[Senate Hearing 108-275]
[From the U.S. Government Publishing Office]
S. Hrg. 108-275
PRIVACY AND PIRACY: THE PARADOX OF
ILLEGAL FILE SHARING ON PEER-TO-PEER
NETWORKS AND THE IMPACT OF TECH-
NOLOGY ON THE ENTERTAINMENT INDUSTRY
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 30, 2003
__________
Printed for the use of the Committee on Governmental Affairs
90-239 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Chief Counsel
Joyce Rechtschaffen, Minority Staff Director and Counsel
Amy B. Newhouse, Chief Clerk
------
PERMANENT COMMITTEE ON INVESTIGATIONS
NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Raymond V. Shepherd, III, Staff Director and Chief Counsel
Joseph V. Kennedy, General Counsel
Elise J. Bean, Minority Staff Director and Chief Counsel
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Coleman.............................................. 4
Senator Levin................................................ 10
Senator Sununu............................................... 27
Senator Pryor................................................ 30
Senator Collins.............................................. 35
Prepared statements:
Senator Coleman.............................................. 7
Senator Levin................................................ 12
Senator Pryor................................................ 31
Senator Collins.............................................. 36
Senator Carper............................................... 71
Senator Lautenberg........................................... 72
Senator Durbin............................................... 75
WITNESSES
Tuesday, September 30, 2003
Hon. Barbara Boxer, a U.S. Senator from the State of California.. 1
Mitch Bainwol, Chairman and Chief Executive Officer, Recording
Industry Association of America, Washington, DC................ 15
Jack Valenti, President and Chief Executive Officer, Motion
Picture Association of America, Washington, DC................. 17
L.L. Cool J, Recording Artist, New York, New York................ 19
Mike Negra, President, Mike's Video, Inc., State College,
Pennsylvania................................................... 20
Alan Morris, Executive Vice President, Sharman Networks Limited,
Australia/England/Vanuatu...................................... 43
Derek S. Broes, Executive Vice President of Worldwide Operations,
Altnet, Woodland Hills, California............................. 45
Chris Gladwin, Founder and Chief Operating Officer, FullAudio,
Inc., Chicago, Illinois........................................ 47
Lorraine Sullivan, New York, New York............................ 49
Chuck D, Record Artist, Author, Activist, Los Angeles, California 51
Jonathan D. Moreno, Director, Center for Biomedical Ethics,
University of Virginia, Charlottesville, Virginia.............. 63
James V. DeLong, Senior Fellow and Director, Center for the Study
of Digital Property, The Progress and Freedom Foundation,
Washington, DC................................................. 65
Alphabetical List of Witnesses
Bainwol, Mitch:
Testimony.................................................... 15
Prepared statement........................................... 78
Boxer, Hon. Barbara:
Testimony.................................................... 1
Broes, Derek S.:
Testimony.................................................... 45
Prepared statement........................................... 115
Chuck D:
Testimony.................................................... 51
Cool J, L.L.:
Testimony.................................................... 19
DeLong, James V.:
Testimony.................................................... 65
Prepared statement with an attachment........................ 136
Gladwin, Chris:
Testimony.................................................... 47
Prepared statement........................................... 123
Moreno, Jonathan D.:
Testimony.................................................... 63
Prepared statement........................................... 134
Morris, Alan:
Testimony.................................................... 43
Prepared statement........................................... 103
Negra, Mike:
Testimony.................................................... 20
Prepared statement........................................... 99
Sullivan, Lorraine:
Testimony.................................................... 49
Prepared statement........................................... 130
Valenti, Jack:
Testimony.................................................... 17
Prepared statement........................................... 88
APPENDIX
Exhibits
1. Statement for the Record from Steve Wiley, President,
Hoodlums New and Used Music & DVDs............................. 145
2. Responses to supplemental questions and for the record
submitted to Mitch Bainwol, Chairman and CEO of the Recording
Industry Association of America (RIAA)......................... 148
3. Responses to supplemental questions and for the record
submitted to Jack Valenti, President and CEO of the Motion
Picture Association (MPA)...................................... 157
4. Responses to supplemental questions and for the record
submitted to Alan Morris, Executive Vice President, Sharman
Networks Limited (Parent Company of KaZaA)..................... 158
5. Responses to supplemental questions and for the record
submitted to Chris Gladwin, Founder and Chief Operating Officer
of FullAudio Corporation....................................... 162
6. Charts submitted by Senator Barbara Boxer:
a. ``Shared Folder'' chart................................ 164
b. ``Beatles'' search generates ``teen porn file'' chart.. 165
PRIVACY AND PIRACY: THE PARADOX OF
ILLEGAL FILE SHARING ON PEER-TO-PEER
NETWORKS AND THE IMPACT OF TECHNOL-
OGY ON THE ENTERTAINMENT INDUSTRY
----------
TUESDAY, SEPTEMBER 30, 2003
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:08 a.m., in
room SD-G50, Dirksen Senate Office Building, Hon. Norm Coleman,
Chairman of the Subcommittee, presiding.
Present: Senators Coleman, Levin, Collins, Sununu, Levin,
Carper, and Pryor.
Staff Present: Raymond V. Shepherd, III, Staff Director and
Chief Counsel; Joseph V. Kennedy, General Counsel; Mary D.
Robertson, Chief Clerk; Katherine English, Counsel; Mark
Greenblatt, Counsel; Kristin Meyer, Staff Assistant; Elise J.
Bean, Democratic Staff Director and Chief Counsel; Rob Owen
(Senator Collins); Joe Bryan and Mike Kuiken (Senator Levin);
John Kilvington (Senator Carper); Tate Heuer and Gita Uppal
(Senator Pryor); Juria Jones (Senator Specter); Mark Keam
(Senator Durbin); and Adam Sedgwick (Senator Lieberman).
Senator Coleman. We are going to call to order this hearing
of the Permanent Subcommittee on Investigations, ``Privacy and
Privacy: The Paradox of Illegal File Sharing on Peer-to-Peer
Networks and the Impact of Technology on the Entertainment
Industry.''
We have with us my colleague, the distinguished Senator
from California, Barbara Boxer. Senator Boxer, I know you
wanted to make an introductory statement. What I'm going to do,
as an accomodation to your schedule, is give you an opportunity
to make your statement now before we begin our formal
statements.
TESTIMONY OF HON. BARBARA BOXER, A U.S. SENATOR FROM THE STATE
OF CALIFORNIA
Senator Boxer. Senator, thank you so much, Senator Coleman,
Senator Carper, and others who will come, for giving me this
opportunity. We had a hearing on this subject at which you
testified, my friend, Senator Coleman, so this is my second
round in putting out some of my thoughts, and I will try to
keep this as closely knit as I can.
First of all, I have four points to make. The first point
is that downloading copyrighted works is theft, and I think if
there is anything else coming out of this hearing other than
that, it is a real problem.
Senator Levin, I was just saying that I have four points to
make that I hope you will keep in mind. First, that downloading
copyrighted works is theft, plain and simple. Second, it is not
a victimless crime, as you will find out today. Third, the
file-sharing networks themselves constitute a threat to
privacy. And fourth, these networks are no place for children.
Those are the four points and I will go quickly through them.
First, the issue of theft. Peer-to-peer sharing is fine,
but not if they are copyrighted works. That is just the fact.
You can't have a law without being able to enforce it or no one
will pay any attention to it.
We know it is legal, again, to share non-copyrighted work,
but if it is copyrighted, it is stealing, and whether you are
stealing it from the store or on the Internet, there has to be
consequences, I believe. Otherwise, it will continue.
Now, we all know about the 1998 Digital Millennium
Copyright Act. A lot of us were involved in putting it
together. And in the course of that, the Internet service
providers said, look, we don't want to be responsible for this
illegal downloading. So we will support turning over the
records to--I don't mean--I should say, turning over the
information to the record companies as an exchange for us not
being liable.
So I think that for them now to say that they won't
cooperate is just going against what they agreed to do. That is
not right. The one thing I have learned about this business
that we are in is that you give a handshake, you give your
word, and you stick with it. That is important.
Now, the second point. Stealing copyrighted work is not a
victimless crime. It threatens our creative industries and our
artists, and there is an artist here today, and I assume a lot
of people are here because of that. I thought it was us----
[Laughter.]
But then I realized, my staff said, no. So the fact is, we
have victims.
As visual proof, there is a chart that shows photographs
taken by the Nashville Song Writers Association of a series of
buildings now for lease that once housed music publishing
companies on Nashville's famous Music Row. Each of these closed
businesses represents jobs lost, and Mr. Chairman, regardless
of our party, we are in it to fight for jobs for our people. We
are losing jobs.
Two song writers who have written for famous artists, Kerry
Chader and his wife, Lynn Gillespie Chader--I hope I said it
right--wrote to me last week, and they wrote, ``Our income fell
over 60 percent from 2000 to 2002. In 2001, we were forced to
declare bankruptcy. After more than 100 songs recorded between
my husband and myself, we were forced to seek outside
employment. In 2002, we were expecting a check for royalties in
the neighborhood of $5,000. When the check came and we opened
it up, it was $17.53,'' she writes. What a shock. And they
attribute their losses to illegal downloading, which they refer
to as ``downlooting.''
So according to the Record Association, the industry has
lost 25 percent in sales over the last 3 years. It has gone
from a worldwide $40 billion industry in 2000 to a $26 billion
industry in 2002.
My third point is that file-sharing networks themselves
pose a great threat to privacy. Most users have no idea that
they are frequently sharing their private documents with
everyone else on the network, and you can see this, and since
my time is running short, I hope you will take a look at this.
This is a chart \1\ that essentially says--it highlights
that you will share files that are in your, ``shared folder.''
It allows you to add any other folder you wish. Users often
make sensitive files available unwittingly to everyone on the
network by putting those files in the wrong folder. In a search
of one peer-to-peer network, a House committee report found
2,500 Microsoft Money backup files. Each of these files stores
a user's personal financial records and all were readily
available for download.
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\1\ See Exhibit 6a. which appears in the Appendix on page 164.
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I will complete this in less than a minute, if I might.
So here we have a situation where we are worried about the
privacy of the people who are illegally downloading, although I
have to say, and no one likes these lawsuits, it is awful, but
if someone came in and had a mask on, as they have done, they
still do, to a store and they were anonymous, they are still a
thief, even though you have got to find out who they are.
So the fact of the matter is, let us not just say we are
trying to protect--hopefully, we are not saying we are trying
to protect privacy of people who are stealing. As unpleasant as
it is, believe me, it is very unpleasant.
The fourth issue, we must address how these networks expose
children to pornography. Children don't belong on these
networks. According to the General Accounting Office,
``Juvenile users of peer-to-peer networks are at significant
risk of inadvertent exposure to pornography, including child
pornography,'' and this is another chart \2\ from Kazaa. You
can see on this chart the user has put in a search for the
Beatles. That search then generates a series of files, and
highlighted on the chart, you see when the user selects
Beatles, a title that says ``Drunk Teen Sex 2,'' which is a
teen porn file. So this means your child could think she is
downloading a Beatles song and be downloading pornography, and
I think parents need to know about this. There are other
unintended consequences of this.
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\2\ See Exhibit 6b. which appears in the Appendix on page 165.
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In conclusion, I believe--and you can play a major role in
this--that coming out of this hearing as well as the Commerce
hearing, we should bring out these points. Clearly, it is
wrong, what is happening. This is a crime. There are real
victims. Inadvertently, people are losing their privacy, and
inadvertently, youngsters are being exposed to pornography.
So for all those reasons, I hope that the message out of
this hearing will be, let us find ways we can all work together
so that we can solve this problem. Instead of just saying, let
us open up the Digital Millennium Copyright Act, rewrite it and
stop what I think is the first thing that is making an impact,
which is enforcing this law. It is actually making an impact.
Teens are saying, gee, maybe this was wrong. I never saw it
before as stealing.
I thank you so much for giving me this privilege to open up
this hearing. As you know, this is very important to my State
of California and the millions of people who live there and, I
think, to people all over the country. Thank you.
Senator Coleman. Thank you, Senator Boxer. I appreciate
your passion and perspective on this issue and I look forward
to working with you on it.
Do my colleagues have anything that they would like to ask
Senator Boxer?
Senator Levin. Just to thank Senator Boxer. Thank you,
Senator Boxer. Thank you for your total commitment to the State
of California and to the jobs that are impacted by what is
going on through this downloading process. We thank you for
your very strong statement.
Senator Boxer. I appreciate it.
Senator Coleman. Thank you.
OPENING STATEMENT OF CHAIRMAN COLEMAN
Senator Coleman. Before I begin with the first full panel,
I will deliver my opening statement. I am pleased to be joined
with my colleague and distinguished Ranking Member, Senator
Levin.
On September 8, the Recording Industry Association of
America (RIAA) fired its first volley of copyright infringement
lawsuits in its battle against illegal downloading. The
industry promised to ``approach these suits in a fair and
equitable manner,'' and that it is initially focusing on
``egregious offenders who are engaging in substantial amounts
of illegal activity.''
I am grateful that the documents provided to this
Subcommittee substantiate that claim. However, there is nothing
under current law that requires the RIAA to target only
``egregious'' offenders in the future. There is nothing in the
current law that restricts the scope of the RIAA's use of
subpoenas to ferret out unlawful downloaders.
It has been these developments that led to my concern about
the use of subpoenas to combat the illegal taking of
copyrighted music files online--and the potential for abuse of
the legal process. However, I am also troubled by the use of
the DMCA subpoena procedure and lawsuits to spear the
registered owner of the computer rather than perhaps the actual
user of a P2P operation like Kazaa. The Subcommittee has been
in contact with numerous individuals whose family members,
friends, or roommates use the Kazaa service. Unfortunately,
these unsuspecting individuals are now the targets of subpoenas
and lawsuits.
Recently, I had the honor of providing a brief statement to
Senator Brownback's hearing before the Commerce Committee on
``Cyber Identity, Privacy, and Copyright Protection.'' It was
the hearing in which Senator Boxer participated. There, I
stated the principles that are the basis for our hearing today.
On the matter of subpoenas, I am concerned about the scope
and the impact of the broad powers extended to the RIAA and
other copyright holders to issue these subpoenas. Is it
possible for innocent people to get caught in the legal web
that the RIAA is trying to create to stop illegal piracy?
I believe we must review the potential civil and criminal
penalties needed to ward off the theft of copyrighted
materials, and determine if such measures will work.
As it relates to the use of technology in general, I am
troubled by the growing use of systems and devices to reach
into our online lives and pluck out information about us with
or without our knowledge. This is particularly relevant here,
since technology is being used not only to steal the work of
artists--but to prove that someone has, indeed, stolen it.
In addition, part of our continuing inquiry will address
why P2P networks do not proactively prevent this illegal
activity from occurring initially and how P2P networks like
Kazaa envision moving from a business model predicated upon
illegally trading songs to a legitimate business model that
derives revenues from licensed copyrighted intellectual
property.
There is more at issue here than just subpoenas--and the
impact of the use of the power of subpoena and threat of legal
action to compel consumers to cease and desist.
I believe the very future of the American music and motion
picture industry is at stake--and, with it, a major contributor
to our Nation's economic stability.
I am pleased to have two leaders of the entertainment
industry here with us today--Mitch Bainwol, CEO and Chairman of
the Recording Industry Association of America, and Jack
Valenti, President and CEO of the Motion Picture Industry
Association of America.
As Mr. Valenti has previously noted, the movie industry
alone accounts for 5 percent of our Nation's economic output.
And, as both Mr. Bainwol and Mr. Valenti have made clear, the
act of downloading the work of their members without their
permission is illegal--and, is contributing to a significant
economic decline in their respective industries.
I think we can all agree that the growth of current, and
future, technologies bodes well for improving the quality of
our lives and productivity, . . . but, we must also accept that
it also could spell economic doom for the entertainment
industry.
In just a short time, it will be possible to download a
full-length motion picture movie in minutes, and to distribute
that movie across the world before it makes its cinematic
debut.
I believe we have the capacity to preserve the economic,
artistic, and cultural integrity of our arts and entertainment
industry in America. It will take a concerted, cooperative
effort among all involved to make it work.
With us today are others who are impacted by those changes
in technology--those who own the brick-and-mortar retail
outlets that are suffering from a decrease in the over-the-
counter sales of CDs and other music products.
And, I want to thank another witness, Lorraine Sullivan,
who is the recipient of one of the subpoenas issued by the
RIAA. Her testimony will help our broader understanding and
discussion today about the impact of such suits against music
lovers--and what the potential ramifications may be for future
customers of the industry.
We have other issues that must be addressed today.
Those who facilitate illegal file-sharing are also here
with us this morning to present their side of the story.
Kazaa has over 60 million individuals who download. Yet,
they have been accused of aiding and abetting those who
willfully violate copyright laws. There are a number of
compelling issues that must be addressed. Kazaa asserts they do
not condone illegal file-sharing and that they want to move
toward a legitimate business model. This raises some important
questions. Such as, if the financial viability of the Kazaas of
the world is based upon illegally trading files, what
incentives do they or consumers have to change their behavior?
What prevents them from more boldly and openly informing their
users about illegal activity?
We also have with us today two artists, L.L. Cool J and
Chuck D, who I hope can shed some light from an artist's
perspective, on what they see to be the changing nature of the
music industry--and for them what has been the solution to the
intricate balance between artistic integrity--and, quite
frankly, making a living.
Finally, we will end our hearing today with a discussion of
the ethics of downloading and the potential need for new
business models. Have we inadvertently created a culture today
that encourages the very behavior that today we feel needs to
be corrected? Let me be clear. Downloading someone else's
property without their permission is illegal, period. Yet
today, there are 60 to 90 million people who use P2P networks,
and I believe that is just in the United States, who use P2P
networks to illegally trade copyrighted material.
Many of these users are teenagers or younger. This
generation of kids needs to be made aware that they are
engaging in illegal behavior. I do not believe, however, that
aggressively suing egregious offenders will be sufficient to
deter the conduct of an entire generation of kids.
As a former prosecutor, I am troubled by a strategy that
uses law to threaten people into submission. Yet, as a former
prosecutor, I am also troubled by a prevailing attitude that
says because technology makes it free and easy, it is OK to do.
