[Senate Hearing 107-1154]
[From the U.S. Government Printing Office]



                                                       S. Hrg. 107-1154

                 PROTECTING CONTENT IN A DIGITAL AGE--
       PROMOTING BROADBAND AND THE DIGITAL TELEVISION TRANSITION

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 28, 2002

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
      Jeanne Bumpus, Republican Staff Director and General Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 28, 2002................................     1
Statement of Senator Allen.......................................     7
Statement of Senator Boxer.......................................     8
    Prepared statement...........................................     9
Statement of Senator Breaux......................................    42
Statement of Senator Brownback...................................     9
Statement of Senator Burns.......................................     4
Statement of Senator Dorgan......................................    10
Statement of Senator Hollings....................................     1
    Article from Time Magazine, dated Feb. 16, 2002, entitled The 
      Pirates of Prime Time......................................    27
Statement of Senator Kerry.......................................     6
Statement of Senator McCain......................................     3
Statement of Senator Nelson......................................     8
Statement of Senator Smith.......................................    10
Statement of Senator Snowe.......................................    44
Statement of Senator Stevens.....................................     4
    Prepared statement...........................................     4

                               Witnesses

Bechtolscheim, Andy, Vice President/General Manager, Gigabit 
  Systems Business Unit, Cisco Systems, Inc......................    65
    Prepared statement...........................................    48
Chernin, Peter, President and Chief Operating Officer, News 
  Corporation....................................................    16
    Prepared statement...........................................    18
Eisner, Michael D., Chairman and CEO, The Walt Disney Company....    11
    Prepared statement...........................................    13
Meyer, James E., Special Advisor to the Chairman and Former 
  Senior Vice President/Chief Operating Officer, Thomson 
  Multimedia.....................................................    66
    Prepared statement...........................................    56
Perry, Robert, Vice President, Marketing, Mitsubishi.............    67
    Prepared statement...........................................    50
Vadasz, Leslie L., Executive Vice President, Intel Corporation...    21
    Prepared statement...........................................    23
Valenti, Jack, President and Chief Executive Officer, Motion 
  Picture Association of America.................................    59
    Prepared statement...........................................    63

 
   PROTECTING CONTENT IN A DIGITAL AGE--PROMOTING BROADBAND AND THE 
                     DIGITAL TELEVISION TRANSITION

                              ----------                              


                      THURSDAY, FEBRUARY 28, 2002

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:35 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Ernest F. 
Hollings, Chairman of the Committee, presiding.

         OPENING STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    The Chairman. The Committee will please come to order. 
Today, we examine the copyright protection problems that have 
been stalling consumer adoption of broadband and digital 
television, and what Government should do to solve it. We have 
been here before, in 1962, under the All-Channel Receiver Act, 
Congress mandated that all television receivers include the 
capability to tune all channels, UHF and VHF, allocated to the 
television broadcast service.
    More recently, in 1998 Congress required that all analog 
VCR's recognize the standard copy control technology known as 
macrovision. In the former case, the Federal Government and the 
FCC took the lead. In the latter case, industry first agreed 
upon the macrovision standard, and Congress validated the 
agreement in legislation, so whether Congress or industry led 
the way, the results have benefited consumers and the industry 
both by providing Americans with wider access to programming 
and content. Ronald Reagan used to say, here we go again. 
Industries are at odds as to how to solve the critical content 
protection problems.
    We have got the tools to break the log-jam. First, rural 
and underserved areas aside, there is not a broadband 
availability problem, there is a demand problem. 80 percent can 
get broadband, but only 10 to 12 percent take it. Most 
Americans do not want to pay $50 a month for faster access to 
e-mail, but if more high-quality content were available online, 
consumers would come. Today, there is very little high-quality 
content available on the Internet. Why? Because content owners 
are fearful that premium content will be stolen, and their 
investment in creative works wasted. The same is true for 
digital television, where piracy deters programmers from 
putting high definition digital content over the airways.
    America's creative artists deserve protection. Our 
copyright industries are among our greatest economic and 
creative assets. The Framers recognized that innovation and 
creativity was instrumental to our country's economic health 
when they empowered Congress in the Constitution to protect 
copyrighted products. Now, however, in an era when products are 
delivered digitally, copyright laws mean less and less. Absent 
strong technological protections layered on top of the 
copyright laws, it is virtually impossible to enforce the law 
as it exists.
    I might note at this particular point that the copyright 
laws are there. That is a matter of jurisdiction for our 
Judiciary Committee, but while they know the law, they do not 
know the business, and this thing continues on into log-jam. 
Every week a major magazine or newspaper reports on the 
thousands of illegal pirated works that are available for 
copying and redistribution online. Academy Award-winning motion 
pictures, platinum records, Emmy Award-winning television shows 
all for free are illegal. I think last night on the Grammy 
Awards they had three college kids in a contest to see how many 
movies--I think it was 8,000 movies that they could download, 
or 6,000 songs I think, that they downloaded in 3 days.
    Piracy is growing exponentially on college campuses and 
among tech-savvy consumers. Over 10 million people use file-
sharing sites on the Internet to download movies and TV shows 
with no penalty. Such lawlessness contributes to the studios' 
and record labels' reluctance to place their digital content on 
the Internet or over the airwaves.
    When Congress sits idly by in the face of these activities, 
we sanction the Internet as a haven for thievery. Luckily, a 
solution is at hand. Leaders in the consumer electronics 
information technology and content industries are America's 
best and brightest. They can solve this problem. The consumer 
electronics and high tech industries claim they are ready to do 
just that.
    Only yesterday, America's top high tech executive sent me a 
letter to that effect. I want to believe them, but why have 
they not done it? This has been going on for years, and today 
the Committee wants results. Industry negotiations have been 
going on for years with little to show for it. Both sides share 
some blame in this area, as I see it. Some companies may have 
divided loyalties. Existing propriety digital rights management 
technologies licensed to content companies would be eliminated 
by the adoption of a single standard. Other tech companies 
profit from the sale of consumer electronics equipment that 
enables piracy in the first place, so when I listen to high 
tech's clarion call to the Government, please stay away from 
our business, I am reminded of the police chief in Casablanca 
who said, I'm shocked. I'm shocked that gambling's going on 
here.
    Senator Stevens and I are planning legislation that would 
place a deadline on affected industries to come together to 
solve these problems in private sector talks. We want industry 
to solve its own problem, and if they do, we will empower 
Government enforcement so that all consumer devices comply. If 
they do not, the Government's technologists and engineers, in 
consultation with the private sector, will step in.
    In addition, I would emphasize that we will work to 
preserve legitimate expectations of consumers and researchers. 
We will make sure that you can take the program off and make 
copies for your personal use on your VCR or for research. If 
they engage in lawful behavior at the home or at the 
university, we will permit them to do the same in the future.
    This will not be the first time Congress imposed 
technological requirements to benefit consumers, and it will 
not be the last. Other standard-setting issues loom ahead, such 
as the need to ensure compatibility of devices used by 
different cable operators, but that is a topic for another 
hearing. Today, we examine copyright protection issues in a 
digital age, and we have distinguished panels with us.
    Let me yield first to our distinguished former chairman, 
John McCain.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you, Mr. Chairman. I thank the 
witnesses for being with us today, and I will be very 
interested in hearing their insights on one of the most complex 
issues facing the transition to digital television and the 
roll-out of broadband services, which is content-protection.
    The transition to digital television has been a long and 
difficult road for consumers. It has been almost 5 years since 
Congress gave broadcasters an enormous amount of free spectrum 
so they could make the transition from analog to digital. 
Unfortunately, very few consumers have yet to experience high 
definition television. Moreover, industry in-fighting has 
caused more arguments than actual progress over cable carriage, 
interoperability, transmission standards, and content 
protection.
    The debate over content protection is a classic chicken-
and-egg story. Content providers spend vast amounts of capital 
each year to produce quality films and programming for 
consumers but are hesitant to supply it in digital form without 
protecting their investment from illegal copying and 
retransmission over the Internet. On the other hand, consumers 
have little incentive to purchase expensive digital television 
without compelling digital content. While DTV sales have been 
slowly increasing each year, an overwhelming majority of 
Americans are still purchasing analog sets.
    I believe the concerns of content providers are justified. 
They invest creativity, effort, and capital into producing 
high-quality films and programming, and should be able to 
adequately protect their investments. However, I believe that 
such protections must not come at the expense of stifling new 
and innovative technologies in the marketplace, and should not 
restrict the rights of consumers to view and record content 
that is legitimately purchased or obtained. I am apprehensive 
of proposals that select technological winners and losers and 
mandate Government intervention in the marketplace. The Federal 
Government has a poor track record in attempting to dictate how 
the marketplace should operate.
    I thank the Chairman for holding the hearing on this 
important issue and look forward to hearing from the witnesses, 
and I think, Mr. Chairman, that this may be the beginning of 
our examination of this very difficult and complex issue, 
rather than the end.
    I thank you, Mr. Chairman.
    The Chairman. Very good. Let me recognize Senator Stevens, 
our cosponsor.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Mr. Chairman, thank you very much. I have 
a short statement just echoing your comments. I will just not 
repeat it, and I will ask that you put it in the record, and 
would yield to Senator Burns, the Chairman of our Subcommittee.
    [The prepared statement of Senator Stevens follows:]

    Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
    I applaud the ongoing efforts of the Copy Protection Technical 
Working Group--the consumer electronics industry, the content 
producers, and others--to develop a standard to prevent Internet theft. 
The private sector, those in the business, are in the best position to 
develop a standard that works.
    I not only hope, but believe, the private sector can and will do 
the right thing to make it safe for the best producers and directors in 
the world to make their movies and television shows available through 
the internet and the digital airwaves.
    That, like nothing else, will stimulate the next quantum leap not 
only in the Internet and the devices used to take advantage of all it 
offers, but our economic engine as well.
    Soon we will be able to watch movies on our cell phones and even on 
our watches. But we will have no movies to watch if a film producer who 
has invested hundreds of millions of dollars feels he may be held up if 
he puts his most recent release on the internet or distributes it over 
the air for any bandit to steal.
    The private market place can forge a solution that would be more 
eloquent than anything government can do. But like Ronald Reagan, I 
believe we must trust--but verify. If the private sector cannot or will 
not develop a uniform, interoperable standard, government must step in 
to help to provide the proper motivation.
    Over the years Congress has done that when market forces have been 
unable to do what is in the best interest of the country.
    We did it in 1997 when we mandated digital television conversion.
    We did it when we mandated the V-Chip in televisions and filtering 
devices in libraries to protect kids from pornography on television and 
the Internet.
    And with a whole range of safety and environmental standards 
designed to ensure everything from safe booster seats for kids to safer 
food.
    After years of hard work, the industry now tells us it on the verge 
of a break through. it predicts an interim agreement on a standard to 
protect broadcast signals by March 31st of this year. I am anxious to 
hear today how those negotiations are proceeding and promise that those 
of us on this Committee will follow your efforts with interest.
    It is my strong hope and desire that those efforts will bear fruit 
and that this Committee can simply ratify the private sector agreement. 
But it that does not happen, I believe Congress will be forced to take 
further action.

    The Chairman. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman, and I thank my 
friend from Alaska. I am very pleased to be here today, and I 
am very pleased with the witnesses we have today because they 
are at the center of the discussion. We have come together 
today to discuss the protection of content in the digital age, 
along with the promotion of broadband technologies, to all 
Americans. While at first glance it appears to be a difficult 
and complex exercise, I believe, through, an honest assessment 
of the problem we can build a framework for the solution to 
this critical problem.
    We need to correctly determine whether or not the 
marketplace is sufficiently driving content protection 
standards, or whether we need to weigh in with legislation. 
While I believe that both the transition to digital television 
and the roll-out of broadband services are inevitable, the 
question is, if we do set policy, will it provide enough 
incentive to propel that process forward significantly.
    When all is said and done, we have two major American 
industries that are talking past each other. The entertainment 
industry is looking for technological solutions to protect its 
intellectual property as soon as possible, while the 
information technology community says that technology exists 
but does not want to impose a cookie-cutter solution. 
Meanwhile, the consumer who wants high-quality content over 
broadband pipes is reduced to waiting for the large players to 
come up with a solution.
    Throughout this debate, it is important to always bear in 
mind the stakes involved for intellectual property holders. The 
sheer volume and use of pirated content is astronomical. The 
Napsterization of our society continues to escalate. In this 
regard, a story I have been following closely is the free 
software program called Morpheus.
    Morpheus is a program that provides users instant access to 
media files other users have downloaded, and whether legally or 
not, have chosen to share. I am told more than a million users, 
on average, are online and utilizing Morpheus at a time. The 
download options are not only MP3 files but also television 
shows and full-length movies. It is obvious to me Morpheus and 
other programs like it pose a serious threat to content 
providers and have complicated issues of copyright protection 
and distribution of compelling content online.
    Until compelling digital content is made available to 
consumers, they will not purchase digital televisions or 
subscribe to broadband services. Content providers, however, 
are reluctant to provide quality content unless their material 
can be properly protected from pirating and retransmission via 
the Internet. Until the issues affecting broadband roll-out and 
the transition to digital television are resolved, consumers 
are left out in the cold.
    This problem is not going to go away. I have spoken with 
several interested parties, and have found that some think 
there needs to be set a Government-imposed standard to protect 
content. Some want more time. Some want action now. Some want 
licensing, and some think Government interaction will only 
stifle the process. While I do not claim to know which of these 
scenarios is best, I am hopeful we can find out, or find the 
outline of a solution anyways.
    It is my hope the parties involved can reach agreement on a 
way to protect the content that works technologically. If that 
is not possible, Congress may indeed step in and will have to 
take a more active role, a prospect that I do not look forward 
to but may be necessary in the end. Usually when we come up 
with Government-imposed solutions, we also create more 
problems. I thank the Chairman.
    The Chairman. Thank you. Senator Kerry.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you very much. This is 
one of those really interesting cross-sections of interest 
issues that comes before us with enormous consequences, 
economic consequences to some very large players, and I think 
it is fair to say that it is the aspirations for those economic 
consequences that perhaps are slowing down the process a little 
bit.
    Some people who might have a solution, or who may be able 
to offer one, obviously have an economic interest in how that 
solution plays out, and to a large degree the market share 
desires that go along with those solutions are governing the 
rapidity with which they are able to reach a closure here.
    I think it is important, and I think the comments of each 
of my colleagues up to this point underscore what is at stake 
here. Our Founding Fathers were very clear, Article I of the 
Constitution creates this property right, this right in 
creative product to be held for a certain period of time, and 
you would have chaos in the marketplace--to some degree we do 
now--if there is not a means of enforcing that.
    Analog piracy, I gather, in the motion picture industry 
already is at about the $3 billion mark. Clearly, when you can 
make a perfect copy and with the punch of a button distribute a 
perfect copy to thousands, tens of thousands of people, the 
undermining of Article I of the Constitution, the undermining 
of the order in the marketplace is just extreme. It is in all 
of our interests to address that. We have a balance of payments 
deficit that is enormous. One of our best industries that 
addresses that is the surplus in the combined industries 
represented here, and we have got just a huge economic interest 
to try to resolve it.
    The question for us, obviously, is sort of a series of 
interlocking and cross-purpose public policy interests. I mean, 
do we rely on market forces, which is our preference, and many 
people in the industry have been saying to us, do not tamp down 
creativity, do not prevent the capacity of creative enterprises 
to come up with technological solutions. Well, that is true. We 
would love that to have happened and to happen, but it is the 
economic interest that to some degree gets in the way of that.
    I mean, do you adopt one standard? Will there be several 
offerings? How do you manage the hardware component of this 
coupled with the software component? These are all crossing our 
public policy interest. Or do we mandate that certain 
technologies be used to prevent the copying of movies, music, 
and software? If the wireless example of Europe is any example 
at all, they established a standard. We have seen some 
differentials in our own deployment of wireless as a 
consequence of our not having done so as we leave it to the 
marketplace.
    So Mr. Chairman, it is clear our first preference. I think 
everybody on this Committee would like the solution to come 
from the industries themselves, and we would like them to be 
adopted as rapidly as possible. It might be that we need to 
legislate initially, sort of codify whatever voluntary 
agreements they arrive at, if that were to make sense, but if 
the parties cannot, I would suggest that we reencourage them to 
try to come together in short order to see if they can do more 
to find a solution, and I would urge the leaders in the high 
tech motion picture and consumer electronics industry to hasten 
that negotiating process, but if not, we may be stuck with the 
need to legislate somehow some broader way to resolve this in 
order to protect the marketplace and the interest of our 
country in the end.
    Thank you, Mr. Chairman.
    The Chairman. Senator Allen.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I want to thank you 
for calling today's hearing, and I want to thank all our 
witnesses for coming, and I look very much forward to listening 
to your concerns and some of your possible hopeful solutions to 
this challenge.
    As chairman of the Republican High Tech Task Force, we care 
about this issue and I care about it and have a special 
interest. As stated by Senator Kerry, I think we all recognize 
the value of the music industry, the motion picture industry, 
and television as a tremendous export for business, but it is 
also an export of our country as well. I will always remember 
being in Tasmania speaking to fifth graders explaining my House 
of Delegates District as being the home of Thomas Jefferson, 
and none of them knew anything about Thomas Jefferson--they are 
still loyal to the Queen there--and I said, but Nelson County 
is the home of--I do not know if you have seen it, a show 
called ``The Waltons''. They all smiled. They all had heard of 
the Waltons and it is, again because of exports. Whether it is 
music or motion pictures, it is very important for our economy 
as well as hopefully a positive influence on our culture.
    And all of us agree that piracy is something that we want 
to stop. Protection of content is a significant concern not 
only for the intellectual property owners, but also for the 
content providers, and also I think for the whole technology 
industry as a whole. I think we all desire to protect the 
content, to also provide the consumers with more choices.
    What Senator Burns said is exactly right. This whole nexus 
between broadband, the roll-out of broadband, the desirability 
of people paying a higher cost for broadband, a lot of that is 
determined by how compelling the content is to pay that higher 
price for high-speed Internet access. Senator Burns, I agree 
with you 100 percent.
    Now, this issue has to be addressed. I welcome 
encouragement of voluntary multi-industry dialogs, but I am 
leery of any process where the Government, rather than the 
market, develops and specifically mandates the technology 
standards.
    I do understand in some areas that where the marketplace 
and all the parties do agree on various standards or criteria, 
that eventually the Government would have to come in and ratify 
those standards. For example, the analog hole issue eventually 
will need that sort of an approach. I think it is in all 
parties' interests to come up with a solution. I think, though, 
that if you have a Government-imposed mandate over these 
technologies, the industry will only be stifled in innovations 
and investments in technology, and I question whether 
Government mandates anyway would be adequate over time to 
protect the content from computer hackers.
    The key is for everyone to work together and find credible 
standards so that the content providers, the folks that invest 
literally tens of millions of dollars for the production of a 
movie, or whatever the product may be, feel that it is not 
going to be easily pirated and unlawfully infringing on their 
copyrights.
    Now, it is my understanding, Mr. Chairman, that there are 
companies such as Entertainer.com, Cinemanow.com, that 
currently offer secure digital rights management software for 
online distribution of music and video content. Business models 
are only beginning to develop in this industry, and the fact 
that some major movie studios already feel sufficiently 
comfortable to provide online movie distribution to these web 
sites suggests that this debate is a business model dispute 
rather than a public policy debate of the Government coming up 
with a standard or passing a law that says in 2 years the 
Government will come up with a standard however long it takes 
for that to be done.
    Now, there have been, Mr. Chairman, strong partnerships 
between the diverse high tech industry and the content sectors 
to develop protection technology such as DVD encryption 
systems, the DVD CSS encryption standard, and the privacy 
content protection system. So, Mr. Chairman, I think this is 
helpful, a good start, as Senator McCain said, and I look 
forward to trying to prod the private sector toward getting to 
where we all want to get. We all share the same goal, because 
it is important for our Nation's economic future, it is 
important to protect private property rights, because if you do 
not, you will not invest those millions and millions of dollars 
and create all those jobs if you are not going to get a return 
on that investment.
    I look forward to hearing from our witnesses as we try to 
address this challenge. Thank you, Mr. Chairman.
    The Chairman. Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, I will be very brief so we 
can get on. I have a daughter who is a budding artist. She 
writes, she sings, she choreographs, and she dances, and she 
would not want her work stolen, nor would the people who 
produce songs want that work stolen, so we have got to find a 
solution here. I am looking forward to the testimony.
    Thank you.
    The Chairman. Very good. Senator Boxer.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Thank you, Mr. Chairman. I ask that my 
statement be put in the record in the interest of time. I just 
want to point out to first thank you and Senator McCain for 
your leadership on this very important issue. Out of the seven 
witnesses today, five are from my State of California. I want 
to welcome them. I think it is symbolic of what this means to 
my State. Literally, all the stakeholders really, most of them 
come from my State. We must resolve this. To me, it is simple. 
Stealing is stealing, and so we have got an issue here. We have 
got to address it. I think we can address it in a way that is 
fair to consumers, that is fair to the artist, and that is fair 
to the high tech companies, but I, too, hope it will come from 
them, but I do stand ready to act if we must act, and I thank 
you very much.
    [The prepared statement of Senator Boxer follows:]

 Prepared Statement of Hon. Barbara Boxer, U.S. Senator from California
    Thank you Mr. Chairman for holding this hearing on how to protect 
digital creative content from theft. You have played a crucial role in 
bringing this issue to the forefront for discussion and I thank you for 
doing so because its resolution is of vital importance to the future of 
the film studios, technology companies, and the Internet.
    As you can tell by the impressive representation of California 
talent on both of the panels of witnesses testifying today, this issue 
is of extreme importance to my state.
    Let me begin by stating what I believe is a fundamental principle: 
Stealing is stealing. And while new technologies have made stealing 
creative content easier, it does not make stealing creative content 
right. We are here today to explore ways to stop people from stealing 
content.
    The good news is that the industries involved in discussions on how 
to protect digital content are well on their way to a solution on two 
pieces of the puzzle. There is some agreement on digital copyright 
protection of over-the-air broadcasts of creative content and some 
agreement on protecting material that flows through analog devices.
    Unfortunately, one issue seems close to an impasse: how do we keep 
files from being illegally shared and distributed over the Internet? I 
want to challenge all of you to commit to resolving this issue as soon 
as possible and in a way that is fair to consumers, the technology 
industry, and the producers of creative content.
    Chairman Hollings has introduced a bill to force that resolution. I 
look forward to hearing your thoughts on his bill as well as other 
possible solutions to this problem.

    The Chairman. Thank you. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman. Thank you for 
holding the hearing. Thank you for the witnesses and their 
attendance and presentations here today. I want to take a 
little different tack on this and to note something that just 
happened in the House in providing the pipelines for this sort 
of material to be able to get out. It is fitting that today's 
hearing comes less than 24 hours after the House of 
Representatives overwhelmingly passed the Tauzin-Dingell 
broadband bill that deregulates in that field. That bill seeks 
to create robust competition in the broadband marketplace by 
freeing up local phone companies from certain network-sharing 
regulations in the broadband market.
    The regulation will place phone companies on a level 
playing field with the cable industry, providing incentives for 
phone companies to deploy broadband systems that not only 
provide a fast Internet connection, but have the added benefit 
of enabling them to compete with cable companies in this 
multichannel video market by providing consumers with a direct 
link to content providers. This competition would in turn force 
the cable industry to release its strangle hold on that market 
and open the floodgates on its own Internet pipes. One only has 
to look as far as the always-evolving and highly competitive 
wireless industry to witness the benefits of such a 
deregulatory move.
    I have introduced my own version of the broadband 
regulation legislation that shares some of the same goals. 
There are several Members of this Committee that have differing 
versions and differing views on this issue. However, we all are 
seeking and certainly try to provide an across-the-board 
deregulation of the local telephone last mile facility, and to 
be able to provide a system where we can get more of that fast 
Internet service and more competition out there.
    The Broadband Deployment and Competition Enhancement Act of 
2001 extends deregulation only to those additions to the 
telephone network that make broadband services possible over 
existing phone lines, and I note all of this because what we 
are talking about is trying to get more services out to 
consumers and to protect those services as they are getting 
out.
    I think we can see what is taking place in the House that 
is going to be a strong, we hope a strong competition for this 
high-speed Internet access. We need to be able to protect those 
intellectual property rights. I hope we can move forward on 
both fronts in this effort so that we can get the pipes out 
there, we can protect the material so people can have access to 
this in a quick, easy, protected fashion.
    So I look forward to discussing possibly some of that as 
well with the witnesses that we have here today.
    The Chairman. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, I want to say, the question 
is not whether we do something here. The question is how we 
address this important issue, but I think most of what needs to 
be said has been said.
    The Chairman. Very good. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman. I am here to 
listen.
    The Chairman. Very good. Senator Smith.

                STATEMENT OF HON. GORDON SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman. Everything that can 
be said has been said, so I will not repeat it, but I do want 
to recognize Mr. Vadasz from Intel who is here. He is a citizen 
of my State, and we are honored to have him here, and I think 
we all share the feeling that we are caught between two of 
America's greatest industries, and hope that this hearing will 
provide a forum so that we encourage resolution of a very 
serious issue, which is stealing, and also the freedom of the 
marketplace to develop without undue Government intrusion.
    Thank you, Mr. Chairman.
    The Chairman. Very good, and we do have a very 
distinguished panel here. Mr. Michael D. Eisner, Chairman and 
CEO of the Walt Disney Company, Mr. Peter Chernin, President 
and Chief Operating Officer of News Corporation, and Mr. Leslie 
Vadasz, the Executive Vice President of Intel. The Committee 
welcomes you, and we would recognize Mr. Eisner.

