 
are in order to encourage the content industries to put more 
media online, offer consumers more choice, embrace the medium, 
and work out technical solutions to solve the boundaries 
between consumers' rights and their own rights.
    Senator Hatch. Well, I will submit other questions. My time 
is up. Thank you, Mr. Chairman.
    Chairman Leahy. Thank you, Senator Hatch.
    Of course, I am always interested in the debates and the 
questions we get up here, and when I ask questions I am going 
to go to one thing. The entertainment industry came to us a 
year or so ago when the FTC came out and said that they weren't 
doing enough to self-regulate the advertising of violent 
entertainment to children.
    There were all these requests for real tough governmental 
mandates on that. I was one of the few who said that we ought 
to let the market work this out, and I remember the 
entertainment industry saying it was great that somebody 
understood them. Now, we have the same entertainment industry 
coming in and saying, of course, we have got to have government 
standards and the industry can't work it out. It is an 
interesting thing and we are going to get into that.
    Senator Edwards has been waiting and I will again withhold 
from asking my own questions.
    Senator Edwards, go ahead. I have got to stay here anyway, 
so you go ahead.
    Senator Edwards. Thank you, Mr. Chairman.
    Chairman Leahy. I feel this is probably going to be more 
pleasant than the Judiciary Committee meetings later today.

 STATEMENT OF HON. JOHN EDWARDS, A U.S. SENATOR FROM THE STATE 
                       OF NORTH CAROLINA

    Senator Edwards. Thank you, Mr. Chairman. Thank you for 
holding this hearing, and thank you to all the witnesses for 
being here.
    Let me just make a few comments. I start with a core belief 
that I know has been recognized by probably almost everyone 
here that when people put creative energy and money and 
investment resources in creating a product, that product ought 
to be protected and protectable.
    The level of piracy we are seeing is just completely 
unacceptable--10 million movies download every month. I saw a 
report that one Internet copying racket has 1.8 billion 
unauthorized downloads every month. Clearly, the music industry 
is suffering. The movie industry, I think, is extraordinarily 
at risk. This piracy is an enormous drain on a creative, 
dynamic, important industry for our economy and we have to stop 
it.
    The second point I would make is that I think also this 
piracy is having an effect on other technologies, particularly 
broadband, because we know that broadband depends on the wide 
availability of content, content that requires broadband. We 
know that online movies are exactly that kind of content.
    The movie industry is nervous, and I think they have reason 
to be, about selling movies on the Web because those movies 
can't be protected. So I think we know that fighting illegal 
copying not only benefits the movie and the music industry. It 
also, I think, will be important in promoting broadband and 
benefiting American consumers and American education.
    Third, with respect to all these piracy problems--broadcast 
hole, digital hole, peer-to-peer systems--we all agree that it 
will be much better if the major players can work out the 
solutions on their own and that our role, government's role, is 
to enforce those solutions.
    If private negotiations don't succeed, then government may 
well need to step in. My greatest hope is that you all will 
work this out and that our role will be limited to backing up 
and enforcing your agreements.
    I really only had one area of questioning, and it has been 
touched on. I heard Senator Cantwell ask about it. I think 
another Senator earlier before I arrived asked about this 
subject, and it sort of goes to the fundamental question of 
what would need to be done to computers in order to provide the 
kind of protection that might be needed.
    The way I view computers is they are an enormously powerful 
and flexible machine that has obviously had an enormous impact 
on our country. But there has been at least some suggestion 
from what I have heard that in order to protect against piracy 
there may be a need to change what some people would consider 
the fundamental nature of a computer.
    I have trouble seeing that myself, but I am interested--and 
I know you all have touched on it at least tangentially when 
other questions were being asked, but I would love to hear what 
members of the panel think about that.
    Yes, sir?
    Mr. Taplin. Well, I don't think, quite frankly, anything 
needs to be done right now in the sense that there are really 
good, legitimate digital rights management technologies. There 
are at least three commercially available that not only allow a 
consumer to watch a specific piece of media for a specific 
period of time and not send it anywhere else and not forward 
it--and these technologies are being used by Time Warner in 
music downloading joint ventures, and being used by us in video 
streaming ventures.