I believe solving this problem will require a way of
thinking that allows the industry to protect its rights, but to
do it in a way that creates new consumers by intellectually and
financially investing in creative methods of delivering of
music to fans.
Technology and the Internet offer great hope for a brighter
future, but with it comes with great concern over how they are
used and how property rights are protected. It is clear today
that the law, technology, and ethics are out of sync. They are
woefully out of step with one another. Hopefully, the dialogue
that we engage in here today will be the factual and
intellectual foundation upon which we can engineer some
thoughtful and practical solutions for the future.
The prepared opening statement of Senator Coleman follows:
[GRAPHIC] [TIFF OMITTED] T0239.001
[GRAPHIC] [TIFF OMITTED] T0239.002
[GRAPHIC] [TIFF OMITTED] T0239.003
Senator Coleman. With that, I would like to turn the podium
over to my distinguished Ranking Member, the Senator from
Michigan, Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you, Mr. Chairman. Thank you very much
for calling this hearing. It is a very critically important
hearing for the reasons that you gave and Senator Boxer gave
and your leadership is going to be critically important in
trying to find a resolution to the issues which you describe.
Today, we face a collision of two worlds. One is the world
of copyright law. The other is the real world, where new
Internet technologies like file sharing are enabling hundreds
of millions of people to instantly exchange movies, music, and
other copyrighted works online for free. In the world of
copyright law, taking someone's intellectual property is a
serious offense, punishable by large fines. In the real world,
violations of copyright law over the Internet are so widespread
and easy to accomplish that many participants seem to consider
it equivalent to jaywalking--illegal but no big deal.
But it is a big deal. Under U.S. law, stealing intellectual
property is just that--stealing. It hurts artists, the music
industry, the movie industry, and others involved in creative
work. And it is unfortunate that the software being used--
called ``file sharing,'' as if it were simply enabling friends
to share recipes, is helping create a generation of Americans
who don't see the harm.
The Internet and related technologies, if used properly,
have the potential to expose millions of people to creative
work that would otherwise not be seen or heard. The question is
whether their potential will be realized at the expense of
artists, authors, software developers, scientists, and others
who rely on copyright protection to earn a living.
The issue we will be struggling with today is what to do
about what I hope is acknowledged to be a problem. How do we
instill in people that downloading a song or a movie off the
Internet, without permission, is like stealing a CD from a
store? If the recording industry's approach--filing lawsuits
against alleged infringers--is not the right answer, what is
the right answer? Is it technologically feasible for software
developers to take steps to prevent their software from being
misused to steal copyright works? If so, are they willing to
take these steps voluntarily or must we require them to do so?
Our copyright laws were designed to protect a person's
intellectual property--a song, an invention, a work of art, a
novel. But the use of new file-sharing software is growing so
rapidly that the law has badly lagged behind.
The Subcommittee obtained copies of more than 1,000 RIAA
subpoena requests and subjected them to a general review as
well as subjecting 42 randomly selected requests to a more
detailed investigation. The Subcommittee's detailed review of
the 42 subpoenas found that the Internet user with the fewest
number of songs had made available about 600 songs for others
to copy, while the Internet user with the highest number
exceeded 2,100 songs. Many had made over 1,000 songs available
for copying on the Internet. There was no evidence, in this
survey at least, of subpoenas directed to users who had made
available only a few songs.
Software providers will play a key role in determining
whether their file-sharing technologies evolve into tools that
promote respect for creative work or instead promote copyright
infringement. Certain developments so far have not inspired
confidence.
With regard to protecting copyrights, the largest software
provider apparently failed to incorporate some elements that
could help fight infringement and that company has taken steps
that hinder rather than facilitate timely reminders from
copyright holders to file sharers that the unauthorized sharing
of copyrighted materials violates U.S. law. While people who
download copyrighted works and make them available for others
to copy should be held accountable for their actions, those
providing the underlying software should also take reasonably
available steps to protect copyrights.
Internet technologies are changing how many Americans find,
listen to, and buy music and movies. Trips to record stores are
giving way to sessions on the Internet. Movie videos are
increasingly online and available to those with Internet know-
how. We must search for ways to accommodate the reasonable and
appropriate use of these new technologies while also
maintaining the integrity of copyright laws critical to
protecting and encouraging creative work.
Again, I thank you, Mr. Chairman, for calling this hearing
and for your leadership in this area.
The prepared opening statement of Senator Levin follows:
[GRAPHIC] [TIFF OMITTED] T0239.004
[GRAPHIC] [TIFF OMITTED] T0239.005
[GRAPHIC] [TIFF OMITTED] T0239.006
Senator Coleman. Thank you, Senator Levin.
With that, I would now like to welcome the first panel of
witnesses at today's important hearing. Mitch Bainwol is the
Chairman and CEO of the Recording Industry Association of
America. Jack Valenti is the President and CEO of the Motion
Picture Association of America. L.L. Cool J is a renowned
recording artist. And finally, Mike Negra, President of Mike's
Video.
I thank you all for your attendance at today's hearing and
look forward to hearing from each of you.
Before we begin, pursuant to Rule VI, all witnesses who
testify before this Subcommittee are required to be sworn in.
At this time, I would ask you to please stand and raise your
right hand.
Do you swear the testimony you will give before this
Subcommittee will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Bainwol. I do.
Mr. Valenti. I do.
Mr. Cool J. I do.
Mr. Negra. I do.
Senator Coleman. Thank you very much.
With that, Mr. Bainwol, we will go first with your
testimony. We will hear then from Mr. Valenti, followed by L.L.
Cool J, and finish up with Mr. Negra. Gentlemen, I would like
you to keep your oral testimony to 5 minutes. There may be
written testimony and we will, at your request, enter that into
the permanent record. But if we do 5 minutes, and I will hold
you to that, that will then give an opportunity for my
colleagues to be able to submit questions.
With that, Mr. Bainwol, you may begin.
TESTIMONY OF MITCH BAINWOL,\1\ CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, RECORDING INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON,
DC
Mr. Bainwol. Thank you, Senator Coleman. I appreciate that.
Chairman Coleman, Senator Levin, and Members of the
Subcommittee, my name is Mitch Bainwol. I am Chairman and CEO
of the RIAA. Having spent much of the last 15 years working for
this institution and for Members of the Senate, it is a special
privilege for me to be here today, but I have got to say, I am
more comfortable on the other side of the dais. [Laughter.]
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\1\ The prepared statement of Mr. Bainwol appears in the Appendix
on page 78.
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It is also an honor to share this witness table with Jack
Valenti, who has done this a time or two, and with Mike Negra
and the incomparable L.L. Cool J.
Over these last 4 years, domestic revenues in the music
industry have plummeted from $15 billion to $11 billion. The
slide on the global side has been even worse. The primary
cause: Piracy. The consequence: Lost American jobs, about 4,000
jobs directly in the previous 2 years alone. That does not
include the enormous retail losses that Mr. Negra will address
shortly. He is the human face of piracy. Everyone in the
magical chain that brings music to consumers is affected. They
are the human toll--song writers, artists, backup musicians,
clerks, truck drivers, everyone.
The scope of the piracy problem is made clear when you note
that the number one downloaded site in America is Kazaa
software, which has been on the top 50 list for 74 weeks. At
least four other P2P systems are also on the top 50 list. There
are tens of millions of Americans, as you have noted, Mr.
Chairman, who download music for free, most of it illegally. At
any given point, three to five million people are on the
Internet downloading music, violating U.S. copyright law.
Any individual downloader may feel pretty innocent taking
intellectual property off the Internet, presuming a victimless
crime. But when you aggregate the universe of downloaders, you
find a piracy problem of enormous dimension, and that produces
an unacceptable human toll, victims in the creative community.
The law is clear, yet the understanding of the law is not
clear. Why? In large part, it is because the file-sharing
networks like Kazaa deliberately induce people to break the
law. A recent independent study by Palisades suggests that 99
percent of all the audio files on the Internet were
copyrighted, and 97 percent of all files were either
copyrighted or pornographic. These networks, the Kazaas of the
world, functionally are illegitimate platforms. They are
cannibalizing a great American industry.
The RIAA embarked on a campaign to get the message out
years ago--paid print, broadcast ad, op-eds, websites, instant
messages to P2P users until Kazaa turned off the IM function.
But we found that P2P activity continued, so we took the next
step, enforcement. It has been painful and it has been
difficult. It was a last resort, but it is building awareness
rapidly.
From December of last year through early June of this year,
public opinion on the legality of trading held constant. About
a third said it was illegal. After announcing our intent to
enforce our rights, but before the lawsuits were actually
filed, that number soared to about 60 percent, and about 15
percent say it is now illegal. We are building awareness
rapidly and it is a function of enforcement.
Our legal actions have, in fact, triggered a national
debate. That is a good thing. This is a matter that will be
settled over the kitchen table, not in the courtroom. Yet we do
recognize that legal action is not a panacea. While we will
vigilantly defend our property rights--we have no choice but to
do so--we also intend to do so in a fashion that is consistent
with common sense, decency, and fairness. We would much rather
make music in the studio than arguments in the courtroom.
A brighter future is evolving--that is the good news--and
there are three legs to the stool. First, the foundation must
be a broad societal understanding of the law and what is right
and wrong. That is being accomplished.
Second, the current market for legal downloads must become
even more vibrant and competitive. We are watching that
marketplace explode right now--Apple iTunes, Rhapsody,
BuyMusic.com, MusicMatch, to name a few. Technology giants
Amazon, Dell, Microsoft are all getting into this in the next
few weeks and months.
Finally, the file-sharing business must become responsible
corporate citizens, moving beyond rhetoric and beyond excuses.
The systems can no longer induce music fans to break the law,
to diminish their computer privacy, disregard privacy, or to
compromise integrity of content.
This brighter future is just around the corner if the
Kazaas of the world voluntarily implement three common sense
reforms. If they do so, losses can be avoided, the record
industry will be healthier, there will be more jobs, consumers
will get the music how they want it, and they will respect
property rights. Here is what it takes.
One, Kazaa and the other file-sharing systems must change
the default systems--the default settings for the users so that
American kids, teenagers, and others, are automatically and
unwittingly uploading the music from the hard drive.
Two, these systems must institute meaningful disclosure.
Clearly notifying the users that uploading and downloading
music, copyrighted materials, without permission is, in fact,
illegal. Disclosure needs to be made perfectly clear.
And third, most importantly, the P2P systems must filter
out copyrighted protected works. Again, 99 percent of the
materials, the audio files on Kazaa under Palisades were
copyrighted materials. That stuff should be filtered out. No
more excuses.
Mr. Chairman, Members of the Subcommittee, I thank you for
this opportunity. We have a bright future ahead of us with
technology. The answer is technology, but there is a right way
to do it, there is an American way to do it, and that is you
pay for what you get. Thank you very much.
Senator Coleman. Thank you, Mr. Bainwol. Mr. Valenti.
TESTIMONY OF JACK VALENTI,\1\ PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA, WASHINGTON, DC
Mr. Valenti. Thank you, Mr. Chairman. I must say, before I
begin, I heartily endorse what Mr. Bainwol has said. These
Kazaas and Neutellas and Morpheus and the rest of them are
outlaw sites who do nothing but offer illegal music and movies
and the most sordid pornography that your mind can ever
comprehend.
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\1\ The prepared statement of Mr. Valenti appears in the Appendix
on page 88.
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But I am very glad to be here. Let me start with a story.
It is said in World War I, Marshall Foach, who was a French
General, later to become the Supreme Allied Commander, was in a
furious battle with the Germans and he wired back to military
headquarters, ``My left is falling back. My right is
collapsing. My center cannot hold. I shall attack.''
Some people say this is an apocryphal story, but I want to
believe it is true because that is precisely the way I feel in
confronting the assault on American movies and these file-
stealing groups all over the country whose mantra is, as you
pointed out earlier, Mr. Chairman, ``I have the technological
power to do as I see fit and I will use that power to upload
and download movies that I don't own, but I don't care who owns
them because I don't care about ownership.'' And that is what
is going on.
I think that this Subcommittee has to understand that we
are under attack, and I think this Subcommittee understands
that we have to use all the resolve and imagination we can
summon to battle this piracy.
Now, this is not a peculiar Hollywood problem. This is a
national issue, Mr. Chairman, because intellectual property,
which consists of movies and home video and TV programs and
books and music and computer software--that is the family of
intellectual property--is America's greatest trade export and
an awesome engine of economic growth. We comprise more than 5
percent of the GDP of this country. We are creating new jobs,
not minimum-wage jobs, new jobs at three times the rate of the
rest of the economy. We bring in more international revenues
than agriculture, than aircraft, than automobiles and auto
parts. And the movie industry alone has a surplus balance of
trade with every single country in the world. I don't believe
any other American enterprise can make that statement at a
time, all of you Senators know, when this Nation is
hemorrhaging from a $400 billion deficit balance of trade.
And, by the way, we have almost one million men and women
who work in some aspect of the movie industry. These are
ordinary people with families to feed and kids to send to
colleges and mortgages to pay and their livelihoods are put to
peril by the onslaught of this piracy.
Now, let me go to my second thing. If we just stopped right
now, if the world just stopped, we would be doing fine because
we could survive it. But to stand mute and inert and casually
attend the ascending piracy that is ahead of us would be a
blunder of the dumbest kind.
On October 2, I am going to Cal Tech to deliver the Lee
DeBridge Lecture and I am going to visit their lab. Their lab
several months ago announced a new experiment called FAST. FAST
can download a DVD high-quality movie in five seconds. Internet
II, which is a consortium of scientists in this country headed
by Dr. Molly Broad, the President of the University of North
Carolina, had an experiment several months ago in which they
sent 6.7 gigabytes--6.7 billion bytes, which is about two-
thirds larger than a movie--halfway around the world, 12,500
miles, in 1 minute. Now I am told that Internet II has another
experiment going which will make the previous triumph seem like
a slow freight train.
So what are we doing? We are trying, Mr. Chairman, to fight
this in the best way we can. First, we have embarked upon a
public persuasion and education campaign with TV, public
service announcements, trailers in theaters, and an alliance
with Junior Achievement with one million kids in grades five
through nine studying what copyright means and how it is of
benefit to this country, and to take something that doesn't
belong to you is wrong, and that no Nation long endures unless
it sits on a rostrum of a moral imperative, and that is being
shattered, as you pointed out. There is a whole generation of
people growing up that think there is nothing wrong with that.
Now, we are also intensifying a new program of law
enforcement, working with the FBI and also constabularies all
over the world. We are doing technological research we hope
will have some benefit to us in the future.
And I might add, Mr. Chairman, that we believe that it is
important to use every tool at our disposal, because if we
don't, we are not going to beat this.
I am quite fascinated with what I am saying up here----
[Laughter.]
But I think I will stop right now and thank you for letting
me deliver this sermon.
Senator Coleman. Thank you very much, Mr. Valenti. Mr. Cool
J.
TESTIMONY OF L.L. COOL J, RECORDING ARTIST, NEW YORK, NEW YORK
Mr. Cool J. Beautiful. First of all, let me say that I am
very honored to be here. It is a very special moment in my
life.
Do people in the entertainment industry have the same
rights as other Americans to fair pay for fair work? When you
do something, should you be compensated for it?
My question is, if a contractor builds a building, should
people be allowed to move into it for free just because he is
successful? Should they be able to live in this building for
free? That is how I feel when I create an album or if I make a
film and it is shooting around the planet for free.
Just because, if I go to Tiffany's and steal a diamond
necklace and put a picture of it on the Internet and promote
it, does that mean I didn't steal, because Tiffany's became
more well known after I stole their necklace? See, some of the
arguments make no sense.
I don't want to attack fans because, obviously, the fans
are what make us. I mean, the reason I am able to sit here
right now and speak to you guys, you gentlemen, is because of
the fans and the love and the support that they have shown me.
I know that coming from where I come from and seeing the
things that I have seen, as an African American in America, the
entertainment industry has provided an opportunity for me that
I probably would have never gotten if the same climate that
exists now existed when I first started. I have seen a gradual
decline of my record sales, even though I have had some of the
largest hits of my career recently.
People say, well, L.L., are you going to sue the fans? A
journalist asked me that, and I am not trying to take a shot at
journalists. I am just saying a journalist asked me. L.L., are
you going to sue the fans? My question to him is, when you use
your creativity and you interview people, do you write for your
paper for free? Do you do what you do for free?
Do the farmers in our country--can you just go down to the
farm and grab a bushel of corn and just walk away? Can you just
grab up some wheat and say, bye. It is OK, because they have
these new airplanes that fly around and they go by the farms
and scoop up the wheat, so because they exist, these model
airplanes that scoop up the wheat exist, I can just have your
wheat, because it is possible.
A lot of things are possible. It doesn't make it right. If
they left all of the money in the bank sitting out in the open,
is L.L. Cool J able to go in and scoop up a half-a-million
dollars because it is there and it is possible?
I don't want to attack children. We have to protect the
kids. I don't want to attack fans who love the music. I know
there are issues, yes. Some of the CDs, maybe they were
expensive. In business, sometimes things have to be adjusted
and you have to make adjustments and make things right on
certain levels. But at the same time, now I understand that
there are sites available where you can download music for 99
cents. Some of the artists may only see a nickel out of the 99
cents. Can we at least see that? Is it all right for us to make
a living as Americans?
Should Steven Spielberg not have the right to get
compensated when he does a movie like ``Schindler's List'' or
he does a movie like ``Jurassic Park''? Should I not have the
right? Should Elvis Presley's estate not be compensated for the
work that he did as an entertainer? Should the Beatles' estate
and the Beatles' catalog not be worth anything anymore after
all of the work that they did in entertainment?
Artists are a huge, an extremely important part of American
culture. We are the dreamers. We don't write the laws like you
guys. We don't necessarily have the power on certain levels
that you guys have, but we are the dreamers. This is like we
are the guys who make the movies and create the scenarios where
the American guy goes in and wins and the rest of the world
sees it and says, hmm, America is not so bad.
We need protection. We need help. A lot of people will say,
well, I will take care of myself. Don't worry about me. And
there are other artists who feel differently and I understand
that. I don't feel like anyone shouldn't have the right to
their own opinion. I just know that when you have producers,
you have the drummer who is just a session drummer, he is not
L.L. He is not getting the big check and doing the movie thing
and all the talk show stuff that I do, but he is on the drums.