  STATEMENT OF MICHAEL D. EISNER, CHAIRMAN AND CEO, THE WALT 
                         DISNEY COMPANY

    Mr. Eisner. Thank you, Mr. Chairman. I want to thank you--
--
    The Chairman. And the full statements will be included and 
you can, of course, deliver it as you wish, in full, or 
highlight it, but all three statements will be included in the 
record.
    Mr. Eisner. I also want to thank Senator McCain and all of 
your colleagues for inviting us to discuss the distribution of 
creative content over digital broadband and digital broadcast 
distribution systems. I am here today representing not only the 
shareholders of the Walt Disney Company, but also the hundreds 
of thousands of people across the country who participate in 
the creation of American film entertainment. I am talking about 
directors, writers, actors, editors, electricians, truck 
drivers, all sorts of laborers, the list goes on and on. They 
work on television shows and they work on movies. On many film 
projects, they work as long as 4 years, until the film is ready 
to be distributed in a theater. If the result of their efforts 
can be digitally stolen, copied, and distributed around the 
world before the first ticket is purchased on opening weekend, 
then these people will no longer be able to earn their 
livelihood because there will simply be no longer a need to 
have a movie business, and that business will not employ them.
    Consider the impact on assembly line workers if the latest 
model Chevrolet were to be mass produced and given away free 
before the car ever got to the showroom. You may think this is 
unimaginable, but it is exactly the prospect that is being 
faced by our industry.
    I know this sounds alarming. It is alarming, and it should 
be alarming. But make no mistake, this is not just about 
entertainment, this is about the economy. U.S. creative content 
industries, which, as has been alluded to already this morning, 
produce such distinctly American products as films and 
television shows, lead the U.S. economy in contributions to job 
growth, gross domestic product, and foreign sales and exports. 
That creative work accounts for a larger percent of U.S. 
foreign sales and exports than most other sectors of our 
economy, including automobiles, aircraft, and agriculture.
    But all this success is threatened by digital piracy--or 
what we would commonly call theft. To be sure, piracy has 
always been with us. But, digital piracy is different. In the 
analog world, each successive copy degrades in quality and 
sharing a copy requires one consumer to physically relinquish 
that copy to another person. In digital, each copy is perfect. 
The one millionth copy is identical to the original. And, 
because of the ubiquitous nature of the Internet, perfect, but 
unauthorized, copies will be able to be transmitted 
instantaneously all over the world, with no regard whatsoever 
for the rights of the content owners. For a chillingly real 
depiction of where we are headed, please take a look at this 
clip from a year-old ``NightLine'' program in which 15-year-old 
Benjamin illustrates his ability to take--for free--any motion 
picture or television program of his choice.
    [A video was shown.]
    Mr. Eisner. We know that we can never achieve, nor do we 
expect, 100 percent content security. But there must be a 
reasonably secure environment to prevent widespread and 
crippling theft of this creative content that drives our 
economy. As Benjamin clearly demonstrated, today, we are not 
even close. One research firm, Viant of Boston, estimates that 
more than 350,000 illegal pirated movies are downloaded from 
the Internet every day. In fact, today you can go to the 
Internet and find illegal copies of brand-new films such as 
``Harry Potter'', ``Lord of the Rings'', ``Monsters, Inc.'', 
``Ocean's Eleven'', and so forth. Just take a look at this 
excerpt from a recently downloaded pirated copy of ``Black Hawk 
Down''.
    [A video was shown.]
    Mr. Eisner. There are several key considerations that 
should be part of the solution to this pressing problem. First, 
in addition to being in the interests of the creators of 
content, it is also in the interests of the device 
manufacturers and consumers that there be common technological 
standards. Second, technological standards should not be 
dominated by any single company, and should be open so that 
consumers have convenient access to all content from all 
producers.
    Third, the private sector should be given every reasonable 
opportunity to develop appropriate means of protection, and to 
adopt common, open standards for use in a wide variety of 
delivery devices, such as televisions, computers, Palm Pilot-
like devices, or anything that can receive audiovisual works. 
Only in the event that computer companies, consumer electronic 
manufacturers, software manufacturers and the content providers 
fail to act should the Government set standards. But the 
pressure of a timeline for eventual Government action is 
critical to getting the private sector to do what is needed.
    And let me add that we are delighted that yesterday eight 
companies offered to get to work immediately. It is about time, 
actually. But anyway, they finally did. So, any time period you 
put into this legislation, whether it be 18 months, 12 months, 
6 months, whatever it is, should now begin today, because the 
letter that was sent is as of today. So, that could be the 
first day of a new world of working together. It is amazing how 
that letter came in yesterday.
    Anyway, fourth, the standards that we seek must be 
consistently adaptable, renewable, upgradable, and extendable 
without the necessity of time-consuming bureaucratic processes 
in either private sector or in Government standard-setting 
organizations.
    Fifth, once standards are set, they must be mandated for 
inclusion in all digital media devices that handle creative 
content.
    Finally, it is critical that the Government act now to help 
achieve appropriate solutions. The digital pirates are not 
waiting to act, and neither can our Government.
    Of course, any legislative solutions must be vetted by all 
appropriate committees of Congress. And, legislation will enjoy 
smoother sailing if it proceeds from agreement among the 
affected industries, consumer groups, and others with a stake 
in the digital future.
    Given the complexity of the situation, we also acknowledge 
the need to avoid unintended consequences of any legislative 
intervention. But, the time to solve this problem is running 
short.
    There are those who would argue that it is unprecedented to 
have Government involvement in the mandating of technological 
standards. This simply is incorrect. There are numerous 
precedents for a Government role here, such as the All-Channel 
Receiver Act, which mandated VHF and UHF tuning in all 
televisions, and the Digital Millennium Copyright Act, which 
mandated Macrovision copy control technology in all VCR's. 
These are examples of precedents where the Government has said, 
put this piece of equipment in your television sets and have 
UHF reception, or change the way you are dealing with VCR's.
    Others claim that Disney and other content-owners are 
seeking to stop home taping or eliminate fair use. Let me state 
for the record we are not here to hinder libraries and college 
professors from using portions of creative works for scholarly 
research. Nor are we here to interfere with consumers who wish 
to time-shift television programming.
    Finally, the most outlandish misstatement I have heard is 
that content providers want to stifle innovation, 
experimentation, and research by our Nation's vibrant high 
technology companies. This is simply ridiculous. At Disney, we 
embrace technology. Continued innovation in high tech is 
necessary for our company to evolve and grow.
    In short, all we are asking is that the Government 
facilitate the creation of standards to enforce current 
intellectual property laws. Providing a more secure environment 
for content is the single most important step the Government 
can take to stimulate broadband deployment and the digital 
television transition. And beyond the specific benefit, the 
protection of copyrighted works will make it possible for 
millions of Americans to continue to partake of the 
extraordinary economic benefits that result from our Nation 
being the preeminent content producer in the world. And, it 
will allow the hundreds of thousands of artists and would-be 
artists in high schools and grade schools to continue to have 
something to aspire to.
    I thank you again for the opportunity to testify here 
today. I would be happy to answer any questions you might have.
    [The prepared statement of Mr. Eisner follows:]

  Prepared Statement of Michael D. Eisner, Chairman and CEO, the Walt 
                             Disney Company
    Thank you Mr. Chairman. I want to thank you, Ranking Member McCain 
and all of your colleagues for inviting us here to discuss the 
distribution of creative content over digital Broadband and digital 
Broadcast distribution systems. For all the reasons that I will share 
with you today, The Walt Disney Company urges the United States 
Congress to act to facilitate the establishment of open and common 
standards for technological protection of creative content in digital 
distribution.
    U.S. produced movies, TV shows and other audiovisual works are part 
of the creative content industries that lead the U.S. economy in 
contributions to job growth, Gross Domestic Product and foreign sales 
and exports. Creative content represents nearly 5 percent of GDP, 
generates more than $450 Billion annually and provides jobs for more 
than 4 million Americans. In fact, creative works account for a larger 
percentage of U.S. foreign sales and exports than almost all other 
sectors of our economy, including automobiles, aircraft and 
agriculture. By facilitating the establishment of open and common 
standards for protection of creative content, Congress will be acting 
to ensure the domestic viability of one of the most important positive 
contributions to our nation's balance of international trade.
    Technological content protection standards also will play an 
important role in stimulating the deployment of Broadband 
communications networks, accelerating the digital television transition 
and re-energizing the sale of many different digital devices, including 
personal computers. Our nation's build-out of Broadband networks is 
going too slowly. The sale of computers and other digital media devices 
has slowed. And, the pace of the digital television transition is a 
frustration to many including the local broadcasters who have invested 
Billions of Dollars in new digital transmission facilities.
    The availability of high quality motion pictures and television 
programs on DTV and on Broadband networks will help drive consumer 
demand. That consumer demand will hasten the deployment of DTV, 
stimulate the sales of digital media devices and speed the build out of 
the vital telecommunications infrastructure that will drive our digital 
economy.
    Digital technology and Broadband communications hold the promise of 
tremendous economic growth for our Nation. At Disney, we have embraced 
advanced digital technology. We were one of the first major studios to 
deliver our product digitally to consumers via direct broadcast 
satellite. We have one of the largest and most successful digital 
videodisc businesses. We broadcast digital television every day. We 
have state-of-the-art digital feature film production studios and were 
the first to produce and deliver our films completely in the digital 
realm with major titles such as ``Dinosaur,'' ``Toy Story'' and 
``Monsters, Inc.'' Currently we are pioneering the development of 
digital cinema screens throughout the world. And, we have entered into 
a joint venture with News Corporation entitled Movies.Com. This new 
company will establish a direct broadband connection between U.S.-
produced motion pictures and U.S. consumers sitting in their own homes. 
Using advanced digital technology, Movies.Com will enable exciting new 
choices and options for consumers wishing to access our movies and 
other creative content.
    These Disney investments demonstrate two things. First, our Company 
has been enthusiastic in its embrace of new technology. Second, the 
digital revolution holds the promise of great economic growth for our 
nation and wondrous new services for our citizens. Unfortunately, these 
same digital technologies can enable a level of piracy--theft--that 
would undermine our capacity to produce films and entertainment, 
undermine the deployment of Broadband networks, undermine the digital 
television transition and ultimately result in fewer choices and 
options for American consumers.
    To be sure, piracy has always been with us. But, digital piracy is 
different. In the analog world, each successive copy degrades in 
quality and sharing a copy requires one consumer to physically transfer 
that copy to another. In digital, each copy is perfect--a perfectly 
coded series of ones and zeros. The 1,000th copy is just as perfect as 
the original. And, because of the ubiquitous nature of the Internet, 
perfect, but unauthorized, copies can be transmitted virtually 
instantaneously all over the world with no regard whatsoever for the 
rights of the content owners. For a chillingly real depiction of where 
we are headed, please take a look at this short clip from a recent 
``Night Line'' program in which 15-year-old Benjamin illustrates his 
ability to take--for free--any motion picture or television program of 
his choice. [Play Night Line clip]
    We know that we can never achieve--and do not expect--100 percent 
content security. But, there must be a reasonably secure environment to 
prevent widespread and crippling theft of the creative content that 
drives our economy. As Benjamin clearly demonstrated, today, we are not 
even close. One research firm, Viant of Boston, estimates that more 
than 350,000 illegal pirate movies are downloaded from the Internet 
every day. In fact today, you can go to the Internet and find illegal 
copies of brand new films like ``Harry Potter,'' ``Lord of the Rings,'' 
``Monsters, Inc.'' and ``Ocean's Eleven.'' Just in case you have any 
doubts about picture quality, just take a look at this excerpt from a 
downloaded pirate copy of the recent film ``Black Hawk Down''. [Play 
clip]
    There are several key considerations that should be a part of the 
solution to this pressing problem. First, the interests of consumers, 
content owners and device manufacturers ALL require that there be 
common technological standards. Common standards will prevent consumers 
from confronting a bewildering array of confusing and incompatible 
standards. Common standards will help create a technologically 
predictable market to which content owners can bring their movies and 
other works. And common standards will make it reasonable to mandate 
that device manufacturers build the necessary hardware and/or software 
into their devices.
    This does not mean that there will be a single ``silver bullet'' 
solution or that all content owners must use the same digital rights 
management system in the distribution of legitimate content. Rather, 
what the market needs is some means to ensure interoperability and a 
common set of ``baseline'' technologies to help digital media devices 
identify and reject the illegal, pirated copies.
    Second, the technological standards should be open--not limited to 
the proprietary developments of a single firm. Widely available open 
standards, licensed at reasonable costs, will prevent the emergence of 
new ``gatekeepers'' who could retard the development of new digital 
services and limit consumer choice in content. A top public policy goal 
for Broadband should be open standards so that consumers have 
convenient access to all content from all producers.
    Third, the private sector should be given every reasonable 
opportunity to develop appropriate means of protection and to adopt 
common open standards for use in a wide variety of delivery devices. 
Only in the event of private sector failure should government set the 
standards. But, the pressure of a timeline for eventual government 
action is critical to yield the desired standards in a reasonable time 
frame.
    Fourth, the standards that we seek must be renewable, upgradeable 
and extensible without the necessity of time consuming bureaucratic 
processes in either private sector, or government, standards setting 
organizations.
    Fifth, once standards are set, they must be mandated for inclusion 
in all digital media devices that handle creative content. This is 
necessary to ensure a reasonably secure environment and to prevent 
unfair competition by non-compliant device manufacturers.
    Finally, it is critical that the government act now to help achieve 
appropriate solutions. Disney is very grateful for the efforts of many 
in the Congress who have tried over the years to ``jawbone'' the 
affected industries to negotiate the required technological standards. 
For example, we thank Chairman Hollings and Ranking Member McCain for 
scheduling this hearing, which has acted as a healthy spur to 
discussions in the private sector. Other leading legislators have been 
helpful as well. Members of both the House and the Senate, Democrats 
and Republicans have written to the Motion Picture Association, to the 
Electronics Industries Association, to prominent high tech companies 
and to the FCC urging swift private sector agreement on technological 
standards to protect creative content in the digital world. And, we are 
grateful to Chairman Hollings and Senator Stevens for the Discussion 
Draft Legislation that they circulated last year. That Discussion Draft 
contained many innovative suggestions to break the Gordian knot that 
has frustrated all prior attempts to solve the digital piracy problem.
    Of course, any legislative solutions must be vetted by all the 
appropriate Committees of the Congress. And, legislation will enjoy 
smoother sailing if it proceeds from agreement among the affected 
industries, consumer groups and others with a stake in the digital 
future. Also, given the complexity of the problem, we need to proceed 
carefully so as to avoid unintended consequences of any legislative 
intervention. But, the time to solve this problem is running short and 
prior attempts at jawboning have not produced a solution.
    Some high tech companies, like Cisco Systems, have been helpful in 
the search for solutions and to them we express our gratitude. 
Unfortunately, other high tech companies have simply lectured us that 
they have no obligation to help solve what they describe as ``our 
problem.'' In fact, at least one high tech executive has described 
illegal pirate content as a ``killer application'' that will drive 
consumer demand for Broadband. Obviously, the development of Broadband 
networks is an appropriate National goal only if those networks are 
conduits for legitimate--not pirate--content.
    I would like to respond briefly to some of the arguments that have 
been raised against efforts to deal with this problem. First, some 
argue that it is unprecedented to have government involvement in the 
mandating of technological standards. That argument is incorrect. There 
are numerous precedents for a government role here. For example, the 
Audio Home Recording Act of 1992 required that all digital audio 
recording devices conform to a specific content protection technology, 
namely, the Serial Copy Management System (SCMS). And, the Digital 
Millennium Copyright Act of 1998 requires all analog VCRs to include 
the Macrovision copy control technology. The All-Channel Receiver Act 
required all television sets sold in this Country to contain both VHF 
and UHF tuners. Clearly, there is ample precedent for legislation to 
mandate technical standards.
    There is another issue I'd like to clarify. Disney and other 
content owners are not seeking to stop home taping or eliminate ``fair 
use.'' We are not here because we want to hinder libraries and college 
professors in using portions of creative works for scholarly research. 
Nor are we here because we want to interfere with consumers who wish to 
make a home copy of Broadcast and basic cable TV programs for their own 
personal time-shifted viewing. We are confident that the government can 
act to facilitate the needed technology standards without endangering 
home taping or fair use.
    Finally, I want to emphasize that Disney has no desire to stifle 
innovation, development, experimentation and research by our nation's 
vibrant high-technology companies. We embrace technology--it is an 
everyday part of our business. Continued innovation in high tech is 
necessary for Disney to evolve how we create and distribute our content 
and to reach consumers in new ways. We are eager to work with the 
consumer electronics and information technology industries to ensure 
that the technological standards we seek are NOT an impediment to 
continued innovation and experimentation.
    I thank you again for the opportunity to testify here today and I 
would be happy to answer any questions that you might have.

    The Chairman. We thank you, sir. Mr. Chernin.

   STATEMENT OF PETER CHERNIN, PRESIDENT AND CHIEF OPERATING 
                   OFFICER, NEWS CORPORATION

    Mr. Chernin. Good morning, Mr. Chairman, Senator McCain, 
Members of the Committee. My name is Peter Chernin, and I am 
the President and COO of the News Corporation. Thank you, Mr. 
Chairman, for inviting me to participate in today's hearing. I 
would like to take this opportunity to applaud you for your 
leadership on seeking to ensure copyright protection for 
content producers in the digital broadband age. News 
Corporation is one of the world's largest media companies. Our 
job is to create and select the most valuable information and 
entertainment and to distribute it as widely and as efficiently 
as technology will allow.
    The entertainment industry is in a very exciting but 
challenging time. The rise of broadband, Internet, and other 
digital technologies is providing us with tools of 
unprecedented flexibility that we are only now beginning to 
fathom. However, we strongly believe that the great potential 
and promise of broadband, Internet, and other digital 
technologies can be fully achieved only if protections are in 
place to safeguard our investment in the development and 
distribution of content.
    Recently, we have seen more and more programs like DivX, 
Gnutella, Morpheus, Bear Share, and LimeWire that streamline 
the downloading of motion pictures and television programming 
without compensation to the copyright-holder. With the advent 
of broadband, it is only a matter of time before these file-
sharing technologies and other technologies have a serious 
impact on the economic viability of the motion picture and 
television broadcast industry.
    One solution to this dilemma may be that we only distribute 
our content through media that are secure, for example, pay 
cable, direct broadcast satellite, and DVHS on digital 
distribution channels to the home that provide a basic level of 
security for digital content. In fact, even the Internet itself 
is not the culprit. It is the unauthorized redistribution of 
unencrypted content that we seek to halt.
    In each of these distribution methods, we are able to 
protect our content through either negotiation, licensing, or 
contractual arrangements. However, there is one major digital 
distribution method that does not currently offer adequate 
protection, digital over-the-air broadcast television. 
Presently, cable and satellite have a competitive advantage of 
DTV due to the closed nature of cable and satellite systems 
that allow for encryption and thus the protection of content. 
DTV is not encrypted for public policy reasons and thus does 
not enjoy the same protections today.
    However, we have identified a technological solution that 
works without encrypting DTV. It involves insertion of a 
broadcast flag in DTV's signals that can be detected upon 
receipt by DTV processing equipment. Once detected, the 
receiving device would protect the content from being 
redistributed illegally on the Internet. Unfortunately, we have 
not yet reached agreement with the consumer electronics and 
information technology industries about the use of the 
broadcast flag.
    Mr. Chairman, as you are no doubt aware, there has been an 
ongoing effort for the last several years to negotiate the 
protection of all digital audiovisual content delivered to the 
home network, including but not limited to DTV. These 
negotiations are often referred to as the 5C negotiations, and 
have made substantial progress with regard to the protection of 
pre-recorded and conditional access delivered content. Fox 
applauds that progress. However, I regret to report to you 
today that these negotiations are at an impasse over 5C's 
refusal to include the broadcast flag in its license.
    I have always believed that an agreement should first be 
brokered through voluntary industry-led negotiations and then 
blessed by Congress to ensure a level playing field against 
rogue companies who will not sign up for voluntary obligations. 
But time is growing short for digital TV copyright protection. 
The parties to the negotiations all know that the broadcast 
flag provides a workable low cost technological solution to 
this problem, yet the 5C companies have been unwilling to 
embrace this license-first then legislation approach.
    I would hope that the 5C companies and their CE and IT 
brethren would rethink their positions. If we cannot arrive at 
a voluntary industry consensus very soon, broadcasters will be 
forced to come to Congress to ask for legislation.
    Another problem is that we need to be able to protect 
analog content, given that hundreds of millions of TV sets can 
only accept analog and not digital content. Unfortunately, 
analog content can easily be converted into an unprotected 
digital form that can in turn be copied or redistributed 
without authorization. We are developing a plan to plug what is 
known as the analog hole that includes harnessing watermark 
technology that would prevent such conversion from being used 
to avoid content protection obligations.
    Finally, we are working on a plan to frustrate the 
unauthorized viewing of content delivered via the Internet. We 
are mindful of not overcorrecting a problem by burdening 
Internet appliances any more than necessary, but we are 
confident that the problem can be solved.
    It is reported that every day hundreds of thousands of 
movies are being downloaded without compensation to the 
copyright holders. The competition from these illegal copies of 
our movies and TV shows is the single biggest obstacle to 
developing a viable business model to offer video content on 
broadband. Again, we are optimistic we can develop a 
technological solution to address this phenomenon in a cost-
effective way.
    At the end of the day, Mr. Chairman and Members of the 
Committee, if we do not find creative solutions to these real 
and growing problems, DTV protection, plugging the analog hole, 
and the wholesale looting of content via the Internet, 
consumers will be the ultimate losers. While some may see a 
short-term gain in avoiding copyright protection, the long-term 
result will be less consumer choice, and stunted American 
technological growth and development.
    Thank you for providing me this opportunity to present the 
views of News Corporation. I would be happy to answer any 
questions, sir.
    [The prepared statement of Mr. Chernin follows:]

  Prepared Statement of Peter Chernin, President and Chief Operating 
                       Officer, News Corporation
    Good morning Mr. Chairman and Members of the Committee. My name is 
Peter Chernin and I am the President and Chief Operating Officer of the 
News Corporation. Thank you, Mr. Chairman, for inviting me to 
participate in today's hearing. I would like to take this opportunity 
to applaud you for your leadership on seeking to ensure copyright 
protection for content producers in the digital broadband age.
    News Corporation began fifty years ago as the owner and operator of 
a single newspaper. Today we are one of the world's largest media 
companies. News Corporation operates newspapers, a publishing house, a 
film company, a television network, television stations, cable program 
networks, and the largest TV production studios in the world. Yet in 
all that time, and in all those businesses, the company's basic 
function has not changed. Whether we're delivering the New York Post in 
Harlem, New York, broadcasting our FOX television programs to viewers 
across South Carolina, or preparing our novels from Harper Collins to 
be downloaded onto e-books for students in Alaska, News Corporation is 
essentially a producer and distributor of content. Our job is to create 
and select the most valuable information and entertainment, to package 
it as attractively as possible, and to distribute it as widely and as 
efficiently as technology will allow.
    As an industry, we are in a very exciting but challenging time. The 
rise of broadband Internet and other digital technologies is providing 
us with tools of unprecedented flexibility that we are only beginning 
to fathom. We are already harnessing these new technologies and 
distribution methods in a big way: over fifty percent of the United 
States television households are able to receive FOX broadcast in DTV 
(through 27 of our owned and operated and affiliate stations), 
including the first-ever all-digital, widescreen Super Bowl earlier 
this month; our BSkyB business is the leading digital satellite 
broadcaster in Europe; and we have released hundreds of FOX movies in 
digital form on hundreds of millions of DVDs sold allover the globe. 
And there is much more to come. We hope soon to be rolling out 
Movies.com and other interactive products, and be releasing FOX movies 
in the high-definition digital D-VHS pre-recorded format. However, we 
strongly believe that the great potential and promise of broadband 
Internet and other digital technologies can be fully achieved only if 
protections are in place to safeguard our investment in the development 
and distribution of that content. Thus, the single most important issue 
for all entertainment companies, and certainly for every content 
producer, is that of copyright protection, a constitutional right that 
has increasingly come under attack in this digital age.
    The right to hold a copyright can be traced back to Article One of 
the United States Constitution. However, the constitutional protections 
of copyrighted works are being threatened by the ease with which people 
can copy and distribute materials in cyberspace. There is no better 
example of the content community's potential, as well as its 
vulnerability, than the rollout of broadband Internet access. Without 
the adequate technological and legal protections for intellectual 
property, content producers and legitimate content distributors will 
find themselves vulnerable to theft by anyone who owns or has access to 
a computer with a broadband connection to the Internet.
    The Internet is more than an economic medium; it is a supremely 
democratic one in providing equality of access to information, and this 
deserves to be celebrated. But its ability to empower the general 
public must not be taken as a license for consumers to essentially 
shoplift online. What the general public has to realize is that many 
businesses that rely on the creation, distribution and sale of content 
will be put in jeopardy by massive copyright infringement. This, in 
turn, will impact the quality of content that makes the broadband 
Internet so exciting for so many people.
    Recently, we have seen more and more programs like DivX, Gnutella, 
Morpheus, Bear Share and Lime Wire that streamline the downloading of 
motion pictures and television programming without compensation to the 
copyright holder. With the advent of broadband, it is only a matter of 
time before these file-sharing technologies and other emerging 
mechanisms have a serious impact on the economic viability of the 
motion picture and television broadcast industry. Films and television 
shows are like any other products in search of investors. However, if 
investors believe that the products they are investing in cannot be 
protected, thus losing their economic value, those investors will look 
for other products to fund, or at least other distribution means for 
those products. That alone will have a dramatic impact on the millions 
of jobs that are created by the entertainment industry. Why would one 
invest millions of dollars in a motion picture or a TV show only to 
have it stolen and placed on the Internet where anyone can access it 
for free?
    Lack of protection of intellectual property is not just a threat to 
the entertainment industry; it is a threat to American business as a 
whole. Protection of intellectual property has been crucial to this 
country's prosperity over the past several decades, and is as critical 
to the success of the Information Revolution as it was to the 
Industrial Revolution. U.S. media industries dependent on copyright 
employ nearly four million workers and produce more than $65 billion in 
exports. American books, movies, television and music are among our 
most successful products overseas; but if they cannot be protected from 
unlawful copying, their export value would shrink to nothing. The 
potential of the wholesale disregard of copyrights would be devastating 
to employment and job creation in the U.S., and to any chance of making 
the Internet a boon to us all.
    The threat is real not just for the creators of content, but also 
for those businesses that make their livelihood on the redistribution 
and licensing of content. For example, the market for network 
television shows after the first network run (including the value of 
rerun and re-purposing rights, and syndication to local broadcast 
stations) in this country alone is hundreds of millions of dollars. 
Around the world, American-produced television programming generates 
additional billions of dollars in revenues. Imagine a world where those 
revenues vanish because any television episode can be posted to the 
Internet at the time of its first network run for redistribution around 
the world. What would happen to the hundreds of TV production companies 
and distributors that employ thousands if buyers vanish because there 
were no incentives to purchase the rights of episodes because that are 
freely accessible on the Web? These are the questions we are asking 
ourselves.
    One solution to this dilemma may be that we only distribute our 
content through media that are reasonably secure. For example, pay 
cable, direct broadcast satellite, and D-VHS are digital distribution 
channels to the home that provide a basic level of security for digital 
content. Indeed, even the Internet affords us the basis to securely 
transmit our content. In each of these areas we are able to protect our 
content, through either a negotiation process regarding protection 
technology (for example, ``D-Theater'' encryption for D-VHS), or a 
licensing process using a commercially available Digital Rights 
Management (DRM) technology for the Internet, or through contractual 
arrangements with cable and satellite providers. However, there is one 
major digital distribution method that does not currently offer 
adequate protection right now--digital over-the-air broadcast TV 
(``DTV'').
    One might ask why broadcast television is worthy of protection in 
this time of multichannel offerings such as cable and direct broadcast 
satellite, each offering a vast array and variety of programming. The 
answer lies in the unique local nature of the service provided by 
broadcast television. For it is broadcasters who provide viewers with:

        high quality local news that keeps viewers abreast of the 
        happenings in their community;

        community affairs programs that help them keep up with local 
        politics, issues, and events in their area;

        coverage of local sporting events at their local high school or 
        community college;

        the weather reports that help them prepare for the coming day;

        an emergency alert system that helps warn viewers of dangerous 
        weather conditions; and,

        traffic reports that help them manage their local rush hour.