    These technologies are consistently getting stronger, 
partially because of the cooperation of the technology industry 
and the entertainment industry. New ideas constantly come up 
between Warner Brothers and ourselves of, okay, how could we 
make the black box of the DRM work better and everything.
    So my sense is I don't think you have to fundamentally 
alter the nature of the intel architecture in order to do this. 
Are there certain things that could be done? Yes, but Intel, 
for instance, had a big blow-up when they had a specific 
processor chip identity and they could have bound a piece of 
media to only that processor. Everybody said, oh, this is 
privacy invasion.
    It could have been a very useful thing to literally make 
sure that a piece of media couldn't play on anything but the 
individual processor to which it was downloaded, and everybody 
went crazy on them on that. So I mean there are lots of cases 
where the industry is willing to do very innovative things and 
they run afoul of other problems.
    Mr. Barrett. I think the issue really is this, that if 
content is protected at the source, then, in fact, you can 
protect it through the rest of the system and its distribution. 
The DRM capability is there. You can upgrade that from a 
software standpoint. You don't have to do anything to the 
hardware to upgrade it.
    The challenge is when there is streaming media out there 
which is unprotected. It is just a bunch of ones and zeroes. It 
could come from a movie, it could come from a song, it could 
come from my home video. How do I differentiate whether that is 
copyrighted media or not, and what would I do to allow you to 
receive lawfully-generated information or streaming media and 
not allow you to receive copyrighted media?
    That is the major issue that the industry is facing today. 
All of the ``in the clear'' content on the Internet can be 
downloaded because it is not protected. And you ask what can 
you do to protect that? I don't think there is a simple 
technical solution to that.
    You could say you can't download streaming media. That 
would serve no one's purpose because there are many lawful 
applications for downloading streaming media--audio or video 
that you create in your home and your own grandchildren send it 
to their grandparents.
    There have been other proposals, not technical proposals 
but I think kind of pie-in-the-sky proposals, which are let's 
just compare the streaming media that is coming to you to a 
fingerprint of all copyrighted content in the world. So let's 
wiretap the information you are sending or receiving over the 
Internet and compare that to copyrighted content someplace on 
the fly.
    If it is copyrighted content and you are getting it in an 
unprotected form, then slam the door. I think there are huge 
technical challenges to doing that. I don't know how to do it, 
and I think there are huge privacy challenges to, in fact, 
listen to someone's Internet communications without their 
permission if you don't like what they are receiving.
    Senator Edwards. Can I get the comments of others? Mr. 
Parsons?
    Mr. Parsons. You have several things working. I don't think 
that there is--and I am not a technologist, but as I understand 
it, a need to re-architect computers. Much of what we are 
focused on now is, as Mr. Barrett was saying, how to flag, 
watermark, or otherwise encrypt digital material at the source 
and then, whether it be a computer or a consumer electronic 
device, detect that flag, that watermark, that encryption so 
that only the uses that were permitted at the source can 
thereafter be done.
    To some extent, as I just said to Senator Hatch, virtually 
all of the music in the world now is available in digital 
space. You can't get that horse back in the barn. But going 
forward, we need as an industry--and I think I want to trade 
your statement; yours was better than mine. We as an industry 
need to come up with a set of standards that say, okay, these 
are the rules going forward; this is how digital material needs 
to be flagged or watermarked or encrypted, and devices need to 
respect these stop signs, if you will. That may need some 
legislative push, but that doesn't require a reengineering of 
underlying computer technology or architecture. That is step 
one.
    I think step two is then to try and figure out how, with 
some of the stuff that is in the clear, it can either be 
fingerprinted--I mean, we are experimenting with some of this 
stuff now--or are there other technologies that can lay over 
the existing install base of computers that will help manage 
that problem as well.
    But the principal focus right now, I think, from an 
industry perspective, at least from my perspective is what do 
we do going forward, not what do we do about what happened in 
the past.
    Senator Edwards. Mr. Hughes?
    Mr. Hughes. I just wanted to add that I think that there 
are three questions when we are talking about digital rights 
management systems and whether they are mandated by government 
or simply agreed by private industry.