He is making a living. Or if you have a producer, a
keyboardist, a song writer, these people can't live.
The entertainment industry, are we just going to give it
away? We are just going to say, OK, now it is free. It is OK.
And that is it?
In my opinion, I just think it is anti-American. I think
the thing that makes America great is that we can make money
and create jobs in all of these different ways. I am not
against the Internet.
Senator Coleman. Mr. Cool J, I am going to ask you if you
can just sum up.
Mr. Cool J. Yes. I will just say that I am not against
technology. I am not against the Internet. I just wish that
these things could be done--music could be downloaded
legitimately. Thank you.
Senator Coleman. Thank you, Mr. Cool J. Mr. Negra.
TESTIMONY OF MIKE NEGRA,\1\ PRESIDENT, MIKE'S VIDEO, INC.,
STATE COLLEGE, PENNSYLVANIA
Mr. Negra. Chairman Coleman and Senator Levin,
distinguished Senators, I am the President and founder of
Mike's Video, Inc., a small chain of four movie rental and
music software stores in State College, Pennsylvania. I would
like to thank you for allowing me the opportunity to tell my
story, which has been mirrored all over the country these past
3 years.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Negra appears in the Appendix on
page 99.
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I am here to support the RIAA's efforts and here is why. In
1999, our business was fantastic. That year, with five
locations in two college towns, we eclipsed $3 million in music
sales, ranking us in the top 50 accounts with some major
suppliers. We were experiencing a rapid growth, due in large
part to the market we were serving, college students.
That all changed abruptly in August 2000 when Penn State
and Virginia Tech students returned for their fall semester. In
both locations, sales fell dramatically. In State College, our
downtown student-oriented store saw sales drop 29 percent,
while in Blacksburg, Virginia, sales decreased by 25 percent.
The slide continued for the rest of 2000, decreasing by 23
percent company-wide.
As you know, 2000 was the year of Napster, and college
students with access to broadband Internet connections provided
by the universities were among the first heavy users of P2P
software. As a result, college town record stores like mine
were the first to feel the brunt of lost sales. Underground
retail stores sprung up in dorms and apartment buildings.
Students were downloading new music before it was available in
my stores and selling illegal copies to friends.
The downslide has continued ever since. In 2001, sales fell
24 percent in State College and we were forced to sell our
store in Blacksburg, Virginia, due to disappointing sales. Last
year, as Kazaa and other P2P services expanded, our sales
continued to decline, falling another 22 percent. Finally this
year, we consolidated our inventory, leaving only one music
store left in our chain. What was once the cornerstone of the
music buying public, college students, has now almost
completely disappeared. We just couldn't compete with free.
Mike's Movies and Music will sell $1.8 million less music
this year versus 3 years ago, a 70 percent reduction in sales.
The trickle-down effect is enormous. For example, the State of
Pennsylvania has lost $108,000 in potential sales tax revenue
from my store alone. Music-related jobs and community-wide
benefits, from a general manager to buyers to store managers
and clerks have been eliminated at Mike's. Wages were frozen
throughout the company as we struggled to overcome the revenue
loss. We were forced to sell our corporate offices and relocate
to makeshift offices in various stores. Major capital
expenditures have been delayed. Advertising has been cut back,
travel and organizational dues eliminated, and on and on.
P2P services that exist for the purpose of stealing music
and movies have decimated small businesses around the country
like mine, small businesses that make America work. Only 3
years after the first sign of the effects of online thievery
appeared, hundreds of stores just like mine are gone and are
still struggling to stay alive, while at the same time
struggling with the public's suggestion that file stealing is
OK and no victims lie in its wake.
I can't tell you the amount of frustration we feel as we
watch our business being stolen from us. In fact, the future
looks even bleaker, as another mainstay of my business, movie
rentals and sales, becomes the next battleground. We have
conversations with customers who comment proudly about their
``ownership'' of downloaded movies. Our student-oriented store
in downtown State College has seen revenue decrease by double
digits, while stores outside the student influence increase.
Finally this year, because of enforcement and deterrence
efforts, I can say people are starting to get it. The Category
5 level of destruction left upon the landscape of the music
industry and approaching the movie industry has people like
yourselves and organizations like the RIAA and Penn State at
least searching for answers. It has been allowed to continue
without fear of repercussion for too long.
The lawsuits recently filed by the RIAA are timely, and
unfortunately, are a required addition to the educational
approach used for the last couple of years. Without that
deterrent, as has been proven in my little corner of the world,
things will only get worse.
People have no more right, no more entitlement to steal
music or movies or any other copyrighted product in a digital
form than they do in a physical world. The same rules apply.
The RIAA is just enforcing them.
I prosecute shoplifters in my store. If I didn't and word
got out, I would have no inventory. Online shoplifting will
only be stopped by aggressive enforcement that creates a
deterrent effect. Please help the copyright owners protect
their property. Our industries depend upon it. My fellow
retailers depend upon it. Our employees and their families
depend upon it. Thank you.
Senator Coleman. Thank you, Mr. Negra.
I know that some of my colleagues have opening statements,
but in the interest of time, I wanted to forgo that and hear
from the witnesses. What we will do is 7-minute rounds of
questions and hopefully that will give my colleagues a chance
to do a preliminary statement. Of course, the full statements
will be entered for the record.
Let me begin. Mr. Bainwol, are you concerned that the
decision to sue hundreds of music lovers could have a negative
effect on fan loyalty and could harden consumer resistance to
legitimate online sites?
Mr. Bainwol. Concern? You can't take a decision like this
lightly. The decision to move forward with the legal action was
a last resort. We simply had no choice. It is the end product
of a campaign that involved paid advertising plus lots and lots
of free media interviews. We have tried to get the message out.
The market has just fallen apart when you are competing against
free, and this was the last thing we had in our quiver.
So we had to do it, and the good news is that it stimulated
a national debate. Parents are going home, having that
conversation with their kids over the dining room table. That
is exactly what we hope to stimulate. The answer isn't
lawsuits. The answer is kids learning the difference between
right and wrong and technology that offers a legal way to get
the music fans want.
Senator Coleman. There are those who are involved on the
P2P side that say that the recording industry is a tough
industry to deal with. They are tough to negotiate with, and if
we could just sit down, we could sort this out. Do you think
there is a possibility of figuring out a way to sort this out
where, in fact, you can protect copyright interests and others
can engage in the business of legal file sharing?
Mr. Bainwol. Until the P2P folks get legitimate, it is an
awfully tough thing to do. The reality is, 99 percent of the
traffic on those networks is illegal downloading. Maybe it is
90 percent, maybe it is 95. One study said 99. It is a totally
illegitimate platform. It is Jesse James wanting to be hired at
the bank. It is just silly.
Senator Coleman. But if we were to do something that would
somehow force those involved in illegal file sharing today,
they might say yes, we have changed our ways, and we now
installed the filtering technology. We are doing all the things
you are talking about. But, what would stop someone else from
doing it? What stops somebody else from just setting up a
similar operation? How do you get your arms around something
that is global in nature and is subject to the flow of
technology?
Mr. Bainwol. Nobody says it is going to be easy. This is
tough. But what we have to do is we have the leaders and
parents send a message that taking copyrighted materials is
wrong. There is an education piece to it, and we have got to
find a way to foster the technology. There is no magic wand
that you can wave and solve this problem. It is education. It
is conversations at home. It is legal alternatives. And it is
putting pressure on the P2P guys to conform to basic common
decency and corporate governance standards.
Senator Coleman. Mr. Valenti, I know you have looked at
this problem for a while, and perhaps the movie industry is in
the somewhat enviable position of being able to kind of watch
as this technology develops. The fast stuff isn't here yet, but
it is coming. The Internet II stuff isn't here yet, but it is
coming.
Can you help us a little bit in terms of what you think
could be done from a software and hardware side that could have
some impact? Is there something? We don't have the Dells and
the Microsofts and others at the table today, and that may be
another hearing. Can you tell me, do you have a vision as to
what can be done on the software and hardware side that can
help us solve this problem?
Mr. Valenti. Mr. Chairman, I think that one of the aspects
of a possible solution, because there is no single silver
bullet, has to be technological research. Technology is what
brought on this problem and technology may be the salvaging of
this problem.
We are working hard on that right now. I am going to be
attending a meeting in 2 days where the member companies of the
association, the studios, are looking at technological research
to begin that. We are already in conversation, deep
conversations with the Microsofts of the world and the IBMs to
see what can be done. There are a number of independent fine
minds in the high-tech industry working on this.
But there has to be something else, too. There has to be an
awareness on the part of the American public that this kind of
scramble, taking things for free that belong to somebody else,
has to be stopped. We are squandering in this country a whole
moral platform that has been built, and I worry about that. I
would think that this Senate and you and the rest of your
Subcommittee would be worried about that. It is a larger
problem. But it is inherent in the solutions that we are
looking for.
Senator Coleman. Mr. Cool J, first of all, you talked about
fans' love and support. I do want you to know that you have
that in this building. On the way over, I heard the folks who
run the elevators in the Senate and the Capitol really want you
to come by and say hello, so there is a lot of love and support
out there. [Laughter.]
Mr. Cool J. Thank you.
Senator Coleman. There are those who suggest that the honor
of online record and music distribution gives more power to the
artist, and somehow takes it away from the record executives
and gives you more power. Can you respond to that?
Mr. Cool J. I understand what you are saying. I think it is
two separate issues. I think that the deal that you negotiate
with your record company and your music being given away for
free are two separate issues.
Yes, OK, maybe if you don't have a contract and you just
started and you put your record on the Internet and people like
it, you can get attention. But that was your choice. You made
that choice. If another artist decides to come here today and
say, hey, I choose to upload my music for free and the rest of
the world can have access to it for free, that is their choice.
That is their right.
But I think that from my relationship and the friends that
I have in the entertainment industry, on both sides, music and
film, I know that the majority of artists--the majority--want
to be compensated for what they do. And ultimately, like I said
before, because you are exposed, because you gain more
notoriety by being shot throughout cyberspace does not make up
for the crime. It doesn't change the fact that it was stolen.
Senator Coleman. You have already had a very successful
career and I suspect there is a lot more to come. What advice--
talking about choice--what advice would you give to an up-and-
coming artist as to how to navigate their way through this
system where you have technology offering all this opportunity.
Mr. Cool J. I think that, obviously, America is a country
where the entrepreneurial spirit is everywhere, in every
corner. Having your own business is always a wonderful option.
Having your own label, having your own things, these are all
wonderful options, but ultimately, it is great to have a great
partner who can invest in you and help you to expose your
product to more people all around the planet.
My advice would be to make great work, choose and figure
out the business model that you want to utilize to get that
work, to disseminate that work to the public, to get it out
there to the public, but ultimately, either you want to be
compensated or you don't. You understand what I am saying? It
is whether you are anti-big industry or anti-big label and you
feel you should be on a small label or you should be
independent and you don't want to be associated with any of the
larger companies, that is your choice. But the real question is
should you be compensated for your work or not? I, for one,
believe that in America, when people work, they like to be
compensated.
Senator Coleman. Thank you. Thank you, Mr. Cool J.
My time is up, but Mr. Negra, I have one question and may
come back on a second round. Do the universities have any
responsibility to step out in front, and have you as an
individual entrepreneur been involved in discussions with them
about this problem?
Mr. Negra. My discussions with Penn State go back to 2001
about it. I think that they were limited in their ability of, I
guess, controlling what was happening on their servers back in
2001. I think that they have some responsibility, yes, and I
continue to have discussions with the university.
Mr. Valenti. Mr. Chairman, can I break in a moment on that
very subject?
Senator Coleman. Very briefly, because I know that my
colleague, the Ranking Member, has another commitment and I do
want to get to him.
Mr. Valenti. Let me withhold that question.
Senator Coleman. Thank you. With that, I will turn to
Senator Levin.
Senator Levin. Thank you, Mr. Chairman. I would ask that my
entire opening statement be made part of the record, also.
Senator Coleman. Without objection.
Senator Levin. First, let me thank each member of this
panel. I just wish everybody could have heard this testimony,
everybody who thinks that it is OK to download or upload
copyrighted material. I wish they could have heard the clarity,
the moral clarity with which you speak.
The question that I have is whether or not the message
which you have provided and which we are attempting to provide
needs to be reinforced by any changes in law. Are there things
that we should do that would require, for instance,
technological capabilities to be inserted in this software
which would notify people that they are downloading or
uploading copyrighted material? I think that is technologically
feasible now. It is not incorporated in some of these
companies' software. Should we require that it be incorporated?
I am just throwing out one possibility.
But my question is, I think the message is so compelling,
does it need to be reinforced by any changes in law, in your
judgment? Now, you may not be in a position where you are able
to answer that, but if you are, I would welcome your comments.
Mr. Bainwol. I would make two quick comments. The first is
that our natural inclination would not be to support mandates
on technologies. What we need to do is have an opportunity to
enforce the law and to send signals that the law matters.
We are a Nation of laws. We are in a situation where an
industry is being ravaged. And what we need to do is send
signals that, in fact, it is appropriate to enforce, and when
people get that message, the education campaign will be
complete and we are on the way to a solution.
Senator Levin. Mr. Valenti, I understand, and I am not a
technology expert, that it is technologically feasible to
require file-sharing software to include features that would
discourage copyright violations, pop-up warnings, for instance.
Now, if that is technologically feasible, which I understand it
is, should we mandate that?
Mr. Valenti. Senator, the movie industry has been in long
years' conversation with the high-tech industry, the IT and
consumer electronics industries, the computer makers, chip
makers, and the consumer people. We have been meeting with
them, trying to find some middle ground, some concord that then
we could come to Congress and mandate.
I lament the fact that we have not been able to make the
kind of progress that I hope for, but one of the solutions, one
of the bullets--not all--will, in my judgment, be at some point
some kind of a mandate that would be technologically feasible,
possible, easy, and inexpensive, because in the long run, it is
the American consumer, Senator Levin, that is going to be
denied high-value programming. We want to put thousands and
thousands of titles on the Internet, deploy those, dispatch
them to homes all over the world at fair and reasonable prices,
which is a definition to be defined by the consumer and not by
the distributor. That is our aim.
Mr. Negra. You are insinuating that people don't know that
it is wrong and that it is copyrighted material, and I
believe----
Senator Levin. No, I am suggesting that they need to be
reminded every time they do it.
Mr. Negra. Well, I think that Penn State students, for
example, are relatively intelligent and they know that it is
not--that it is wrong to do and that it is copyrighted
material, and yes, I guess another line of defense per se
wouldn't hurt, but I think they know it ahead of time. I just
don't think they care and I think that they have this
entitlement feeling, that if it is on the Internet, it must be
OK. It is mine.
Mr. Bainwol. If I could just add one thought, the folks
from the P2P community will be here. Ask them if they would
voluntarily have these pop-ups that tell you that you are
violating the U.S. law----
Senator Levin. I intend to do that if I can get back here.
If they say that they are not going to do it voluntarily, the
question is whether it should be mandated or not.
Mr. Cool J. Yes.
Mr. Valenti. The answer is, at some point, we probably have
to do that.
Mr. Cool J. Ultimately, sir, I think that people are well
aware, the general public is well aware, and the only thing
that will really be a true deterrent are laws that are fairly
strict and deter you from wanting to engage in this type of
activity. I mean, it is like anything else. If you guys with
the power don't say, hey, you can't do this, it is wrong and if
you do it, this is what happens----
Senator Levin. We have already said that.
Mr. Cool J. Yes, sir.
Senator Levin. It is already against the law to do it. The
question is, does the law need to be in some way strengthened
to use new technologies in some way to fight this pirating. We
fight the piracy when it occurs in other countries. We
negotiate trade agreements with other countries trying to
protect our intellectual property. Some of them continue that
piracy unabated, despite those efforts. But here, if there is a
technology which could be effective, should we mandate its use?
That is the question which I think we need to struggle with, if
it is not voluntarily used.
Mr. Bainwol. If, in fact, the P2P community does not
respond voluntarily, then they should be subject to mandates.
Senator Levin. The last question for this panel, and that
has to do with this subpoena question. The current law does not
require notice to the person whose identification information
is being subpoenaed, and the question that I have is, isn't it
to your advantage that person be notified that there is a
subpoena that has been issued or requested, because you may be
able to achieve voluntary compliance.
In other words, there is a change in law which it seems to
me might be consistent with fairness that is to notify somebody
that, hey, there is a subpoena out now for information relative
to you. This isn't like notifying somebody who is engaged in
money laundering that there is a subpoena issued, because that
person might then run and try to hide the money or move the
money. This is a different issue. That person is not going
anywhere. Wouldn't notice of the issuance of a subpoena be
consistent with fairness, but from your perspective, also lead
perhaps to quick and voluntary compliance? That is my question.
Mr. Cool J.
Mr. Cool J. I agree. I think that is very fair and I think
it sounds very smart and it is a really creative idea and I
think it is the right way to go. I definitely think it is the
right direction.
Senator Levin. I really welcome that endorsement. I hope
you will also endorse my records, by the way. [Laughter.]
Thank you all. You have been a great panel.
Mr. Cool J. Thank you very much, sir.
Senator Coleman. Thank you. I would note the presence of
the distinguished Chairman of the Committee on Governmental
Affairs. That is Senator Collins. Welcome. With that, Senator
Sununu.
OPENING STATEMENT OF SENATOR SUNUNU
Senator Sununu. Thank you, Mr. Chairman. I have no records.
I have no intention of producing records. Everyone can breathe
a sigh of relief. [Laughter.]
I appreciate, Mr. Chairman, you holding this hearing. This
is, obviously, an extremely important subject and one in which
I take great interest. I appreciate all of the panelists, their
statements, and want to reiterate the statement by Senator
Levin.
The degree to which this is an important issue hinges on
our respect for private property rights. I think you will find
everyone on the panel committed to supporting individual
property rights and sharing the belief that copyrights are part
of that individual property right history that, in many ways,
makes our country unique. It drives commerce. It drives
business. It drives industry, whether you are in the
entertainment industry or writing or producing any kind of
intellectual property.
Second, I think it is important to acknowledge the right of
those who are engaged in business, whether you are a recording
artist or you own a business, your right to use the legal tools
at your disposal to protect your property rights, your
copyright. I think that is legitimate, that is fair, and has to
be acknowledged, because if we don't acknowledge that, we are
sending the wrong message.