    In addition to this local programming, local broadcasters provide 
viewers with what is still, overall, the most popular and high quality 
entertainment programming on the air, as well as the big ``event'' 
programming that touches us all and brings us together as a nation, 
such as the Super Bowl, the Olympics, and the State of the Union 
address. Finally, and perhaps most importantly, broadcast television is 
universal, which means that for twenty-five percent of the country 
broadcast television is their only source of programming.
    News Corporation has recently spent a tremendous amount of money 
investing in the future of this medium that, as I stated above, is so 
vital to this country. I know that that Members of this Committee are 
strong supporters of this medium and its rapid transition from analog 
to digital. Our investment in new broadcast technologies and commitment 
to the digital transition positions us to be a leader in the rollout of 
DTV.
    Presently, cable and satellite have a competitive advantage over 
DTV due to the closed nature of cable and satellite systems that allow 
for encryption, and thus the protection of content. DTV is not 
encrypted for public policy reasons and thus does not enjoy those same 
protections today. However, we have identified a technological solution 
that works without encrypting DTV. It involves insertion of a 
``broadcast flag''in DTV signals that can be detected upon receipt by 
DTV processing equipment. Once detected, the receiving device would 
protect the content from being redistributed on the Internet. Weare 
hopeful that through negotiations with the consumer electronics (CE) 
and information technology (IT) industries this solution will be 
voluntarily agreed upon and incorporated in relevant copy protection 
technology licenses; in fact, FOX is leading this charge. However, even 
if we do reach agreement, targeted legislation will be necessary in 
order to ensure a level playing field for all entities involved.
    Unfortunately, we have not yet reached the agreement with the CE 
and IT industries. Mr. Chairman, as you are undoubtedly aware, there 
has been an on-going effort for the last several years to negotiate the 
protection of all digital audio-visual content delivered to the ``home 
network'', including but not limited to DTV. These negotiations are 
often referred to as the ``5C'' negotiations. Those negotiations have 
made substantial progress with regard to the protection of pre-recorded 
and conditional-accessdelivered content (e.g., pay-per-view, video-on-
demand, pay and basic cable), and FOX applauds that progress. But as a 
representative of one of the largest broadcasters in the country, I 
regret to report to you today that, although some hopeful developments 
have occurred with regard to protection of over-the-air broadcast 
content, those negotiations are presently at an impasse over 5C's 
refusal to include the obligation of protecting DTV via the ``broadcast 
flag'' in its license. They say there are antitrust problems with 
extending their license to cover broadcast; they also say that 
potential licensees will be so turned off by a broadcast protection 
obligation that they won't sign up for a 5C license at all. We think 
these objections are unfounded. We don't believe that a serious 
antitrust objection can be raised to such a narrowly targeted and pro-
competitive technology as the broadcast flag; nor do we think it right, 
or even logical, that non-complying competitors would use the fact that 
their devices do not contain protection of DTV as a selling point. 
Regardless, we are currently at an impasse with 5C.
    Needless to say, this impasse is much to the broadcast industry's 
collective frustration. I have always believed that an agreement should 
first be brokered through voluntary, industry-led negotiations, and 
then blessed by Congress to ensure a level playing field against 
``rogue''. companies who will not sign up for the voluntary 
obligations. But time is growing short for digital TV copyright 
protection. Lengthy negotiations have resulted in some progress in 
airing the issues but have not produced tangible results. The parties 
to the negotiations M.L know that the broadcast flag provides a 
workable, low-cost technological solution to this problem. Yet, the 5C 
companies have been unwilling to embrace this ``license-first, then 
legislation'' approach. Other voices in the CE and IT industries have 
likewise refused to support this two-step approach. I would hope that 
the 5C companies and their CE and IT brethren would rethink the 
position they are presently taking. If we cannot arrive at a voluntary 
industry consensus very soon, broadcasters will be forced to come to 
Congress to ask that a DTV solution be imposed on the CE and IT 
industries.
    Just as we are striving to protect our content when distributed by 
DTV, we are addressing two other mechanisms that threaten content. Into 
the foreseeable future we will still need to deliver content to 
consumers in an analog form; after all, hundreds of millions of TV sets 
can only accept content in that form. Unfortunately, analog content 
(including protected digital content converted to analog for viewing 
purposes) can easily be converted into an unprotected digital form that 
can in turn be copied or redistributed without authorization. This is 
called the ``analog hole'' in digital content protection schemes. We 
are developing a plan to plug the ``analog hole'' that includes 
harnessing watermark technology that would prevent such conversions 
from being used to avoid content protection obligations.. We hope to 
secure inter-industry consensus on such a proposal, and we welcome your 
assistance in encouraging all relevant parties to make this happen. 
Once it does, we would have that solution ratified by Congress.
    Finally, we are working furiously on a plan to frustrate the 
unauthorized viewing of content delivered via the Internet. It is a 
difficult problem to address because there are We are also so many ways 
unauthorized content can be distributed on the Internet. mindful of not 
over-correcting the problem by burdening Internet appliances any more 
than necessary. But we are confident that the problem can be solved; we 
know it must be. It is reported that every day, hundreds of thousands 
of copies of movies are being downloaded, without compensation to their 
copyright holders, and this number is growing rapidly, in tandem with 
the increasing speed and proliferation of Internet-delivered broadband. 
The competition from free, but illegal copies of our movies and TV 
shows is the single biggest obstacle to developing a viable business 
model to offer consumers authorized versions of these same movies and 
TV shows. Again, we are optimistic that we can develop a technological 
solution to address this phenomenon in a cost-effective way, just as we 
have with DTV, and will soon be doing with the ``analog hole''.
    However, it is critical that Congress plays an active role in 
ensuring that the parties reach a consensus on how to solve this 
problem as quickly as it is technologically possible. This is an 
Internet problem that needs to be solved at Internet speed; we need 
Congress to help make that happen. As with the broadcast flag and 
analog hole solutions, we will need Congress to codify the solution to 
the illegal download problem. We at News Corporation are working to 
build the necessary support in the private sector, with consumer 
electronics and computer manufacturers and Internet service providers 
and others to come up with solutions to this incredibly complex problem 
so that we can all--but especially consumers--be the beneficiaries. 
With our combined technological expertise, we have a chance to stop the 
theft--which everyone agrees must be stopped--of copyrighted works and 
to provide the business opportunities that will drive the development 
of new and innovative products and services.
    At the end of the day, Mr. Chairman and Members of the Committee, 
if we do not find creative solutions to this real and growing problem, 
consumers will be the ultimate losers. While some may see a short-term 
gain in obtaining free unauthorized material from the Internet, the 
long-term result will be less consumer choice and stunted American 
technological growth and development.
    Thank you for providing me this opportunity to present the views of 
News Corporation on this important topic. I will be happy to answer 
questions.

    The Chairman. Very good. Mr. Vadasz.

STATEMENT OF LESLIE L. VADASZ, EXECUTIVE VICE PRESIDENT, INTEL 
                          CORPORATION

    Mr. Vadasz. Thank you, Mr. Chairman, for inviting me. My 
name is Les Vadasz. I am executive vice president of Intel 
Corporation. I have submitted my testimony in writing, and I am 
just going to say a few words, just to mention a few points.
    20 years ago, Mr. Valenti called the then-nascent VCR 
industry the Boston Strangler of the film industry. In the year 
2000, the media industry revenue from VCR amounted to about $11 
billion, much more than their revenue from box office receipts.
    The latest manifestation of the technophobia of the media 
industry is the campaign to mandate the features of personal 
computers and information technology product, Government-
mandate these features.
    Let me talk about the information technology industry. I 
spent over 40 years of my career either creating technology or 
creating businesses out of technology. It is a fast-moving, 
highly innovative industry, and it is very large, over 20 times 
larger than the media industry we are working to protect.
    Let me tell you how Intel works. We spend many hundreds of 
millions of dollars to develop a single microprocessor. We 
spend billions of dollars even before we develop that product 
to equip our manufacturing plants. And, we run as fast as we 
can. We listen to our customers; we listen to our constituents. 
But, at the end of the day we can only run fast if the product 
decision is ours. Success or failure is determined by what 
features we include in our product, and how fast we get the 
product on the market. To think that something good could come 
out of a Government-mandated deliberative process interjected 
in this development cycle is just plain wrong. Innovation would 
suffer. Innovation would come to a screeching halt. Investment 
levels would suffer, and you would create an irreparable damage 
to a vital industry.
    Now let me talk about copy protection. I do not think I 
have to speak much about Intel's stand on intellectual property 
protection. Our vigorous defense of our intellectual property 
speaks louder than I could ever do, but it is not just our 
intellectual property. We have to work in an industry 
environment where everybody's intellectual property is 
protected, or there is just chaos. There is no question in my 
mind about that, and that is why Intel was a very active and 
very willing participant in the cross-industry effort to attend 
to the legitimate issues that the movie industry has.
    We have been at this now for over 6 years. Lots of good 
technology was developed. Some of that technology is beginning 
to be used. Where are we? DVD is protected. Cable transmission 
is protected. Satellite transmission is protected. Internet 
transmission, contrary to some beliefs, is and can be 
protected.
    Furthermore, based upon the work of this Committee, who by 
the way has some of the best engineers that I know, once the 
protected content is receive in your home, it can be protected 
as it goes from one device to another device to another device 
in your home. That technology is available today. It only needs 
to be used.
    Now, the issue of the day is terrestrial broadcast and the 
analog hole. There are about 130 people working on the issue of 
the terrestrial broadcast, a cross-industry group, from the 
content industry, from the consumer electronics industry, from 
the information technology industry. I expect that by the end 
of March there will be a specification proposed on how that 
problem can be addressed, and I think to the satisfaction of 
virtually everybody.
    Now, the analog hole problem will probably need more time. 
That is a difficult problem. That is a newer problem that that 
committee is engaged in, but to me, when I look at all these 
technology developments that we do, that is the easy part. It 
is really how to use these technologies. We are putting some 
very powerful technologies in the hands of the media industry, 
and I have to admit, I worry: ``Is that going to be used to the 
benefit of the consumer, or to the detriment of the consumer?''
    Let me tell you what I mean. The personal computer started 
out as a productivity tool, but today it is much more than 
that. It is integral to the fiber of our life. It is integral 
to the fabric of our children's life. The media industry would 
try to make that personal computer nothing more than a DVD 
player--an expensive DVD player--or a CD player, and maybe not, 
at that.
    Why am I worried? Well, I have here some of the newer CD's 
you can buy. It comes with some disclaimer which says--well, if 
I translate it, this may play on your PC or it may not play on 
your PC, but certainly I can guarantee you that if you are used 
to collecting a number of songs on your MP-3 player while you 
exercise and listen to them, you cannot do that with this.
    Worse than that, these CD's do not even play on your CD, so 
I would like to leave you with two thoughts. First, please do 
not tamper with the dynamics of the information technology 
industry. You will create irreparable damage to a vital 
industry.
    Second, listen to the consumer. Be the voice of the 
consumer. I think it is time we refocused this activity from 
content protection to consumer protection.
    Thank you very much for listening to me.
    [The prepared statement of Mr. Vadasz follows:]

Prepared Statement of Leslie L. Vadasz, Executive Vice President, Intel 
                              Corporation
    I appreciate the opportunity to appear before the Committee to 
discuss the information technology (IT) industry's work on creating a 
more secure environment for the dissemination of digital content. 
Intel--and the rest of our industry--has as great, if not a greater, 
interest as the studios in the growth of a robust market for new 
digital content offerings to the consumer. And, we have an equally 
strong interest in the protection of intellectual property.
    But we come at these challenges from very different perspectives. 
The IT industry is all about innovation; we embrace and champion 
technological progress. The content community, by contrast, has 
historically feared technology--from the advent of sound recording, to 
the development of the VCR, the DVD, the PC and other digital devices. 
Yet every advancement in technology has proven to be a major growth 
catalyst for the studios. Videocassette rental and sales totaled about 
11 billion dollars last year, exceeding box office receipts by some 2+ 
billion dollars. This is the device once referred to by Jack Valenti as 
the ``Boston Strangler'' of the film industry. Other ``attackers'' of 
the film industry include the DVD, which added another 5.9 billion to 
studio receipts in the last year. \1\ It is important to keep these 
facts in perspective when reviewing claims of imminent threats to the 
health of the film industry.
---------------------------------------------------------------------------
    \1\ Scott Hettrick, ``2001: Higher Ground, Tight at the Top,'' 
Video Business, 21 January 21 2002, 32.
---------------------------------------------------------------------------
    Nevertheless, we agree that content protection is important and we 
are working together on that challenge. But at the outset, I want to 
emphasize the following points:

   Any attempt to inject a regulatory process into the design 
        of our products will irreparably damage the high-tech industry: 
        it will substantially retard innovation, investment in new 
        technologies, and will reduce the usefulness of our products to 
        consumers.

   Consumer rights to enjoy powerful technology products, with 
        the robustness they have come to expect, and their right to 
        fully enjoy content in accordance with what the law permits, 
        would both be greatly diminished if the studios' ``wish list'' 
        of content protection objectives were fully implemented. PC's 
        would become a ``dumb device'' when it comes to copyrighted 
        content, and consumers would lose important fair use rights now 
        protected in the law.

IT Industries: the power behind our economy
    The information technology sector is enormously important to the 
overall health of the US economy. The Department of Commerce just 
released a new report entitled Digital Economy 2002. According to this 
report, in 2000, the IT-producing industries employed some 5.6 million 
workers, with average wages per worker more than twice the national 
average. During the period from 1996-2000, IT ``was responsible for 28 
percent of overall real economic growth''. Most importantly, the study 
states that the evidence ``suggests that massive IT investments by U.S. 
industries are producing positive and enduring changes in the nation's 
economic potential.'' \2\
---------------------------------------------------------------------------
    \2\ United States, Department of Commerce, Economics and Statistics 
Administration, Digital Economy 2002 (Washington: February 2002, 
accessed 25 February 2002); available from http://www.esa.doc.gov/508/
esa/DIGITALECONOMY2002.htm.
---------------------------------------------------------------------------
    Information from the Bureau of Economic Analysis provides useful 
insight into the relative positions--and importance to the economy--of 
the IT industry and the studios. According to Digital Economy 2002, 
business, personal, and government spending on IT goods and services 
(not including communications services) totaled $600 billion in 2000. 
Meanwhile, the gross domestic product of the motion picture industry 
was approximately $35 billion in 2000. \3\
---------------------------------------------------------------------------
    \3\ United States, Department of Commerce, Bureau of Economic 
Analysis, Gross Domestic Product by Industry in Current Dollars, 1994-
2000, (Washington: undated, accessed 25 February 2002); available from 
http://www.bea.doc.gov/bea/dn2/gpoc.htm.
---------------------------------------------------------------------------
    Innovations in our industry have come at a staggering pace. 
Consumers have come to expect from us a continuous flow of ever more 
powerful devices, at lower cost, each year. These innovations require 
large amounts of investment and tremendous amounts of research and 
development. Last year, Intel spent $3.8 billion on R&D alone, about 
half of all that Hollywood earned in box office receipts in the past 
year. \4\
---------------------------------------------------------------------------
    \4\ Box Office receipts totaled $8.35 billion in 2001. See Sharon 
Waxman, ``Hollywood's Great Escapism: 2001 Box Office Receipts Set a 
Record'' The Washington Post 4 January 2002, p A01.
---------------------------------------------------------------------------
    This dynamic of innovation would be choked by any attempt to 
regulate the design of products solely for the benefit of one industry. 
Designing products through a regulatory process, as some studios have 
advocated, would inject political influences into technology 
development in very destructive ways. Investment and innovation will 
both suffer, as a fear of entanglement with government processes will 
have a chilling effect on investors and subject new ideas to ``reg 
review''.
Overview of content protection: the work that has been done by the IT 
        industry
    The primary challenge in content protection, we have found, comes 
down not to technology but answering the question: how is the consumer 
best served?
    The first time the issue of digital video content protection arose 
was in 1995, when Digital Versatile Discs--DVD's--were preparing to 
come on the market. Concerned about mass copying of DVD's, Hollywood 
attempted to persuade Congress to legislatively mandate technological 
``fixes'' to address the prospect of widespread consumer copying of DVD 
discs. Not surprisingly, the studios opted for an overreaching approach 
that would have all but eliminated the value of the PC experience.
    Responding to the threat of legislation freezing in place 
inadequate, clumsy solutions to copy protection issues, Intel and the 
PC industry mobilized the consumer electronics industry and the studios 
to form a working group known as the Copy Protection Technical Working 
Group (CPTWG). This body reviewed and enhanced cryptographic tools that 
could be applied to DVD content--which still today protect DVD's from 
being hacked by all but a tiny percentage of users of these products. 
Through the work of CPTWG (subgroups 4C and 5C), we have also tackled 
the issues of content distribution between devices and the protection 
of information in recordable media.
    While this consensual process yielded specifications that sped DVD 
to market, I have serious concerns that consumers were not fully 
served.
The over-the-air broadcast protection question
    One immediate concern of the studios, today, is over-the-air 
broadcast of digital content. The CPTWG is nearing completion of 
technical specifications to address this issue. There is general 
agreement that it may be necessary for the FCC to assist in the 
implementation of the digital broadcast protection solution by enacting 
a very narrow regulation respecting requirements for digital television 
receiver products to ensure that they pass on the content in a 
protected form. However, I have great concerns that we are, again, 
rushing this technology to market without pausing to ensure that 
customers' reasonable expectations for use of the products are weighed 
in the balance.
The ``analog hole'' issue
    Another issue, much more complex and difficult to solve, is the so-
called ``analog hole''. This is the situation presented by millions of 
legacy devices--such as the commonly owned VCR of today--that have 
digital inputs and analog outputs. Such devices can be used to 
reconvert a digital signal to analog, from which it can then be 
reconverted to digital through available PC equipment or other devices.
    Work toward solving this issue has started--``watermarking'' 
solutions have been proposed and are being evaluated--but there is no 
clear path to a solution at the present time. Again, we are working on 
this issue aggressively, but some studio demands--we believe--would 
infringe on consumer fair use rights.
    It has been suggested by the studios that the placement on chips of 
electronic circuitry that would recognize and respond to watermarks be 
mandated by regulation. For the government to mandate how the IT 
industry designs and develops chips--or to try and force agreement for 
design features--would be ludicrous. As I said before, irreparable 
economic damage would result.
Our view of the studio perspective
    For some studios, the objective is total control. In the early 
70's, when RCA was experimenting with the new technology of videotape, 
researchers were eager to find a means to control consumers' use of the 
product in order to maximize studio revenues. The means eventually 
chosen was simple: a video would play once, and when finished, the 
cassette would lock into place. The customer would have to return the 
video to the store, and pay again, to have it unlocked. In spite of the 
restrictive nature of this technology, the Disney executives were 
horrified because they could not control how many people could watch 
the videotape. \5\
---------------------------------------------------------------------------
    \5\ Lawrence Lessig, ``May The Source Be With You,'' Wired 
(December 2001, accessed 25 February 2002); available from http://
www.wired.com/wired/archive/9.12/lessig.html.
---------------------------------------------------------------------------
    In 1981, Mr. Valenti bemoaned the prospect that the industry would 
be overwhelmed by ``millions of little tapeworms'' eating at the very 
heart and essence of copyright(s). \6\ Today there are 88 million VCR's 
in use in the US alone, yet the studios are making more money than ever 
before. Since the VCR has been introduced, the number of new films 
released per year has more than doubled, while annual sales of 
videotapes have grown from approximately 3 million units to over 700 
million units. \7\ Four and a half million VHS tapes of Shrek were sold 
in just two days. As I noted before, consumers spent $11 billion on the 
rental and purchase of VHS tapes in 2001. \8\
---------------------------------------------------------------------------
    \6\ Ellen Goodman, ``The Right To Zap,'' Washington Post, 24 
January 1984, p A13.
    \7\ MPAA Research Department, 2000 US Economic Review (accessed 25 
February 2002): available from http://www.mpaa.org/useconomicreview/
2000Economic/index.htm.
    \8\ Hettrick, 32.
---------------------------------------------------------------------------
    Substitute ``digital'' for ``tape'' in Mr. Valenti's comments in 
1981 and the arguments are the same. Congress should not engage in 
futile attempts to design products by regulation. Instead, Congress 
should focus attention on the degree to which the consumer interest is 
being undermined by a slavish adherence to demands for ``total'' 
content protection.
Where is the voice of the consumer?
    There is a fundamental difference between the perspectives of the 
high-tech industry and the content community. High-tech does not have 
one narrow market objective--that of maximizing revenue from content 
distribution. We have a broader marketplace composed of hundreds of 
millions of consumers who want ubiquitous, powerful digital tools that 
can manage a wide variety of information, content, and applications and 
who want to use them for all lawful purposes.
    Consumers expect, when they buy a PC, that it will have the power, 
versatility, and robustness that they know our industry can provide. 
They also have expectations to be able to make full use of the PC's 
ability to store, retrieve, create, and manage digital content. We 
intend to provide that utility, while providing technologies to protect 
against wholesale copyright infringement.
    I have stated that I have concerns whether all of the compromises 
that have been reached to date are in the best interests of the 
consumer. We have rejected some of the more onerous controls that have 
been advanced by the content community, such as:

   ``Forensics'' tracking--which would identify parties from 
        whom unauthorized copies of content products were obtained--
        with very substantial impacts on consumer privacy;

   ``Selectable output'' controls that would allow the content 
        owner to arbitrarily meddle with the consumer's electronics;

   Playback controls, which could require devices to inspect 
        all digital content and prevent playback of any content which 
        is not approved by Hollywood.

Voluntary, consensual standards--the best means to the right balance
    In the end, the only way to effectively balance the interests of 
content owners, manufacturers of consumer electronics devices, and the 
information technology industry with the rights of consumers is through 
the voluntary, consensus-based process. It can be difficult, does not 
lend itself to ``one size fits all'' solutions, and may be viewed as 
cumbersome by some who would rather see the process driven by top-down 
control mechanisms. But it is the only path which will allow technology 
to advance efficiently while reconciling all of these competing 
interests.
    There are new ``intelligent'' consumer products, exemplified by the 
PC, that are dramatically improving the consumer experience. The real 
question for the content community is not whether we will provide 
effective content protection tools, but rather whether they are 
prepared to enter the digital age. They must finally accept that 
consumers want affordable, usable digital products and they must 
develop new business models that give consumers what they want--without 
obsessing about controlling all of the consumers' choices. The video 
rental market has contributed very substantially to studio profits--but 
that market developed over their early objections to the idea of 
allowing consumers to view a film as many times as desired without 
paying for each viewing. The same will be true of digital products, 
once the studios move forward and take advantage of the content 
protection tools that we are now offering.
    I would like to leave this Committee with the following thoughts:

   First, listen to the consumer--he is paying the bill for all 
        of our products. Consumers want flexibility and power in 
        digital products and robust applications.

   Second, do not tinker with the IT industry by trying to 
        regulate the development of our technologies. Irreparable 
        damage will result--the pace of innovation, productivity 
        growth, and our industry's contribution to economic growth will 
        all decline.

   Third, do not buy into a view of content protection that 
        will deprive consumers of the ability to get the full benefit 
        of the capabilities of the PC by neutering it--when it comes to 
        content management--to be nothing more than a more expensive 
        version of a ``dumb'' DVD player.

    Thank you for your time. I would be happy to answer any questions.

    The Chairman. Very good. Mr. Vadasz, your plea that we do 
not tamper with the industry, you are the gentleman that is the 
vice president of Intel, the executive vice president of Intel. 
I think back on this Committee when we hampered and we saved 
you. You would not be up here testifying. I will never forget 
it. Everybody thinks of Ronald Reagan. I do, too, and one of 
the best parts of his administration was, he was a 
protectionist. He saved the automobile industry with a 
voluntary restraint agreement on motor vehicles, the same with 
the hand tools, the same with Sematech, the semiconductor 
industry. I will never forget--and you go double-check it--a 
gentleman by the name of Frank McCabe, and he was in charge of 
your industry there in Dublin, Ireland. It is the most modern 
microprocessing plant in the world. Intel--you know about it, 
do you not?
    Mr. Vadasz. Yes.
    The Chairman. Well, you go ask him, because as he showed 
me, and he said, Senator, if it had not been for Sematech--$900 
million tampering by this Government over a 10-year period. He 
said, if it had not been for your Sematech, we would not have 
it here. What is your response? Now, where do you get all this 
nonsense about how we are going to have irreparable damage?
    We would not know, we are not technologists. We do not know 
how to irreparably damage you, other than trying to bring in 
line what you say you can do. We now have the letters here by 
Intel and everybody else that technology is available and we 
can do it. Until we had this hearing, they said it could not be 
done, but now we know the best of the best can do it, and they 
are ready to do it, and that is all we are asking.
    We do not want to legislate. We want to give you time. What 
would be a reasonable time? Since you know all the technology, 
what would you think is a reasonable time to develop the 
technology that you right now--and I will make this letter a 
part of the record.
    The Chairman. What would be a reasonable time, since you 
know the technology and I do not?
    Mr. Vadasz. First of all, Senator, I appreciate very much 
what the Government has done in the time since Sematech was 
formed. What was done was the right thing. It was creating the 
necessary infusion of capital to have our industry continue 
with innovation.
    I am not talking about that. What I am talking about is 
that when you put a regulatory process in a very rapid design 
cycle of products you, perhaps inadvertently, will slow down 
the process of innovation, and you put these kind of regulatory 
uncertainties into new developments that the industry will have 
irreparable damage. That is a totally different issue in my 
mind, than providing the means for a capable industry like our 
industry to continue with innovation, like what Sematech has 
done.
    The Chairman. Well, how did the All-Channel Receiver Act, 
or how did macrovision put in uncertainties? It worked 
extremely well, as far as we know here at the Committee level. 
What kind of uncertainty? We are trying to fix certainty, but 
let you do it. That is what we are trying to do is to give 
certainty. That uncertainty allows for piracy.
    And that is all the testimony I have got, and I will make a 
copy in the record also of the Time Magazine, the Pirates of 
Prime Time We will make that and put that in the record also.
    [The information referred to follows:]