    One is how widespread they are; that is, the number of 
digital devices they cover. If you look at Senator Hollings' 
and Stevens' draft legislation, it is far too epic in its 
scope.
    The second one is how intrusive is the system. Mr. Barrett 
was completely right to say that many of the ideas that have 
been floated about are just too intrusive for our civil 
society.
    Then the third one is how will it affect the current 
expectations and the fair use rights of consumers.
    So the first question: digital rights management needs to 
be effective in combatting piracy, and then, third, we have to 
calculate the costs which I put under those three categories.
    Senator Edwards. Yes?
    Mr. Kraus. The last thing I would add is I would refer you 
on your original question of how does the re-architecture 
affect the computer industry to Professor Felten's written 
testimony. He says very eloquently that solutions that Mr. 
Barrett does not favor--for example, the fingerprinting--have 
an effect on the general purpose nature of a computer and why 
that is a powerful tool for innovation.
    He gives an analogy which I will repeat here, which is that 
by general purpose tool I mean that the computer is able to 
perform powerful operations on data without needing to 
understand everything about that data. That key element is what 
enables computers to be cheap, very flexible, and platforms for 
innovation.
    Let me give you another example in the world, which is the 
phone system. The phone system is general-purpose; it can 
perform powerful operations on data. Every nuance of every 
conversation you have is faithfully replicated by the network. 
But Alexander Graham Bell did not anticipate answering machines 
or voice mail or call waiting or modems and data transfer.
    The notion here is a general-purpose platform is very ripe 
for innovation because it is general-purpose and doesn't have 
to understand all the bits that go through it. Solutions which 
require computers to ``understand'' all of the bits that go 
through them are naturally more constraining and more expensive 
because they lack that fundamental nature of not having to 
anticipate all future uses of that platform itself. Again, the 
phone network is a perfect example.
    Senator Edwards. Well, I still have some trouble seeing it, 
but I appreciate it very much. I appreciate the testimony of 
all the witnesses and the work you are doing in this area, 
which as I said earlier I think is critically important.
    Thank you, Mr. Chairman, for having this hearing.
    Chairman Leahy. Thank you.
    Mr. Kraus, I couldn't help but think--it is somewhat 
related to what you were saying about the phones--I remember 
when government very fully regulated phones, innovations, what 
you could have. You couldn't get things like call forwarding, 
or you couldn't get all the other things because, no, we don't 
have to give you that.
    Then when they started allowing industry to come up with 
it, all of a sudden you were finding all the things that the 
phone company, when it was controlled with government saying 
what the standards were and it is a monopolistic and everything 
else--all of a sudden, wow, when you could compete with it, 
sure, you can buy a phone with everything from the hold button, 
to the transfer, to the conferencing, and on and on, the 
answering machines and all the rest.
    That is what I want to make sure of. I want to make sure 
that we are able--I don't want to stretch this analogy too far, 
but, of course, under the phone system criminal conduct did 
take place over the phone. People would call up and plan 
crimes, plan other things, the criminal. It didn't mean that we 
did away with the phone system. We tried to do away with the 
criminals. As a former prosecutor, I remember that very well 
when people would call up and plan an armed robbery or 
something like that. It is not the phone; it is the people 
doing it.
    Here, of course, we are talking about the fact that you can 
run millions of times more data in that same amount of time. 
Mr. Barrett's comments--and I keep going back to two of them 
especially, Mr. Barrett. One is the fact that you had better 
get this at the source or by then the horse is out of the barn.
    The other one is if you are going to try to track these 
things while they are going on, how can you possibly do that 
because you have millions, sometimes tens of millions of items 
going across the Internet? I am really struck by both of those 
analogies.
    I have asked that the committee be kept apprised on a 
regular basis, certainly every couple of months, about the 
progress being made in the inter-industry working groups on 
finding some technical solutions to protecting these digital 
copyrighted works, including the solution of the broadcast hole 
and analog hole.
    I went out to California a few weeks ago and met with 
content providers, software providers, and technical folks. Mr. 
Barrett, people were there from Intel, but also from the movie 
industry and others, trying to figure out how you bring about 
the solution. If I was at all sanguine that we could come up 
with an easy solution before the meeting, I certainly wasn't 
after.