There are a number of concerns here, though, and when we
talk about technology and we talk about the text of the laws we
write, we begin getting into slightly grayer areas. Concerns
for me are, one, the very nature of the subpoena power that has
been written into the MCA, the Millennium Copyright Act, and
specifically the 5(12)(h) subpoena. This is a new kind of
subpoena power. We need to acknowledge that. Whether we think
it is a good idea or a bad idea, we have given unique new
subpoena powers to copyright holders, a type of subpoena power
that no other individual or entity that I know of is given, and
we want to make sure it is used in an appropriate way. We want
to examine the question of whether or not it is used in a way
that intrudes on privacy.
And certainly a second concern is probably much greater on
that side of the dais, is the way in which these technologies
are going to change, one, the business models that you
incorporate; two, the way these technologies are going to
facilitate ever-greater volumes and ease of file sharing, and
Mr. Valenti, as usual, addressed that in a very eloquent way;
and finally, the way in which these new technologies,
technologies that are going to come around in 5 years or 10
years, are going to make enforcement even more challenging. We
can certainly hold out the hope that we will identify some
technologies that make enforcement easier, but I think the
history, the evolution of the Internet and processing
capability and distributed networking, show that it makes
enforcement, in many cases, much more challenging.
So those are the concerns that I have and I hope to explore
with this panel and the next panel.
Let me begin with Mr. Bainwol, welcome. In the material we
have, it noted that there were 2.6 billion downloads a month.
Try as you may, you can't sue them all. I don't think that is
your goal. We could probably find some lawyers that would be
more than willing to try to sue them all---- [Laughter.]
But I don't think that is realistic. So in that light, can
you talk a little bit about the goals of your legal strategy,
the subpoenas and the lawsuits that you have pressed forward.
What are the goals, and as quantitatively as possible, how will
you know when you have achieved your goal?
Mr. Bainwol. Our objective, again, is not to file lawsuits.
Our objective is to create an environment in which legal
alternatives can flourish. If there is a free competitor, that
makes it awfully difficult to establish an economic model that
can work.
But we are engaged in lawsuits. Again, it is done as a last
resort. We will do it as long as necessary to get the message
out and to establish the proper deterrent. Laws are there in
order to defend property and we have got to enforce that law to
get the message out and we will continue to do so.
Senator Sununu. How do you know when the message is out,
though? How do you know when you have sort of achieved the
goals of this legal strategy?
Mr. Bainwol. We will know it when we see these legal
offerings flourishing. We are not operating in a situation
where we expect a zero tolerance on downloading. What we are
looking to do is to create a marketplace that can operate, that
can take hold, and my hope is, in 6 months from now, we are
going to be talking about the whiz-bang offerings that are
already out there that are getting better and better and
better. Kids, as a result of conversations with their parents,
know that instead of going to Kazaa, they are going to go to
BuyMusic.com, they are going to go to iTunes, they are going to
go to MusicMatch, and they are going to find a legal way to get
done what they want, which is to enjoy music.
Senator Sununu. Do you think the poor performance of legal
options that are out there has been driven solely by the
existence of peer-to-peer?
Mr. Bainwol. One, I would not accept the premise that the
performance is not good. I think if you go on some of these
sites, they are outstanding. Go on MusicMatch. They opened up
yesterday. I went last night. Go on iTunes. It is amazing.
But, I will say this. P2P makes it much tougher. If you are
a kid and you can go out there and get it for free, why would
you go to iTunes? And unless this Congress enforces our right
and enforces the law and--we are going to have a tough time
making that sell.
Senator Sununu. Mr. Valenti, you had wanted to make a
comment earlier. Let me ask you a question, and if you want to
stick in the comment you had missed, by all means, and that is
sort of the second concern and you began to touch on it in your
testimony.
How will the new technologies or emerging technologies or
even existing technologies today change business models used by
the entertainment industry and the motion picture industry?
Mr. Valenti. Let me answer that by saying President Kennedy
used to tell a story about a French General in Algeria who told
his gardener that he wanted to plant a certain species of trees
along his pebble drive to his chateau, and the gardener said,
but General, this tree takes 50 years to really bloom. And the
General says, my God, we don't have a moment to lose. Plant it
today.
We are trying to put in place right now, Senator Sununu,
Bathel plates to the future. We have been sort of relieved
right now because it takes so long to bring down a movie, but I
told you what is going on in Cal Tech and Internet II, what is
experiment today will be in the marketplace 3 to 4 years. So we
are looking 3 to 4 years in advance.
I believe that technology is going to play a large role in
dealing with this, but along with that there has to be an
understanding by the public that this is wrong.
What I was going to say earlier to the Chairman was, we
have been working very closely with a group of universities,
Rick Levin, the President of Yale, Graham Spanier, the
President of Penn State, John Hennessy, the President of
Stanford, Charles Phelps, the Provost of Rochester, and Molly
Broad, the President of the University of North Carolina. As
these students came back this year, a lot of universities gave
them a code of conduct saying this is wrong and if you persist
in doing this, there are penalties. They vary in substance and
in heft. But they are trying to explain to students that there
is a price to pay.
What the RIAA, and I am not speaking for them because I
don't know their overall strategy, is trying to say is ``it is
wrong and this is not risk-free. There is a penalty to be
paid.'' If we did not have the IRS auditing at least 2 percent
of the income taxes in this country, who would pay income
taxes? Nobody, because it is risk-free.
And so what we are trying to do is to point out that there
is a risk for this. On the other side, we are going to try to
use technology to see if that will also be one of the silver
bullets that we can use.
Senator Sununu. Thank you very much, Mr. Chairman.
Senator Coleman. Thank you. Senator Pryor.
OPENING STATEMENT OF SENATOR PRYOR
Senator Pryor. Thank you, Mr. Chairman, and I would like to
thank you for your leadership on having this hearing today.
And also, I need to acknowledge Senator Boxer, who was here
a few moments ago. She and I have talked about this subject
privately on more than one occasion, and so I just want you all
to know, the people in this room, that she is not just here
when the microphones are on and the cameras are on. She is very
vigilant about this issue, is very concerned about this issue
and wants to make sure that everyone's rights are protected.
What Senator Levin said a few moments ago--he talked about
different forces colliding, and I agree with him on that. And
another way to look at that, I think, is you have the one
traditional American force that is foundational to American
law, and that is that this country, from the foundations of our
Nation, made the commitment that we are going to protect
intellectual property rights. We did that through the patent
law initially and we have had a strong history of doing that
for the last 200-plus years. I think that is one of the reasons
why our economy has historically continued to grow and
continued to be as strong as it is, and that is because people
in this country who are creative and who are industrious know
that their rights will be protected here in America.
But at the same time, there is this other great force and
it is the information age or the Internet, and it really is a
revolution. It is changing the way business is done in this
country. It is changing our law. It is changing people's
ability to function in this country. It is something that I
know the music industry has been struggling with in the last
few years to try to get a handle on this. My hat is off to the
ones who are trying and trying to protect the legitimate rights
of the industry.
Another thing that, Mr. Chairman, I just wanted to say is
that I have some concerns, just general concerns, about the
concept of file sharing. I am not opposed to that concept. I
understand how it can be a very positive thing, a very
constructive thing, a very good thing, but I am very concerned
that we need to build in more consumer safeguards with regard
to file sharing.
There is a lot of inappropriate content out on the
Internet. There are a lot of young people and others who come
across inappropriate content that they really don't want to
see, they don't have any desire to view, but nonetheless it is
out there and file sharing adds to that.
There is also the problem that was mentioned in someone's
opening statement about the unwanted access to your personal
files. If you are not careful, you are opening all of your
personal files to people who you don't know and you don't
intend to do that.
Of course, a third thing about file sharing is the piracy
aspect of that, which concerns me greatly.
The prepared statement of Senator Pryor follows:
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Senator Pryor. Mr. Valenti, let me start with you, if I
may, and it is great to see you here in the Subcommittee today.
I know that your industry is, in many ways, related to the
recording industry. There is a lot of cross-pollination there
and there is a lot of overlap there. What has the movie
industry learned from the battles that you have seen the
recording industry go through and is the movie industry
changing its business model or what steps is the movie industry
taking to prepare itself?
Mr. Valenti. To paraphrase Mr. Churchill, I didn't become
head of the Motion Picture Association to preside over a
decaying industry. And when I see the pillaging that is going
on in the music industry, and L.L. Cool J has explained why the
artists are worried about this, I have a few Maalox moments
when I do that. [Laughter.]
We are following very closely, Senator Pryor, what is going
on in the music industry right now. I have great sympathy and
compassion for what they are going through, because you can
bring down a song in real time, 2 or 3 minutes. One of L.L.
Cool J's recordings, 3 or 4 minutes, bango, you have got it.
So we are trying to put in place a lot of things.
Ultimately, Senator Pryor, our aim is to benefit the consumer.
That is what this is all about. When somebody said to me, why
don't you Hollywood guys stop whining and get a new business
model, and I said, ``boy, that is a great idea, why didn't I
think of that,'' except there is no business model ever struck
off by the hand and brain of man that can compete with free.
That is an absolute truth.
So we are working with technology, we are working with the
colleges, we are doing public persuasion, upping our law
enforcement, all of these converging elements in order to put
in place something that is going to help us survive 3 to 4
years from now when you can bring down these movies in minutes
and seconds.
Senator Pryor. Mr. Bainwol, let me ask you, if I may, there
have been some press accounts of sort of innocent bystanders,
so to speak, being dragged into this litigation. What
safeguards are in place or should be put in place to make sure
that innocent people don't get dragged into this?
Mr. Bainwol. Great question, Senator. There are a number of
safeguards that we do, in fact, employ, and more on the way.
Let me first say that we focus on the most egregious
offenders. The average number of uploaded files in the 261
folks who were sued was over 1,000. I have had these CDs here
for a reason and I have waited for the moment to pop them out
and tell you why. It wasn't to hide my face. It is to make the
point in a visual way that this is roughly the amount of
material that was taken from the artists, from the L.L. Cool
J's of the world. This is their work product. This is their
dream. This is their future. This is what they have been
compensated for. And this is what, on an average basis, what
was taken down from the Internet.
It seems awfully innocent for any individual that does it,
but when you aggregate it by the millions, you are killing an
industry, a great American industry. That is one.
Two, based on the law and based on technology, what we do
is we seek information from the ISPs on an IP account. We don't
know who the individual is. What we know is, when you go on
P2P, you are offering your files up to the world. There is no
privacy there. You are exposing it literally to the entire
world.
We go in, we get a snapshot of that, and we are able to
determine what files are out there and the IP address. That is
what we send over to the ISP. They give us the name. What we
get is the name, the E-mail account, the address, and the phone
number. That is it. It is very limited. It is the same
information that some ISPs sell to marketing partners.
Senator Pryor. Mr. Chairman, that is all I have. Thank you.
Senator Coleman. Thank you, Senator Pryor. Chairman
Collins.
OPENING STATEMENT OF CHAIRMAN COLLINS
Chairman Collins. Thank you very much, Mr. Chairman. I have
an opening statement that I would like to have inserted in the
record.
Senator Coleman. Without objection.
The prepared statement of Senator Collins follows:
[GRAPHIC] [TIFF OMITTED] T0239.010
[GRAPHIC] [TIFF OMITTED] T0239.011
Chairman Collins. I want to commend you for tackling this
very interesting and difficult subject. I think you have said
it well when you said that the law, ethics, and technology are
not in sync and it is our job to try to deal with these very
complex issues.
Mr. Bainwol, in your testimony, you said that the music
industry has for a number of years undertaken a massive
campaign to educate consumers regarding the illegality of
unauthorized distribution of copyrighted music online. Do you
think that that campaign has been a success? Do you think that
the average consumer who is downloading music from a peer-to-
peer network realizes that they are committing essentially a
theft?
Mr. Bainwol. The campaign was necessary, but not
sufficient. There is no question. What we have seen is that as
much as you tell folks, until you demonstrate that there is a
consequence, the behavior is not going to change.
But we also had to tell people and reach more people and
penetrate with the message that downloading is wrong. The
lawsuits have, in fact, done that. Earlier, I noted that we
have public opinion data that suggests until June, prior to the
launch of the subpoenas, that the number of folks who
understood that it was illegal to download copyrighted
materials was around a third. That number has doubled to about
60 percent. So the legal action is a piece of an education
campaign that happens to be profoundly effective.
Chairman Collins. I think the lawsuits have certainly
gotten everyone's attention. I would agree with you on that. I
don't think the educational campaign has been successful. There
is still a widespread misperception that if it is on the
Internet, it is free, it is OK to use. An individual who would
never think of going into Mr. Negra's store and stealing CDs
sees nothing wrong with downloading the exact same music from
the Internet. I think until we change how people perceive the
Internet, that we are not really going to solve the root of
this problem.
I am also not sure that lawsuits are the answer, and Mr.
Negra, I want to ask you how you feel about the lawsuits that
have been filed. I have read your testimony where you say that
you think they were required, but as a small business person,
how do you feel about solving this problem through litigation?
Mr. Negra. Well, my feeling is that something has to be
done, and as a deterrent, a deterrent has to be present, very
similar to Mr. Valenti's analogy to income tax. I absolutely
agree with that. The entitlement issue that our customers feel,
that they can go online and take that without consequence, has
been the destructive force to my business and a lot of other
businesses. So I am all in favor of the efforts of the RIAA
towards this as long as obvious safeguards are taken.
Chairman Collins. Mr. Bainwol, I want to go back to you on
the issue of CD prices. One of your member companies, Universal
Music Group, recently announced it was going to cut the
wholesale price of its CDs by three dollars. Some experts
believe that this move would help reduce the pirating of music
from the Internet. Is that why the prices were cut? Is this an
attempt to make music at the retail level more affordable?
Mr. Bainwol. It is difficult for me, as an association
chief, to speak to the pricing practices of member companies.
As a consumer, lower prices certainly are attractive and I
think I would leave it there.
I do want to add one other thought, though, related to your
first question, if I could. We try to get a message out, and in
the absence of conflict, sometimes penetration is very
difficult. The legal action stimulated coverage like you would
never believe. Let me read three headlines. Newsweek: ``There
is One More Talk You Need to Have.'' New York Times: ``New
Parent-to-Child Chat: Do You Download Music?'' USA Today:
``Parents Have a Hand in Song Swap Debate. The Kids All Do It,
So Experts Say It is Up to Mom and Dad to Lay Down the Law.''
The legal action is about setting up a deterrent, but it is
also about making sure that parents do their duty and have that
conversation.
Mr. Negra. May I respond to the pricing issue?
Chairman Collins. I was just going to turn to you for that,
so please do.
Mr. Negra. I don't believe that the idea of CDs being over-
priced was ever a concern or a conversation until ``free'' was
the option. I have been in the business long enough to know
that the value of CDs was considered, or the value of music,
going back to vinyl, was fine. People responded to it, and
obviously my business was strong and the business as a whole
was strong until that option of ``free'' was out there.
And so, yes, I mean, I am very glad that Universal is
reducing the price, but still, paying $9.99 for a new release
versus getting it for free on the Internet is still a no-
brainer to most kids.
Chairman Collins. That is why I am curious about the action
taken by Universal. Again, I was going to ask you whether you
think it will reduce the pirating from the Internet, because I
personally don't think it will have any impact because, as you
just said, you are comparing it to getting it for free.
Mr. Negra. Well, I think it is all part of the puzzle. I
think that along with the RIAA's efforts towards deterrent and
as far as reducing pricing and showing more value, including a
DVD extra or whatever it takes to get people back into the
stores, and I also believe that is one of the ways that we are
going to determine whether the lawsuits are effective or not is
increased traffic in physical stores as well as increased
traffic on legitimate downloaded sites.
I think that it is all part of pieces of the puzzle and
that it can't be just one thing. There are a number of things,
and lowering the prices is certainly a move in the right
direction.
Chairman Collins. Mr. Chairman, I will say, as someone who
has no idea how to download music, that I am pleased to see the
price cut. So it will make some of us who are older happy.
Thank you, Mr. Chairman.
Senator Coleman. Thank you, Madam Chairman.
We do have two more distinguished panels, however. What I
am going to do is provide an opportunity for one more 2-minute
round. I think there are some follow-up questions that my
colleagues have, and actually, I have two of them.
Mr. Bainwol, Senator Levin had raised the issue of fairness
and notification. In the present system, subpoenas are issued
to the ISP. The individual doesn't know that they are subject
to any investigation. The individual, in fact, may not be the
person who was actually using it, and that is some of the
problems that we are seeing, moms and dads, 12-year-olds,
whatever, folks who said, ``It may not be me, it may be my
brother or my friend.'' Do we need to--is there something that
the Recording Industry can do voluntarily to provide more
fairness?
Mr. Bainwol. Yes, Mr. Chairman. As I noted in my testimony,
there are two standards that we are living by as we go through
this exercise. One is to vigorously advance our rights and the
second is to try to do it in a reasonable, smart, and decent
way. And toward that end, we would like to add one level to the
process.
Currently, before we go to the ISP, we do provide the ISP a
notice that we are going to serve them a subpoena, we are going
to issue a subpoena. So they have got that and they certainly
have the right, if they choose, to notify the user.
But what we are going to do in advance of filing the
lawsuit against an infringer, and again, we are focusing on the
egregious infringers who have downloaded something akin to what
you see before me, but what we are going to do is we are going
to notify folks that in a period of time, we will commence
legal action. That gives them the opportunity to settle in
advance of that legal action. It gives them the opportunity to
make a case that we ought not, if that is their opinion. The
idea is to be reasonable. We want to advance our rights and
advance respect for property, but we want to do it in a fashion
that is fair.
Senator Coleman. My concern about the settlement are the
penalties that individuals face. And by the way, many of these
laws were passed, in the DMCA, the Digital Millennium Copyright
Act, before the advent of peer-to-peer.
I have two concerns about that. You have an individual, the
little guy, a little person coming up and talking about the
impact of being sued and they are being told that they face a
penalty of up to $150,000 per song. Don't you think that is
excessive?
Mr. Bainwol. The $150,000 is law, and it is certainly not
what we seek. What we do is leave it to the court to decide.