The Pirates of Prime Time
Anyone want to trade some episodes of The Simpsons online? TV Land is 
        getting Napsterized (By Anita Hamilton)
Saturday, Feb. 16, 2002
    Michelle Chaplin can't get enough Sex and the City. She has seen 
virtually all 66 episodes of the series--some of them, like the one in 
which Samantha tries to seduce a priest, repeatedly. But unlike most 
people, who pay an extra $13 a month on their cable bills to get HBO, 
which carries the show (and is owned by TIME's parent company AOL Time 
Warner), Chaplin gets her Sex and the City free. Using a program called 
Morpheus, she goes online and downloads any episode she wants in as 
little as 10 minutes. Then she watches her haul on the computer. ``I 
know it's not legal,'' the college sophomore says, ``but it's easier 
for me to download than it is to get HBO or cable.''
    People like Chaplin pose an increasingly worrisome problem for the 
$80 billion television industry. Just ask anyone who works in the music 
business, which in 1999 was upended by a free music service called 
Napster that made music swapping easy online. While Napster was 
subsequently hobbled by lawsuits, it pried open a Pandora's jewel box: 
Last year CD sales declined for the first time in a decade. Now, with 
the proliferation of a new generation of ``file sharing'' programs such 
as Morpheus, people are swapping TV shows and movies along with their 
music--more than 11 million Americans do it. And since the current 
programs, unlike Napster, are decentralized, it's much harder to shut 
them down.
    In TV Land, the swapping comes on top of another, potentially 
bigger threat. While college kids and geeks are swapping comedies and 
cartoons online via PCs, a controversial new device called ReplayTV 
4000--think of a supersmart VCR--lets regular nontechie folks save 
television shows in pristine digital format directly from their TV, 
then watch them commercial free and send them over the Net to other 
Replay users. Hackers have even figured out ways to copy Replay files 
to their personal computers, where the files can be uploaded by users 
of Morpheus and similar programs for wider dissemination.
    Hollywood is not amused, and has filed two lawsuits: one against 
the makers of Replay, the other against the creators of Morpheus and 
two similar file-sharing services called Grokster and Kazaa. While it 
may be O.K. to copy a show for yourself on the VCR, ``it's not O.K. to 
start sending it around and file sharing,'' warns Jack Valenti, CEO of 
the Motion Picture Association of America. The first legal face-off 
begins March 4 with a hearing on the Morpheus case in federal district 
court in Los Angeles. The Replay trial is scheduled for August.
    While the legal battles drag out in court, pirates are enjoying a 
virtual free-for-all. Necratog (who asked to be identified by his 
screen name only) is the first link in a chain that supplies digitized 
copies of Buffy the Vampire Slayer to an online chat room and a website 
that get as many as 1,500 downloads a week. Not to be confused with the 
many ``leechers'' (people who only download shows), he's a ``capper'' 
(someone who captures a TV show, digitizes it and sends it out to 
others).
    His PC is connected to a TV cable; an inexpensive video card allows 
him to watch TV on his monitor. Using a free application called 
VirtualDub, he digitizes any show he wants and saves it to his hard 
drive. He then spends about five minutes editing out the commercials 
and an hour compressing the file until it is small enough to swap 
online. Then he uploads it to a friend who makes it available for 
others to download.
    Like many other TV freaks, Necratog, 21, also downloads favorite 
programs and burns them onto CDs. His archives include 400 CDs that 
hold more than a thousand Buffy, Babylon 5, South Park and Star Trek 
shows. But Buffy is his favorite. ``I'll watch the same episode three 
or four times in a row,'' he says. ``I've watched some over 20 times 
altogether.''
    In Napster's heyday, pirated TV shows were a rarity on the Net. But 
that changed with the advent of broadband home connections, $40 TV 
tuner cards that snap into your PC and cheap ways to store data. 
Looking for episodes of Friends? The MPAA counted more than 5,000 
locations on the Internet last year where people could download 
episodes for free. Using custom software to track copyright violations, 
it also found 4,000 sites for The Simpsons and 2,000 for The Sopranos. 
Big Pussy is not going to like that!
    The biggest threat to Hollywood may not come from the geeks but 
from so-called personal video recorders. Like its competitor TiVo, 
which has sold some 400,000 units to date, the newer Replay which has 
sold only 5,000, gives owners an easy, menu-driven way to search for 
shows to record onto its hard drive. The reason Sonicblue got sued is 
that the new Replay 4000, which hit the market in late November and 
sold out before Christmas, automatically fast-forwards shows past 
commercials and lets broadband users send them to friends over the 
Internet. (TiVos do not offer these features.) An independent site 
called Planet Replay even helps match up people who want to trade 
shows.
    For now, though, Replay-to-Replay show swapping is painfully slow. 
Software engineer Thomas Wagner, 32, who has three Replay boxes at 
home, says it took him eight hours to get a half-hour episode of the 
now defunct show The Tick from another user, even though he has a high-
speed cable modem. But he figures all that will change as the 
technology improves.
    To goose the process along, Wagner decided to write a program 
called Replayer that lets people hack into their Replay 4000 and 
transfer files to their PC. Once the shows are in the computer, users 
are free to squeeze them down further, burn them onto a CD or dvd or 
trade them online. It took Wagner less than a week to crack the box's 
coding.
    ``These boxes have the potential to kill prime time,'' says 
industry analyst P.J. McNealy of GartnerG2, a market-research firm. 
McNealy notes the obvious: TV networks make their money from 
commercials and syndication rights. ``We're not the police,'' counters 
Sonicblue CEO Steve Griffin. ``We can't tell people who it's O.K. to 
send shows to and who it isn't O.K. to send them to.''
    A number of court decisions support Griffin's argument. In the 
famous Sony Betamax case in 1984, the Supreme Court refused to block 
the sale of vcrs even though they might be used in some instances to 
make illegal copies of shows. And in the 1999 Rio lawsuit, Diamond 
Multimedia (whose corporate name, perhaps not coincidentally, happens 
to be Sonicblue) won the right to continue marketing the first portable 
MP3 music player, the Rio, even though many people used it to play 
pirated copies of copyrighted music. As long as Sonicblue and Morpheus 
can demonstrate just two legitimate uses of their products--such as the 
trading of TV shows that are not copyrighted or simply saving a show 
onto the device for personal use--they could win their lawsuits, says 
Stanford law professor and cyberlaw expert Lawrence Lessig. ``In order 
to innovate, you shouldn't have to fund a new lawsuit,'' he says.
    In the case of Napster, while a circuit judge found that the 
service did have legitimate uses, she nonetheless forced the service to 
block the trading of copyrighted songs on the grounds that Napster had 
the ability to police the activities of its users and profited by 
failing to do so. The owners of Morpheus, Grokster and Kazaa, on the 
other hand, are expected to argue that since they don't use a Napster-
like central server--even the indexing software is distributed among 
users--it is impossible for them to monitor the activities of the 
millions of people who use their programs.
    And if the industry tries to go after individuals like Chaplin, it 
will probably be an uphill battle. According to Forrester Research, 
personal video recorders will be in 40 percent of all U.S. households 
by 2006. Until better encryption or industry-ordained alternatives give 
consumers legitimate ways to watch any show, anytime--without bothering 
to set the VCR--pirating and trading are bound to flourish. Even then, 
concedes TiVo president Morgan Gunther, ``nothing is unhackable.'' 
While soap operas and sitcoms may not be getting any smarter, our ways 
of watching them almost certainly will.

    The Chairman. Everybody knows about it. It is the 
uncertainty that allows that piracy to embellish and continue 
and enlarge, but what is the uncertainty that you are talking 
about?
    Mr. Vadasz. Senator, the computer is a general purpose 
device. We deal with video cassette recorders. The video player 
is a very narrow function device. We have developed protection 
technologies today that, if it is adapted by the studios, can 
utilize--well, both the computing device and the content. All 
it needs is a rapid adaptation of some of the technologies that 
the cross-industry group has developed. That is all I am 
saying, is that we do not need to neuter the personal computer 
to be nothing more than a video cassette recorder. All we need 
to do is adapt the technologies that our industry, our cross-
industry activities put on the table.
    The Chairman. We are neutering piracy. We are not neutering 
the technology.
    Mr. Eisner, what is your comment?
    Mr. Eisner. I think you are getting an example of the kind 
of rhetoric we have been hearing for years. I have been asking 
consistently, OK, you say we are impeding innovation--explain 
to me exactly how we are impeding innovation by asking you to 
help us create a technology that helps us end theft. And I get 
exactly the kind of answer we just got. I did not understand it 
before; I do not understand it now.
    Intel is a great company, and has had fantastic effect, 
positive effect, on our industry and our country. But, for some 
reason, and I cannot get to the bottom of the reason--therefore 
it must be economic, either the technology companies want to 
become the gatekeeper and, by creating the lock on the door, 
charge you for every person that wants to come in and use your 
lock, and we have a lot of examples of that, or they are 
afraid, honestly afraid that the legislation will be so 
draconian that they will not be able to create technology 
around it. I cannot fathom how an 80-cent chip to stop 
unauthorized pirates would impede innovation. Once a 
copyrighted work is on the Internet, in the clear, it is 
totally available to be stolen. And, we must find a solution to 
this problem.
    We get to the Moon, we get to Mars, we create these great 
companies. I cannot understand how difficult this is, and I 
believe the difficulty of getting a letter from them was 
overcome in 1 day by you having this hearing. I am absolutely 
100 percent convinced that if you say to these people, who are 
very talented, you give us a system by December 31 or we will 
do it for you, you will be surprised how innovative they will 
become, and how it will no longer hurt their product.
    And by the way, Intel, again a great company, has so many 
quotes about the sanctity of intellectual product, I have 
quotes from this year--the last quote is, if you cannot beat 
them, sue them. That is their strategy on intellectual product, 
that we have an obligation to our shareholders to ensure their 
investment in their intellectual property is protected. That 
was Chuck Malloy, October 25, 2001. I have got all these 
quotes. They really work hard to protect their intellectual 
product. I would just like them to work modestly to protect the 
intellectual product of another industry which needs their 
expertise.
    The Chairman. I have got a lot more, but let me yield to 
Senator Burns.
    Senator Burns. I would yield to Senator Stevens.
    Senator Stevens. I do have to leave, so I would like to ask 
a question. Do you believe there is such a thing as Internet 
theft?
    Mr. Vadasz. Absolutely.
    Senator Stevens. Do you believe anyone should try to 
prevent it?
    Mr. Vadasz. Absolutely.
    Senator Stevens. Now, we have a bill that is trying to say 
to the copyright protection working group to get busy and get a 
standard, and get a mechanism for protection in the private 
industry, without Government intervention. Do you disagree with 
that?
    Mr. Vadasz. Well, sir, what I would like to see is that we 
balance technology solutions with legal solutions.
    Senator Stevens. Can that be done without Government 
intervention?
    Mr. Vadasz. I hope it can be. I believe that we have gone a 
long distance to meet most of the needs of the content industry 
with the technologies that we developed today, but there has to 
be a balance between what kind of protection do we use and not 
trample on the fair use expectation of the consumer, and what 
kind of actions do we forbid people to do, and use the rule of 
law to stop it. We cannot just solve all the problems with 
technology, because I can guarantee you, Senator, we will 
trample on fair use expectation of the consumers who pay for 
the product.
    Senator Stevens. All our bill says, if the private sector 
does not develop a standard to prevent Internet theft, that the 
people involved in Federal control, the FCC, must do it. Now, 
what would be a reasonable time for the private sector to 
develop such a standard on a balanced basis?
    Mr. Vadasz. Well, the private sector, none of the elements 
of the private sector is a monolith. For example, already today 
some part of the media industry has started deploying the 
technologies that the cross-industry working group has 
developed. Some of the consumer electronics companies have 
started to deploy it. The companies represented by the 
gentlemen at the table have not started to deploy those 
technologies. Maybe you should ask them why.
    Senator Stevens. Well, I think what we are telling them as 
well as you is that we feel like we did when the V chip issue 
came before us. Remember, we had the V chip issue. The whole 
industry opposed that, and Congress said, look, either develop 
a V chip, or we will mandate it, and when the industry did not, 
we did mandate it, and guess what, it is out there, it is 
available to everybody.
    All we are saying to you is, we want the industry to do 
this, and if you do not do it, we are going to turn it over to 
the Government experts to bring it out.
    Mr. Vadasz. All I am saying, Senator, is that we have been 
doing it, and the technology is on the table to be used.
    Senator Stevens. There doesn't seem to be an agreement that 
it is effective, Mr. Vadasz.
    Mr. Vadasz. The latest issue of the day is terrestrial 
broadcast and the analog hole. The previous issues have all 
been handled and dealt with, and the technology solutions are 
on the table. Some members of the media industry are adopting 
it; others are not. As I said, in the case of the terrestrial 
broadcast issue, by the end of March there will be a proposal 
on the table.
    Now, I expect that when that proposal comes, there may be a 
need for a narrow Government action to change the current 
rules, how broadcast is done in order to allow adequate 
protection, and I think that at that point there is a very 
important role that the Government can play.
    Senator Stevens. I am very glad to hear that. All we are 
asking is that the private sector do it. Theft is theft, and I 
understood what Senator Nelson said. The concept of theft is 
something that our society is dedicated to oppose. Why should 
we allow it to continue on the Internet because there is a 
failure to come to total agreement in the private sector?
    Now, if the private sector does not come to an agreement 
soon, I think we will pass our bill.
    Mr. Eisner. Senator, the problem we have is that many 
people in the technology realm have been quoted as saying that 
the killer app for technology is pirated content. So, we are 
dealing with an industry, some of whom feel that the actual 
availability of illegal material to the consumer like this kid 
sells computers.
    He is buying a computer because he can get all of 
``Seinfeld''. And, we have suspected that this is a strategy--
an unspoken strategy. We have heard it spoken, and we can 
verify it and give you specific information on where this has 
been said. But, it is very hard to negotiate with an industry 
that thinks its short-term growth is dependent on pirated 
content.
    In the end, I believe the really smart people in the 
technology world, understand that if they kill the content 
companies, that will impede their long-term growth. However, 
their quarter-to-quarter growth is definitely pushed forward by 
people wanting to be able to get everything for free on their 
television or their computer or their hand-held device.
    Senator Stevens. Mr. Chairman, I still would express my 
strong hope that we will find an industry agreement, and we 
will not have to act.
    Mr. Chernin. Senator Stevens, if I might, I think Mr. 
Vadasz is guilty of some obfuscation on this issue. We are 
looking for varying controlled solutions to issues, and it is 
true we have made a lot of progress on a lot of issues. No one 
is denying that, but we do need protection on DTV, we do need 
protection on the analog hole, and for Mr. Vadasz to say that 
there are no viable technological solutions to solving piracy 
on platforms like Morpheus or peer-to-peer file-sharing, which 
was demonstrated by Mr. Eisner's tape, is not accurate.
    Senator Stevens. I have to leave, Mr. Chairman, but let me 
just say, as a consumer, I would like to sit in front of my big 
TV watching my videos. I do not really enjoy watching 
television programs on a computer set. I see that all day, and 
I hope that somehow or another we can preserve the whole 
industry that delivers to all of us the way we want to enjoy 
this media.
    I have got a daughter that loves to pull down movies. She 
is going to scream at me tonight on the phone, I am sure, but I 
think you missed my point, Mr. Vadasz. You are talking about 
the consumer. The consumer is a vast collection of people, some 
of which do not even use computers. A lot in my generation do 
not even know what they are, and so unless we protect this 
industry against theft, they are not going to continue to enjoy 
the movies, and I do believe we have to solve the theft 
problem, and I hope you will come to an agreement. If you do 
not, I am ready to go out on the floor with you, Mr. Chairman.
    The Chairman. Very good. Senator Burns.
    Senator Burns. I think the Senator from Alaska has pretty 
much covered the ground. Looking at this whole thing from 
30,000 feet, both are dependent on each other. Both of you need 
each other, and I guess where I am coming from in this whole 
debate is that, as dependent as you are on each other, why has 
there not been a solution up until now?
    Now, I have just got a question here for Mr. Chernin. We 
have heard the concerns about selectable output controls. Can 
you tell me what that phrase means, and is injected into the 
public debate on this, and I get the feeling that--the other 
day we had a new term injected into another piece of 
legislation. We know what an endangered species is, we know 
what a threatened species is, but a new term comes along and 
says, sensitive species. I do not want to spend the next 20 
years trying to find the definition to a term, so would you 
enlighten me on selectable output controls?
    Mr. Chernin. Yes. First of all, Senator, I am hardly a 
technologist, but I believe selectable output control was a 
very early stage proposal to try to solve the problem of 
piracy. I know Fox and I believe all the other content 
companies have explicitly abandoned this proposal several years 
ago. It is a nonissue for us, and I think it has been largely 
superseded by the 5C negotiations.
    Senator Burns. OK, that is fine. Do you have any problem 
with consumers copying television programs on a digital VCR and 
then routing the copy to any other device in the home, as long 
as it does not get uploaded to the Internet?
    Mr. Chernin. No. I think in effect Mr. Vadasz sort of waved 
the flag of fair use, and I think it is very clear that I know 
myself and Mr. Eisner believe that home copying is a legitimate 
use issue, and we do not seek to hinder home usage. It is the 
transmission of perfect digital copies to millions of people on 
the Internet illegally that we seek to halt.
    Senator Burns. In other words, therein lies the problem. We 
can narrow everything down to that problem, then.
    Mr. Chernin. Yes, absolutely. We have no problems with 
people using our content in multiple ways inside their own 
home. It is the illegal use and transmission of that content to 
millions of other people potentially which causes us grave 
concern.
    Senator Burns. I will ask this of both Mr. Eisner and Mr. 
Chernin and Mr. Vadasz. The 5C negotiations, give me your 
honest assessment of where they are. Are we making progress, or 
have we almost come to the end of that process?
    Mr. Eisner. Again--well, you go ahead.
    Mr. Chernin. I will start. I think we have made substantial 
progress, Senator, and we applaud our colleagues in both 
industries for the progress we have made. However, I also think 
7 years is enough time to come to a solution, and we have to 
solve these three remaining points, and we have to solve them 
with some alacrity. To be direct, this is an Internet problem. 
It needs to be solved at Internet speed, and 7 years I believe 
is too long.
    Mr. Eisner. And the 5C does not really address the real 
problem which we saw in the video. The big problem is the 
pirated, de-crypted copy that goes up on the Internet. And that 
can be from a print stolen out of a projection booth when 3,000 
prints go out, or it could be stolen from the lab, or it could 
be stolen from the FedEx car somewhere along the way, or it 
could be some disgruntled employee that could send it to 
somebody. There are many ways. We know that. And, whether it is 
an analog or digital copy, it could be made into a digital 
copy. It goes up illegally, in the clear, on the Internet.
    I do not believe the most significant problem is a 5C 
problem. Rather, it is the problem I was referring to--which is 
the need for a different kind of technology. If ``Black Hawk 
Down,'' the day it comes out, is in the clear up on the 
Internet, it totally undermines the $100 million--not our $100 
million, but the other company's, Sony's, $100 million--
investment in it.
    Senator Burns. Mr. Vadasz.
    Mr. Vadasz. First of all, I would like to take exception to 
what Mr. Eisner said about our industry trying to build a 
business on illicit trafficking of content. You cannot build 
the kind of industry of the size that we are, or that we expect 
to be, by illegitimate means. There has to be a rule of law. 
There has to be a proper protection of all participants' 
interest in order to build an industry, so I really take 
exception to that.
    Second, there are technologies today available as a result 
of the 5C and 4C work to create a protected environment for the 
content. Protected content; Napster or Morpheus does not work 
with protected content, with the technology we have today. And 
as I said before, terrestrial broadcasts, the analog hole is an 
issue we are working on. That is not a 7-year-old issue that we 
started to work on. That is about a 10-year-old issue, and 
progress has been made, as I said before. The proposal will be 
on the table by the end of March this year to solve one of 
those.
    Mr. Chernin. But if I may, Mr. Chairman, I would like to 
dispute this notion of protected content. It may be true that 
protected content cannot be used on Morpheus. But as Mr. Eisner 
said, that content does not get there in legitimate ways. It is 
stolen from theaters. Someone sits there with a digital video 
camera and tapes it off the screen, so our problem is not that 
we do not have ways of protecting content. I think there are 
numerous ways, satellite, cable, et cetera, that we can 
transmit protected content. It is that content that is obtained 
illegally and is allowed to pass freely on the Internet without 
any protection whatsoever that is the problem.
    But if I may, Senator, there are no technological problems. 
They are all problems of the world, I am sorry to say. You can 
cut bread with your kitchen knife, or you can kill somebody 
with it. There is no way to protect every element of our 
society by technology. That is where the rule of law comes.
    Mr. Eisner. If we do not protect content on the Internet, 
you will end the entertainment business. Therefore, I would say 
of all the things you are working on, this would be one to try 
to work quickly on. If you are saying that you cannot do it, it 
absolutely cannot be protected, like cutting bread, or whatever 
that was, then we will not be able to distribute our movies to 
consumers in the ways in which we have been doing it, and then 
the consumer will really be deprived.
    If that is what you are saying--you are telling us it 
cannot be done, then fine. That is the first time I have heard 
that. Then I know where I am.
    Mr. Vadasz. That is not what I said, sir.
    Mr. Eisner. OK. Can it be done?
    Mr. Vadasz. The technology is on the table for you to 
distribute protected content, and that protected content to be 
distributed in our home.
    Mr. Eisner. Can we stop what that kid was doing in the 
video?
    Mr. Vadasz. That is not protected content.
    Mr. Eisner. Can you protect open content on the Internet 
that has been stolen, sitting up on files? Is there a 
technological way in the future to be able to protect that kind 
of content?
    Mr. Vadasz. Provided that you maintain fair use rights of 
consumers. I doubt that some of the old content can be 
protected.
    Mr. Eisner. I am not talking about the emotional or moral 
right. I just want to know if technically you could protect 
content that is in the ether. Can you protect it from being 
copied and transmitted? Forget for now about fair use, and the 
emotional, the moral issues--just, can it be done?
    Mr. Vadasz. I am sorry, sir, there is nothing emotional 
about fair rights.
    Mr. Eisner. Can it be done, yes or no?
    Mr. Vadasz. No.
    Mr. Eisner. Therefore, we have a big problem.
    The Chairman. Very good.
    Senator Burns. I am going to yield my time. I started this 
problem. Now I will yield. I will let somebody else referee 
from here on in.
    The Chairman. I think it was a very meaningful exchange.
    Senator Allen.
    Senator Allen. Thank you, Mr. Chairman, and I do think it 
was a very meaningful exchange. Listening to all the 
gentlemen's comments, I do not think there is any doubt that 
there is support for fair use. The compelling testimony of all 
of them, and obviously Mr. Eisner's showing of these pirated, 
stolen videos that are on the Internet, but the question is, 
whether it is fair use or whether it is a broadcast flag issue. 
These both make some sense. That is a roundabout way, or 
watermarks is what you are all talking about.
    And Mr. Vadasz is talking about the voice of the consumer. 
It is good to be a voice of the consumer, but we must be a 
voice for protecting private property rights. That is the rule 
of law. It is so important in our country for those who invest, 
take risks--they may invest $100 million in a movie. One out of 
whatever number of them may actually recoup that investment.
    Now, I think in that discussion, Mr. Chairman, it gets to 
two points. One, this legislation and this hearing has been a 
good prod, and certain things happen, and certain things happen 
because of fear.
    Senator Burns and I were talking about fear being a great 
motivating factor. Whether it is the fear of draconian 
Government regulations, or inept Government regulations, 
regardless of what they may be, that may get folks moving. I 
think it is very important that all parties recognize from my 
point of view that I would like the private sector, clearly, 
and the marketplace to derive and devise innovations that will 
have the content producers feeling comfortable putting their 
content over the Internet. The consumer electronics folks 
should want that interest.
    Now, in the midst of all this discussion here, that what 
Mr. Eisner showed was not obtained by legitimate means, because 
whether it is Disney, whether it is Fox, whether it was Warner 
Brothers, or Sony, or whomever, they did not put that out over 
the Internet, and somebody pirated it. It was somebody getting 
it off of a projector in the movie theater, and so we have two 
questions here. One is prospectively, what flags or watermarks 
can be put on so it cannot be distributed? I am not talking 
about fair use. I am talking about unfair, illegal utilization 
that can be solved, right? Right.
    Now, putting the cockroaches into a bottle in a dark 
basement is a hard thing to do, and I think the testimony, Mr. 
Chairman, from Mr. Vadasz was to try to get all those, the ones 
who are pirating these, from filming it at a movie theater, or 
however else they are purloining this property. There is not a 
solution for that, is that what you are saying?
    Mr. Vadasz. That is what I am saying, sir. You can take a 
home movie and put it on the Internet. Once that home movie is 
on the Internet, it is out there.
    Senator Allen. And so therefore it would be available to 
anyone, obviously.
    Mr. Vadasz. I think that is correct, sir.
    Mr. Eisner. You then have another issue, which is privacy. 
I would think that technology should try to work on a way for 
the home movies to be able to be sent from a mother to a son 
and not be kidnapped by all of her son's school mates. I think 
that is also a problem. So, I believe this is an escalating 
problem on the Internet. I do not accept that you cannot 
protect your content on the Internet--I just do not accept it. 
But, I am Panglossian, so maybe I am wrong.
    Senator Allen. If this is a situation, and you are saying 
that the solution is suing those who are obviously not paying 
what they should be paying to watch it, that just as a 
practical matter is impossible. You all cannot be tracking 
scanning, cruising the Internet, tracking all the Benjamins and 
everyone that Benjamin linked into.
    Mr. Eisner. Maybe the miscommunication here is, we do not 
expect, because we know that is impractical, 100 percent 
protection. We do not have it now. We probably only have 90 
percent protection now. We can work in a world with 90 percent 
protection. In some countries, it is 60 percent. In some, it is 
95. In some, it is zero.
    We can live with that world, and if the reason that the 
answer is no is that we are asking for 100 percent protection, 
and no genius from MIT can hack it, OK. But I am really asking, 
can we get to 90-percent protection, so the general population 
will not be able to download illegal material from the 
Internet?
    If you are basing it on 100 percent protection, and that is 
why you are saying no, then I just want to back off a little 
bit, because we are not asking for 100 percent.
    Senator Allen. Mr. Vadasz.
    Mr. Vadasz. I think we keep mixing the past and the future. 
I have tried to state that through the working of the cross-
industry group, content can be protected as we go forward.
    Not all the problems of the past can be solved. There are 
1/2 billion PC's out there today. There are, I am told, amount 
of content on the net, there are 150-plus million more PC's are 
sold every year. The number of users on the Internet is growing 
at a very fast rate. Not all of the past issues can be handled.
    Mr. Eisner. I am not worried about the past.
    Senator Allen. There is two different things, Mr. Chairman, 
we are trying to get at. Most of this I look at as being in the 
future, as opposed to what is existing.
    Mr. Vadasz. And what I am saying is that what the cross-
industry working group has done provides protection, the kind 
of protection that Mr. Eisner would like to have, with the 
exception of the work that I described that is still in 
progress.
    Senator Allen. I do not think Mr. Eisner is yet satisfied 
with that, but hopefully he will be.
    Mr. Vadasz. If the answer is: ``My way or the highway,'' 
gentlemen, I do not know what to do about that.
    Mr. Chernin. I do not think it is fair to say it is my way 
or the highway. I think clearly both of us would say, as 
unhappy as we are with what has happened in the past, we would 
be thrilled if we could protect the future.
    Second, I do think it is important to say that what we are 
talking about, though, is the illegal sharing of unencrypted 
files, regardless of how they get there. I do agree that it is 
possible for us to encrypt and safely deliver certain kinds of 
files. We are not concerned about that, and in fact we do 
applaud the progress that has been made, but there still are 
illegal movie, television, music files on the Internet that get 
traded, and this can be solved in the future.
    This is an industry that I know both of us have the highest 
respect for. The people are geniuses with what they can 
achieve, and I just find it hard to believe that with prodding 
from this organization, and with the full intelligence and 
resources and creativity that they have, that we cannot solve 
the illegal transmission of encrypted files on the Internet 
going forward.
    Mr. Eisner. I was in New York in the Village last weekend, 
and bought on the street several video cassettes of films that 
opened that Friday of the Disney Company and other companies. 
Now, the quality was pretty pathetic, but they could be 
digitized and put up on the Internet. I do not know where they 
came from. I do not know whether it was a screening in 
Indonesia that came back. Who knows? But every single film and 
every single television program is pirated. The problem that is 
a killer is when it becomes digitized and put up in the ether.
    The Chairman. Very good. Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman. This hearing is 
taking a turn that I didn't expect, because I thought this was 
just going to be intellectual property rights versus equipment 
manufacturers that didn't want to do what needed to be done 
about that.
    Now, if the question is, can you protect intellectual 
property rights once they're in the ether, as Mr. Eisner says, 
is the technology there? I just don't believe that the 
technology's not there or that the technology can't be 
developed, Mr. Vadasz.
    Mr. Vadasz. Let me just say as clearly as I can, the 
technology is there today. If you use it, you can protect your 
intellectual property rights in the ether, over cable, over 
satellite, over the Internet, and in your home, going from one 
device to another device to another device. That technology is 
there.
    Mr. Eisner. But the hardware manufacturers have to put 
into--tell me if I'm wrong--have to put into a computer a chip 
to make that technology workable. And right now, we have not 
gotten the agreement from the hardware makers--computer makers, 
etc.--to spend the 80 cents a chip, or whatever it is, to make 
it prevent piracy.
    Yes, I think the answer is, it is available or could be 
available. There's a long way between that and putting it in 
the device.
    Senator Nelson. Is that what you referred to as the 
watermark?
    Mr. Eisner. That is one way of doing it. As a matter of 
fact, there are computer companies, that their ads, full-page 
ads, billboards up and down San Francisco and L.A., that say--
what do they say?--``rip, mix, burn'' to kids to buy the 
computer. They are selling the computer with the encouragement 
of the advertising that they can rip, mix, and burn. In other 
words, they can create a theft and distribute it to all their 
friends if they buy this particular computer. Definitely, 
content moves distribution and hardware.
    Senator Nelson. Mr. Vadasz?
    Mr. Vadasz. Sir, I would just like to clarify the 
discussion here. My statement, what I said, referred to no 
chip--no new chip in the personal computer. My statement 
referred to the work of the committee that has been done in the 
5C and the 4C with the adaption by the consumer equipment 
companies for the specification. That is absolutely capable 
today. It has nothing to do with the microprocessor design.
    Mr. Chernin. But I think that--let's be very clear what 
we're talking about here. Again, we have made substantial 
progress, and no one is denying that. And we do have the 
ability to protect numerous legitimate downloaded content on 
satellite, on digital television, on digital cable, et cetera.
    What we complained about is three very specific issues--
digital broadcast television, the analog hole, and the use of 
un-encrypted illegal files and sharing them back and forth. And 
for Mr. Vadasz to say that it is impossible to stop that--it's 
the equivalent of saying, yes, we can stop the people who don't 
steal from stealing. But we have to stop the people who are 
stealing. In addition, we have to stop the people who are 
sharing illegal un-encrypted files, who are stealing, and that 
is not something that they have attempted to solve.
    There are, indeed, legitimate uses and legitimate solutions 
that have been created. It is these three areas that we're 
focused on.
    Senator Nelson. Well, Mr. Chairman, I want to ask a 
technical question. But before I do, this is the kind of 
situation. These folks had better work it out, or we're going 
to work it out for them.
    The Chairman. Yes, sir. No question.
    Senator Nelson. Let me ask you a more technical question. 
Watermarks, as I understand them, are fairly permanent. And yet 
intellectual property, the Constitution says, has a limited 
lifetime. So if, in fact, there's a present case in front of 
the Supreme Court, if the Supreme Court accepts that premise, 
what can we do to make sure that while we're developing the 
watermarks, or whatever the technology is that's developed, 
that we're also protecting the consumers and the collectors of 
the future? Would, Mr. Chernin and Mr. Eisner address that?
    Mr. Chernin. I actually think that's quite simple, Senator, 
which is a watermark, or a broadcast flag are all fancy 
technology terms which I certainly don't understand, but they 
are--quite simply, they are labels and instructions. So a piece 
of content can be labeled ``watermark'' to say, ``Protect this 
as long as its copyright is in effect.'' A piece of content can 
contain instructions that say, ``Stop it from doing this for 
the period of time that the copyright is in effect,'' and stop 
protecting it the moment that copyright expires.
    So, yes, there are permanent--but all it is a label. And, 
in fact, it's a very efficacious way of labeling this is when 
the copyright expires, among other things, so I don't think 
that that's a potential issue at all.
    Senator Nelson. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Boxer?
    Senator Boxer. Thanks, Mr. Chairman. Believe me, no one on 
this panel wants this issue to go away more than I do.
    (Laughter.)
    Senator Boxer. I mean, this is one of those moments where 
you say, ``Oh, God.'' We've got Silicon Valley. We've got 
entertainment. Got it all.
    So the way I've been trying to approach it is right and 
wrong, which is always a good thing to do on most issues, if 
not all. So I see it this way, and I think you all three agree 
with this. There's no question that it is wrong to steal 
intellectual property. Everyone agrees. You all said that. OK. 
So that's right and wrong. And, in fact, we know that property 
is protected in the Constitution. So set aside all the 
interests of the groups. I do believe we would all, I think, 
agree on that.
    So then you come to the issue of what's right and wrong for 
each industry, 'cause, you know, we're not--we know that the 
bottom line is the bottom line for all of you, and you wouldn't 
deny that. So what's in, you know, the short-term economic 
interests of each of you, and what's in the long-term? And I 
think that was what--Mr. Eisner said that, and I just want to 
pick up on that, 'cause Mr.--Mr. Vadasz, is that--am I saying 
it right?
    Mr. Vadasz. That's close enough.
    Senator Boxer. Good enough? OK. You know, I truly do 
believe, in the long-term--and I know it's hard sometimes for a 
business to think long-term. I think the really good ones do. 
If there is a situation where there's no longer capital flowing 
into creativity here to create these incredible exports, OK, in 
the end, no one's going to want to really look at this content. 
This kid's excited--this kid, who doesn't think he's a thief. 
He's really excited, because he's gotten some fabulous products 
for free.
    But if there's nothing out there but junk, in the long-
term--my point is, I think everyone suffers, including the 
group you talk about, the consumers. And I do serve on the 
Consumer Protection Subcommittee here. So I would hope, 
therefore, that my high-tech people are as interested in 
solving this problem as my entertainment people, because in the 
long run, it's in your self interest.
    What I would like to get to is, how are these meetings 
going? I mean, I was hopeful--I learned about this issue quite 
a while ago, and I was extremely hopeful that things would be 
resolved by now. I'm a little concerned, frankly, given some of 
the comments here, which, by the way, I think are very helpful 
to you, Mr. Chairman, because you've got the bill that 
basically says, ``Please figure it out. Please figure it out. 
And if not, we're going to have to figure it out.'' So I get 
the sense that the meetings haven't been as productive as I 
thought and hoped.
    Is there any truth to Mr. Eisner's point that it's more 
than a coincidence that these letters arrived today from the 
high-tech people?
    Mr. Vadasz. Frankly, I think it is a coincidence. However, 
let me just----
    Senator Boxer. But that's good.
    Mr. Vadasz.--say it's because----
    Senator Boxer. But this was really what was coming, and if 
a breakthrough was coming without this hearing, that's good.
    Mr. Vadasz. I hope, Senator, that you include us, Intel, as 
one of the companies who looks at the long-term. And for 
everything that we have done, we----
    Senator Boxer. Yes.
    Mr. Vadasz.--have demonstrated that. That's why we always 
believe that there has to be a rule of law governing the whole 
structure here, so that we don't try to build business on the 
illicit use of anybody's intellectual property. And that's why 
we are an active participant in that.
    Senator Boxer. I know. I'm very glad. But you seemed to be, 
at one point in your testimony, extremely disturbed at the 
thought that this Committee might get involved if nothing 
happens. You know, it confuses me, because you sure want us to 
get involved if there's a problem of counterfeiting your chips, 
right?
    Mr. Vadasz. Absolutely.
    Senator Boxer. OK. I mean, I think the Chairman made this 
point in the beginning. I mean, I would just roll up my 
sleeves, and I have done so, to protect my high-tech people, 
because it's a nightmare. It's happening to you in many cases. 
So I think we need to not have a double standard here. We need 
to work this out. In many ways, it is our economy. You know? In 
many ways, are we going to continue to be the economic leader 
of the world? So I know that businesses do get very--you know, 
do have disagreements, and I understand it. But in the end, I 
think it's in all of our interests to protect this property and 
do it in the right way.
    So let me just close, because my time is up, but ask each 
of you, you know, your perspective on how the negotiations are 
going--have gone so far. Now, Mr. Vadasz says that, in fact, 
you do have at your disposal, is what I understand--he says you 
have at your disposal the way to fix this problem. I believe he 
said that. Would you comment on whether you--that's your 
feeling? And how do you think these negotiations have gone?
    Mr. Eisner. Well, first of all, I don't want to single out 
Intel, because Intel is one of the most respected companies, if 
not the most respected company, in the Silicon Valley, so they 
are not--you just happen to have a spokesman----
    Senator Boxer. I know. They're here, so I----
    Mr. Eisner.--here. But I can tell you, that until the 
Senator said he was going to consider legislation, you couldn't 
even have a conversation about the big issue. I can tell you--
and I tried to have a conversation personally; this is not 
hearsay--I can tell you, until the hearing was set, that I 
could not get people from the high-tech world to discuss this 
issue. I can tell you, before this hearing was set, I had never 
had a conversation with the largest company in the world about 
this particular issue. I can tell you, until yesterday, we were 
told that if you had this hearing, that the high-tech industry 
would then get more entrenched, rather than less entrenched.
    And in comes a letter, by coincidence, yesterday, the day 
before the hearing. I think that coincidence is highly 
unlikely. So the conversations are just now beginning, because 
I think everybody recognizes that the legislators have a right 
to regulate street lights and interstate commerce and a lot of 
things that they've regulated for two or three hundred years. 
This is not unusual.
    And, frankly, this is the court of last resort for us. This 
is the place that we learned in civics you go to to get action. 
And that's why we're here. And we are hopeful that in the next 
60 days, if our associates in California believe this is real, 
they'll come in, and we'll get this done. But they have to 
believe it's real.
    Senator Boxer. OK. Mr. Chernin, when you--would you address 
the fact that you do have these technologies at your disposal 
now? Because that was stated, and I'm----
    Mr. Chernin. Yes, I think--again, let me be as clear as I 
possibly can. We think substantial progress has been made in 
numerous technologies, which is what I assume Mr. Vadasz is 
referring to. We are safely encrypting content for satellite 
and digital cable and DVHS, et cetera. And we applaud and 
appreciate the cooperation in those areas.
    I think it does come down to this--there are three areas in 
which we are frustrated and stymied--protection of digital 
broadcast signals, the analog hole, and the protection of un-
encrypted illegal files that are passing back and forth on the 
Internet. So I do think we want to make it very clear, we're 
not saying everything's wrong, and these guys are horrible 
guys. In fact, we are saying we've made some progress in some 
areas. But we have reached what feels pretty close to a brick 
wall on these final issues. And I do share Mr. Eisner's 
suspicion about the coincidence of the letter arriving 
yesterday. And I applaud this Committee for at least goading 
all of us into what hopefully is the final action to get this 
done.
    Mr. Vadasz. May I?
    Senator Boxer. Please.
    Mr. Vadasz. First of all, this is not just an activity that 
started when the threat of legislative mandate on PC designs 
have come about. We have been at it for 6 years--over 6 years. 
As you know, our industry does not have an excess of good 
engineers. We have spent our resources for 6 years working on 
this problem. It's not ignoring it. It's not ``not listening.'' 
It's working, and it's hard work.
    And as far as the industry listening to the studio's 
better, I'd just like to remind Mr. Eisner that our CEO, Mr. 
Barrett, tried to have a session with you last October, which 
you canceled. So that's unfortunate, but we go on.
    What I would like to suggest is that we also recognize that 
this is a very talented industry. I'm not talking about ours. 
I'm talking about the media industry. And then the issue of the 
VCR came, and they dealt with it. And they dealt with every 
other technology generation, although somewhat reluctantly at 
first, but they dealt with it. And they did brilliantly.
    Maybe it's time that we tell them--there's a lot of 
technology out there, time that we deal with the new digital 
world. But when we do that, I think you have to also see how 
they deal with it that the consumer also gets a fair shake.
    Mr. Chernin. Senator, if I may, I think this issue of 
bringing up the Betamax case from more than 20 years ago is a 
little bit of a shibboleth, and that, you know, there's a huge 
difference between analog, in-home taping, which, as both of us 
have said repeatedly, is something we support and are willing 
to support in both analog and digital form. There's a huge 
difference between that and the ability to make one million, 
ten million, a hundred million perfect digital copies and press 
a send button and send them. And to bring up the Betamax case, 
which, indeed, executives long before either of our tenure 
opposed 20-something years ago, I do think is an attempt to 
take our eye off what's the real issue.
    Mr. Eisner. And the other attempt, and I'll just say no 
more--I'm accused of being a meddler and being into everything. 
And I assure you, if somebody wants to see me, they can see me. 
My only recollection is being on a bike trip with Andy Grove, 
who never mentioned it to me over 5 days. But if somebody at 
Intel wanted to see me, they certainly know my telephone 
number.
    I want to point out one company up there, Cisco, who has 
done an enormous introspective look at this problem and has 
decided that it is in the best interest of Cisco to be 
cooperative in this whole area. Whereas, four or 5 years ago, 
they questioned whether they should even participate. So there 
are companies that are definitely addressing this issue.
    The Chairman. We have been a little liberal up here, but we 
have got Mr. Cisco, and we have got to move. Senator Breaux?