    I mention that because I want to note publicly my 
appreciation to a lot of companies who have differing views on 
what should be done--the entertainment industry, the innovation 
industry, the software and other industries. Even though they 
had differing views, they all were willing to come at their own 
expense, come to this meeting, spend time, and do a great deal 
of work preparing for it. I just wanted to say that I 
appreciate that to all the companies that did it.
    That is why we want here for the committee--to the extent 
you are willing to share your progress with us, do so. The more 
sunshine we have on it, the better it is. We will be informed 
and less apt to be swayed by the statements of whoever thinks 
they have a momentary advantage saying an impasse has 
developed.
    I think there may come a time when you have that consensus 
solution, and then we can talk about whether we need any kind 
of a legislative blessing or legislative mandate there. 
Frankly, I don't think we are there now. Frankly, I think it 
would be a disaster to try to have legislation go through now. 
I think that it is possible that we could reach that point.
    I mention that only because if there are enough conflicting 
views on this, as a practical matter under the Senate rules no 
legislation will go through anyway. That may be a good idea, it 
may be a bad idea.
    So I would ask both of you, will you commit your companies 
to try to keep us apprised of what is going on?
    Mr. Barrett. Well, I think both AOL Time Warner and Intel 
will immediately send you a copy of our joint statement of 
principles in this area, and then from the technical working 
group we can give you periodic progress reports on solutions to 
at least two of the problems we mentioned today; that is, the 
terrestrial HDTV and then the analog hole issue.
    Chairman Leahy. And, understand, nobody is asking for 
corporate secrets on this. We just want to be kept apprised.
    Mr. Parsons.
    Mr. Parsons. Let me say, Senator, that I think your idea is 
a splendid one. Your notion of a little sunshine on the 
process--of course, we needed a little sunshine this morning to 
burn that fog off, but sunshine on the process here is good. 
That is a way in which you, this committee, and the Congress 
can be helpful by keeping some measure of gentle pressure on.
    It is a subject worthy of your tracking and following, and 
we will work together with our colleagues at Intel, as we have 
been, and our other colleagues both within the entertainment 
industry and across the CE and IT sectors to come back to you, 
I think you have suggested on a bi-monthly basis, and just tell 
you how we are doing. And we look forward to your administering 
the tough love when we need it.
    Mr. Kraus. Mr. Chairman, can I add that I think consumers 
do need to be part of that process of developing whatever 
standards are developed that end up affecting consumers' lives? 
They need to have a voice.
    Chairman Leahy. I want to make it very clear, Mr. Kraus, 
that I want your comments, and Mr. Taplin's and Mr. Hughes'. 
That is why we have got this new point on our Web site. You can 
feel free to contact me, you can feel free to post it in our 
Web site, and we are going to make sure that everybody knows, 
whether you agree or disagree with me. I can assure you that 
the people who disagree with me don't hesitate to let me know--
one of the reasons I am glad to have an on/off switch. But we 
won't turn it off; we will listen to what you have.
    Mr. Barrett, you and others on the panel have warned us 
about the cost to innovation that sometimes comes up with 
government intervention. Let's use a hypothesis: Say the major 
content companies persuaded us in Congress to mandate the use 
of certain anti-piracy technologies that they have presented to 
us, and then mandate that the Internet service providers and 
the online service providers and all digital device 
manufacturers support them.
    What does that do to you if you are working on developing 
new anti-piracy technologies that might serve the interests of 
content providers who may want to distribute their content in 
different ways?
    Mr. Barrett. Well, I think anything that freezes technology 
in place and stops innovation is bad for all parties 
concerned--the content owners, the intermediate hardware 
suppliers, software suppliers, and the consumers.
    My biggest concern would be to adopt a standard which would 
then stop development of new capability. If we had stopped the 
Internet and software at plain, flat-text messages going back 
and forth and saying that you are not allowed to do anything 
beyond that, then you wouldn't have had the CD-ROM, you 
wouldn't have multi-media, you wouldn't have the ability to 
translate audio, video, et cetera.
    If we stopped just with one form of transmission of rich 
content, then you will stop new compression technologies, new 
capability to bring the consumer a better experience, and allow 
the content owners to provide that content to the end consumer 
with a better business model.