But let me just make a point. If you are to go out and buy
CDs, say they are all on sale and you got them for $9.99, you
get 120 of them, that is a lot of money. That is $1,200,
roughly. Many of these settlements are not much beyond that.
And I think one could argue that if we are trying to establish
a deterrent, and that is something we should do to be serious
about a law, that, in fact, the penalties could be even higher.
But nobody is talking about $150,000.
Senator Coleman. But I think you have that threat and I am
concerned about the excessive nature, and we talked about
bringing things to people's attention. Public floggings would
get people's attention, but we don't do that. I think there
have got to be some limitations.
Mr. Bainwol. But public flogging is not part of law. The
$150,000 is.
Senator Coleman. The last comment, though, as you indicated
that you would know it is successful when the legal offerings
are flourishing. I think it is fair to say that one of the
problems is the legal offerings are coming back way after the
P2Ps took hold. I mean, would it be fair to admit that the
recording industry had not been quick enough to put on the
table the kind of legal offerings that now we are talking
about, and so we still haven't seen the impact of that. What I
am hearing is promising, but P2Ps took hold way before the
recording industry decided there should be legal offerings.
Mr. Bainwol. The timing of this, I think, is subject to
some debate. There is no question that it has been tough to get
these offerings to flourish, but it is tough to compete with
free. If you try to amass capital and raise money for a
business proposition, it is very tough when you can go out
there and download from Kazaa for free. So I have a pretty good
understanding of the way marketplaces work. That is a tough
thing to accomplish.
Once you begin to enforce, once we begin to set an
expectation with the Kazaas of the world, then these offerings
have a real live chance to flourish.
Senator Coleman. Senator Pryor, do you want to have any
follow-up?
Senator Pryor. I just had one quick follow-up, if I may,
Mr. Bainwol, and that is I have heard the term, and I am not
sure I understand how it works, but the clean state program?
Mr. Bainwol. Clean slate.
Senator Pryor. I am sorry, clean slate program. I can't
read my own writing. Could you run through that very quickly
with the Subcommittee, please?
Mr. Bainwol. Sure. If somebody does not want to worry about
subject to legal action, they can simply stop downloading and
uploading illegally. That is all you have got to do, and you,
in effect, got your own clean slate program.
There were some people who came to us and said, we would
like a piece of paper, a sense of certification that we can
sleep at night. We want something that says we are OK. And so
we made available a clean slate program that gave them the
piece of paper, the sense of comfort, and it is at their
request.
There have been about 1,000 people who filed for that.
Obviously, that is about four times the number of folks who
have been sued so far. But I would suggest that there are
probably hundreds of thousands, certainly tens of thousands of
folks who have done the amnesty thing the old-fashioned way by
stopping the illegal activity.
Senator Coleman. Senator Sununu.
Senator Sununu. Thank you, Mr. Chairman. I want to
associate myself with your concerns, the remarks regarding the
balance of the penalty. I don't hold the RIAA responsible for
setting the $150,000 penalty, but it is important that we have
in statute penalties that are commensurate with infractions,
because if we don't, then they could be subject to abuse,
although I don't know that anyone is suggesting at this point
that RIAA has grossly misused the statute.
Mr. Bainwol, let us stipulate that the scenario we have
been talking about comes to pass, that your legal strategy
succeeds, that we have dramatically reduced, if not totally
eliminated, the incidence of illegal downloading on peer-to-
peer networks. Your offerings, as impressive as they are today,
improve even further so that your public offerings, for sale
offerings of peer-to-peer downloads of the best the music
industry has to offer is thriving and utilized by countless
music lovers across the country and across the world. Doesn't
that still leave Mr. Negra without a livelihood?
Mr. Bainwol. The future of music is both going to be in CD
form and online, and that is the nature of life. If you are 22
and under, some studies suggest that half of your music comes
from the Internet. If you are over 23, most of it comes from
plastic. So there is a marketplace for both.
Senator Sununu. But in the scenario I described, the
downturn in sales, the erosion of his business profile would be
just the same, if not even more dramatic, would it not?
Mr. Bainwol. I am not sure I follow that question.
Senator Sununu. We are talking about a scenario where all
the illegal downloading of music is replaced by legal
downloading of music, unless you believe that someone would
rather, instead of download it legally at the same or a cheaper
price, actually go out of their home. So if you replace all the
illegal downloading with legal downloading, you are still going
to see an erosion of the business model and an erosion of the
business that has sustained Mr. Negra and his family profitably
for a number of years.
Mr. Bainwol. There is an impact on the bricks-and-mortar
side of the business if the legitimate businesses do flourish.
Senator Sununu. Mr. Negra, your thoughts about that
prospect?
Mr. Negra. I can live with it. If there is a legitimate
alternative, Mike's Movies and Music can move into an online
service just as anybody else can. Things change.
Mr. Bainwol. And I would add to that, a great Minnesota
company, Best Buy, is, in fact, doing exactly that. Businesses
are modifying their strategies so that they can take advantage
of bricks-and-mortar, which is how some consumers want it, and
online, which is how others, typically younger consumers, want
it. The idea here is to get music that folks want, how they
want it.
Senator Sununu. Mr. Valenti, a number of different ideas
were mentioned to deal with the illegal downloading on peer-to-
peer, a change in the default settings, filtering copyrighted
materials, and disclosure. I think that was the third one. How
do you get an offshore entity like Kazaa, which is the one we
always talk about, to comply with those kinds of mandates?
Mr. Valenti. The answer is very difficult, and that is the
problem. By the way, Senator, $150,000--I can't speak for
music, but for the movie industry, where the average movie made
by the major studios to make and market costs $90 million, and
only one out of ten pictures ever get their money back from
theatrical exhibition, and that is how they become prey to the
infestation of these peer-to-peer networks.
I think at some point there is going to have to be some
kind of legislation that will allow this country to be able to
deal with people who get on some obscure island in the South
Pacific and thumb their noses at legitimacy, and there has to
be some way to deal with that. I am not prepared at this time
to tell you how, but I think that is absolutely essential if we
are going to have any kind of order in this country.
But I think the question, going back to the Chairman,
Senator Coleman, I think that you need to ask the Kazaas of the
world. Incidentally, the interesting thing is, you go to
business school and they tell you how you fix a profit. First,
you have got to get cost of goods sold. Kazaa has a zero cost
of goods sold and they are just rife with advertisements, and
that is how they make a lot of money. I am ashamed to say that
some segments of the U.S. Government advertise on Kazaa, which
I think is shameful.
Senator Sununu. I appreciate that. I am not aware of that,
and I think that is something that would be cause for concern.
Thank you, Mr. Chairman, and thank you for your directness,
Mr. Valenti.
Senator Coleman. Thank you, Senator Sununu. Chairman
Collins.
Chairman Collins. Thank you, Mr. Chairman. I have no
further questions.
Senator Coleman. With that, thank you to the panel. We are
very appreciative.
We will call the next panel, Alan Morris, the Executive
Vice President of Sharman Networks Limited, the parent company
of Kazaa, a peer-to-peer network; Derek Broes, the Executive
Vice President of Altnet, an online business which sells
recordings; Chris Gladwin, the founder and Chief Operating
Officer of FullAudio Corporation; Lorraine Sullivan, the
recipient of a RIAA subpoena and one of the targets of an RIAA
lawsuit; and finally, another noted artist, Mr. Chuck D.
Pursuant to Rule 6, all witnesses testifying before this
Subcommittee are required to be sworn. At this time, I would
ask the panel to all stand and raise your right hand.
Do you swear that the testimony you will give before the
Subcommittee will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Morris. I do.
Mr. Broes. I do.
Mr. Gladwin. I do.
Ms. Sullivan. I do.
Mr. D. I do.
Senator Coleman. Thank you very much.
Again, we will stick to 5-minute statements by the
witnesses and then we will do a round of questioning.
With that, we will start with Mr. Morris.
TESTIMONY OF ALAN MORRIS,\1\ EXECUTIVE VICE PRESIDENT, SHARMAN
NETWORKS LIMITED, AUSTRALIA/ENGLAND/VANUATU
Mr. Morris. Thank you very much, Senator Coleman. Thank you
very much indeed for your leadership and the timely nature of
this inquiry.
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\1\ The prepared statement of Mr. Morris appears in the Appendix on
page 103.
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I note also holding it in this august chamber, where there
has been very much drama, and we have just seen a bit of drama
now. I have not recognized what I just heard. I think the
notion that we acquired Kazaa at the beginning of 2002 just to
make a quick buck from advertising is both offensive and naive.
I used to run a major advertising agency network and there are
much easier ways of doing that.
Now, when we acquired the asset, the first thing we did was
remove anything at all which implied, suggested or condoned
infringement. Second, we changed a lot of the settings so that
people wouldn't be inadvertently sharing files.
More importantly, we engaged straightaway with Altnet,
sitting here, to fulfill our goal. Our goal was very simple
when we acquired the asset, and that was to become the world's
largest and most effective online distributor of licensed
content, and we have achieved that. We distribute more DRM-
licensed files than anybody else in the world. Along with
Altnet, we have been responsible for making new artists become
successful, artists successful in some countries becoming
successful in other countries. We have been embraced by the
video games industry. They distribute massive files very
successfully through the Altnet network.
And what we have recognized is that as licensed files are
available, then people will use them. I think it is patronizing
and unkind to say of the 60 million people worldwide that use
Kazaa, over two-thirds of whom, by the way, are over the age of
majority, that they would go out and steal.
There is infringement, and let me be clear, we do not
condone infringement. We do not condone breach of copyright. I
have run a pay-TV company. I have worked with copyrights all my
life. The issue here doesn't seem to be about copyrights. It
seems to be about the control of the Internet, the control of
online distribution.
We approached the major labels and major studios back in
May last year with a workable solution, the ability to
effectively and efficiently distribute files online. We are not
talking about an e-commerce website. We are talking about the
mechanism which is regarded by consumer electronics companies,
the computing industries, and academics everywhere as the most
effective way of distributing content. And they refused to do
business.
Now, it shows my age, but I was around in the age, at the
time of the VCR. I was advising the MPAA at the time. It is
like deja vu for me, because then I heard about the fact that
advertising on TV would die, that broadcast TV would wither on
the vine. That didn't happen. What we saw happening, and it is
a lesson that maybe they can learn from, was they reduced the
windows for exposure. Because, initially, you had to wait 5
years before you put a video out. They reduced the price and
gradually they capitalized, and once a critical mass had been
achieved, the motion picture industry adopted the VCR as the
most profitable way of moving forward.
You have raised the issue of subpoenas, and we think they
are most unfortunate. We think that rather than serving
subpoenas, they should address the paradox in your title. Why
sue the people who are your customers?
The reason the public has chosen peer-to-peer isn't this
naive notion that they are all criminals. I really don't
subscribe to that. Sixty million people are not criminals.
Thirty million in the United States are not criminals. The
reason is that it allows them to access files in the most
effective way.
We promote independent artists. We distribute the material
from upcoming bands worldwide, and these are the gold files
that are at issue. People find that the peer-to-peer mechanism
as opposed to the website mechanism is the most effective.
There is a 95 percent efficiency in terms of distribution. Mr.
Valenti talked about 4 years hence, being able to download
large files using new technologies. We can offer those
efficiencies today.
So I would ask the industry, why don't they license to us?
It is my firm belief that this notion of copyright, important
as it is, is a smokescreen. They sought to control the
distribution of video material. They have demonstrated, the
RIAA and the MPAA, and not necessarily the entrepreneurial
heads of labels, they have always sought to control. And maybe
this is the one technology they feel they can't.
Is there anybody in this room that honestly believes that
peer-to-peer will go away? I could say their worst nightmare
would be that responsible companies like ourselves and Altnet
cease to operate, because then people would be driven to the
darknets. These are the encrypted networks that are very
difficult to detect. Or they would use the other means of the
Internet, which they do anyway, for accessing infringing
material. People have talked about downloading from the
Internet, and that is true. It is not just about peer-to-peer.
So we would say very simply to the entertainment industry:
Serve consumers, not subpoenas. Why litigate when they could
and prepared to license to us? They were prepared to license to
Altnet. Their attorneys told them not to.
Senator Coleman. Thank you, Mr. Morris. Mr. Broes.
TESTIMONY OF DEREK S. BROES,\1\ EXECUTIVE VICE PRESIDENT OF
WORLDWIDE OPERATIONS, ALTNET, WOODLAND HILLS, CALIFORNIA
Mr. Broes. Thank you. I would like to submit my written
testimony into the record.
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\1\ The prepared statement of Mr. Broes appears in the Appendix on
page 115.
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Senator Coleman. It will be entered in its entirety,
without objection.
Mr. Broes. Thank you. First, I would like to start by
saying that we do not condone copyright infringement. It is
illegal.
I am a copyright owner. I have managed an Academy Award-
winning actor and produced multi-million dollar films. As a
technologist, I have worked for the RIAA and the MPAA on this
very subject.
I would like to read you a quote. ``It is not in our
national interest to ban what you cannot see, to prohibit what
you do not know, to turn your back on what you cannot
measure.'' Those are the words of a man who cares deeply for
copyrighted intellectual property. They are the words of Jack
Valenti's recent testimony before a Congressional Committee
earlier this month. The words are profound. They do not,
however, reflect his industry's actions.
A closed mind is so intent on salvaging the status quo that
it fails to embrace the potential of change. Our Nation is
founded on the principles of accepting change, and having
vision is one of our Nation's greatest attributes, whether it
is a black student entering an all-white school and breaking
the status quo for a great America, or our Nation's vision that
space exploration is critical to future global needs. I fear,
what kind of Nation would we be if we neglected to see the
potential of desegregation or if we thought the moon was too
far away and offered us nothing more than dust and rocks.
It is both vision and an open mind that brings me here
today. It is the love of creative works that fuels Mr.
Valenti's argument, and I don't think anyone can argue with
that. We agree that copyright is in peril and we agree that
something must be done.
Both the film and the recorded industry are building a
business around peer-to-peer. They are inserting files into P2P
networks in order to displace illicit files being traded. They
are gathering information about users' appetite for specific
artists so they can exploit that knowledge and guide marketing
dollars in the right direction. They are evaluating technology,
with great attention paid to the viral aspects of its users and
their ability to distribute a single file to millions of users
across the world without much cost at all, or effort.
The facts that they have discovered should be an
encouraging sign of future business growth. I am certain that
creative executives that run the entertainment companies are
excited at the thought of a larger distribution platform, and I
am also equally certain that the attorneys managing these
companies are fearful of losing control of distribution rather
than entrusting technology and users to provide their new
global channels.
I can tell you with great confidence that the entire
entertainment industry believes that peer-to-peer is the single
most powerful distribution tool they have ever seen. The MPAA
states that 400,000 to 600,000 films are being distributed
every day on peer-to-peer. How much would it cost to distribute
that many DVDs and could you do it in a day?
With the industry's cooperation, Altnet could exceed that
number and provide it securely and in a manner where we would
assure that all parties were fairly compensated. If you can
imagine a few years from now a blossoming music industry and a
growing film market in line with other historical technological
adoption, both would be exceeding past revenues. Can you
imagine that? L.L. said they are dreamers. We are dreamers.
The MPAA has urged Congress not to close the legislative
door on any new technological magic that has the capacity to
combat digital thievery. I would argue the same. I would ask
Congress to encourage the industry to explore all sources of
technological magic to combat the issue. I would ask Congress
to encourage the industry to explore an open mind, including
the solution that has been proven to increase revenue, mitigate
piracy, displace illegal pornographic material, and proven to
empower the industry and artists alike.
Altnet's technology easily enables any content owner from
the music, software, film, game industry to publish their
content into Altnet's secure distribution platform. These files
are displayed in a prioritized listing in the top slots of the
user's returning search results. Any illicit file being traded
will be pushed deeper into the system, since the licensed file
is now taking up a very valuable slot in that system. Once
downloaded, the user attempts to play the file. The digital
rights management reaches out to deliver a license. The content
owner maintains how they license and the rules surrounding a
specific piece of content.
As you will read in my written testimony, Altnet is
leveraging its role as a market leader by spearheading efforts
to establish a viable business model for peer-to-peer
providers, content owners, and users, while at the same time
having the highest regard and respect for the rights of each of
the parties concerned. It is very effective.
If the industry is truly enlisting the greatest
technological minds to find a means to battle piracy
technologically, we are right here. We are even in the same
room.
Ignoring the solution just because you don't understand it
is a disservice to those almost one million men and women that
work to create movies and music. They are counting on the MPAA
and the RIAA to find a solution.
Senator Coleman. I would have you sum up, Mr. Broes. Your
time is up.
Mr. Broes. Yes. If the industry truly wants to find a
solution to piracy and as not just a way to control the vast
distribution networks of the future, they would not ban what
they cannot see. They would not prohibit what they do not know.
And they would not turn their backs on what they cannot
measure. Thank you.
Senator Coleman. Thank you, Mr. Broes. Mr. Gladwin.
TESTIMONY OF CHRIS GLADWIN,\1\ FOUNDER AND CHIEF OPERATING
OFFICER, FULLAUDIO, INC., CHICAGO, ILLINOIS
Mr. Gladwin. Good morning. I am Chris Gladwin, founder and
Chief Operating Officer of FullAudio, the company behind the
MusicNow digital music service. I would like to thank the
Subcommittee for scheduling this hearing and taking the time to
address some important issues in the future of digital
entertainment.
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\1\ The prepared statement of Mr. Gladwin appears in the Appendix
on page 123.
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I started MusicNow 5 years ago with the purpose of creating
an Internet-based music service that would improve the way
people explore and enjoy music. MusicNow is an independent
company without any financial support from record labels or
traditional music industry executives. In our 5 years, we have
worked through many difficult issues with major labels and
music publishers to create the first licenses for interactive
music services and to build a service that consumers are
willing to pay for.
We have always expected this business would be a challenge,
but we never expected to be challenged by competition from
black market networks that confuse consumers about intellectual
property rights, that takes money from music fans without
compensating creators, and that seem to thrive in the absence
of law enforcement. In this challenging environment, MusicNow
absolutely supports the recording industry's aggressive action
in defense of its intellectual property.
Other witnesses will testify, and are testifying, that
copyright and music licensing laws are so outdated that the
only reasonable alternative is a compulsory license that strips
from creators their ability to manage their own creative works.