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you, Mr. Chairman. As the saying 
goes, everything that needs to be said has probably been said, 
but not everybody has said it.
    (Laughter.)
    Senator Breaux. So let me see if I can say it also. Let me 
ask Mr. Vadasz. Is there equipment that is now available that 
could be put into personal computers to prevent Benjamin from 
doing what Benjamin did so well?
    Mr. Vadasz. That could be put in the personal computer?
    Senator Breaux. Yeah, somehow preventing Benjamin from 
copying the things he did.
    Mr. Vadasz. The protection has to start at the source. So 
if the source material is protected, then you can protect it in 
the chain. And what I'm saying is that that technology is 
available today.
    Senator Breaux. OK. If Congress said that that technology 
should be made available by December the 31st of this year, 
could the industry comply with that?
    Mr. Vadasz. I believe they could.
    Senator Breaux. I was impressed with the letter that you 
sent to Eisner and all of his colleagues--not you, personally, 
but from all of the industry. And I'll bet some people spent a 
lot of time writing this letter, because it was very carefully 
worded. And that read, ``It's critically important to 
development anti-piracy tools. We're working diligently to 
develop systems. The meetings have been highly productive. 
Optimally effective solutions are in reach. Informed consensus 
on key technologies. Working diligently. We're committed. 
Working with you. Consensus. Cooperation.'' I mean, all these 
words--I mean, the bottom line is that we're going to work with 
you. And does the letter say anything more than that?
    Mr. Vadasz. Well, just a confirmation that we will work----
    Senator Breaux. It's a well-written letter saying, we're 
going to continue to work with you.
    Mr. Vadasz. That's right.
    Senator Breaux. The question we have before us how long is 
it going to take?
    Mr. Vadasz. Well, the real problem of the day, as I 
mentioned to you before, is the over-the-air transmission, and 
the analog hole. And I also said that proposals will come to 
the cable this yeas, this quarter, on the over-the-air 
broadcast. And there is more work to do on the analog hole. And 
I do not have a timescale. I just don't know.
    Senator Breaux. Well, the interesting thing, I think, is 
that there is, Mr. Chairman, equipment available that can, I 
think, get this done. It's a question of whether we're going to 
mandate it or whether the industries will get together and do 
it themselves. I'd prefer the latter, but it may be necessary 
for this Committee to take action, which I would support, if 
need be. Thank you very much.
    The Chairman. Senator Smith?
    Senator Smith. Thank you, Mr. Chairman. Mr. Vadasz, I want 
to give you a chance to correct what I think you said. And you 
quoted Jack Valenti as saying that--in the former period, that 
you're industry was the Boston Strangler.
    Mr. Vadasz. No, Senator. I said the VCR industry.
    Senator Smith. The VCR industry. Were you implying at all 
that they're making a lot of money, so a certain amount of 
theft is OK?
    Mr. Vadasz. Absolutely not, Senator. What I'm implying is 
that this is a very talented industry. And when they had to 
deal with the changing technology, they dealt with it in a very 
successful commercial manner.
    Senator Smith. I am wondering what this chip costs that has 
been spoken of here. What does it cost? What does it mean to 
the consumer, in terms of the cost? And what does it do to the 
efficiency of the computer--its speed and the consumer 
friendliness--if this were required to be included?
    Mr. Vadasz. I don't think it's really a cost issue. I mean, 
whether it's five cents or five dollars, that's really not the 
issue. The issue is abdicating the design decision of our 
microprocessor and potentially creating technology cul-de-sac 
for our product. So I would like to see that the solutions that 
come do not have the chance of limiting technology's ability to 
move forward.
    It's not that I want to see piracy happen. It's not that I 
want to see an unsafe environment. But I do not want to see our 
industry simply abdicate some key design decisions to the 
studios.
    Senator Smith. Some in the entertainment industry would 
charge that your industry doesn't want to fix this, because you 
make money selling equipment that boots up their material and 
sells it for free. Is that the case?
    Mr. Vadasz. It seems like that's ``guilt by association.'' 
As I said before, I don't think that we can build a significant 
big business on illicit use of intellectual property. So this 
problem needs to be solved. There is no question in my mind.
    Now, there is no question in my mind, either, that rich 
content--use of rich content in very different ways is 
beneficial to our industry, is beneficial to the networking 
industry, is beneficial to the telecommunications industry. And 
I think, at the end of the day, it's beneficial to the media 
industry, as well.
    Senator Smith. I guess my questions now turn to the 
entertainment industry. If you're pointing the finger at the IT 
industry, saying they need to fix it; and they're saying 
there's some watermark or some technology available to you, 
that if you use it, then this boy couldn't steal your product. 
What is that technology?
    Mr. Eisner. There has to be--at the end of the game, there 
has to be something at the hardware end. So if he doesn't want 
to put in that chip at the last--at the end of the game, for a 
reason that I just don't understand, whether it's five cents or 
five dollars, it's just not going to work. So you have to--it's 
the whole chain. You put it in--and I'm not a technician 
either; you probably can do better than I can on this--but you 
put it in in the creation of the product. You put it in in all 
the legal transportation of the product, and you put it in in 
the end-usage of the product, as long as there's some sort of 
flag or some watermark on the illegal use, so when it comes to 
the computer, it won't play.
    Now, if that's a cul-de-sac, and we're asking for something 
that is--it's going to make the computer blow up--they've 
taken--they used to say it would slow down. They're off slowing 
it down. There was always a reason it couldn't be done. The 
reason now is a cul-de-sac. I don't know why they just don't do 
it and get over with it, because they admit that it is this 
high-quality video--movies, television, and other things, 
sports and so forth--that will drive broadband and drive their 
business. So let's get it done and move on and not fight about 
it.
    We don't want to make any money from it. We'll pay for what 
we have to pay to encrypt our product. We're not asking anybody 
else to pay for it. We just don't want to pay a continuing fee 
for that.
    Senator Smith. So at the end of the day, there's nothing 
you can really do to fix this from getting onto digital and 
having it multiplied perfectly every time.
    Mr. Eisner. We don't make the televison sets or the 
computers where this is distributed. We can do it up to that 
point.
    Senator Smith. Up to that point. Is that right?
    Mr. Eisner. Yes.
    Senator Smith. The cul-de-sac that we're talking about--my 
concern for the IT industry is that when we establish it, that 
just begs the stealers to get around it.
    Mr. Eisner. Well, we're asking for renewable, changeable, 
expendable, all those words that mean it has to be developed 
and legislated to be able to adapt to new technology. Yes, if 
you make one system, and you tell them they have to do one 
thing, that will be antiquated probably the day it opens. So it 
has to be--like everything else--renewable. And it doesn't have 
to be a hundred percent. I mean, if some people get into it for 
awhile, then they get into it. DVD has been hacked. Normal 
people just say, ``I'll pay the money.''
    Senator Smith. Thank you. Mr. Chairman, I just want to say 
I thought that the video of this young boy--and I don't want to 
moralize here, but I thought it was a tragic thing that we saw. 
I mean, we're all worried about the Ten Commandments being hung 
in a courthouse. Heavens, we took them down at home a long time 
ago, apparently.
    The Chairman. Right.
    Senator Smith. Because the commandment ``Thou shalt not 
steal'' is clearly not taught in somebody's home, and 
apparently a whole lot of homes. And that's a real tragedy for 
our country.
    The Chairman. Senator Snowe? And they don't feel like 
they're stealing. They just see it out there, and they just 
take it. That's the truth. Go ahead.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman. And I want to thank 
the panel here this morning. I obviously have heard the 
preference that--from the Committee, I think, essentially that 
if we could work this out through the private-sector industry, 
that certainly would be most desirable.
    I think that--one of the areas I want to probe is to why 
the industry has reached an impasse. Has it reached an impasse? 
Is it unresolvable at this point with the association, or is it 
still possible? And what's the timeframe here? At what point 
would it be, you know, an absolute necessity that Congress take 
action to mandate a solution, if that becomes the only option 
remaining?
    Mr. Chernin. Well, I'll speak, for at least ourselves. We 
think we have reached an impasse, but we certainly do not think 
it's unresolvable. We're certainly willing to do it, but I 
think that, as I said earlier, 7 years is too long a timetable. 
If the timetable is 12 months or 18 months or 2 years, I'm not 
the one to say.
    As I said, I applaud these hearings, because I think just 
that letter showing up is an indication of some movement. These 
issues are resolvable. But for some reason we haven't been able 
to get there yet. And we think that the threat of these 
hearings has been a big help. And if this isn't enough and we 
can't resolve it, then I think we are going to come and ask for 
legislative help to solve it.
    Senator Snowe. Yes, Mr. Vadasz?
    Mr. Vadasz. It's very interesting, because I thought that 
we didn't reach an impasse. I thought that we were working 
diligently on the issues that you brought up. I thought the 
issue of her terrestrial broadcast and the analog hole came up 
as an issue that you wanted to be solved in a relatively recent 
time, like a year ago or so. And we have been working on it. 
But if you think that we have reached an impasse, I'm really 
sorry to hear that. I thought that our--jointly our people have 
been working diligently on this issue--your people and ours.
    Mr. Chernin. I guess maybe what makes us more pained, Mr. 
Vadasz, is when you see several hundred thousand of our movies 
and our television shows downloaded every day. Perhaps we're a 
little bit more sensitive, and perhaps we're even a little 
hypersensitive about this. But given the millions of dollars 
and thousands of jobs that contribute to the economy, this is 
an extraordinarily important issue for those of us in the 
content business.
    Mr. Eisner. I'm not super sensitive about this. I know when 
I'm being finessed. You know, finesse is finesse. And until 
this process that we're going through now started, you couldn't 
discuss this. At least at my level, you couldn't discuss this. 
And when you discussed it with your friends, who I have in high 
places in Silicon Valley, you would get a lot of negative body-
language. You know when you're making a deal and it's not going 
to happen and you're being treated very respectfully.
    I would say there was a total impasse, and I think--good-
natured impasse, by the way--friendly impasse, not hostile, and 
a lot of good work being done around the impasse, a lot of 
other things being done between us and Intel and Microsoft and 
Cisco and all the rest. But on this particular issue of that 
kid downloading our movies, putting our industry in real 
jeopardy, I would say there's been an impasse.
    Senator Snowe. So are the negotiations still ongoing? The 
discussions ongoing? Or is anything happening?
    Mr. Eisner. We are assuming that Congress is going to come 
up with some period of time that we have to do something. And 
we are going to subtract every day starting today from that 
period of time, because now we have a letter from a high-tech 
company saying they're going to be cooperative, they're going 
to sit down. So we're going to call them tomorrow morning and 
say, ``OK, when do we meet?'' I'm returning the call from last 
August that I don't remember getting.
    Mr. Vadasz. October.
    Mr. Eisner. Excuse me, October--that I don't remember 
getting. I'm pretty good at returning my calls, but I'll return 
it now: Let's meet.
    Senator Snowe. Well, Mr. Vadasz, you had mentioned in your 
testimony on--that your concern is it would infringe on 
consumer rights and it would do irreparable economic damage. On 
the other hand, you also can recognize--the concerns of the 
entertainment industry. Whether you regard it as, you know, 
real or not, or it should be done by government or not, the 
fact of the matter is it remains a real concern. And our 
economic system operates on incentives and disincentives. And 
if the industry refuses to make the investments to take the 
risk, obviously that affects not only the industry, but it 
affects the American economy, as well.
    So I think you can understand why there would be a true 
interest on our part to try to resolve this issue. We would 
prefer it to be done within the industry. But clearly, if all 
else fails, then we're not going to have any choice in the 
matter, because they do have a legitimate concern. I mean, 
would you take those--would you make those investments, would 
you take those risks, if you were in their shoes?
    Mr. Vadasz. Senator, first of all, I do agree with you that 
this issue needs to be resolved, and that's exactly why we have 
committed the kind of resources we have in all of our other 
industry partners in the past. So there is no disagreement on 
solving legitimate issues.
    But when it comes to taking risks with investment, nobody 
can manage the kind of risks we take with the investment on our 
future products.
    Mr. Eisner. Can I ask one question? Is it your customers? 
Because they sell their chips to the computer manufacturers. Is 
it that your customers don't want this chip? Because you would 
do the chip if your customers wanted it. There's no reason for 
you not to do the chip. So is it COMPAQ or Dell that says, 
``You know what? Don't send me that chip. I don't want that 
chip''?
    Mr. Vadasz. That's not the issue. The issue is how does the 
industry moves forward. What are the dynamics of the industry? 
Who makes the design decisions?
    Mr. Eisner. If Michael Dell said, ``I want the chip,'' 
would you give them the chip?
    Mr. Vadasz. If Michael Dell wants to put that capability 
into his machine, he's perfectly capable of doing that.
    Mr. Eisner. I think that may be the issue. I don't know. 
I've been trying to figure out for 2 years why we can't get 
this done.
    Senator Snowe. Well, maybe as a result of this hearing 
today, maybe we have now sort of figured out what the issues 
are, and maybe we can get it resolved, Mr. Chairman. Thank you.
    The Chairman. ``On behalf of the Committee, and this letter 
here from the Business Software Alliance, I read, ''The 
software and hardware industries are committed at the highest 
level to a solution that protects content,`` signed by Michael 
Dell of Dell, Mr. Capellis of COMPAQ, Mr. Gerstner of IBM, Mr. 
Bennett of Intuit, Balmar of Microsoft, Galvin of Motorola, 
Chen of Sybase, Weinback of Unisys, and none other than Mr. 
Craig Barrett, the chief executive officer of Intel.
    And now we know the time, because I can go back to the 
taken record, and Mr. Vadasz has testified that the technology 
is on the table and ready to be used. I remember asking--and I 
have toyed with my friend, Mr. Valenti, for two or 3 years over 
this same problem--and the testimony has shown we have been at 
it for 7 years of listening and waiting and listening and 
waiting. But now we know that the technology is on the table 
and ready to be used.
    I asked--I said our bill has got 18 months. And the answer 
from one of the real good experts says you can do it in 18 
days. And Mr. Vadasz says you can do it now. So that question 
is answered.
    That won't be a technological cul de sac--we don't have a 
genius for that in Congress.
    (Laughter.)
    The Chairman. But we can create an economic cul de sac for 
the standard technology. And that's what we're about to do if 
you don't.
    And otherwise, Mr. Vadasz, in thanking you and thanking the 
entire panel, it's been the most outstanding panel we've had in 
a long time. You say looking at Intel for the long-term. That's 
all I got to know about the Dublin, Ireland, plant. That's a 
billion-dollar plant, and I tried my best to get it from Andy 
Grove to go into South Carolina.
    (Laughter.)
    The Chairman. And I'm still trying. And incidentally, we've 
got the technology ready for it, because the vice president of 
Intel in Dublin took me down the road, and he said, ''Senator, 
I've got a surprise for you.`` And he showed me a technology 
training institute very, very similar to the one I had broken 
ground for myself in Columbus, South Carolina, 40 years ago. He 
said, ''I sent two teams on two occasions to Midland Tech in 
Columbia, South Carolina, and we duplicated your facility,`` 
and that's how they got it up and got it operating and in the 
black.
    And this has been a wonderful success. So I thank you, Mr. 
Vadasz. I thank you, Mr. Chernin, and thank you, Mr. Eisner. 
We've got a very important panel of five others here this 
morning. And we want to excuse you folks and get them forward 
here.
    Mr. Jack Valenti, the president and CEO of the Motion 
Picture Association of America--let's do it as quietly as we 
can--Mr. James E. Meyer, the special advisor to the Chairman 
and former Senior Vice president and Chief Operating Officer of 
Thomson, Mr. Andreas Bechtolsheim, the General Manager and Vice 
President of Cisco, and Robert Perry, the Vice President, 
Marketing, of Mitsubishi.
    Mr. Valenti, while they're moving out, I'm reminded of the 
time after the hurricane, Camille, hit the Gulf and Senator 
Houston took Senator Stennis down to President Nixon in the 
Oval Office to have a disaster declared. And they sat in the 
Oval Office, and President Nixon came in, and the president had 
already been briefed, obviously, and he said, ''This has been a 
very terrible thing down there, and I'm ready``--he was ready 
to declare it an emergency, a Federal emergency.
    But Senator Stennis interrupted and said, ''Now, Mr. 
President, you don't understand.`` He said, ''It just took all 
the boats, the docks and washed them away.`` President Nixon 
said, ''Yes, but, Senator, I know, and I'm ready.`` ''Oh, no,`` 
Senator Stennis interrupted again. He says, ''It washed ashore 
and took all the houses.`` And the president started one more 
time. He said, ''I understand there's been quite a loss down 
there, and I'm ready to``--''But you don't know,`` Senator 
Stennis said.
    (Laughter.)
    The Chairman. ''And it washed away all the palms.`` 
Finally, Senator Eastland reached out and touched Senator 
Stennis on the knee. He said, ''John. John, hush. Let the boy 
talk.``
    (Laughter.)
    The Chairman. We have let the boys talk already this 
morning, and I apologize to this important panel. But the truth 
sort of comes out, and we're better informed. That's one of the 
best panels we've had. But without further ado, obviously, Mr. 
Valenti, Mr. Meyer, Mr. Bechtolsheim, Mr. Perry, we welcome 
you. Your statements in their entirety are included in the 
record, and we can highlight them or deliver them as you wish. 
I can start with Mr. Bechtolsheim.
    [The prepared statements of Mr. Bechtolsheim, Mr. Perry and 
Mr. Meyer follow:]