    Chairman Leahy. You have such things as blue laser 
technology and all these other things that may change the whole 
picture yet again.
    Mr. Barrett. Well, certainly blue laser technology, or blue 
ray technology, is just going to give you ten times the content 
density in a DVD and will allow you pack more and richer 
content, better end user experience. This is precisely what has 
driven this industry forward. This is precisely what will allow 
people like Mr. Parsons to deliver better content, richer 
experience, better business model to the end consumer. The same 
with Mr. Taplin.
    Chairman Leahy. Mr. Taplin, did you want to say something?
    Mr. Taplin. Yes. My sense is that any attempt--and we could 
look at the digital TV problems that have happened when the 
government in Japan decided that there was going to be a 
digital TV standard and they made it an analog digital TV 
standard. The Japanese spent 10 years developing an analog 
high-definition television standard, only to find the year 
after they adopted and published it that it was totally useless 
because everyone had gone to digital.
    We happen to be using a technology called Ampeg 4, and 
there are lots of various variations of that. But when I 
compare what is happening in the Ampeg 4 world, delivered by 
Real and Microsoft and others, to the government Ampeg 2 
standard, it is unbelievable.
    Ampeg 2 has not changed from 3.8 megabits per second 
throughput in 12 years. Ampeg 4 gets better quality every six 
months at half the bit rate. It is like Moore's law on 
steroids. You know, we see the kind of innovation that comes 
with two competing companies, Real and Microsoft, constantly 
trying to better the quality at a lower bit rate, and that is 
what the marketplace delivers.
    If there was a government standard, my business would come 
to a halt because everyone would stop. There wouldn't be any 
content available to us at all, and my guess is it would take 
three or four years for everybody to actually bring it into the 
marketplace.
    Chairman Leahy. You also have a point. The Internet is 
worldwide. I get correspondence every so often from a friend of 
mine in Sri Lanka who sends me something that might have been 
in an article there.
    Mr. Parsons, I will see things on the CNN.com site that 
somebody picks up in whatever country it is and sends it back. 
How are you going to control that?
    Mr. Taplin. Well, I just came back from Europe, the Ce Bit 
convention.
    Chairman Leahy, If they don't have the same standards, what 
do you do?
    Mr. Taplin. Yes, and we saw some IP video, the same kinds 
of standards that we are using, delivered to cell phones that 
handle 9.5 kilobits a second through a 3G phone. It was the 
first time I said that really looks decent. So I mean there is 
constant innovation going on.
    We have got some standards now. It is called IP HTML, you 
know, a basic format and platform on which we can all work and 
innovate. That is the format that AOL's whole Internet service 
runs on and it exists already.
    Chairman Leahy. Well, gentlemen, you have been good. We 
have gone beyond the time we told you. I am going to submit 
some other questions for the record, but I would also suggest 
this. All of your statements will be made part of the record, 
but go back through this record, and I will make you an offer. 
If you see something in there, like I wish I had said this, or 
I wish I had added that, do it. This is not a ``gotcha'' kind 
of thing. I want your input.
    Excuse me. One of the problems with the dry air in here; I 
seem to have gotten a nosebleed. I am sorry. I apologize for 
that. We will stand in recess for a moment.
    [Pause.]
    Senator Cantwell [presiding]. Senator Leahy had to step out 
for just a moment. I am sure he is going to return because he 
wanted to make, I think, some last closing comments.
    I think, as I ran upstairs, that most of you made your 
wrap-up comments on this. Is that correct? Is there anything 
else anybody wants to add before we adjourn?
    Mr. Parsons. Well, Senator, having started late, I will 
cause us to go even later. I do think that several of you have 
indicated a sense of reluctance to jump into the pool now with 
both feet, that you are looking for more work--I will put it 
that way--on the part of the private sector.
    The reality of the circumstance we are in is he needs me in 
his business to make it work long term and I need him, and I 
think that recognition is becoming deeper within the industry 
and you can look forward to more cross-industry collaboration.