MusicNow believes otherwise, that the basic foundation of
copyright law is sound and that though some of the rights and
technologies are complex, these complexities should not cloud
the reality of how our industry must collectively proceed in a
legitimate manner.
Other witnesses will tell you that the record labels
illegally or unreasonably withhold licenses. I will tell you a
different story, that the recording industry and the companies
in it have been slow to recognize the change in technology and
consumer behavior around us, that the recording companies tried
for several years to control the future of technology and
consumer behaviors, and that as a result, they are exceedingly
difficult to negotiate with at a time when MusicNow and several
legitimate companies are trying to help them reach consumers
with viable services.
But speaking as one independently funded music service
provider who is in the market of selling services, it is
possible, although very difficult, to license digital music.
Apple, RealNetworks, the new Napster, MusicMatch, BuyMusic.com,
AOL, Dell, Amazon, and others offer or will soon offer digital
music services that compete with MusicNow. MusicNow and several
competitors have licensed interactive digital distribution
rights from all five major labels, major publishers, as well as
several independent labels and publishers. Using these
licenses, MusicNow has developed Internet-based music services
that enable consumers to play music on demand, to play Internet
radio stations, to subscribe to music, and to buy music that
could be burned onto a CD or transferred to a portable device.
Black market network companies that complain that they
haven't received licenses from music owners haven't worked hard
enough to establish sensible business models nor to establish
themselves as reputable business partners by not facilitating
piracy.
Another issue raised by this Subcommittee and by advocates
is whether the RIAA's anti-piracy enforcement efforts have been
over-aggressive or anti-consumer. Rather, I would suggest your
concern should be whether these enforcement efforts may be too
little, too late, whether they are adequately supported by
Federal law enforcement, and whether the consumer education
efforts behind this anti-piracy campaign are sufficient.
Enforcement is valuable for a specific deterrence of bad
behavior, but it is perhaps more important as a public
education tool. The public needs to clearly understand that so-
called, ``peer-to-peer sharing'' of music is stealing and it is
wrong and it will be prosecuted. The public also needs to be
aware that several legal alternatives exist for acquiring
digital music. We call on the RIAA, Congress, music companies,
musicians, and the press to at least match the attention they
have given to black market networks with an equal level of
attention and support for legal services.
Congress must also do its part. Two years ago, the U.S.
Copyright Office reported to Congress suggesting changes in
copyright law for digital online music, but neither the House
nor the Senate has acted. We urge the Congress to consider
these recommendations and to modernize our copyright laws for a
digital age.
MusicNow and other legitimate Internet music companies have
built great services which offer hundreds of thousands of
songs, including new releases and back catalog. Collectively,
we have several hundred thousand paying customers who
demonstrate that there are viable alternatives to stealing
music online.
I believe in the inherent ethics of the American people,
and we prove that every day by signing up paying customers.
However, in order for the United States to enjoy the benefits
of our cultural creators and of a vibrant and healthy digital
media industry in the 21st Century, we must establish and
enforce property rights for digital media just as we did for
manufactured goods in the 20th Century. Thank you.
Senator Coleman. Thank you, Mr. Gladwin. Ms. Sullivan.
TESTIMONY OF LORRAINE SULLIVAN,\1\ NEW YORK, NEW YORK
Ms. Sullivan. Good afternoon, Mr. Chairman and Senators. In
August 2003, I was sent a very confusing letter by my cable
provider alerting me that they had been subpoenaed by the
Recording Industry Association of America for my personal
information for copyright infringement. I immediately called
the phone numbers listed on the subpoena for the RIAA and the
lawyers, but wasn't able to reach anyone. My customer service
from the cable provider told me not to worry about the matter,
that I would probably just receive a cease and desist order.
However, that turned out not to be the case.
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\1\ The prepared statement of Ms. Sullivan appears in the Appendix
on page 130.
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On September 9, 2003, I came home to four messages on my
answering machine from reporters asking me for statements in
response to being sued by the RIAA. After recovering from that
shock, I immediately tried to contact the RIAA and the person I
reached explained the charges and that they could range between
$750 and $150,000 per song. He followed that up saying that the
goal of the RIAA was not to ruin your life and make you
bankruptcy.
Actually, it felt like that. He said a letter would come
with the summons. It would explain how I could settle the case
out of court. He said a settlement would be in the low
thousands and it would probably be worth it to put it all
behind me and get on with my life. He referred me to Pat Benson
and advised me not to seek her advice, as she was not my
attorney.
I phoned Pat Benson. She told me that if I settled, I would
get settlement papers detailing a mutually agreed upon monetary
settlement. I then asked the exact number and she quoted
between $3,000 and $4,000. She said I probably heard about a
12-year-old who had settled for $2,000, but informed me that
that had been a special case, since Brianna's mother was on
public assistance. This particularly upset me, because I
thought since I worked so hard for many years and waited until
my mid-20's to go to college and I am not on public assistance,
my case is different. I couldn't understand that implication. I
asked if the settlement had to be paid in one lump sum. She
said yes, accepting increments would not be feasible.
At this point, I was crying and told her that all I had was
$1,500 to my name. I explained that I was already in debt, a
full-time student. I also explained I had taken out student
loans, but they had almost all gone to my tuition and expenses.
She asked me if I could ask my parents for money, to which I
replied no. She asked if there was anyone else I could go to
and I said no. She asked if I had credit cards at that point. I
told her I did, but they were pretty close to their limits, but
perhaps I could inquire about cash advances.
I was explaining to her that this was all pretty stressful
and she said that nobody likes to be the heavy. She said she
would go to her clients to see if they would be willing to
accept less than $3,500 from me.
Two days later, she told me that they had accepted the sum
of $2,500. I had come up with $2,100 at that point. She told me
that the paperwork would be sent out. I would have a week to
look it over and send it back with a certified check. I created
my website seeking advice or help from the 60 million or so
other download users. It helped me raise $600 in donations
towards my settlement. I actually received my summons on
September 18, 2003, when they were hand-delivered to my
address.
I feel that I have been misled as a consumer of music.
Particularly misleading is the advertising that Sony has for
their mini-disks. In the commercial, you see a blue-headed
alien encouraging a couple hundred friends to copy the play
list he has created. Is it any wonder why other consumers such
as me found and actually still continue to find it confusing? I
mistakenly imagined that since Kazaa was still up and running,
while Napster had been forced to close down, that the
downloading I was personally responsible for was OK.
I compared my actions to recorded songs on the radio. As
far as I was concerned, the music I downloaded was for home
personal use. I in no way financially benefited from nor
intended to make a profit from this music. To me, copyright
infringement actually pertained to the people in Chinatown who
were hawking bootlegged and fake CDs on the street corner.
I have taken responsibility for my part in all this. I
fully realize that ``I didn't know what I was doing'' is
certainly not a valid defense. Still, I am very upset with the
way that the RIAA, and their unfairness in handling the
subpoenas and lawsuits. Where is the due process of law?
I resent the invasion of my privacy, being named publicly
without any warning whatsoever and also being unfairly targeted
and having to choose between paying a settlement I can barely
afford or to deal with the stress of litigation and potentially
being held responsible for a couple million dollars in damages.
The RIAA manner of investigating is severely lacking. They
may not seem to care how responsible the person listed on the
IP address actually is for the crime they are accused of. They
go through all the trouble to make press statements, but do not
follow up on actually researching how egregious each user is.
They could have at least informally gotten in touch with me
before knowingly unleashing a media storm upon my head.
Supposedly, though I never actually read one, the RIAA sent
out instant messages of warnings to people. This doesn't make
sense to me. If I am not the one who is actually on Kazaa at
the time, how can they ever be sure it got to me? With all the
people who have come and stayed at my apartment, including
subletters, roommates, family members that I have had, it would
be nearly impossible to monitor everyone and everything, and I
wonder why they didn't send a letter in my name to address me
personally and make me aware of their intentions. I would have
ceased and desisted on the spot. I would have made sure all my
household members did the same. Surely, a courteous letter
would bring about a much quicker result than a complaint filed
in court, but they never gave me that chance to protect my
privacy.
I have been a music fan all my life and until recently had
still bought CDs of the artists I love because I do wish to
support them. But until the RIAA stops targeting unwitting
victims, I am not going to buy any more CDs and I know many
consumers feel the same. The personal invasion of privacy, the
financial punishment and personal stress I have suffered seem a
very hefty price to pay.
I settled my lawsuit, gained a whole education of what is
really at stake here, and now my main concern is that this
situation not happen to other people. It is not fair to anybody
not to be duly warned nor to have a chance to answer the
charges against them. We need to change the system without
creating new victims, and I hope that change starts here.
Senator Coleman. Thank you, Ms. Sullivan. Thank you for
your courage to come forward today. Mr. D.
TESTIMONY OF CHUCK D, RECORDING ARTIST, AUTHOR, ACTIVIST, LOS
ANGELES, CALIFORNIA
Mr. D. Good afternoon. I see there is less of an audience
than the first panel. Maybe they are getting their picture
taken and autographs.
I repeatedly come to you as an artist, a fan, a father, and
a technology buff. I feel that we should go forward, that we
want to go forward, that as technology prevails, it giveth and
it taketh away, and the industry knows this. The horseshoe
makers probably got upset at the train manufacturers because it
took away their transport dominance, just as the train
manufacturing business probably got mad at the airline
industry.
I think this expands artistry and it is about adjustments.
And if the Internet reaches the world, then maybe we should
think about becoming more worldly, and if P2P reaches the
world, we should think the same. We shouldn't just detach
ourselves from the planet for the sake of just having American
business.
As this pertains to the music, the industry has lost sense
of its humbly beginnings while being hypocritical at the same
time. The fans have gotten hold of the technology before the
industry. Just like once upon a time the photography business
thought they could make a killing on the exclusivity, and all
of a sudden, portable cameras came out. We still have a viable
photography industry. People still take their pictures. They
make a living. Maybe they don't make a killing. Maybe that
should be the theme of American business.
Companies digitized. Record companies digitized in the late
1970's and the early 1980's and they let the genie out of the
bottle then, and they knew it was an unprotected format,
digitizing signals and waves so they could raise the prices as
hardware and software companies merged. And so it is difficult
to define the crime alongside the technological innovations
that move faster than the domestic legal corralling of that
industry.
I speak at many colleges. They know it is a crumbling
economy. Increasing tuition. The college student would rather
have Wendy's and lunch than try to buy an expensive CD.
The collusion of five record companies and four radio
networks and TV outlets is becoming issues of the FCC, and as
it pertains to artists, it stifles the growth of grassroots
businesses from the bottom up to the top. I think this is a
great way to expose across the planet. I call it a new
accessible radio. In fairness, performance fees might have to
take place of the mechanical fees that companies and artists
seem to think that they miss.
As an artist representing an 80-year period of black
musicianship, I never felt that my copyrights were protected
anyway. I would sign a contract and my lawyer would tell me,
this goes out to the world and the universe. So that means when
I get to Venus, why should Universal get the rights when they
can't be there themselves? If I could get to the Ukraine with
my copyrights, then it should be up to me with my flexible
business plan.
I have been spending most of my career ducking lawyers,
accountants, business executives who have basically been more
blasphemous than file sharing and P2P. I trust the consumer
more than I trust the people that have been at the helm of
these companies.
I have been told by Universal themselves that, Chuck, you
have sold millions of records for us, but you will never
receive a dime from us again in lieu of spending money on my
behalf and marketing and promotional fees that had to clear the
high hurdle that the collusion formed in the first place. So
they say it costs money to promote, but they create the
standard that costs so much for the artist to get exposure to
the marketplace. That is what got me involved with file sharing
in the first place. It is controlled and the usual names and
suspects want to maintain it.
In all fairness to my friend, L.L. Cool J and Leo Cohen, I
was there at rap music and we know the beginnings of it, with
the machinery, the turn tables, the drum machines, and the
hypocrisy of the contracts and what built the damn thing in the
first place is forgotten since some people have become the
haves looking at everybody else like they are the have-nots.
They used music that was previously copywritten music in the
first place to make the music that form the companies that
makes this guy sell his company for $160 million. Music was
sold and exchanged at swap meets, flea markets. Illegal tapes
were sold to build and promote the music in the first place in
the 1980's and in the 1990's.
And as far as rock and roll, blues licks were taken from
the Mississippi Delta without authorization so people could
spend $180 to check out the Rolling Stones do it all over
again. So the record industry is hypocritical and the
domination has to be shared.
P2P to me means power to the people, and let us get this to
a balance, and that is what we are talking about.
Senator Coleman. Thank you, Mr. D.
I am going to come back in reverse order and come right
back to you, Mr. D. I asked L.L. Cool J about the new artist,
somebody coming up. You have the recording industry and you
have technology that is offering these new opportunities out
there, but at some risk. What advice do you give somebody
coming up?
Mr. D. To learn all of the above, to at least have control
of their business model and make sure it is flexible, and to be
able to use these exposures to the best of their ability. You
have to reach the fans, and in the businesses in both film and
music have gotten away from the people. I mean, people wouldn't
use it if it wasn't out there in the first place. When it comes
down to it, blank CDs--CDs are still selling. They are just
blank.
And it all brings us back to the table. This is the same
bullet and gun as the K-Mart argument. Best Buy sells computers
and blank CDs. So the consumers come in and say, wow, this is a
technology that the music business and the film industry did
not come up with in the first place. We came up with it. What
do you expect them to do?
Senator Coleman. What about the artist who is taking the
other path? Don't they have a right to do that and don't they
stand to lose?
Mr. D. What other path?
Senator Coleman. The path of saying, I am working with a
recording company. This is the way I am going. I have got a
copyright. I produced something. I should get paid for that.
Mr. D. If there was honesty in that neo-plantationistic
attitude of a company telling the artist exactly, like you
signed a worldwide contract, but we can't sell CDs in Africa.
We can't sell CDs in the Ukraine. Then it should just be a
domestic contract. The problem is, is that the lawyer that
negotiates for the artist many times is on the same side as the
record company and they flip back and forth. So the artist
never, ever knows the truth. So their trust in the companies
has been defaulted for the last 80 years anyway. What other
choice for innovative artists do we have?
And what other choice does a new artist--I will tell you
what is going on, because it is also combined with the FCC. If
an artist comes out of Phoenix and wants to get played on
Phoenix radio, they have got to get signed by the major
companies in order to get played back in Phoenix to their
demographic. That is crazy.
Senator Coleman. Thank you, Mr. D.
Ms. Sullivan, when you were first notified that you were
being sued and you had a conversation with the folks from the
RIAA, or at least directed to them, and you were told there was
a potential of a $150,000 penalty, what did you feel?
Ms. Sullivan. I was horrified, because the first thing I
thought of was, well, that is it. My life is over. I will have
to file bankruptcy. I won't be able to get a house. I mean,
those were the fears that immediately came into my mind.
Senator Coleman. Before this, you talked a little bit about
Napster and that it is gone, and that Kazaa is still there. You
figured this may be legal. You go into the store and you see
the CDs that are available. Had you seen anything from the
RIAA, anything from the recording industry about the evils of
downloading?
Ms. Sullivan. No, I haven't, but I don't watch a lot of
television. I listen to CDs that I buy. I don't really listen
to the radio. So no, I really hadn't seen anything that they
had put out there, I guess.
Senator Coleman. What do your friends say now? How did they
react? Do you know folks who still download, and have they been
moved one way or the other?
Ms. Sullivan. Not my close friends and family. As soon as I
told them, they all immediately put a stop to what they were
doing, and most of them feel the same way I do, which is that
they don't want to buy CDs anymore. They feel like this is so
unfair, that until it changes we are not going to keep buying
the music or the product.
Senator Coleman. Thank you, and again, thank you for your
courage in coming forward.
This question, I am going to put to all three of the
gentlemen there. I am trying to understand whether this thing
is solvable, whether, in fact, you can work with the recording
industry to approach a workable solution. I got a sense from
Mr. Gladwin saying, yes, I am going to work with the industry.
We have got that worked out. Mr. Broes and Mr. Morris, you have
got a different perspective.
Can you help me understand the division here? What is
missing, and in your own words, why is it easier for Mr.
Gladwin to do what he is doing, but Mr. Broes and Mr. Morris,
you still see some difficulty in reaching that workable
solution.
Mr. Broes. Well, I think that there are two issues here.
There is about commercializing the Internet from a film and a
music industry point of view. This is about maintaining their
existing relationships and distribution channels. I understand
that is a very delicate balance. They have to maintain their
relationships with Best Buy and they have to appease those and
I understand that.
But we also have an issue of peer-to-peer networks and it
is precisely why I got involved in it in the first place. I was
hired to investigate peer-to-peer networks on behalf of the
RIAA and the MPAA. In fact, I was hired to investigate Kazaa,
which I did. When I saw the technology, I saw how powerful it
was, I encouraged them to exploit that technology, and the
approach, the only solution from a technology standpoint that I
saw was commercializing that in the same way that Yahoo and
Google has commercialized their search results.
When you type in ``Tom Cruise,'' you get 20,000 sites that
were essentially pirating Tom Cruise's name, and they would be
pornography sites and such. They started selling those search
results and pushing those illigal results deeper. They are
still there, and they are still as illegal as they ever were,
but they are just very difficult to get to.
And so as far as from a technology standpoint, the solution
is commercializing peer-to-peer networks. It is not colluding
with the enemy, and that has been our goal from day one.
Mr. Gladwin. With all due respect, I think there is some
misunderstanding of what the real issue is. The real issue is
not peer-to-peer technology. We have technology that we
actually think is better than peer-to-peer. There are other
companies like us that offer licensed, legitimate digital music
on the Internet that have similar approaches.
We don't have a problem figuring out how to distribute
hundreds of thousands or tens of millions of legal songs. That
is not the problem that the industry is looking for a solution
for. The issue here is copyright law and compensating owners
for their works.
FullAudio and similar companies approached the music
industry and said, look, we would like to work out an
arrangement where we fairly compensate owners and copyright
owners. And by taking that approach, we have been able to get
those licenses.
Mr. Morris. You talked about paradox. Derek is responsible
for negotiations in the USA and I am responsible for
negotiations in the rest of the world, and we have companies in
India's ``Bollywood,'' a major distributor of films outside the
United States. We have independent artists and companies in the
UK. We have 30,000 emerging artists.