   Prepared Statement of Andy Bechtolscheim, Vice President/General 
      Manager, Gigabit Systems Business Unit, Cisco Systems, Inc.
    Good morning and thank you, Mr. Chairman, for convening these 
hearings on protecting digital content and promoting broadband 
deployment. At Cisco, we believe that growing the Internet from the 
current narrowband generation of email and web browsing to one that is 
capable of delivering movies and multimedia applications is crucial to 
the economic future of our country. Although many forces will drive 
broadband deployment, one key factor will be the availability of 
audiovisual content on the Internet. The more and better content that 
is available on the Internet, the more consumers will choose broadband 
connections to access that content and also gain access to the benefits 
of broadband in other areas, such as education, medicine, and 
government services.
    But why should government care about the deployment of broadband 
Internet networks? The answer is simple, yet compelling. Broadband 
enables new applications and services that will continue the radical 
transformation of our economy that the Internet has begun. It is not 
just about watching movies online or playing interactive games, however 
interesting those activities may be. It is about improving the 
productivity of our workforce and increasing long term economic growth. 
If we look at the recent past, we can see the enormous impact of first 
generation Internet services on the economy. In industries where 
information technology and Internet services were integrated into their 
operations, productivity increased four times faster than in industries 
that did not integrate information technology. Higher productivity 
growth creates more jobs, strengthens existing industries, and provides 
higher wages for workers.
    But as I said before, movies will help draw consumers to broadband 
services. But first, the movies must be drawn to the Internet. The 
motion picture industry is certainly interested in using the Internet 
as a new distribution platform for its movies. But the movie industry 
is not interested in doing so without proper protection against 
unauthorized copying of copyrighted material. We would not expect 
anyone to put their money in a bank that does not have a safe and 
secure vault to store the money. Likewise, it is not reasonable to 
expect movie studios to release content on the Internet without strong 
copy protection systems in place. The technology industry, including 
Cisco, has worked hard to create copy protection technology and 
continues to work with the content industry to improve and implement 
such technologies.
    Copy protection technology, however, must be about more than just 
preventing authorized copying of content. The technology must support 
multiple encoding technologies, multiple platforms, and multiple 
categories of devices. Most importantly, the technology must be 
consumer friendly. If consumers find the copy protection technology to 
be confusing, difficult and burdensome, they will not move to the new 
services. For consumers to embrace broadband distribution of movies, 
copy protection must be transparent to the user, available for multiple 
platforms and formats, and support multiple usage models such as 
purchase, rental, subscription and broadcast.
    The best example of this type of security is already in widespread 
use on the Internet today. Millions of consumers make secure 
transactions on the Internet using the Secure Socket Layer encryption 
technology, commonly referred to as SSL. The open and interoperable SSL 
technology allows for the transmission of sensitive data, such as 
credit card numbers, securely across the Internet in a manner that is 
virtually transparent to the user. In fact, most Internet users do not 
even know that they are using SSL protection in making these 
transactions. The creation of SSL was critical to developing commerce 
on the Internet largely because it is an open and interoperable system 
that supports almost all technologies and is easy for consumers to use.
    It became clear that a similar system for protecting content on the 
Internet would be the best and most consumer friendly way to bring high 
value content to the Internet. So Cisco took up this task and has 
created a system called Open Conditional Content Access Management, or 
OCCAM. OCCAM is an end-to-end protocol for protecting content from 
unauthorized copying, distribution and playback and can be used to 
protect content during transmission and storage in any public, private 
or home network.
    OCCAM utilizes 128-bit AES or Advanced Encryption Standard for 
encrypting content. This is one of the best encryption technologies 
known today which was created by industry working with the National 
Institute of Standards at the Department of Commerce. In addition, 
OCCAM uses PKE or Public Key Encryption which allows for the secure 
transmission of a content key from a content provider to the consumer 
playback device. Both of these technologies have been extensively 
researched, are in wide use on the Internet today, and are considered 
open standards.
    I would like to state for the record that government, in particular 
the Department of Commerce has already greatly contributed to enabling 
content protection technology, by defining the standards for security 
technologies that are used as the basis for e-commerce,.
    In order to maintain the open nature of this system, Cisco has 
created a non-profit licensing organization to administer the OCCAM 
technology. The licensing organization can also be used to enforce the 
robust implementation of the copy protection technology by 
manufacturers of compliant equipment. Cisco believes that the open 
licensing of open and interoperable technology will be the best means 
of creating strong and consumer friendly content protection to 
encourage the distribution of content on the Internet.
    The availability of open systems of content protection like OCCAM, 
which can be enforced through licensing regimes leads to the conclusion 
that legislation prescribing specific content protection technology, is 
not necessary. In fact, it would be quite undesirable. If the decision 
on selecting and implementing technologies were left to government 
bureaucrats, we run the risk of selecting inferior, market-unfriendly, 
and limited technologies. We would also limit future innovation in 
security technology by freezing in place current technology and only 
making changes at the speed of government, not the speed of the 
Internet.
    Looking at history only confirms this conclusion. For example, the 
Audio Home Recording Act attempted to legislatively protect digital 
audio content through a government-mandated copy control technology. 
Initially, the AHRA largely succeeded only in destroying the market for 
digital audio devices. Then, as technology developed, it became clear 
that the copy protection system of the AHRA was extremely ineffective. 
Despite provisions in the AHRA that would allow the mandated technology 
to be ``updated,'' no serious attempt has been made to do so. Instead, 
the recording industry is working through private sector technologies 
to solve its problems, rather than seeking another government mandate.
    The best way to protect content is through technology, not 
government. Proven content protection technology exists today that does 
not require new legislation for efficacy. Alternative technologies that 
would require new legislation to be effective in our opinion are not 
technically sound because the protection offered by the law can never 
be as strong as protection offered by the strength of encryption and 
mathematics.
    A standard for copy protection is required to assure a viable 
market for content creators and consumer electronics companies, while 
making the widest range of content available to the public. Such a 
standard should be technically sound, be open to all qualfied 
participants, and not be controlled by a for-profit entity. Cisco 
remains committed to work with the industry to implement an open and 
interoperable system of this nature.
    Mr. Chairman, thank you for the opportunity to present Cisco's 
views today.
                                 ______
                                 
   Prepared Statement of Robert A. Perry, Vice President, Marketing, 
                               Mitsubishi
    Chairman Hollings, Ranking Member McCain, and Members of the 
Committee--
    I am pleased to appear today on behalf of the Home Recording Rights 
Coalition (``HRRC''). I serve on the Board of the HRRC, and currently 
chair the Video Board of the Consumer Electronics Association 
(``CEA''). I also serve as Vice President of Marketing of Mitsubishi 
Digital Electronics America, Inc., a corporate leader in the transition 
to DTV and other digital products for the home network. In my role at 
Mitsubishi, I am the executive directly responsible for the product 
strategy of the company.
    The HRRC was founded more than 20 years ago, after a U.S. Court of 
Appeals ruled that Sony could not legally sell the first ``Betamax'' 
home VCR to consumers. Fortunately for all involved--including the 
motion picture industry--that decision was reversed by the U.S. Supreme 
Court. Not many years after having failed to keep the Betamax and 
successive generations of VCRs off the market, the motion picture 
industry began receiving greater revenue from the home video market 
than it does from the theatrical box office, a trend that continues in 
the digital DVD era.
    This morning it should be apparent why, after twenty years and a 
Supreme Court victory for consumers, the HRRC finds it necessary to 
remain active. Despite the tremendous benefits conferred on the 
entertainment industry by consumer electronics products, some in the 
content creation and distribution industries continue with their 
efforts to limit, curtail, restrict and confine the design of these 
products, and their use by consumers. Many or most of the areas in 
which restrictions are now sought are targeted at the home, and the 
home network, rather than at abuses related to the Internet, which is 
their purported justification.
    Proposals to restrict the development of new technology, and 
consumers' use of it, represent an alarming trend which in our view 
should be a main subject, if not the subject, of the hearing today. We 
are at the forefront of a digital revolution that, if allowed to 
proceed, can offer consumers greater value at lower prices. But history 
teaches that if the Congress allows content industries to dictate the 
designs and uses of new products, the digital revolution will never 
reach its full potential.
    All who seek regulation or legislation today cite to actual and 
potential redistribution of commercial programming over the Internet. 
But the legislative agenda of some is not confined to addressing this 
problem. It extends to dictation of the design of products by 
technology companies, and the dictation of their use by consumers. We 
hope this Committee, in its fact finding, will sort the wheat from the 
chaff.
The HRRC Has Worked With Content Industries On Approaches That Are 
        Balanced And Fair To Consumers
    In the analog domain, HRRC cooperated with the entertainment 
industry in drafting section 1201(k) of the Digital Millennium 
Copyright Act of 1998 (DMCA). Prior to that, we worked with the 
recording industry on the Audio Home Recording Act, and we took the 
initiative in negotiating with the motion picture industry, to address 
their concerns over emerging digital video formats, starting in 1992. 
It was, literally, we who invited them to the table. We were also among 
the founders, along with information technology and content 
participants, of the Copy Protection Technical Working Group 
(``CPTWG''), which has met approximately every month on the West Coast 
for the last six years. Its most recent meeting was yesterday.
    For several years, both HRRC and consumer electronics companies 
have offered to work, via legislation if necessary, with those who 
legitimately want to address large scale, anonymous redistribution of 
content over the Internet. I am a co-chair of a CPTWG work group on 
this particular subject. Consumer electronics companies have already 
committed publicly to support measures, regulatory if necessary, 
addressing such redistribution.
Some Content Industry Agendas Extend Into Deep Control Over Consumer 
        Practices In The Home, Not On The Internet
    The movie industry agendas from which consumers need protection go 
well beyond dealing with external connections to the Internet. Rather, 
they extend internally, inside the home, into heart of the consumer 
home network. We are concerned about efforts to control or eliminate 
reasonable, healthy, and constructive practices of consumers, and to 
chill the design of innovative products.
Congress Should Not Allow Control Over Consumer Home Recording Of Free 
        Over The Air Broadcasts
    At least one motion picture and television network company has 
sought, through regulation or legislation, the ability to control 
consumers' enjoyment of free, over the air broadcast programming within 
the home--not just on the Internet. The argument has been that private 
sector content distribution licenses provide for ``generational'' 
control of home recording in some instances. So, it is reasoned, free, 
over the air digital broadcasts should be similarly controlled, and 
consumers may be limited to making a single, personal copy.
    They shouldn't be. Consumer expectations about free, over the air 
broadcasting are different from those as to cable and satellite 
delivery. Those who receive programming over cable or satellite have 
contractual relationships with their content distributors; the devices 
they use are specifically licensed to receive content Approximately 15 
percent of the public, however, chooses to forego such contractual or 
license relationships, preferring to watch whatever they choose, plus 
the advertising, delivered via rooftop antennas or rabbit ears. 
Imposing a technical regime on free broadcasts would forever change 
this paradigm and experience. If those who want to equate free 
programming with paid programming had their way, these consumers would 
become involuntary licensees, subject to technological controls 
negotiated elsewhere.
    Advocates of such a regime say they would still allow consumers to 
make a single copy of a program. Beware. As Herbert T. Gillis famously 
advised, ``The first step down is a long way.'' Any imposition on 
consumer home recording of free, over the air broadcasts would have 
significant, harmful consequences for consumers.
    For example, many consumers now have set-top boxes with built-in 
``personal video recorders,'' or PVRs, as well as plain-old VCRs. Some 
studios insist that consumers should only be able to make one copy of a 
broadcast, claiming that they never have a need for more than one. If a 
PVR copy counts as the consumer's one copy, however, he or she can 
never record it on a VCR, or play it back on another TV in the house. A 
program recorded for viewing by the children could only be viewed on 
the same TV on which a parent would otherwise watch Sunday sports. A 
program of local interest could not be shared with parents or grown 
children living in another community.
    Licenses governing programs distributed over cable and satellite 
systems have complex and expensive ways to deal with such issues--for 
example, allowing transfer of a copy from a PVR to a VCR, if the PVR 
copy is erased at the same time. Nor have such licenses imposed 
restraints on programs originating as free, over the air broadcasts, 
even when delivered to the home over cable or satellite. Imposing such 
complexities as to free, over the air programming would bring the 
government into a complex, changing, and expensive technical area, with 
consumers suffering the consequences.
    HRRC is strongly opposed to any legislative (or regulatory) 
interference with consumers' rights to engage in inhome, private, non-
commercial recording of programming originating as free over the air 
broadcasts. We urge the proponents of legislation to publicly disclaim 
any such objective today, on the record, and without condition.
Congress And The FCC Should Not Allow Content Owners And Distributors 
        To Exert Remote Control Over Consumers' Selection Of Home 
        Network Interfaces And Viewing Products
    Another agenda of some studios, that we already see in proposed 
licenses to be administered by the Federal Communications Commission, 
is the exertion of remote control over the daily operation of consumer 
devices. The technical phrase, ``selectable output control,'' sounds 
inviting--until one realizes that the ``selection'' would be done by 
the movie studio or cable company, not by the consumer. The technology 
as to which some studios seek mandated adherence would allow them, or 
cable or satellite operators, to exercise direct, remote control over 
all product-to-product connections in the home. Once given this power, 
a movie studio, or cable or satellite operator, could simply turn off 
any interface at will, effectively making the consumer home network a 
part of its own distribution system.
    Please remember that digital technology, which causes content 
owners to feel threatened as to its distribution potential, offers a 
much more frightening potential for control--if the FCC and the 
Congress allow such control to be exercised. And here is why it is 
being sought. Today, there are two standard all-digital interfaces 
being readied for widespread use in the home. One, known as IEEE 1394, 
iLink, or ``firewire,'' provides a bi-directional means of connecting 
TVs, VCRs, and other standard consumer products within a home network. 
This connection allows home recording to be either supported or 
disabled. The other digital interface, called ``DVI,'' is a one-way, 
broader digital connection originally designed to hook personal 
computers to digital monitors. The DVI signal used in this interface is 
simply not recordable by any known consumer technology.
    Over several years of negotiations, license agreements governing 
the ``1394'' interface have spelled out when this technology may be 
used to block home recording of certain content, based on ``encoding 
rules'' that protect current consumer practices. (Congress in fact 
endorsed these rules in principle as part of section 1201(k) of the 
DMCA.) Such an approach is not possible utilizing DVI alone.
    Each of these interfaces offers different advantages. Many people 
in my industry envision home networks in which each interface 
connection would be available to consumers--some TV receivers might be 
designed to rely on the ``1394'' inputs, some on DVI, some on both. 
Connections to digital VCRs, for example, would be made through the 
1394 interface, meaning that copying would be controlled, but subject 
to balanced ``encoding rules.''
    However, if those studios seeking to impose ``selectable output 
control'' gain this power, they could remotely control, on a program by 
program basis, which one of these interfaces would be active in a home, 
and which would be switched off for all purposes. A studio, cable MSO, 
or satellite provider that did not want to permit any home recording on 
VCRs would simply turn off the ``1394'' interface, and the ``encoding 
rule'' protections for consumers, painfully negotiated over several 
years, would become irrelevant. But the damage would not stop there. A 
consumer who had bought a state of the art HDTV receiver, with a copy-
protected digital 1394 interface, would lose the signal from this 
interface for all purposes, including viewing the program. So even 
consumer high resolution viewing, on the newest frontline, digital 
products of the DTV transition, could be cut off at the discretion of 
the studio, cable, or satellite company.
    Unfortunately, the damage to consumer living rooms from 
``selectable output control'' would not stop even at the choice of 
digital interfaces. Neither of these digital interfaces is yet in 
general use. Most HDTV displays in the market today, and sold over the 
last three years, rely on the same sort of broadband interface that is 
used to deliver signals from PCs to computer monitors. (In computer 
terminology it is called ``RGB.'' Its consumer electronics cousin is 
component video, also known as ``Y, Pb, Pr''.) If Congress were to give 
this enormous ``selectable output control'' power to content owners, 
they could simply cut off broadband signals to the pioneering Americans 
who have purchased these 2.5 million displays.
    To simplify this issue--if studios and content distributors were 
given this power over consumer viewing, some consumers might conclude 
that they had overpaid for their brand new HDTV. Even more disastrously 
for our country's digital television transition, they might conclude, 
and tell their friends, that it was a mistake to buy any new digital 
television at all--because all the high resolution inputs on the TVs 
manufactured to date could become useless as to content delivered over 
cable, satellite, or broadcast. We suggest that any studio proponents 
of such control be asked to explain to the Committee how such an 
outcome could possibly serve the public interest.
    Spokesmen for the entertainment industry have never publicly 
disclaimed any intention of proceeding with such an agenda, through 
licenses as enforced by the FCC or through the Congress. We call upon 
them to do so today.
A Cable Industry Proposed License And Specification Threatens Consumer 
        Enjoyment Of Innocent Home Products
    Ironically, the Federal Communications Commission today is in a 
position to enforce anti-consumer license provisions because of a 
provision passed by the Congress, in the 1996 Telecommunications Act, 
that was meant to be explicitly proconsumer. Section 304 of the 1996 
Telecommunications Act requires the FCC to assure in its regulations 
the competitive commercial availability of devices that attach directly 
to cable systems--breaking the 50-year monopoly, based on their 
concerns over theft of service, that cable multi-system operators have 
enjoyed.
    To achieve competitive entry with a range of new devices, as 
occurred in telephone deregulation, the FCC oversaw a standards 
development process that would also protect the security of cable 
signals from unauthorized use. CableLabs, the research consortium of 
the cable industry, volunteered, and was chosen by the FCC, to set such 
standards. But as presently drafted these standards, and the license 
agreement that would extend from the cable industry to device 
manufacturers, pose another threat to consumer enjoyment of home 
devices, and represent yet another part of a motion picture industry 
agenda represented before you today. We believe that in combination, 
their specifications and their license would:

   impose ``selectable output control,'' as I have described, 
        on all downstream devices

   reduce viewing resolution by three-fourths, at the option of 
        the content owner (out of concern for potential copying)

   restrict the other functions and the flexibility of devices 
        hooked up to cable, making sure that the competitive flowering 
        and diversity that followed telephone deregulation does not 
        happen with respect to cable

    HRRC and others have repeatedly requested, in writing, that the FCC 
publish the pending drafts of this license, for public comment. We urge 
this Committee to exercise its jurisdiction to see that this occurs.
    Several of these impositions are said to be at the behest of 
content owners. We call upon those who seek legislation that would 
grant them power over consumer devices to state clearly whether and how 
they intend to preserve consumer enjoyment of home devices attached to 
cable and satellite systems.
Congress Should Look Skeptically At Vague Proposals For A ``Single, 
        Standard Secure Domain'' Controlling All Consumer Use Of 
        Consumer Electronics And Information Technology Products
    The Consumer Electronics Association (``CEA'') has provided 
financial support for its members' attendance at CPTWG, and has also 
supported research and testing products of its work groups. I am 
thoroughly familiar with the technical proposals pending as to Internet 
redistribution. This project does not and should not require the sort 
of control over the home network that apparently has been sought as a 
part of a separate legislative agenda of the sort I have described 
today.
    In addition to going well beyond the redistribution issue, these 
agendas also get well ahead of private sector processes. We have heard 
speeches about ``single, standard security domains,'' but have yet to 
see particular proposals, in the CPTWG or elsewhere, specifically 
related to such speeches, defining what is sought, and what it would 
mean for products that are in consumers' hands today. This imprecision 
will not be improved by tossing everything into the hands of a 
government agency to figure out. In my view, the output of industry-led 
groups such as the CPTWG should be an essential input for the 
consideration of any proposed legislative or regulatory agenda. We do 
not have an admirable history in doing the opposite--legislating the 
``solution,'' and expecting the private sector to figure out what the 
Congress meant.
Any Further Regulation Or Legislation Would Be Appropriate Only As A 
        Narrow, Necessary, And Targeted Supplement To A Private Sector 
        Consensus That Protects Consumers
    As I noted near the outset, the HRRC has worked cooperatively on 
legislative and regulatory proposals over the last two decades, so long 
as they gave fair consideration and protection to consumer interests 
and practices. In the analog domain, HRRC cooperated with the 
entertainment industry in drafting section 1201(k) of the Digital 
Millennium Copyright Act of 1998 (DMCA). This section--the only part of 
the DMCA that provides for any mandate on product design--takes a 
balanced approach. It recognizes the prevailing technology that may be 
used to limit analog home recording, but subjects any use of such 
technology by content owners to clear ``encoding rules'' that protect 
reasonable and customary consumer practices.
    A similar approach could be identified to address widescale 
redistribution of content over the Internet, and, on an appropriate 
time scale, to provide necessary tools for the enforcement of 
reasonably balanced license agreements that address copy protection 
issues, as well. Such an approach has been suggested by Rep. Boucher in 
House hearings over the last several years. In fact, representatives of 
the content industry at times have appeared publicly committed to work 
towards enactment of a digital video version of section 1201(k), but 
little has been proposed as to such a project.
    HRRC has been engaged in the debates over actual and potential 
copyright legislation for the digital era since that era began, for 
consumer recording devices, in the mid-1980's. We have developed a set 
of principles, as to potential legislative or regulatory mandates, 
which we commend to the Congress in the interest of protecting 
consumers and not interfering with either technical progress or 
commerce:

    HRRC will consider supporting a regulatory or legislative mandate 
only if--

        (1) the issue cannot be addressed effectively by private sector 
        standards or licensing activity alone,

        (2) the result promotes rather than hinders technical progress 
        and legal certainty,

        (3) the mandate is of a known technology and as narrow as 
        possible, and

    (4) the outcome protects consumers' reasonable and customary 
expectations.