    But we need you to keep our feet to the fire and to make 
sure that that cross-industry collaboration is productive, 
because what is at issue here, what is at stake here is 
something larger than just the well-being of my industry or the 
well-being of the software industry or the well-being of the 
consumer electronics industry, or even the well-being of 
individual consumers.
    There are interests that are larger than that that underlie 
this whole set of issues we are talking about in terms of how a 
government of laws and a nation of laws that has built its 
position in the world on the basis of the fact that there are 
established rules and people can commit effort and can commit 
capital into an enterprise knowing what the rules are ahead of 
time and that those rules are going to be enforced along the 
way--that is the backbone of the American economy. That is why 
we are someplace different than so many of the other countries 
in the world because you can commit capital and effort and 
intellect on a set of rules that are fair and balanced and that 
will be there down the road so that you know where you are 
going at the time.
    I think that is what underlies this whole discussion and I 
think that is what the interest of this committee and this 
Congress is, ensuring that structure, that framework of rules 
and laws and property rights remains intact in this digital 
world.
    We have the burden of going forward in terms of trying to 
work it out, but you have the ultimate responsibility of making 
sure that we are moving forward. So I think that the structure 
that the Senator talked about and that this committee is 
imposing, saying keep us informed, we are not ready to jump in 
just now, but keep us posted, let us know of your progress, let 
us know if and when you do hit serious stumbling blocks, is a 
good one.
    Mr. Taplin. I would like to just take that one step 
further, and this is something you mentioned earlier in your 
statement. Companies like myself and Time Warner Cable have 
committed incredible amounts of capital to building the 
infrastructure to deliver video on demand in legitimate, 
encrypted ways.
    Some content companies who may not own last-mile networks 
or who may not have made those investments have chosen to 
perhaps withhold content from the broadband industry, in the 
mistaken idea that it would change the supply/demand curve.
    Mr. Parsons' company is paying 10 percent more margin 
points for video on demand this year than they were last year 
because people withheld content to a point that they needed to 
get some content out on their video-on-demand system.
    So I think it is important that we not confuse the piracy 
fear issue with other economic issues that some slightly 
misguided studios may have in terms of how to change the 
economics of the business, because we have all made huge 
capital commitments to an industry with the understanding that 
content would be forthcoming. And to have those content 
licenses withdrawn at the last minute sometimes--and AOL is the 
real exception; they really have been open in trying to build 
the industry. But some of their brethren have not been so 
forthcoming.
    Senator Cantwell. Mr. Hughes, did you want to make a 
comment?
    Mr. Hughes. Yes, Senator Cantwell. You had earlier asked 
where are we going to get the best solutions, and I think that 
that is a very legitimate question. I know that this is not an 
extensive discussion of that draft legislation that we have 
seen from Senators Hollings and Stevens, but Senator Specter 
pointed out that the decision about antitrust law in that draft 
legislation is to be made by the Secretary of Commerce.
    Well, I used to be in the Department of Commerce and to the 
best of my knowledge we didn't have any particular expertise in 
that area. At the same time, while that expertise is in the 
Antitrust Division of Justice and the FTC, this committee in 
its oversight function should rely on the expertise you pay for 
in the Patent and Trademark Office, in the Copyright Office, in 
the information policy experts at the Justice Department and 
the science agencies, to watch whether the solutions that are 
being proposed by the private sector are maintaining the 
balance in copyright law that this committee has for so long 
and with so much difficult sought to maintain.
    Senator Cantwell. Thank you.
    Well, I know as painful as these hearings might sometimes 
be, they certainly are illuminating. And no doubt, Mr. Parsons, 
as you have said, the products and services that the public is 
yet to reap the benefits of are incredible. And how they will 
help our economy and change our culture probably is not really 
known to all of us yet.
    Thank you for persevering. I think the chairman probably 
said it, or Senator Hatch, but we will be continuing to monitor 
this issue. Maybe a little more progress would be made, I 
think, for the music industry if we had a hearing every 7 to 12 
months. Maybe at the next hearing we have, we will have a 
little more of a report and a little more progress, but we 
thank you for being here today.
    The Senate Judiciary Committee is adjourned.
    [Whereupon, at 12:33 p.m., the committee was adjourned.]



    [Questions and answers and submissions for the record 
follow.]



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