You asked Chuck D how should a new artist go. Thirty-
thousand emerging bands have distributed license content
through Altnet. You can go to Altnet and for $99 you can
distribute your content in a licensed way on KMD. That is how
easy it is to do it. So the paradox I have is when everybody
else recognizes--and I think it is reasonable to presume, also,
that, as Derek said, many people in Hollywood recognize that
this is the best method in terms of efficiencies and in terms
of being a chosen method for distributing.
Why won't they license the content? I know it is hard to
negotiate. We have no difficulty with that; we were set up to
do that. There has got to be another reason, and people have
always said this is probably about control.
Senator Coleman. Thank you, Mr. Morris.
Senator Pryor, you have been here. I am going to recogize
the presence of the distinguished Ranking Member, but I will
defer to you for your questions first.
Senator Pryor. Go ahead.
Senator Levin. You have been here consistently. You go
ahead.
Senator Pryor. All right. Well, let me run through my
questions because I certainly want to hear from Senator Levin,
as well. He always has great questions.
Mr. Morris, you mentioned a couple of times, I believe, in
your statement and in answering questions that this is, at
least today, the most efficient and effective way to distribute
music. Tell me about your traffic count, so to speak. Are you
increasing or decreasing in the number of people who are using
your site?
Mr. Morris. Are you talking about in the last month or two?
Senator Pryor. Yes, just in the last, say, 6 months or so.
Mr. Morris. Data would indicate that there has been the
normal seasonal drop. As I say, I used to run a TV company. We
all know what happens in the summer, and there was a drop at
the beginning of the holiday period; there always is. It looks
as though it is coming back, so we don't see significant
reductions or changes other than those we would expect.
Given, also, that the growth of P2P has been nearly
exponential over the last 3 years, even though I am a
statistician by background, projecting what it would be this
year isn't a perfect science. But it doesn't look as though
there has been a massive reduction. That is my best guess.
Senator Pryor. You seem to be kind of on track with where
you thought you might be? Is that fair?
Mr. Morris. Well, we might be in terms of number of
instances of the application downloaded, yes; in terms of the
critical mass of users, yes; in terms of having licenses so
that those users can access the content they want, no.
Senator Pryor. I am not as familiar with your site as maybe
I should be, but when someone comes on your site, they have
different choices. One thing they can do is they can download
your software. Is that right?
Mr. Morris. Yes. I will very briefly talk you through it.
People are referred by friends or they go on to one of the
portal sites or whatever. If they go to CNET Download, which is
one of the major sources, they will be given the option of
downloading. The applicaiton will be described in a standard
way in terms of size, etc. The application is downloaded. There
is a very full disclosure then, and as I testified at another
place in this building, we work very hard to make sure that it
is very difficult for anybody to share that which they don't
wish to share.
So all the defaults are set basically with big yellow signs
saying ``Do you want to share this?'' So the application is
then installed on the computer in the way in which any
application would be, and then it is used. So the site is
purely a way by which people obtain the application.
Senator Pryor. Now, that application you are talking
about--is that software that you have created?
Mr. Morris. There are two aspects to the software. One is
the underlying protocol. Just as HTTP is the protocol used on
the Internet, there is a peer-to-peer protocol, and we have the
graphic user interface which plugs onto that. So we have
acquired that. The user interface is ours.
Senator Pryor. Now, is that software that you have
copyrighted or protected in some way?
Mr. Morris. It is, indeed.
Senator Pryor. Let me ask you this question. Does anyone
pay for music on your site?
Mr. Morris. Yes.
Senator Pryor. OK, and how does that work?
Mr. Morris. That works through Altnet.
Senator Pryor. Some do, some don't, or is that by the
artist, or how do you know?
Mr. Morris. The Altnet mechanism--and I will just explain
it very briefly, if I may--is that when somebody searches for
content and there is a DRM-protected and licensed file, that
file, as Derek says, will be displayed first. The content owner
then has complete control over the terms under which that file
is then licensed.
They may well say somebody can play it for 3 days. They may
well say you have to pay straightaway. They may well say this
is promotional. I should say that the upcoming software
release--the things that we are doing in terms of making it
even more creative and more effective for users are increasing
even more.
So that file has allowed the content owner, in negotiation
with Altnet, to set their own terms. If you go to the Altnet
site, you can actually do a click-through. For $99, you can put
your own material up there, and it will say what level of
security do you want, what licenses do you want, etc.
The important issue, of course, is--and this is where the
efficiency of P2P comes in--that gold file sits in somebody's
shared folder and we have a program with Altnet which
encourages, like a frequent-flyer program, the sharing of these
gold files, something which Altnet funds.
If somebody then searches that file and finds it from a
peer and downloads it, that file is still protected. The DRM
still works. So that file will again go back to the DRM server
and say what are the terms for me to see this? That is why P2P
is so efficient. Instead of downloading each one each time, the
distribution is dealt with by the network.
Senator Pryor. Well, they are downloading it each time, but
are they paying for it each time?
Mr. Morris. Yes, they are.
Senator Pryor. Can you tell us how that works?
Mr. Broes. They pay through a payment gateway that we have
provided, so I will give you just a very basic scenario. If you
download one of our files or you type in an artist's name, you
double-click the file and you download it. When you open that
to play, a window will pop up and say, this is the artist, and
say it is 99 cents or 49 cents, or whatever the price that the
content owner has set.
You enter your credit card, or we have other systems that
allow you to receive a telephone call. It will be a recording
of the artist on the line saying thanks for downloading my
product, press 1 to confirm your purchase. The license is
acquired. Now, that file is free for them to play.
In the interest of paying, I think it is important to note
that we are distributing close to 35 million licenses of legal
content, of licensed content, every single month, and that is
without having the major labels' content. We also do this for
the game industry, as well, and do the same function for
software. We distribute up to 30,000 licensed games right now,
including many games from some of the major gaming companies
like Atari.
They understand how this mechanism works and they are
ecstatic that they can provide the game on our company's peer-
to-peer network in the same fashion that they do in the stores,
but without having to pay for the packaging and the wrapping,
and they sell it. These are big files; these are one-gigabyte
files and they sell for $50, and people put their credit cards
across the line. And let's keep in mind, I am also competing
with free. So if I can compete with free and succeed, then the
industry certainly can.
Senator Pryor. But are you saying that every single person
that accesses your site is actually paying in some way or is
entering into a licensing agreement in some way with musicians?
Mr. Broes. There is a choice that individuals make. When
they see a gold file, they choose to purchase it. When they
download that gold file, they choose to purchase that file.
Senator Pryor. Yes, but is every single person doing that?
Mr. Broes. Well, if every single person were doing that, I
would be distributing more than 35 million files a month. Let
me put it this way: If I can put the industry's content--if the
labels licensed me their content as they have licensed iTunes
and BuyMusic.com--if they license me that music and I put it
into the system in a secure fashion, I guarantee you that every
single one of those users will purchase those files. Some
won't, and maybe then that is the time for the stick approach.
We are saying that there is a carrot-and-stick approach for the
solution.
Senator Pryor. That is all I have, Mr. Chairman. Thank you.
Senator Coleman. Thank you, Senator Pryor. Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
First, a question for Mr. Gladwin. I am trying to
understand some of the technology, also, here. Is it
technologically possible for a software developer to include in
online software the capacity to block a person who has
downloaded the software from subsequently using it, like a
turn-off switch?
Mr. Gladwin. Yes. That is not only technically possible,
but it is standard industry practice. There have been a number
of instances where AOL, Prodigy, and other services 5 or 10
years ago started that practice.
Senator Levin. Now, Mr. Morris, let me ask you whether or
not your company can cut off people who are violating your end
user agreement's prohibition against downloading copyrighted
material.
Mr. Morris. We have no knowledge and control over users, in
the same way that Microsoft doesn't know who has a copy of
Outlook or whatever. So, technically, it isn't possible.
Senator Levin. So you disagree with Mr. Gladwin's answer?
Mr. Morris. Yes.
Mr. Broes. I would like to add a piece of this, because
prior to Altnet I was the CEO of Vidius, which I said had done
some work for the MPAA and the RIAA on peer-to-peer,
specifically Kazaa. We practiced interdiction. We invented many
of the technologies that they use today--interdiction, blocking
the files. We also were involved in spoofing files, putting
files out there to try to disguise them in certain ways.
What I found was it is not impossible. It is certainly
possible from an outsider's standpoint, when you can recognize
someone sharing. The difference is we have a real issue
identifying, without question, that the file that they have is
specifically the one--for instance, I don't want some 15-year-
old or some 12-year-old boy to make a movie in his backyard
called ``Gladiator'' and I start interdicting and blocking that
file because of the name, that it is called ``Gladiator.'' So
the process to verify those files is very extensive and it is
not cost-effective when you are looking at trying to prevent
the piracy.
Senator Levin. You have the ability to do it, though?
Mr. Broes. Do we have the ability?
Senator Levin. Technologically, the ability is there?
Mr. Broes. Sure. The ISP can shut down that individual user
if you notify them. Of course, they can.
Senator Levin. Do you disagree with Mr. Morris' answer that
they cannot technologically do that?
Mr. Morris. I think we are answering two different
questions.
Senator Levin. Well, I asked a question of Mr. Gladwin and
he answered the question yes. I asked the same question of you
and you answered no. So I tried to ask the same question.
Mr. Morris. My understanding of your question, Senator, is
you asked, if a person had downloaded the Kazaa Media Desktop
application--that having happened, was there any way in which
we could technically stop that person from using the
application.
Derek, you would agree that that is impossible?
Mr. Broes. Yes.
Mr. Morris. I think you are answering a slightly different
question.
Mr. Broes. Yes. I was answering the question, is
interdiction possible.
Senator Levin. Here is my question. I will repeat it. Is it
technologically possible for a software developer to include in
online software the capacity to block a person who has
downloaded the software from subsequently using it, like a
turn-off switch? Mr. Gladwin's answer was yes.
Your answer, Mr. Morris?
Mr. Morris. No.
Senator Levin. Now, it is the same question, Mr. Broes. So
we don't have a problem of answering different questions. We
have a problem of answering the same question the opposite way.
I don't want to argue which is correct.
Mr. Broes. Sure, I understand.
Senator Levin. But in any event, if you could have that
capability, would you use it, Mr. Morris?
Mr. Morris. That is a hypothetical question.
Senator Levin. It sure is.
Mr. Morris. I mean, first, we don't. Second, to Derek's
point, I think that there is a myth around that somehow you can
identify what a file is. There are many promotional files out
there. There are files that are misnamed. The provenance of a
file is very difficult to identify.
So there are two problems in my answering your question.
First, could we be certain that people were infringing? Second,
could we switch them off? And the answer to both is no.
Senator Levin. So you would not use that technology even if
it were technologically possible?
Mr. Morris. If it were technologically possible, which is
bounded by the laws of physics rather than anything else, then
in answer to the first question, I don't know if we would use
because we would have to be certain if we were to use it that
the files could actually be identified. So I can't answer the
question, sir.
Senator Levin. How do you enforce your prohibition that is
in your agreement against users infringing on copyrights?
Mr. Morris. My understanding--and you must know I am not an
attorney--is that EULA, which is pretty standard----
Senator Levin. That what?
Mr. Morris. Yes. EULA, the end user license agreement--
sorry I slipped into jargon there--is a permissive one. What it
says--this is the interpretation of our attorneys--is that if
people carry out the permitted acts, then they are licensed.
They are not licensed when they carry out non-permitted acts.
So it isn't a matter of revoking the license. The license
doesn't exist if they carry out prohibited acts.
Senator Levin. Let me read you your agreement, your EULA.
``Your rights under this license will terminate immediately and
without prior notice if you violated any terms of this license.
. . .'' It sounds to me like it is going to terminate, which is
not what you just described.
Mr. Morris. I am advised by our attorneys--and I don't
know, Senator, if you are an attorney.
Senator Levin. Well, I am an attorney, but I also am just
reading your agreement. I mean, the fact that I am an attorney
isn't relevant to my question. The agreement is very clear that
the agreement will terminate. ``Your rights under this license
will terminate immediately and without prior notice if you
violate any terms of this license, including violating any
applicable laws or rights of any third party, including the
intellectual property rights of any such third party,'' which
is very different from what you just said.
Mr. Morris. These honor agreements are common.
Senator Levin. These what?
Mr. Morris. Honor agreements.
Senator Levin. This isn't a real agreement? This is an
honor agreement?
Mr. Morris. These are honor agreements.
Senator Levin. Which means----
Mr. Morris. They are common throughout the Internet. They
are click-wrap agreements. Because we don't know who the users
are, because we can't technically control them, they are called
honor agreements.
Senator Levin. Which means they are not worth the paper
they are written on?
Mr. Morris. I wouldn't say that, sir.
Senator Levin. Well, what would you say if they are honor
agreements?
Mr. Morris. I would say that honor is respected.
Senator Levin. They are not enforceable, though?
Mr. Morris. It is not enforceable. I don't believe that
because something is not enforceable, it shouldn't be set down.
Senator Levin. If you had the power to enforce it, would
you?
Mr. Morris. So what you are saying, if I may paraphrase, is
if a court of due competence judged that somebody was in breach
of a law or an obligation--Is this what you are saying?
Senator Levin. No. I am asking a question. If you could
enforce it, would you?
Mr. Morris. If we could enforce it, would we? My answer is
if the court of due competence stated that there had been an
infringement, then we would certainly look at it.
Senator Levin. My time is up. Thanks.
Senator Coleman. I want to follow up with a couple-minute
follow-up. I sense that there are some follow-up questions that
Subcommittee Members would like to ask.
Mr. Morris, let me raise the question with you about
notifying users that copyrighted material is illegal. One of
the concerns that has been raised is when one goes on Kazaa,
the notice that this is illegal is not prominently displayed.
Is there a reason why you wouldn't want to more prominently
display that? Is there any thought about doing that?
Mr. Morris. As I said, when we acquired www.kazaa.com and
the Kazaa Media Desktop, the first thing we did was to take it
all offline, strip it down, change the EULA to which your
colleagues refers, and put in those prominent notices.
You are saying, could they be larger? I suspect that there
is a debate with designers about how large something has to be.
We would certainly consider making it more prominent if that
will be beneficial, but there is no magic in the size.
Senator Coleman. Mr. Broes, do you want to respond?
Mr. Broes. Yes. I think I can do one better than just
notifying those users. I would like that when they type in
``Eminem'' to find licensed songs that they can purchase from
Eminem, and to replace that and let them know right away that
this is a legal file and displace all those illegal files. I
think that is more powerful than you are doing the wrong thing.
Senator Coleman. We are getting to whether we can get long-
term solutions here, which is licensed material online.
Mr. Broes. Yes, absolutely.
Senator Coleman. And let me ask just one other kind of
technical question. Mr. Morris, apparently there are updated
versions of Kazaa, which I think are actually better in terms
of identifying this stuff. But I have been told that
penetration is still pretty light, that folks aren't
transferring over. How do you get folks to transfer over to an
updated version? What kind of penetration do you have?
Mr. Morris. Again, because we don't know specifically, it
is anecdotal, but the evidence seems to be from our technical
director that over a relatively short space of time--we are
only talking about months--that about 90 percent of people will
upgrade. The reason the application is so popular is that we
worked very hard on it. It is smooth. It works very well. We
put a lot of features in there. And particularly since the
relationship with Altnet, by including things like the
channels--there is a hip-hop channel, the emerging artist
channel, which I mentioned--there are major incentives to
people to upgrade.
So we can't make people upgrade, but all the evidence
suggests that, over a relatively short space of time, most do.
Some will not, because some people always stick with what they
are with, but over time, that tends to be a small proportion.
Senator Coleman. Great. Thank you. Senator Pryor.
Senator Pryor. Mr. Chairman, if it is OK, I would like to
allow Senator Levin to proceed with his questions and his
follow-ups and I may have a few follow-ups after that.
Senator Coleman. Senator Levin.
Senator Levin. I am just curious about--we are trying to
find out more about your company. It is normal for most
companies and corporations that are incorporated in the United
States, for us to get a feel as to who these folks are and it
is public information. You are incorporated, or your parent is
incorporated in Vanuatu?
Mr. Morris. Indeed, yes.
Senator Levin. We have got a lot of experience with that
particular jurisdiction, not particularly positive. When I say
``we,'' I mean the Subcommittee. It is a very secretive
jurisdiction, incorporates companies within 24 hours of
request. It allows companies to set up websites to conduct
business without requiring residency, directors, shareholders,
or a registered office in the country, according to our State
Department. It has been named by our State Department as a
country of money laundering concern--that is a State Department
issue--due to the excessive secrecy laws, weak anti-money
laundering enforcement, other problems. It licenses offshore
shell banks.
This is a problem with Vanuatu that we have had as we have
gone through some investigations. It characterizes itself as a
tax haven, one of seven countries on an international list up
until a few months ago of uncooperative tax havens. It has been
removed from that list after promising to increase
transparency.
I am just curious why you are incorporated there. What is
your--I am trying to figure out who owns your company. Most of
that information should be public, if it were an American
corporation, but why Vanuatu?
Mr. Morris. I think there is a perception in the States--
this is my observation--that offshore is somehow something----
Senator Levin. No, Vanuatu specifically. Why Vanuatu?
Mr. Morris. Because it is the closest island to Australia
and that is where we are----
Senator Levin. Why not Australia?
Mr. Morris. We are registered in Australia. The service
company is registered in Australia.
Senator Levin. Your parent company, the beneficiaries, the
trust, the owners could be----
Mr. Morris. No, that is incorporated in Vanuatu.
Senator Levin. Why not Australia?
Mr. Morris. Sir, the same reason that major banks, media
companies, and others are--Australian companies are
incorporated in Vanuatu, for tax savings.
Senator Levin. They are tax havens.
Mr. Morris. Yes.
Senator Levin. Are you----
Mr. Morris. Major banks, major companies do exactly the
same thing. It is a much more common thing than it is in the
States. It is the same way that people register in Delaware.
Senator Levin. Are you able or willing to share with us the
ownership of your company, your parent company?
Mr. Morris. The ownership of the company is a matter of
record in Federal deposition.
Senator Levin. The trust beneficiaries who truly own the
company, is that a matter of public record?