Narrow And Targeted Provisions May Be Appropriate To Secure Full 
        Consumer Use And Reliance On Component Analog Interfaces
    I have already identified the pending consensus, private sector 
approach to redistribution of broadcast content over the Internet as 
one candidate for government support of an existing private sector 
consensus. There is one other issue that we see, a bit further on the 
horizon, which might be addressed according to the principles that I 
have suggested.
    The preferred methods for dealing with reasonable content industry 
concerns are private sector development of technologies, and private 
sector licensing as the prevailing means to apply such technologies. 
These should be subject to fair ``encoding rules,'' protecting 
consumers from arbitrary impositions that interfere with their 
reasonable and customary expectations. Through licensing alone, 
however, it may not ultimately be possible to reach all the relevant 
devices in the market, or to protect consumers through adequate 
encoding rules.
    For example, HRRC is committed to maintaining the full consumer 
enjoyment of DTV displays, owned by millions of consumers, that rely on 
the ``component analog'' video interface. We have asked the FCC, and we 
are asking the Congress, not to do or allow anything that would 
interfere with the right of consumers--the pioneers in the DTV 
transition--to use and enjoy these display devices. Those who seek the 
discretion to turn off or degrade the quality of this interface in set-
top boxes (that would feed signals to these displays), however, cite 
their inability, using present technical and licensing tools, to 
provide any protection for high definition signals once they are 
allowed to pass over these interfaces. They argue that without such 
tools, there will be no means to prevent the future re-digitization of 
these signals for passage over the Internet. They would also need a 
means to enforce whatever copy control they may apply to licensed 
programs provided by cable or satellite conditional access--e.g., pay 
per view, video on demand--as allowed by reasonable ``encoding rules.''
    We hope that everyone in the Congress, the FCC, the movie industry, 
and the cable and satellite industries will agree with us that it is 
essential that consumers who buy DTV and HDTV receivers not lose most, 
or even any, of the benefits of their bargain. Therefore, in HRRC's 
view, a balanced regime as to ``component analog outputs,'' that is 
fair to consumers, is far preferable to the imposition of broader 
measures such as ``selectable output control'' or ``downresolution.'' 
One such approach--which at this stage would still need much private 
sector investigation and discussion--would be an obligation only on 
narrowly and specifically defined, future analog-todigital converters, 
to read and respond to so-called ``watermark'' technology that may 
emerge from a private sector consensus. Since private licenses cannot 
and should not reach every product, to enforce that obligation 
equitably some regulatory or legislative action may be necessary. We 
emphasize, however, that much needs to be done in the private sector 
first, before we can know whether the necessary preconditions as to 
fairness to consumers, and not hindering technology or commerce, can be 
met. We know there is particular concern on these points in the 
information technology industry, and we share it.
A Published Draft Of Legislation Is Unfocused And Dangerously Overbroad
    I have attached the HRRC critique of the first published version of 
a draft bill entitled the ``SSSCA.'' I understand that it is being 
reconsidered. The fundamental problem with its approach--aside from its 
potential support for goals that we consider to be anti-consumer--is 
the lack of any apparent nexus between content that would be protected, 
devices that would be subject to mandate, and the results that would be 
achieved.
    One could go on and on about the sorts of devices that would be 
covered, intentionally or inadvertently--from wristwatches to PDAs to 
ordinary TV receivers to supercomputers. This is not a drafting issue. 
This is a fundamental policy issue. The main question is whether the 
Congress is going to hand unfettered control of the future design of 
devices by consumer electronics and computer makers over to a few 
studios to who wish to exert absolute authority over what consumers can 
do with lawfully acquired programming in the privacy of their homes.
    If Congress is not about to hand over such power, we respectfully 
suggest that it needs to back up and focus on particular issues and 
problems, find out exactly what the private sector is capable of doing, 
find out where the private sector would need help as to enforcement of 
reasonable measures, and, most importantly, assure that the outcome is 
fair to the consumers who are critical to the success of the digital 
television revolution.
    On behalf of the HRRC and the other organizations with which I am 
affiliated, I greatly appreciate the opportunity to have appeared 
today.
Home Recording Rights Coalition Analysis And Concerns, Draft ``SSSCA'' 
                     Technology Mandate Legislation
I. Objections In Principle
    The approach taken in the published staff working draft of 
``SSSCA'' technology mandate legislation would deal far too harshly 
with consumers, and put an end to their reasonable and customary home 
recording practices which, to date, have contributed to entertainment 
industry prosperity. The draft--

   Does not distinguish between ordinary consumer 
        retransmission or copying of a work in a home network; and the 
        redistribution of programs, outside the home, in competition 
        with the original public distribution. It would prevent both.

   The single exception, for making a ``personal'' time-shift 
        copy of only certain video programming, would not acknowledge 
        the common practice of sharing of lawfully acquired material 
        among family and close friends, nor would it recognize 
        customary consumer ``place shifting'' of audio recordings. It 
        would, therefore, in the guise of ``security'' legislation, 
        virtually wipe out most private, noncommercial audiovisual, and 
        audio, home recording.

   For the first time, this legislation would constrain 
        consumer use, within the home, of free, over the air TV and 
        radio broadcasts. After passage of this bill, requiring device 
        compliance with an encryption regime as ``security'' for 
        receipt of free as well as paid services, no consumer could 
        hoist a pair of rabbit ears, or turn on a car radio, without 
        having to agree to become a ``licensee.''

   The draft bill makes no reference to the Digital Millennium 
        Copyright Act of 1998 (DMCA), and thus may make illegal devices 
        built in conformance with that statute, in part icular analog 
        recording devices (containing digital circuitry) that implement 
        a well-known anti-copying technology as required under section 
        1201(k).

   The bill contains no exemption for products that comply with 
        the Audio Home Recording Act of 1992 (AHRA), under which 
        consumers pay levies on products and media used primarily for 
        digital audio recording. Nor does the bill repeal the AHRA.

II. Objections As To Overbreadth And Ambiguity
    The draft legislation is so broad in its application that, 
technically and legislatively, it entirely lacks focus. Selecting 
actual products to which to apply its provisions, from the literally 
millions that would be covered, would be pure guesswork. Hence, its 
application would arbitrary, its direction uncertain, and its effect on 
the marketplace potentially catastrophic. The draft--

   Does not require that ``digital'' products be in any sense 
        electronic.

   Does not require that an ``interactive digital device'' be 
        in any sense interactive. It covers all devices primarily used 
        for ``storing, retrieving, processing, performing, 
        transmitting, receiving, or copying information in digital 
        form.'' Even if limited to electronic devices, this would 
        include most wristwatches, microwave ovens, TV sets, radios--
        anything with an IC chip in it. Obviously, all PCs, PDAs, and 
        consumer electronics products would be covered.

   Does not indicate or even imply what relationship is desired 
        between the device, the ``certified security technology,'' and 
        the content that is sought to be ``protected.'' Thus it 
        entirely lacks focus or direction. Having identified a device 
        that falls within the definition of ``interactive digital 
        device,'' how is the private party or government body to decide 
        what is to be ``certified,'' and thus mandated for application 
        and conformance? Must a device (like a PDA) that stores, 
        processes, performs, transmits, receives, and copies 
        information be subject to a separate ``certified security 
        technology'' for each of these functions? If not, why not?

III. Objections To Nature And Sweep Of Government Mandate
    Consumers, consumer organizations, retailers, and others would be 
shut out of the preliminary round of ``negotiations'' as to imposition 
of any ``certified security technology''--only ``device manufacturers'' 
and ``copyright owners'' would participate. Even the device 
manufacturers would lack negotiating leverage, as the bill puts no 
constraint whatsoever on the objectives and means of enforcement that 
can be demanded by the copyright owners. The draft--

   Provides no guidance to the Administration as to which 
        products and technology must be subject to a Federal mandate 
        after private sector negotiations fail. Is a Federal mandate 
        triggered after any and every failed discussion between any 
        device manufacturer and any copyright owner? If not, which 
        private sector discussions would be chosen as triggering a 
        mandate, and which would not?

   Would provide a sweeping antitrust exemption for private 
        party cooperation in imposing constraints, without providing 
        for any input from the Department of Justice, its Antitrust 
        Division, or the FTC.
                                 ______
                                 
 Prepared Statement of James E. Meyer, Special Advisor to the Chairman 
   and Former Senior Vice President/Chief Operating Officer, Thomson 
                               Multimedia
    Thank you, Chairman Hollings, Senator McCain, and Members of the 
Committee for the opportunity to bring the views of my company to this 
hearing.
    My name is Jim Meyer, most recently Senior Executive Vice President 
and Chief Operating Officer and currently special adviser to the 
Chairman of Thomson multimedia. I have over 25 years of experience in 
the consumer electronics industry, and I'm here today to share the 
views of one of America's largest entertainment industry employers. I 
believe that I also can speak fairly for the millions of consumers who 
purchase RCA brand home entertainment products each year and call us if 
there is a problem.
    I commend you, Mr. Chairman, for holding this hearing and for the 
continued leadership that you, Senator McCain and other Members of the 
Committee have demonstrated over the past decade in attempting to guide 
and accelerate our nation's transition to digital television. The 
subject of today's hearing, the protection of copyrighted video 
programming formatted digitally and electronically transmitted by 
broadcast, satellite, cable or over the Internet, involves numerous 
difficult technical and business issues. I would suggest, however, that 
the public policy issues are relatively few and straightforward.
    First, there needs to be agreement on digital copy protection 
standards if the conversion to digital television is to move forward 
more rapidly.
    Second, any such agreement must embody one fundamental principle: 
it must protect both the interests of digital content owners and 
providers and consumers. Copy protection must be effective, 
particularly in addressing the core problem of unlawful internet 
retransmission, but it must permit consumers to continue to make 
recordings for their personal use within their homes just as they have 
come to expect in the analog world since the advent of the VCR. 
Consumers making investments in advanced digital products will not and 
should not accept reduced functionality in their digital viewing 
experience.
    Third, ideally, agreement should be reached voluntarily among the 
affected parties through private negotiations using established 
standard setting processes. However, if that effort does not succeed 
within a reasonable period of time, the government must facilitate and, 
if necessary, mandate the adoption of standards.
1. Unresolved Issues Slow The Digital TV Transition
    While digital technology is transforming our industry, the switch 
to digital transmission and reception of TV signals has been a bumpy 
ride so far. Fewer than one out of six broadcasters is now sending a 
digital TV signal. We are hopeful that by May 1, 2002, an additional 
400 to 500 broadcasters will be transmitting digitally. While consumers 
have purchased more than two million HDTV monitors and sets, the 
reality is that this transition has only just begun.
    Content owners have yet to release truly compelling digital high-
definition movies, sports, and shows. Their reasoning is simple--they 
want more protection from illicit Internet redistribution of digital 
content.
    Obviously, if we're going to have an orderly transition, there 
needs to be agreement about what we're trying to protect and how. 
Thomson prefers private agreements that insure full functionality in a 
Personal Home Network, and protection of digital content from 
widespread piracy.
    To that end, Thomson is developing a new technology called 
SmartRight. Designed to work with a simple ``smart card,'' the 
SmartRight system would permit a consumer to view, record, and store 
digital content for his own use within what is called a personal 
private network. The system would work for broadcasters, for cable and 
satellite operators, and could even be extended to computing platforms. 
SmartRight is a good example of a technology that is reliable, 
renewable, modular, and easily applied to a variety of situations.
    Beginning this year, Thomson is also building copy protected 
interfaces for cable and satellite programming into its new line of RCA 
Scenium integrated digital television receivers and in RCA HDTV 
monitors that will be available to consumers in time for this year's 
Christmas shopping season.
    Another roadblock in the digital TV transition is incompatibility 
between various cable systems throughout the country. Current cable TV 
systems are proprietary and closed, making it impossible to develop new 
digital TV products that could easily be sold anywhere in the U.S. and 
plug directly into a cable outlet. This is an unfortunate fact that 
will certainly hinder a speedy digital TV transition.
2. Background on Thomson multimedia
    Thomson multimedia is the company behind RCA home entertainment 
products and the owner of Technicolor, a service provider to the film 
industry. As the leading manufacturer and marketer of consumer 
entertainment products, and as a trusted supplier of DVD and tape 
replication services to Hollywood, Thomson is well positioned to 
comment on how best to expand broadband entertainment while preserving 
both home recording rights and the rights of copyright holders.
    One out of five TV sets sold in America comes from Thomson's RCA 
brand, our professional broadcast division is one of the world's 
largest, and we are the worldwide leader in DVD and CD-ROM replication 
serving such diverse customers as RadioShack, Circuit City, Best Buy, 
Wal-Mart, Fox, Disney, Warner Bros., and hundreds of others. Of course, 
millions of consumers are also our customers, and we field more than 
10,000 calls, e-mails, and letters each day with consumers who need 
help, need service, or just need some advice.
    As one of the largest employers in the entertainment industry, our 
reach spans these United States, with more than 10,000 employees in 30 
different communities. Our biggest concentration of employees live and 
work near Indianapolis, Indiana and in Senator Boxer's home state of 
California (near Hollywood) at Technicolor.
    So, we have a unique position in both of the content and 
electronics industries--by helping the creative community reach the 
public through Technicolor's trusted film and video services, and by 
designing and selling new RCA home entertainment products that 
entertain and inform millions of people.
3. Consumers Expect Features Like Home Recording
    With my 25 years of experience in the consumer electronics 
industry, I've lived through several revolutionary changes in our 
business. I was there when RCA sold the very first VCR that could 
record four hours on one tape. That business is now very mature, with 
VCRs themselves selling for under $75 and both content owners and 
consumers migrating to the popular DVD platform.
    Home recording has become a popular past-time, as people use their 
VCRs to watch their favorite programs at different times and keep 
``bookshelf'' copies in a collection. Thomson, alone, sold more than 55 
million blank VHS tapes last year. While not formally enshrined as a 
U.S. law, home recording has become a feature that consumers expect to 
enjoy. They like the convenience. Some record to catch up on favorite 
programs, others to skip the commercials. But most people aren't using 
a home VCR to become pirates.
    Prerecorded movies and TV shows on tape and disc are coded to 
prevent copies from being made. Both the VCR and the DVD player 
recognize standardized copy protection methods for prerecorded content, 
restricting the average person from making and selling pirated copies.
    With today's products, a good balance has been struck between the 
consumer convenience and popularity of home recording and protecting 
copyrights. Tomorrow's products are another story. Digital recording 
makes perfect digital copies. The situation is compounded by the 
convergence of the computer with many popular consumer electronics 
products. Typically, computing devices are not subject to the same 
restrictions as consumer electronics products. This disparity is the 
cause of much debate and concern.
    Today, Thomson is working on new technologies that will link 
together digital entertainment products in a Personal Home Network. 
This is the VCR of the future--the ability to easily record shows and 
watch them anywhere in your home, at any time. Our customers have been 
struggling to identify how the ``rules of the game'' should change as 
products go digital and perfect copies are possible. Thomson draws the 
line at the Personal Home Network, allowing consumers to time shift, 
keep archival copies, move content to various devices, and preserve 
favorite content as long the consumer wants to. But there are 
legitimate fears about sending that content outside the home network. 
These issues are now heating up because of America's transition to 
digital television.
4. Thomson Leads the Digital TV Transition
    With the transition to digital TV just a few years old, Thomson has 
already developed a broad array of RCA-brand digital television 
equipment that spans a wide range of price points--including digital 
satellite receivers, DVD players, HDTV monitors and HDTV receivers.
    Consumers can make the digital transition in a manner that serves 
their own needs and personal budgets. For most people, it means the 
addition of a digital satellite receiver or digital video disc player--
and maybe an upgrade to an HDTV monitor. Slowly, as the amount of good 
HDTV programming is increasing, we're also seeing growth in the market 
for fully-integrated high-definition televisions.
    As I mentioned earlier, Thomson supplies digital broadcast 
equipment to broadcasters, cable networks, satellite broadcasters, 
local stations, and production companies. And all of them worry about 
security.
5. More Digital Content and More Digital Products Will Drive the 
        Transition
    It is indisputable that high-value, high-quality content will drive 
deeper consumer acceptance of digital television. For example, the 
availability of thousands of movies on DVD has sparked strong sales of 
high definition TV monitors and sets--as well as discs and players.
    Thomson views the digital TV transition holistically--that is, the 
pieces are interconnected: viewers want content; broadcasters want 
viewers; and content companies want to sell their content, with 
assurances that their digital material is secure. For more consumers to 
embrace digital TV, we believe that two things must happen.
    First, high quality and innovative digital content must be created 
by the content community and distributed in its fullest quality and 
integrity. This happens with over-the-air terrestrial broadcasts, 
through the cable and satellite facilities, with pre-recorded media, 
and someday even over the Internet.
    Secondly, for more consumer acceptance of digital TV, companies 
like Thomson must offer innovative products that let consumers exploit 
the full benefits of going digital. As your constituents buy new 
digital gear, they will still want to record favorite shows, pause to 
take a call during a broadcast, and save episodes or sports events for 
posterity.
    Achieving these two mutually reinforcing--not mutually exclusive--
goals of more HDTV content and more digital products requires certainty 
for content providers, for consumers, and for manufacturers.
6. Copy Protection Standards Provide Assurances for Studios, Network 
        Operators, Manufacturers, and Consumers
    What's missing from the transition is certainty--for everyone. 
There are holes in the system that could be used to steal content. That 
worries the Studios. Broadcasters fear they'll be passed over for more 
secure networks like satellite and cable. Manufacturers move 
cautiously, because of the huge engineering investments required to 
make new products. And Consumers may not buy anything, fearing 
obsolescence.
    In more detail:
    Studios need assurance that their content (their intellectual 
property) is protected before they make investments in the production 
and distribution of high quality digital content. They will not have 
that certainty unless there is genuine and effective protection against 
commercial piracy and against unauthorized retransmission of digital 
content--especially over the Internet. Once the necessary copyright 
protections are in place, we believe that consumers will enjoy a 
dramatic increase, not decrease, in the availability of compelling, 
creative works online. This will be good for consumers, and very good 
for the companies that provide the content.
    Network Operators like cable, satellite, and terrestrial 
broadcasters want to offer their services in a secure environment so 
that they get the best content and interested subscribers.
    Manufacturers like Thomson need to know that consumers won't be 
stranded by obscure licensing agreements or heavy-handed control 
exercised by content owners under the terms of licensing agreements 
between Cable Labs and consumer electronics manufacturers. Some 
proposals would allow the owner of the content to prevent recording, or 
worse, automatically erase programs that consumers have recorded at 
home. Just because we move to digital delivery doesn't mean that we 
should run roughshod over law-abiding consumers.
    Consumers expect full functionality in new products. They want home 
entertainment systems to work as advertised, and consumers want to know 
that common home recording practices enjoyed today will continue. 
Believe me, nothing will kill the transition to digital television 
faster than trying to sell digital products that are actually less 
functional than today's common VCR.
    It's clear that some form of copy protection standard setting is 
necessary. (Some of this work has already been done for cable networks, 
although HOW that technology is used remains an open question.) 
Preferably, these standards should be adopted expeditiously by private 
negotiations among affected industries. If that effort fails, the 
government must facilitate and, if necessary, mandate their adoption. 
These standards must, however, focus on the real concerns--such as 
commercial piracy and illicit retransmission of content over the 
Internet, and not just new ways for the copyright holders or network 
operators to charge for consumer convenience.
    During the last few months, progress has been made within the Copy 
Protection Technical Working Group and related groups, bringing 
together representatives of all industry stakeholders, toward agreement 
on a number of outstanding copy protection issues, most notably a 
broadcast flag which could be embedded in the digital bitstream and 
recognized by a digital television receiver, cable set top box or 
computer. The heightened Congressional interest in these activities 
reflected in discussion draft legislation circulated by Chairman 
Hollings' Commerce Committee staff and the roundtable discussions led 
by Chairman Tauzin and Upton in the House have clearly accelerated the 
pace of these discussions. Hopefully, they will conclude swiftly and 
successfully.
    Thomson multimedia remains squarely focused on the needs and 
desires of our customers. If we can work this out, then everyone will 
benefit. Studios will sell more content. Network Operators will have 
more viewers. Manufacturers will sell more products, and Consumers will 
enjoy a better entertainment experience.
    Ultimately, our own government will be able to reclaim the valuable 
broadcast spectrum now used for analog TV--and reassign it for future 
communications needs.
    Thank you for your interest in these complex but critical issues. I 
look forward to your questions.

    The Chairman. Thank you. Mr. Valenti.

         STATEMENT OF JACK VALENTI, PRESIDENT AND CHIEF 
    EXECUTIVE OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA

    Mr. Valenti. Thank you, Mr. Chairman, for you and Senator 
McCain calling this hearing. I really think in my frail 
judgment that the progress that is being made now would have 
been in exile had you and Senator McCain and your Committee not 
given some, quote, incentive, unquote, for these talks to 
begin.
    And I want to thank Senator Smith and Senator Boxer for 
their patience in being here. The greatest gift one can give 
another human being is the gift of one's presence, particularly 
in Congressional hearings. So I am grateful to you for that.
    The Chairman. I am grateful to them, too.
    [Laughter.]
    Mr. Valenti. One of the down sides of being chairman of a 
committee is that you are forced to stay at a hearing, and so I 
have compassion for you, Mr. Chairman.
    I must say that I thought that Mr. Eisner and Mr. Chernin 
laid this out compellingly, and persuasively, and accurately. 
My only regret is that they said it so well that all these 
picturesque phrases that I had in mind I am going to have to 
discard now, and take some of Senator Eastland's advice and let 
the boy talk.
    I do believe that there is a truth that underlies 
everything that we are doing. Let me get that out of the way. 
Mr. Churchill once said, The truth is incontrovertible.'' He 
said, ``Ignorance may deride it, panic may distort it, and 
malice may ignore it, but there it is.''
    One of America's greatest assets is in danger of being 
slowly squandered and shrunk as a result of virulent piracy 
that in ever multiplying avalanches is on the Internet, and 
that is a truth that we have to deal with.
    Now why is that important to the American people? Why? 
Well, what is the economic worth of these copyright industries: 
movies, television, home video, books, music, and computer 
software, the intellectual property community copyright 
industry. What is at stake here, not just for us at this table 
and the previous panel, but for the citizens of this country?
    The copyright industries are America's greatest trade 
export prize. We comprise about almost 5 percent of the GDP of 
this nation. We bring in more revenues, as Mr. Eisner pointed 
out, than aircraft, than agriculture, than automobiles, and 
auto parts. We accrue new jobs at three times the rate of the 
rest of the national economy.
    And the movie industry alone has a surplus balance of trade 
with every single country in the world. No other American 
enterprise can make that statement at a time when you all know 
we are bleeding from over $400 billion in deficit. That is why 
it is important to the American people, not to let this 
enormous awesome engine of economic growth go into decline, and 
it very well may be.
    For as Senator Boxer pointed out, who on earth in their 
right mind is going to continue to invest large sums of private 
risk capital in a movie that is going to be ambushed in the 
first day it is in the theater before it makes its journey 
through all the other sequences that it has to go through in 
order to retrieve its investment, much less make a profit?
    That is what is at issue here, and that is why it is 
important. And I am grateful for--Andy, it is good to see you 
here, and Mr. Meyer, and Mr. Perry. I want to deal with Mr. 
Perry in just a minute.
    Because we are here in order to find solutions. Now, there 
are three goals that I put in the paper that I have submitted 
to you that we have to solve. The other panel made it very 
clear, and truthfully, as Mr. Eisner and Mr. Chernin, and the 
gentleman from Intel, by the way, I wish I was as sure of one 
thing as he is of everything. I mean that would be something.
    But I think that we know we can protect our property. There 
are a number of wonderful content encryption systems out there 
to bring them down from a satellite to a home. But we have 
other issues, and I set forth three goals, Mr. Chairman, in my 
document.
    Goal No. 1 is the broadcast flag which will keep television 
programs from being redistributed on the Internet which is a 
form of thievery. Now, I want to pay compliments to the great 
majority of the information technology community. I laud them, 
and the consumer electronics industry, and the movie industry 
for getting together and dealing with this broadcast flag. I 
cannot say enough wonderful things about all three of these 
groups where they are really trying strenuously to find an 
answer to the broadcast flag.
    And I think maybe by the end of March I have been told 
there is a possibility of this coming to pass. And it may be 
that they need to come to Congress or the regulatory agencies 
for implementation and enforcement of the broadcast flag. And I 
thank you all. I think you had a lot to do with making us go 
forward.
    Goal No. 2 is plugging the analog hole. Now that is 
technical jargon, and I want to put it in plain English, 
because I have a technique for dealing with abstruse issues, 
Mr. Chairman. If I can understand it, your granddaughter, your 
grandchildren can understand it. So I use myself as a template 
here.
    What it means is that when a digital signal comes down and 
goes into a set top box or whatever, a digital signal, and it 
goes into the television set. Ninety-nine percent of television 
sets in this country are not digital. I do not even own a 
digital set. I am going to buy one, but I do not have one.
    So it is an analog set. That digital signal then comes out 
of the set top box, and it is transformed immediately into 
analog. Why? So it can be watched on the television screen.
    But once that happens that can be sent off to a computer. 
It can be sent to the Internet in unprotected form. That is 
what is called the ``analog hole.'' That is kind of an awkward 
phrase, but I guess it is the best way to describe it. And 
conversations are going on now with your community, all these 
three gentlemen's community, the consumer electronics' 
industry, information technology, and the movie industry to try 
to find some way to plug that analog hole.
    But the third goal, and the one that was talked out at 
great length, and wherein there was an astonishing revelation 
from the gentleman from Intel. He threw up his hands and said, 
``We cannot do anything about it.'' Well, I do not believe that 
for one minute.
    The point is that unless we can deal with peer-to-peer or 
so called ``file sharing sites,'' the Gnutellas, the Groksters, 
the Morpheus that you heard about. You saw it brought down. My 
colleagues bring stuff down all the time, and I am appalled at 
how watchable it is. But that is going on.
    Viant, a consulting firm in Boston, estimates 350,000 
movies a day, a day are being brought down. And all of the 
university systems here in this country, all the California 
systems, and Oregon, and South Carolina, and my home state of 
Texas, all of those university, state-of-the-art, large pipe, 
high-speed Ethernet systems, the best there is, are being 
overburdened, an avalanche with students using that to bring 
down stuff in 20 minutes.
    I am not going to give you the name of this university, but 
I found out by reading one of their campus newspapers, somebody 
sent it to me, they were so appalled and so angst-ridden by the 
fact that their system is being crushed by all these students 
using it to do what? To bring down movies. It is easy, it is 
fast, it is free, and it is also illegal.
    And for this, parents are spending a couple hundred 
thousand dollars a year to send their son to the university 
that says it is OK to steal. This university, in order to 
relieve the burden on their Internet system, set up a separate 
server of what? For Gnutella. Gnutella is one of these 
fragmented, anonymous systems up there where everybody shares 
their files. As I said, file stealing sites is what they are.
    And I sent a letter--I would like to believe it was a 
rational letter, but I guess I was a little angry, I sent to 
the president of the university. I said, ``Your disreputable 
plausibility about this collides with the concept of a free 
society, its ethics, and its morality. How can you do this?'' I 
am pleased to say that instantly they responded, and they took 
down the server.
    But that is what is going on. We have got to find a way to 
deal with this. Now, right now these discussions are going on 
in the first two goals. That is, the broadcast flag and 
plugging the analog hole.
    We need to begin continuous negotiations with the 
information technology people, with the consumer electronics 
people to find a solution. I cannot believe that there is not 
some two young nerds somewhere in a garage in San Diego who do 
not have the solution right now, just as Mr. Hewlett and Mr. 
Packard did, just as Mr. Jobs and Mr. Wasnowski did some years 
ago. It is out there somewhere, and we have got to find it.
    Finally, what I want Mr. Perry to do, and I will join him 
in this, let's don't go back and dredge up the past. None of us 
is flawless. I am willing to talk to you about that, because 
the facts are all wrong. I think I will do it right now.
    We were never against the VCR. We were trying to establish 
copyright infringement. So then we could get a copyright 
royalty fee on blank cassettes. By the way, Mr. Chairman, 
copyright royalty fees are resident in just about every country 
in Europe and in Asia today in which they take a little fee on 
every blank tape you buy, and they give that money back to the 
creators to compensate them in part for their losses in piracy.
    And at that time I predicted--I said, ``This will create 
piracy.'' And guess what? We are suffering from $3.5 billion a 
year right now in analog piracy on the VCR. But never did we 
want to get rid of the VCR. I mean they accuse us of a lot of 
things, but there are some smart people in the motion picture 
industry, and they are not fiscal lunatics. They understood 
what this issue was all about.
    So let is get rid of that. I want to put that on the record 
so next time somebody says, ``Well, Valenti said it was the 
Boston Strangler.'' By the way, I did say it. It was a 
picturesque phrase. I really liked it at the time. And if I had 
the opportunity I would say it again.
    Having said all of this, I think what we need to do, and a 
lot of people at this table and others are already doing it. 
Let's get rid of all these hostilities. Let's get rid of all of 
our rigid conceptions that might be wrong, and let's do what 
they do in the Congress, and that is when there are opposing 
views in the Congress, you sit down and you try to work it out. 
You try to make compromises. You try to find some place to 
bring the extremes into the center.
    That is what we have to do, and we have to do it without 
antagonism. We have got to do it in good faith. We have really 
got to do our dead level best to do this. And I have nothing 
but praise for the information technology group and the 
consumer electronics. I believe that they are really moving 
with us in trying to find an answer to this.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Valenti follows:]

   Prepared Statement of Jack Valenti, President and Chief Executive 
             Officer, Motion Picture Association of America
If You Cannot Protect What You Own, You Don't Own Anything!
A brief report concerning the dark underside of Internet piracy as well 
        as the possibility of a cleansing redemption to benefit the 
        American consumer
On behalf of the member companies of The Motion Picture Association of 
        America
    This document sets forth the goals that the American movie industry 
urges the Congress to seriously examine. The future of these unique 
creative story-telling works is in danger of being shrunk and 
squandered by an increasing thievery on the Internet. We cannot stand 
mute and observe the slow undoing of a formidable American economic and 
creative asset.
The Economic Worth of the Copyright Industries
    What kind of asset is at stake here and what does it mean to this 
country? The facts are these: The Copyright Industries (movies, TV 
programs, home video music, books and computer software) are America's 
greatest trade export prize. They are responsible for some five percent 
of the GDP of the nation. They gather in more international revenues 
than automobiles and auto parts, more than aircraft, more than 
agriculture. They are creating NEW jobs at three times the rate of the 
rest of the national economy. The movie industry alone has a SURPLUS 
balance of trade with every single country in the world. No other 
American enterprise can make that statement. And all this at a time 
when the country is bleeding from a $400 Billion trade DEFICIT.
    Which is why we come to you with a clear statement of what is 
needed to preserve this extraordinary economic/creative engine of 
growth in a broadband world.
    Broadband (high speed, large pipe entry to the Internet) is an 
OPPORTUNITY to make available to consumers another delivery system for 
transporting visual entertainment to their homes. This means more 
freedom of choices for consumers.
    As you may surmise, producers of visual entertainment are 
enthusiastic, ready and eager to offer their creative works on the Net. 
And to dispatch those works LEGALLY, at a fair and reasonable price to 
those American homes who choose to view them. It should be noted that 
`fair and reasonable' will be defined by the consumer and no one else.
    But there is an obstacle. Consider this: The cost of making and 
marketing movies, for example, has risen to nerve-shattering heights. 
In 2000, the total cost to the major studios for making and marketing 
their films was, on the average, an astounding $82 Million! Only two in 
ten films ever retrieve their total investment from U.S. theatrical 
exhibition. Those films must journey through various marketplace 
sequences: airlines, home video, satellite delivery, premium and basic 
cable, over the air TV stations and internationally. They must make 
that journey to try to break-even or ever make a profit.
    Today as that movie travels its distribution compass course, it is 
exposed to great peril, especially in the digital environment. If that 
movie is ambushed early on in its travels, and then with a click of a 
mouse, and without authorization, sent hurtling at the speed of light 
to every nook and cranny of this planet, its value will be seriously 
demeaned. Who on earth would continue to invest huge sums of private 
risk capital when the chances of redeeming that investment become 
remote, if not impossible?
    Broadband entices and allows piracy of films and TV programs on a 
massive, unprecedented scale. And at this precise moment, movies and 
other visual entertainment works are in ever-multiplying numbers 
swarming illegally throughout so-called file-sharing sites (a more 
accurate description would be ``file-stealing'' sites). And this is in 
an environment where most people's broadband connections are not fast 
enough to enable speedy downloads of these illegally copied files 
(funny how people will wait a long time for something when it is 
free!).
    Thus, the problem will only get worse as the speed of broadband 
increases. University-based piracy provides especially troubling 
evidence of this phenomenon, because university ethernet systems are 
state-of-the-art, large pipe, highest speed broadband connections. 
These university systems are over-run and heavily burdened by student 
downloading of pirated movies and TV shows. It's easy. It's fast, and 
it's free. It is also illegal.
    Gresham's Law works its will in such a landscape. Just as cheap 
money drives out good money, so we are afraid that pirated movies will 
spoil the market for broadband delivery of high-quality films with 
superior fidelity to sight, sound and color once these high-speed 
connections proliferate. A consulting firm has estimated that more than 
350,000 movies are being illegitimately brought down EVERY DAY. Who 
would choose to pay for movies when you can have them delivered to you 
FREE? It is this infection which corrodes the future of creative works.
    But if through technological measures, producers of visual 
entertainment could defeat the spread of pirated movies populating 
`outlaw' Net sites, the Net would be cleared of illegal debris and able 
to hospitably welcome legitimate, superior quality entertainment in a 
user-friendly format. The Consumer Electronics and Information 
Technology industries have been working cooperatively with us to find 
methods to deliver our legitimate content in a more secure digital 
environment. The largest beneficiary of such an environment would be 
American consumers.
    The THREE GOALS I outline below are designed to protect valuable 
creative works in visual entertainment, and at the same time expand the 
reach and attraction of broadband in the consumer society.
    How to achieve these GOALS? First and foremost both the Senate 
Commerce Committee and the Senate Judiciary Committee must be involved 
because these goals are umbillically connected to the oversight 
jurisdiction of both Committees.
    Our Three Goals, whose Objective it is to Protect movies, TV 
programs and other visual entertainment on the Net.
    Goal One: to create a ``broadcast flag'' which would prevent 
broadcast programs exhibited on over the air TV stations from being re-
distributed on the Net, which is a form of thievery.
    Because just about all such TV creative material is in ``deficit,'' 
(that is, its production costs are higher than the license fees it 
receives from the network) TV series and other high value broadcast 
material must go to `syndication' when they leave the network. 
Syndication means those programs must be licensed to local and 
international TV stations in order to recoup their total investments, 
and hopefully make a profit. If such programs are re-distributed on the 
Net while they are still on the network, it shrinks and decays the 
earning power of that program in the syndication market. Discussions 
are now going on which could result in a mutually-agreed upon accord to 
construct a `broadcast flag.' Praise is due all those Information 
Technology, Consumer Electronics, and Movie industry companies for 
these good faith discussions which I pray will end in a unanimous 
accord.
    Action: To achieve this important goal will require congressional 
or agency action to implement the accord. In the absence of such an 
agreement, a narrow mandate may be necessary.
    Goal Two: To ``plug'' the ``analog hole.''
    This is technical jargon. Let me sort this out in plain English. 
All digital protection designs can only work in a digital environment, 
which is the environment of the Internet. When a digital signal comes 
down to a TV set in the consumer home, that TV set in 95 percent or 
more of American homes is an ``analog'' set. This means the digital 
signal is immediately transformed into an analog signal in order for 
the consumer to watch it. If the analog signal is then converted back 
to digital, it cannot be protected by any known protection device. This 
is called ``the analog hole.'' One way to `plug the hole' could be 
through a `watermark detector.' The `watermark' is an ingenious design, 
which commands the signal converter in the TV set to respond to the 
instructions on the movie. This can be accomplished through a concord 
agreed to by the Information Technology, Consumer Electronics and Movie 
industries.
    Action: To reach this goal, Congressional assistance will be 
necessary.
    Goal Three: To stop the avalanche of movie theft on so-called 
`file-sharing'' Web sites, such as Morpheus, Gnutella, etc. (the more 
accurate name would be `file-stealing' sites).
    Unhappily, neither the `broadcast flag' nor `plugging the analog' 
hole will stop this relentless thievery that is endemic.
    We have not hesitated to spend considerable resources to fight 
these sites and services in the courts. But litigation alone cannot 
possibly provide an adequate solution, particularly as these services 
become increasingly decentralized, fragmented and anonymous. 
Constructive discussions need to take place with the Information 
Technology and Consumer Electronics industries to determine how best to 
develop effective technical solutions to crush online theft of our 
valuable creative works.
    Action: Continuous negotiations must take place to develop 
technical solutions, which may require legislative enforcement.
    There is one truth that sums up the urgency of this request to the 
Congress to enlist in the battle to preserve and protect an American 
economic and artistic asset which attracts the enjoyment, the patronage 
and a most hospitable reception by every creed, culture and country 
throughout the world.
    That truth is: If you cannot protect what you own, you don't own 
anything.

    The Chairman. Thank you, and I will join in with your 
observation with Mr. Perry, because Mr. Perry, you are right as 
rain, we are going to protect the VCR. You are going to be able 
to record that particular program for home use on your VCR. I 
do not believe you could get one vote out of 535 otherwise. So 
our bill, proposed bill, protects the recording of the program 
for home use all within the university for research or 
educational purposes.
    Mr. Bechtolsheim should have been included with all of 
those research individuals, Mr. Valenti, because he developed I 
think Sun Microsystems. Do you think Sun Microsystems could 
have been created without the Stanford Research Institute 
financed by this government that you want to get the government 
out of the business?

  STATEMENT OF ANDREAS BECHTOLSHEIM, GENERAL MANAGER AND VICE 
                       PRESIDENT OF CISCO

    Mr. Bechtolsheim. No, I should have mean meant to point out 
that the government played a very important role in the 
creation of Internet standards. The original TCPIP transmission 
standard was in fact funded by the Defense Department Advanced 
Research Project Agency, and became the basis for the Internet 
as we know it today.
    So I think the government through this type of funding 
played a hugely important role in the creation of essential 
standards for the--open standards for the business today.
    The Chairman. Thank you, Senator Boxer.
    Senator Boxer. Well, this has been really one of the best 
hearings, and that is really why I stayed here. Because if they 
are not getting anywhere, I'm not learning anything, I go to 
another hearing. So this has been really excellent.
    And let me say again, as all of the pressures come down to 
bear at this hearing. It is pretty clear to me where we are 
going. I think Mr. Valenti puts his finger right on the button 
when he says, ``Look, we have got to get past it, and we have 
got to just get together.''
    And I look at it this way, because in many ways it is about 
America in the world, our economic leadership in the world. We 
need to come together. Sometimes we compete, and sometimes we 
have to overlook these differences, and the short-term 
interests and come together. This is one of those moments.
    And I really thank my Chair. I just wanted to say to Mr. 
Perry who I think I was watching during the first panel was 
getting agitated at some of the things. When you put up your 
chart, Technology Threat or Growth Engine, there is not one 
person I do not think in this room, be they in the 
entertainment industry, or up here on this panel or staff that 
thinks that technology is not a growth engine and the way to 
our future. There is complete agreement there.
    But that is not what this hearing is about. I will tell you 
what the threat is. The threat is piracy. The threat is not an 
industry. That is not the issue. So if you thought that any of 
us thought that, please put that to rest. We do not see it that 
way at all.
    As a matter of fact, we are looking to you to help solve 
this incredibly important problem that we are facing in a fair 
and just way.
    And to Mr. Meyer, I just want to say I thought your 
presentation was exceptional. I really have to say I mean you 
just talk straight from the heart and did not mince words.
    And you are basically saying--and I want to make sure I 
understand--that the reason you do not see more digital content 
is because this problem has not been solved yet.

 STATEMENT OF JAMES E. MEYER, SPECIAL ADVISOR TO THE CHAIRMAN 
   AND FORMER SENIOR VICE PRESIDENT/CHIEF OPERATING OFFICER, 
                       THOMSON MULTIMEDIA

    Mr. Meyer. That is correct.
    Senator Boxer. Am I right on that point?
    Mr. Meyer. I just, on the record, this new technology does 
allow a great deal of temptation. And that temptation on many 
people's parts. And that is the heart of this argument, OK, is 
who can control what?
    I think it is pretty easily agreed upon what we are and are 
not going to allow, and then getting the technology in place to 
do that. And a TV or a set-top box I think can be done. Will 
consumers ultimately buy a lot of digital TVs? I do not know. 
My company and Mr. Perry's company have bet hundreds and 
millions they will.
    Senator Boxer I have one.
    Mr. Meyer. And I believe they will. But they will not 
without the spirit of Hollywood.
    Senator Boxer. Right.
    Mr. Meyer. They do not on anything.
    Senator Boxer. I mean I watch, because it is so fantastic, 
I watch, you know, rivers going down and falling down into 
streams, and that is about what you get to watch.
    Mr. Meyer. After an hour it gets old.
    Senator Boxer. Yeah. I mean there is just so much of that.
    I want to take up what Mr. Meyer told us, because I think 
it is interesting. If we together, meaning you hopefully, can 
resolve this problem, it is not only going to stop piracy and 
take care of that problem and thievery, because it is just the 
same if you steal my purse is to steal someone else's work. I 
hope we agree on that.
    So you solve that. And that is the right and just thing to 
do. And then you get into protecting investors' dollars, but 
that is not my business. My business really is what the 
constitution says about the rights of property.
    But you also will hopefully unleash this industry that has 
been sitting there, this Direct TV, this digital TV, because 
they are saying to us, the people who are in the business, the 
content is not coming. So it is not just----
    So what you are trying to do, Mr. Chairman, is not only 
right a wrong and a problem, but you will also unleash some 
positive things as a result. I have learned an enormous amount 
today.
    And again I make my plea to every one of you here. Please 
fix this so that it happens in the private sector. We can 
ratify it. We can help you make sure it is in force, but we are 
asking you to step up to the plate. No one is going to get 
everything he or she wants. Life is not like that. Believe me. 
I have passed a lot of legislation that did not look like the 
one I introduced. I have to compromise.
    This is that moment. And if you step up to the plate, trust 
me when I say the American people appreciate it. I think our 
economy will take off as a result of it. And in the long run, 
in the long run, everyone is going to prosper, even though some 
of you think you will not. In the long run everyone will 
prosper. I truly believe that.

    STATEMENT OF ROBERT PERRY, VICE PRESIDENT OF MARKETING, 
                           MITSUBISHI

    Mr. Perry. Senator Boxer, thank you very much for bringing 
up my squirming in my seat while sitting in the audience. It is 
due to a number of things.
    I would like to make a couple points very clear on behalf 
of the HRRC, the company I represent, and as well as our trade 
association of which I am a board member, the Consumer 
Electronics Association.
    We absolutely abhor the concept of any intellectual 
property, whether it is creative, electrical, whatever being 
stolen. People who share files and do things of that nature are 
stealing. They are not compensating the copyright holder for 
all their investment and creative genius, and we find that 
offensive.
    My company has spent tens of millions of dollars in direct 
subsidies to U.S. broadcasters to bring HDTV content to 
television. That is tens of millions of dollars in direct cash 
payments to U.S. broadcasters to make HD content available. 
Every HDTV we sell that has a tuner, an integrated tuner, or a 
digital connection to a recording device incorporates a copy 
protection system that prevents the content from going on the 
Internet. We absolutely support it.
    My company has also spent hundreds of millions of dollars 
trying to negotiate in advance through all of these issues. I 
believe that this hearing today, the interest of the chairman, 
the interest of all the representatives clearly places pressure 
to get that accomplished.
    No one in this room wants this situation solved more than 
I. I have got hundreds of millions of dollars of investment 
that has to go forward based on this country's transition to 
digital television.
    The squirming in my seat surrounds a couple of issues which 
I think perhaps are not yet resolved. With just one moment I 
would like to point them out.
    The FCC is preparing to rule to require our industry to 
adopt a license agreement that is being put forth by the cable 
industry. That license agreement is known as the FILA license. 
That license basically talks about how a digital TV can talk to 
a cable system. That license which is supported specifically by 
the content community absolutely requires content encoded 
output switching.
    In other words, the creator of a piece of content, perhaps 
even being created in another country, when that content is 
being broadcast, can turn off the outputs of the television so 
it cannot be recorded. That issue has not been resolved. The 
technical issue in protecting content that is being broadcast 
is absolutely resolvable. As our spokesperson from Intel 
mentioned, we have the technology to do that.
    Part of the question he was asked, however, perhaps is less 
clear. The question he was asked was: Can you prevent all the 
file sharing on the Internet today? Of course not. The reason 
for it is very simple. It is not up to the IT industry or the 
CE industry to go into theaters and arrest people with 
camcorders. It is not up to our industry to control how film is 
duplicated in production houses.
    When Mr. Eisner talks about stuff being on the Internet 
before it is broadcast, that is not an IT problem. That is not 
a CE problem. Somebody got the film before it got broadcast. We 
will put all the safeguards that are commercially viable and 
reasonable based on all of our discussions and consensus 
building of which we have made a lot of progress. We will put 
those in our products. But we cannot stop stuff that never got 
into the system.
    So if a movie gets stolen, we have no way of controlling 
that. And it is unfair perhaps to place that burden on the CE 
and IT industries. In fact, if you think about it most of the 
commercial piracy that occurs does not occur with consumer 
electronics devices.
    If I want to steal a high-definition movie, I put a 
commercial satellite receiver on a truck. I receive the movie. 
I store it on a disk. I take it out of the country for 
duplication. It is stolen. I did not use a TV or VCR to do it.
    We will work very hard toward this goal. We have poured 
huge resources into it.
    One of the additional frustrations I think that we have not 
really voiced we have talked about is the goal keeps moving. 
Even today you heard from Disney and Fox a divergence of 
opinion. Disney has been in the copy protection working group 
meetings for many years. Perhaps Mr. Eisner himself has not 
attended. That is rational. He has teams of people to do that 
for him. They have been in that. There is a divergence of 
opinion of exactly what they want.
    Warner Brothers and Sony have already agreed. Those studies 
have already agreed to some standards. Those are being 
implemented by companies like myself and others. We are getting 
there.
    What we need to do is resolve this last issue. How to 
protect broadcast content over the air from getting on the 
Internet. Generally, if I can be so bold as the co-chair of 
that committee, we think we have a technical solution that is 
very low cost.
    And by the way, there is no chip involved. There is no such 
thing as a chip. And it is not a cost issue. We have a 
technical solution.
    What we are doing now with Hollywood, IT, and consumer 
electronics' companies, and with very strong support from the 
MPAA, I might add, what we are doing is discussing exactly how 
do we do it with the least possible interference into these 
products without impinging on consumers' rights. And how do we 
make it happen very quickly?
    We believe by March 31st we will have that. And at that 
time we may need to come to the FCC for some very narrow 
regulatory rulings so that this would apply to everybody, so 
there are in fact no scoundrels taking advantage. Because it is 
not companies like ours, by the way, that provide methods for 
stealing stuff. We are too easy of a target. It is small 
companies that skirt the law.
    If the FCC does not have the regulatory authority, once we 
reach consensus about the commonsense way to deal with this 
issue, like we have all the other issues like DVD, we may need 
to come here to Congress to ask for your support for some very 
narrow, limited legislation that would require the 
implementation of our consensus agreement so that in fact we 
give everyone exactly the protection they have asked for.
    But broad over-reaching legislation that tries to hit it 
with a shotgun unfortunately would damage some other 
technologies that have not yet been created. Every time we have 
created a digital technology, ladies and gentlemen, we have 
created a solution together. I really believe we will be able 
to do it this time around, and I applaud this willingness to 
continue talking. But he has misstated something, and he did it 
inadvertently, not deliberately, that I need to clear up.
    Neither Mr. Eisner, nor Mr. Chernin, nor I are blaming the 
consumer electronics' people who do theft in our theaters or 
steal something. Not at all. That is not the issue.
    The issue is what happens when somebody does steal 
something, however it is done, and throws it on the Internet to 
go into the Morpheus and the Grokster, and all of these 
Gnutella anonymous, fragmented and very difficult to find 
sites? That is the issue.
    In other words, when that is up there unprotected, and 
somebody has to bring it down on file sharing, is there some 
technological way we can then baffle the entry of that stolen 
movie going to somebody else's hard drive? We are not blaming 
you at all, Mr. Perry. I think you guys have done a great job. 
But you have misstated what the issue is. And that is what we 
are talking about.
    When you have 350 to 400,000 movies being brought down 
illegally every day, and it is broadband growth--by the way, 
the one moat that surrounds our castle now that is keeping us 
from being inundated is only about nine-and-a-half to ten 
million out of the 66 million computers homes are on broadband, 
Mr. Chairman.
    And as broadband begins to grow, although it is growing 
very slowly now, because there is nothing up there, as you 
pointed out. You do not need broadband for e-mail, or instant 
messaging, or text, or references, or anything like that. You 
can do that with a 56K modem.
    But as broadband grows, the threat to us becomes more 
onimous, more perilous and more difficult to avoid. That is why 
we need the help of these very, very smart people in technology 
to help us.
    And by the way, whatever they develop we are going to buy 
by the long ton so everybody benefits, as Senator Boxer said.
    The Chairman. Senator Smith.
    Senator Smith. Thank you, Mr. Chairman. I join Senator 
Boxer in thanking you for this hearing. It is been one of the 
more enlightening that I have ever attended.
    Mr. Perry, I think you have defined very clearly for me how 
difficult a cul-de-sac we are talking about. And I now see that 
it is a moving cul-de-sac, and everybody has a different 
interpretation as to the dimensions of that cul-de-sac.
    Your description of the box that people would buy, and the 
inability to keep it, it would go back, I think that is a real 
consumer irritation. That is a problem. We have got to figure 
that out.
    What we have got to also do is figure out how to stop--
allow it to happen in the home, and to be kept in the home, but 
stop it from going to somebody else's home. And I do not know 
the engineering to make that possible. I think you are telling 
me it is impossible.
    Mr. Perry. Yes, sir. That is in fact not only possible, but 
it is implemented on the products that my company has been 
selling in the marketplace.
    Senator Smith. OK.
    Mr. Perry. The issue that Mr. Valenti just brought up is 
the issue of content that has never had any form of protection 
system applied to it. That gets hijacked before it is 
broadcast. How do we clean that off of the Net? And the reality 
is, is that it is a little bit like a piece of stolen art or 
anything else that is stolen. Once it is stolen, it is very 
hard to get it back into the barn.
    Senator Smith. And are you saying that there is some 
technology that the content industry, the entertainment 
industry can apply when it leaves their studio that they can 
protect it? Do they have the technology to do that?
    Mr. Perry. I believe, Senator, that there are technologies. 
So let me please explain just for a moment. There are really 
two segments to this.
    If a studio produces a master negative or film of a movie, 
and they lose control of it, and it gets pirated, there is 
nothing that can be done by anybody with any magic wand. It is 
a fact. Because frankly it goes outside of the United States. 
And regardless of what legislation we pass, it will not matter. 
It will be entered into the Internet.
    There is however a transition that is occurring in 
Hollywood where more and more films, instead of being created 
on films, are being created digitally. And as they are being 
created digitally, there are certain technologies which we are 
discussing in the copy protection working group that could be 
applied to the master version of that videotape that would keep 
it from going out into the Internet.
    Now it still does not stop when somebody crawls, some 
nefarious person crawls into a theater with a camcorder. There 
is simply no tool we can use to do that.
    Senator Smith. That brings me to my only other question, 
Mr. Chairman, and that is with respect to your chart. I want to 
understand it better. Are the green lines on the graph, are 
those the profits of the entertainment industry?
    Mr. Perry. They are the revenues of the entertainment 
industry, and in general their profit margins have remained 
relatively constant as an industry over this time. So they 
would reflect increasing profits as well.
    Senator Smith. In spite of the theft.
    Mr. Perry. Yes. Although I do want to point out that 
regardless of how profitable they are, the stealing of property 
is absolutely wrong. And even if you can cover it with growing 
profitability, it is still wrong. It still needs to be stopped.
    Senator Smith. Well, that is the point I wanted to make. I 
was afraid--and I am glad you corrected it, because I think we 
are leaving the impression that as long as they are growing we 
can codify and support theft. And I think, Jack, you would 
argue that if there was some protection here, that growth would 
be even greater.
    And I am saying as a Republican, I think growth is good. I 
think a Democrat would say that, too, our Chairman.
    And I want more of those green lines going out. I do not 
want less of them. That is not to be ashamed of, that is to be 
encouraged. And I thank the IT industry for helping that to 
grow. We just got to figure out how to have both of you grow, 
because you totally need each other.
    Mr. Valenti. That is precisely correct, Senator. And I 
might add to go back to what the Chairman said. We are also 
talking about not taking away one jot of a right of what a 
consumer does in their home today. You made that point, Mr. 
Chairman, and I want to confirm it.
    See, what we do not know, how long will there be DVD? There 
will be something else. For example, digital. Instead of coming 
to your computer, you will have a little line going from your 
computer into your television set. Or you can do it right 
direct to your television set, and bring stuff on the Internet, 
bypassing the computer completely, and maybe not even need DVD 
in the future.
    There are all sorts of new ways to have movies into the 
home, and I applaud that. The more choices you give to 
consumers to rent or buy movies at a fair and reasonable 
price--a phrase that will be defined by the consumer and not by 
the movie distributor--that is wonderful.
    But I am saying to you like Banquo's ghost right outside of 
the shadow of our dinner table that there is the danger of the 
pilfering of this material as it is ambushed.
    Let me just make one other statement. The average cost in 
the year 2000 to make and market a movie made by a major 
studio, one of the seven members of my association, the average 
cost is $82 million. Only two out of ten movies ever get back 
their investment, much less a profit, from the United States 
theatrical exhibition.
    That means that a picture must journey through airline, 
home video, Blockbuster, premium cable, pay-per-view, basic 
cable, over-the-air television, and international in order to 
try to retrieve this investment and hopefully make a profit.
    Now if it is ambushed early in that journey, when you are 
setting out you are going to cross the United States before you 
get to the Appalachians, the wagon train, the bandits take it 
over. And as broadband grows to 20, 30, 40, 50 million homes, 
you can see, I do not have to draw a chart for you, is the 
possibility of peril there that causes us many Maalox moments 
out when we make movies.
    Senator Smith. So those green lines disappear. I mean they 
go away at some point if we do not figure this out.
    Mr. Valenti. That is right. Nothing less, Mr. Chairman and 
Senator Smith. And as a businessman you know that, and we all 
know it. While those lines are going up now, I am not looking 
at the past. I want to look at the future.
    How do we keep those green lines growing, which is in the 
long-range interest of this economy. It is in the long-range 
interest of the American consumer that all of these choices be 
made available to him and her. And this is what it is all 
about.
    Senator Smith. Mr. Chairman, I think these two industries 
are in the long-term interest of the United States. So I plead 
with you, as my colleagues have, that we get this figured out.
    The Chairman. Well, thank you very much, Senator. I hope we 
get together.
    What happens? Let's say they do not get together, Mr. 
Valenti. What happens?
    Mr. Valenti. Well, that is a mystery wrapped in an enigma 
inside a riddle. But eventually----
    The Chairman. And assume we cannot do anything about it. I 
think I can. Do not worry about it.
    Mr. Valenti. I know.
    The Chairman. Go ahead. The worst case if nothing happens.
    Mr. Valenti. I think that we have to go back and do some 
more talking. But if both sides come to the agreement that 
there is an impasse, we simply cannot agree, well that does 
tend to concentrate the mind wonderfully. And you then have to 
say, ``I have to go either to regulatory agencies or the 
Congress for help and assistance in whatever they can do. I do 
not know any other option.
    The Chairman. Well, The Chairman of the regulatory agency 
believes that his authority is only to get rid of every 
regulation. So do not worry about that one.
    I have got to thank you for the very valuable contribution, 
Mr. Bechtolsheim, Mr. Perry, and each of you. Mr. Meyer, if 
this had been a court of law, and I would have been a judge, I 
could have directed a verdict after what you said. You brought 
it right--you encapsulated it. You had it first. And Mr. 
Valenti, you are always the best. I would buy a ticket to hear 
you.
    Thank you all very, very much. The Committee will be at 
ease subject to call of the Chair.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]