Mr. Morris. Sir, it is a matter of record in deposition. I
am not an owner or shareholder of that company, so I cannot
speak on behalf of the company.
Senator Levin. The information you make reference to in
depositions is under seal. Would you be willing to make that
public?
Mr. Morris. Without advice, I can't do that. This is a
subject----
Senator Levin. Would you let us know?
Mr. Morris. It is a subject of litigation, as you know, by
a particularly aggressive foe, so I would need to take
advisement.
Senator Levin. Would you let the Subcommittee know whether
you would be willing to do that, for the record?
Mr. Morris. Yes, certainly. I will liaise with the relevant
staff.
Senator Levin. And the balance of my questions, I will save
for the record in light of the time. Thank you, Mr. Chairman. I
thank all of our witnesses.
Senator Coleman. Thanks, Senator Levin. The panel is
excused. Thank you very much.
Senator Coleman. The final panel is Dr. Jonathan D. Moreno,
Director of the Center for Biomedical Ethics, University of
Virginia, Charlottesville, Virginia, and James DeLong, Senior
Fellow and Director, Center for the Study of Digital Property,
The Progress and Freedom Foundation in Washington.
Pursuant to Rule VI, all witnesses before the Subcommittee
are required to be sworn, and gentlemen, will you please stand.
I ask you to raise your right hand and repeat after me.
Do you swear the testimony you give before the Subcommittee
will be the truth, the whole truth, and nothing but the truth,
so help you, God?
Mr. Moreno. I do.
Mr. DeLong. I do.
Senator Coleman. Thank you. You can sit down.
There are no rock stars at this panel, but the discussion,
I am sure, will be very worthwhile.
Mr. Moreno, it is a pleasure to see you. You may proceed.
TESTIMONY OF JONATHAN D. MORENO,\1\ DIRECTOR, CENTER FOR
BIOMEDICAL ETHICS, UNIVERSITY OF VIRGINIA, CHARLOTTESVILLE,
VIRGINIA
Mr. Moreno. Thank you, Senator. Good to see you. This has
been a fascinating colloquy this morning. I spend most of my
time worrying about matters of life and death and the paradoxes
and contradictions of taking care of people under extreme
circumstances when moral values are in conflict. Although this
is not specifically perhaps a matter of life and death, it is
obviously of grave concern to people who make their living.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Moreno appears in the Appendix on
page 134.
---------------------------------------------------------------------------
I am reminded, in thinking about analogies for the ways in
which ethical change is created by technological change, of my
mother's situation 46 years ago. My mother was diagnosed with a
chondrosarcoma when she was in her late 40's. Her arm was
amputated. She lives to this day, I am happy to say. She is 86
years old. But she was not told her prognosis by her doctor,
and that was very common 50 years ago for cancer patients not
to be told their prognosis.
As the technology changed and we began to have more control
over the course of a disease, the consumer, the patient,
insisted on having control over information. So we have an
interesting analogy here of the way that in health care,
technological change has created moral change. Fifty years ago,
it was thought that doctors would be unethical to tell a cancer
patient their prognosis. Today, we clearly don't feel that is
the case, and just the opposite.
Having said that, today, I come before you not as a
bioethicist but as a social ethicist. In one sense, the
question before us in social ethics is straightforward. As has
been said this morning, to intentionally take that which does
not belong to you is to violate the social contract.
Intellectual property is a form of property and intellectual
theft is a form of theft.
Yet if our goal is not merely to be punitive but to craft
an effective public policy, as we know, the law is a
notoriously blunt instrument. There are many social behaviors
in which the rigid application of the law is not only
ineffective in solving the underlying problem, but may actually
aggravate the problem by encouraging offenders to find
ingenious new ways to use technology, in this case, to evade
authorities or decrease their buying of legitimate CDs.
Prosecution may also be disproportionate to the value of
its loss, up to $150,000 in fines in this case. It may be
seemingly arbitrary in its selection of targets. Making an
example of a few people for the sake of deterrence makes many
Americans uncomfortable. Or the prosecution may be erroneous.
Files may be misidentified by ISPs.
Furthermore, if powerful and distant entities that control
a highly-valued item, like music, institute legal measures that
are widely perceived as draconian, they may encourage
disrespect for law, especially among young people. Still more
complex situations like this in which the culture itself is
evolving in tandem with technological change.
Here is the underlying problem. Many people with otherwise
healthy moral intuitions fail to see Internet file sharing as
theft, or if they do, they do not perceive it as wrong, or at
least not very wrong. I have spoken to a lot of my students
about this in the last few days and I can tell you this is the
case.
The lawsuits themselves may not, in fact, send a moral
message. They may teach people that this is theft, but they may
not teach them that it is wrong. And it may not teach them--the
lawsuits may not teach them that this is not worth the risk of
prosecution.
Of course, we have heard that the pricing structure of
compact disks is widely resented because the blank CD is so
inexpensive. I went to Office Depot yesterday and I looked at
blank CDs for 50 cents or less. And downloading can be
accomplished with ease. But these facts don't explain the moral
psychology underlying this phenomenon. What is the psychology
of guilt-free file sharers when they know that it is theft and
when these are not evil people?
I think there are a number of explanations. First, and this
is a complex phenomenon, those who are victimized are moral
strangers. They are not known to us. They are distant. They are
unknown to us as individuals. The engineer, the janitor in the
factory, the studio musician, the record store clerk, they are
not known to us. Harms to moral strangers don't easily excite
our guilt.
Second, consumers have become accustomed to the portability
and transferability of music, partly because of successful
marketing by the industry.
Third, as someone alluded to, unlike familiar forms of
copying a record, as in the case of bootleg audio tapes, a copy
never needs to be a physical object. It doesn't need even to be
put on a CD but can remain in electronic form. Physical
associations with theft may be absent.
Now, the very term file sharing, fourth, file sharing is an
interesting term. It connotes altruism and community. In
particular, many adolescents find a sense of community more
easily in the World Wide Web than in the rest of their lives.
In this case, what seems to be an impersonal, wealthy, and
imperious industry places itself in opposition to this
otherwise positive value.
Now, these factors don't justify theft. File sharing,
though, is misunderstood as simply an attack on a concept of
private property. It is primarily a demand for access to a
highly-valued social commodity, a demand triggered and
facilitated by technology.
A new interpretation of the social contract in this area,
Mr. Chairman, may be emerging, and industry and the law must
take note. Thank you.
Senator Coleman. Thank you, Mr. Moreno, and Mr. Moreno,
your full statement will be entered into the record without
objection. Thank you. Mr. DeLong.
TESTIMONY OF JAMES V. DeLONG,\1\ SENIOR FELLOW AND DIRECTOR,
CENTER FOR THE STUDY OF DIGITAL PROPERTY, THE PROGRESS AND
FREEDOM FOUNDATION, WASHINGTON, DC
Mr. DeLong. Thank you, Senator. It is a pleasure to be here
today, particularly with Dr. Moreno, because I think the
ethical dimensions of this whole issue are absolutely
fascinating, and endless, I might add.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. DeLong with an attachment appears
in the Appendix on page 136.
---------------------------------------------------------------------------
I would like to emphasize just one point here, and that is
that this is a class of problems called prisoner's dilemma, in
which, obviously, the interest of each individual consumer is
in free-riding and getting music for free. But, equally
obviously, everyone cannot free-ride and get music for free.
And so the collective interest is in having functioning
markets, functioning property rights that deliver the music and
other intellectual products as efficiently and as cheaply as
possible.
Now, there is a tension between those two because everyone,
in pursuing their individual interest of getting it for free,
then tends to destroy the social system. We have all sorts of
ways of compensating for prisoner's dilemma problems. The
social contract analogy was used by Dr. Moreno, and I think
that is very applicable. And what we use primarily are markets
and property rights and then some enforcement as a way of doing
this.
But this highlights, I think, a fundamental point, and that
is a great deal of what I read somehow seems to assume that
there is a conflict here between producers and consumers and
that consumers have some right to get things for free and that
in some way, when you make them pay, you are inhibiting their
interests. It isn't so. My interest as a consumer is in making
my voice, my pocketbook, felt in the marketplace in buying
things and in giving the incentives to producers to actually
make the things that I want to buy. If I don't have any way of
buying something, of actually giving money to the producers for
it, obviously they don't do it, and you and I do without.
So at the moment, what is going on is that we have this
huge backlog of music that can be looted because it is already
there. But if you think about it in terms of not even very
long--in terms simply of a couple of years down the road, it is
rather obvious this can't go on very long because there will no
longer be the production.
Starting from there, it is fairly clear where we want to
get on this. The difficulty is in figuring out how to get there
and the outlines of a solution.
There must be legitimate online services that wring the
unnecessary transaction costs out of the deal. You can send
bits over fiber optic cable very cheaply. It is much more
expensive to put them on plastic and send them around the
country by truck. So inevitably, the prices have to come down,
legitimate services have to be there, and the people have to
perceive it as being fair.
If I were a student and a downloader, I might well take the
position that it was up to the industry to get these services
online. Once they did get them online, I would be glad to pay
for it. Until that time, there is this firehose of stuff going
by and I am going to drink from it. That is exactly the
attitude of some college students I have talked to, mostly
children of acquaintances and such.
This is both good news and bad news. They can be brought
around to a paid system, once it is there, and they can see
their ethical obligation to support the industry. Some of them,
in fact, even make a point of downloading some things and then
going out and buying some CDs to sort of make the moral balance
proper.
The second thing, there must be digital rights management
control over the downloading so that you can allow people to
pay for different levels of use, so people can pay for a single
use, multi use, or put it in their library.
There has to be education, not just in the form of saying
downloading is wrong, but education in the form of saying, that
this whole system depends on the market and on reciprocity. I
know I am showing my age, but I remember when you could walk
down the street in Boston or Chicago, walk by a newsstand, and
there would be a pile of newspapers with a cigar box on it. You
took a paper, tossed your money in, and then eventually the
operator would come around and pick up the money. I haven't
seen that in some time. That is a form of social reciprocity
that works, or did work.
And then, finally, there has got to be some enforcement,
and I know the RIAA people here are obviously not happy with
what they have been forced into, but they have to do it to send
a message to the downloaders, to send a message to people who
want to invest in the legitimate services, and also to disrupt
the system. They are trying to get the downloaders to get
themselves into a position where they are willing to download
but not upload, because that will destroy the system. If people
think, well, I will take, but not give, it won't last very
long.
So I think the solution is in prospect, but it may take
some time and pain to get there and I certainly hope this body
helps us do it. Thank you.
Senator Coleman. Thank you, Mr. DeLong.
I actually would have hoped that this panel may have
preceded the other panels. It is, I think for me, very
worthwhile to hear what I am hearing, which is that in the long
run, we can work it out, there is a solution here. Our
challenge, it appears to be, in the short run, is whether the
strategies being employed or strategies in effect generate any
change in behavior.
One of the witnesses talked about the dark net and there
are other variations of technology that could push this stuff
further and further away. I am a parent and I have a 17-year-
old and a 13-year-old and it is a place I don't want them to
go, so how do we deal with that?
So the question that remains is certainly the short term.
Let me just kind of throw it out to both of you. One of the
witnesses, Lorraine who is the subject of a subpoena and a
suit, talked about facing $150,000--someone telling her, you
can face a $150,000 penalty. I presume that has got to be
pretty daunting to somebody who is struggling to make ends
meet. Understanding the RIAA had to do something, and I think,
by the way, they got great benefit out of this discussion. A
lot of discussion. A lot of people who knew before, or who may
not have known at all--know now that there is a problem.
But I still worry about that kind of heavy hand--that
penalty sitting out there. How do lawmakers try to figure out
what is the right balance? How do we, sitting up here--I don't
know whether it is $150 a song, or $150,000. Is there a way to
get a better sense of what kind of balance, what kind of
authority can you give somebody to enforce their interests but
not let it be too heavy-handed?
Mr. Moreno. Well, I think that a psychologist would
probably tell you that you don't need a $150,000 threat in this
case to give somebody a disincentive. You can get just as much
bang for your buck, as it were, with a lot less bucks involved.
So there probably is some recrafting of the law, the copyright
law, required for this kind of situation. My guess is, again,
that much of it--this is a disincentive that is really
horrifying and it seems to strike fear into the heart of
anybody that thinks about it and just seems to be way out of
proportion.
Senator Coleman. Mr. DeLong.
Mr. DeLong. Yes. I think, clearly, the lack of
proportionality is a problem and the penalty was set for other
circumstances than this. It was set for people engaging in mass
piracy.
Senator Coleman. Right.
Mr. DeLong. But I notice that there has been a scaling down
by the RIAA itself, and I think certainly by the courts. They
figure they aren't going to get anything except--I think what
Mitch Bainwol said was the price of the CD.
I might add, generally, there has been a huge increase in
criminalization in this country, just one offense after another
made into very hefty criminal penalties, and I think this is
something, in general, that this body should look at very
closely. It is getting to be a severe problem in a number of
areas.
Mr. Moreno. Can I add, Senator, also, that there was a
little discussion earlier about the carrot approach as well as
the stick. It strikes me, as a consumer, I have only seen one
instance in which one of these public service announcements was
used, and it was in a movie theater about a couple of weeks ago
with my wife, I saw it.
Mr. DeLong. Yes.
Mr. Moreno. It was pretty effective. They had a recording
engineer who said, ``I am a working guy and I am afraid of
losing my job.'' But I haven't seen the industry use its
ingenuity and its resources that it uses to sell its products
and develop them in the same way to create this public
education campaign. I just haven't seen it.
Senator Coleman. Do you think that kind of public education
campaign can be effective when you have a generation of kids
who don't think that they are doing anything wrong?
Mr. Moreno. Yes.
Senator Coleman. I am trying to get into the mindset of
that 13-year-old, or think that--and maybe it is not--you made
a distinction, I have got to get it, between--what was it----
Mr. Moreno. Realizing it is theft but not thinking it is
wrong?
Senator Coleman. Right. Help me understand that.
Mr. Moreno. Well----
Senator Coleman. And in understanding that, talk to me then
about things that would actually flip the switch that says,
hey, I shouldn't be doing what I am doing.
Mr. Moreno. I think the key is the concept of the moral
stranger. The recording engineer, I thought was pretty
effective, a regular guy. But what about the recording
engineer's 13-year-old? What if you put the recording
engineer's child on the screen--and this kid said, ``My dad
came home the other day and said he might lose his job because
my friends in school are downloading and file sharing.'' That
would be a very powerful message, and I am sure it is
happening.
But I think, somehow, we have to use these images to make a
connection, a living connection, to the experience of people
who are affected, not the industry CEOs and the rock stars, but
the actual folks. I think the industry is smart enough and
creative enough to do this, but I think they haven't done it
yet.
Mr. DeLong. I think, also, you see a tremendous amount of
demonization of the movie industry and the recording industry
in particular. As far as I know, they are just normal, good,
greedy American industries trying to make money and have fun at
the same time, and they are no worse or better than anybody
else, or than any other institution.
But it is like there has been almost--the academic left is
a bit opposed to property rights generally, including
intellectual property rights, and it is like there is an effort
to give people license to rip these people off because they are
nasty people and, therefore, go ahead. It seems to me that in
educating if you can get across this point that you are
injuring your fellow consumers by not doing your share, because
you are not helping to pay for this and not helping to produce
it, that is an important educational message.
Senator Coleman. But, Dr. Moreno, following up on that
point, your last comment in your oral testimony, not your
prepared testimony, was the note of a new interpretation of the
social contract is emerging and the industry and law must take
note. I don't know whether you are part of that academic left
or anything, but---- [Laughter.]
Mr. DeLong. Present company excepted. [Laughter.]
Senator Coleman. Is there a sense that perhaps our notion
of what our property rights, traditional property rights may,
in fact, be changing? Should they be changing? Talk to me a
little about that.
Mr. Moreno. Actually, that comment was only addressed at
the instant case, namely the music industry, and I actually,
with due respect to one of the Senators who is not here, I am
not persuaded that this is the first step in a slippery slope,
an attack on the concept of copyright or private property. I
don't think that is what is going on here, and I actually think
that music itself is a different case from film.
Film takes 90 minutes to 2 hours to watch. You can't walk
around on the street watching a movie unless you want to bump
into things. Music is different. We can walk around. We can
take a minute, 2 minutes to listen to a song.
So I actually think that the social contract that I am
referring to is really about access to music and the
transformation of musical imagery, auditory images into
digitization. That is what I am talking about.
Mr. DeLong. I think that is a very interesting point. I
think music is somewhat special, although the movies are
getting downloaded. The video game industry has been quite
successful at maintaining a sense of community and hasn't been
hit as hard. Now, part of that may be simply downloading time,
but it is very interesting to talk to them about it. They have
some interesting ideas.
Mr. Moreno. And in that case--this is a good example. My
son, years ago, even when he was in middle school, would play
these video games with other kids online. He had a community of
friends online that he would play these--and he still does,
with anonymous people playing chess. The file sharing business
in music is analogous, I think, in some respects.
Senator Coleman. Both of your testimonies indicated a
prospect for this thing being resolved down the road. Any sense
of how long it will take the market to kind of sort all this
thing out? And--I will leave it at that. Any best guess as to
how long it takes to bring these sides together, the peer-to-
peer folks saying, hey, we are ready to step this forward. We
want to make this happen. The music industry says, we are ready
to step forward, ready to make it happen. Obviously, that
hasn't happened and the focus today are 12-year-old kids or 71-
year-old grandmas or Lorraine who was here. So what is your
best guess of how long that takes?
Mr. DeLong. I am optimistic. I think with iTune coming on
and MusicMatch and the others, they are getting their act
together on that and the downloading services is the biggest
piece of the puzzle. I would say a couple of years.
Mr. Moreno. I was going to say within 5 years. Capitalism
is about innovation, and innovation is stimulated by losing
money. [Laughter.]
So I think this is going to move along pretty well. I was
going to say 5 years, but I will take 2 years.
Senator Coleman. We will put that in an envelope and we
will open it up in 2 years.
Mr. Moreno. Oh, oh. [Laughter.]
Senator Coleman. I want to thank you both very much for
your presence here. Your full testimony will be entered into
the record as part of the record.
We will keep the record open for 3 weeks for additional
questions from other Senators on the Subcommittee.
So with that, this hearing is adjourned.
[Whereupon, at 1:08 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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