[Senate Hearing 108-987]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 108-987
 

                    CONSUMER PRIVACY AND GOVERNMENT
                   TECHNOLOGY MANDATES IN THE DIGITAL
                           MEDIA MARKETPLACE

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 17, 2003

                               __________

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

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel


                            C O N T E N T S

                              ----------
                                                                   Page
Hearing held on September 17, 2003...............................     1
Statement of Senator Boxer.......................................     6
    Article dated February 10, 2003 from the Wall Street Journal
      by Lee Gomes...............................................    37
Statement of Senator Brownback...................................     1
Statement of Senator Burns.......................................     3
    Prepared statement...........................................     4
Statement of Senator Inouye......................................    41
Statement of Senator Lautenberg..................................    42
    Prepared statement...........................................    45
Statement of Senator Nelson......................................     5
Statement of Senator Sununu......................................     6
Statement of Senator Wyden.......................................    39

                               Witnesses

Barr, William, Executive Vice President and General Counsel,
  Verizon Communications.........................................    26
    Prepared statement...........................................    28
Blanford, Lawrence J., President and Chief Executive Officer,
  Philips Consumer Electronics North America.....................    47
    Prepared statement...........................................    50
Coleman, Hon. Norm, U.S. Senator from Minnesota..................     9
Davidson, Alan, Associate Director, Center for Democracy and
  Technology.....................................................    32
Ellis, James D., Senior Executive Vice President and General
  Counsel, SBC Communications Inc................................    11
    Prepared statement...........................................    12
Felten, Edward W., Professor of Computer Science, Princeton
  University.....................................................    62
    Prepared statement...........................................    64
Murray, Christopher, Legislative Counsel, Consumers Union........    67
    Prepared statement...........................................    69
Rose, John, Executive Vice President, EMI Group and EMI Music....    15
    Prepared statement...........................................    17
Sherman, Cary, President, Recording Industry Association of
  America........................................................    24
Valenti, Jack, President and CEO, Motion Picture Association of
  America........................................................    58
    Prepared statement...........................................    60

                                Appendix

Hollings, Hon. Ernest F., U.S. Senator from South Carolina,
  prepared statement.............................................    83

 
                    CONSUMER PRIVACY AND GOVERNMENT


 
                   TECHNOLOGY MANDATES IN THE DIGITAL


 
                           MEDIA MARKETPLACE

                              ----------


                     WEDNESDAY, SEPTEMBER 17, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m. in
room SR-253, Russell Senate Office Building, Hon. Sam Brownback
presiding.

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

    Senator Brownback. I call the hearing to order. Thank you
all for joining us today. We have got an important hearing. I
would like to begin this morning by thanking the Chairman,
Chairman McCain, for permitting me to hold this important full
Committee hearing.
    Today's hearing focuses on two timely issues for consumers
in the information age, new challenges to their privacy and an
ongoing Federal Communications Commission proceeding that
raises the specter of depriving them of their customary and
legal uses of broadcast television content.
    Our first panel will discuss the merits of the Digital
Millennium Copyright Act information subpoena, included in
section 512(h) of the Act. Recently, a Federal court has held
that copyright owners may use a subpoena to compel Internet
service providers to disclose to them the names, addresses, and
phone numbers of their subscribers suspected of piracy. This
occurs when an ISP service acts as a conduit or the transport
over which the subscriber sends and receives data. This
subpoena process includes no due process for the accused ISP
subscribers, none.
    This past July a hard-core pornographer, Titan Media, filed
a subpoena against SBC Communications seeking the identifying
information of 59 SBC Internet subscribers. Since that time,
Titan has offered a most generous amnesty program: those ISP
subscribers it suspects of piracy can go to their website and
buy porn and in exchange Titan will not identify them. Gracious
indeed.
    I strongly support protections of intellectual property and
I will stand on my record in support of property rights against
any challenge. But I cannot in good conscience support any
tool, such as the DMCA information subpoena, which can be used
by pornographers and potentially even more distasteful actors
to collect the identifying information of Americans, especially
our children.
    Yesterday I introduced the Consumers, Schools, and
Libraries Digital Rights Management Awareness Act of 2003, in
part to eliminate the results of the RIAA case against Verizon
to ensure the DMCA information subpoena cannot be used in this
manner. The Consumers, Schools, and Libraries Digital Rights
Management Awareness Act of 2003 also addresses other issues
vitally important for consumers in the digital environment.
This legislation seeks to preserve consumer and educational
community customary and legal use of content and to create
minimal protections for them as digital rights management
technologies are increasingly introduced into the marketplace.
    Digital rights management, otherwise known simply as DRM,
refers to the growing body of technology, software and hardware
that controls access to and use of information, including the
ability of individuals to distribute that information over the
Internet.
    Today's hearing seeks to answer the questions of whether
government should mandate DRM solutions to combat piracy and
whether such an action can be achieved without limiting the
public's customary and legal uses of content.
    I do want to note the 2 days ago AT&T Labs issued a report
estimating that 77 percent of the pirated movie content
available through peer-to-peer file-sharing software has been
made available by movie industry employees, not unaffiliated
consumers. This report raises strong questions about whether
digital video piracy occurring today is primarily a
governmental or intra-industry issue to be dealt with at this
point.
    Currently the Federal Communications Commission is
considering how to implement Hollywood's proposal for the
broadcast flag, a DRM proposal designed to protect digital
television programming. This proposal would require that a flag
be attached to DTV programming which would in turn inform
consumer electronics devices that the DTV content cannot be
redistributed over the Internet.
    The flag as envisioned by Hollywood is clearly problematic.
Today consumers in the educational community are empowered to
use content in a host of ways, none of which require the
permission of the copyright owner. By including a complete ban
on Internet redistribution of DTV programming, Hollywood's
broadcast flag proposal will artificially limit the way
consumers may take advantage of the Internet to make these
customary and legal uses.
    In fairness to Hollywood, I am not aware of an existing DRM
technology that both prohibits piracy yet also allows consumers
to redistribute content over the Internet in legal ways.
    To the degree that digital piracy of video content is a
real issue, I have proposed a different way to address the
protection of DTV content from piracy in the Consumers,
Schools, and Libraries Digital Rights Management Awareness Act.
Instead of mandating specific technologies and giving one set
of stakeholders a veto over others, my bill would create a
self-certifying self-certificate environment where hardware
manufacturers may use whatever technologies they determine meet
the requirements of the flag.
    In addition, the flag itself imposes a rule that DTV
content cannot be illegally redistributed to the public over
the Internet, which is a more flexible anti-piracy policy than
the one Hollywood proposes. In my bill it is the FCC that will
resolve any disputes that arise in determining if a self-
certified technology does not comply with this anti-piracy
safeguard.
    These are important issues for our Nation's transition to
digital television, as the content community has threatened to
withhold digital content unless the issue of digital piracy is
addressed. I certainly look forward to hearing from our
witnesses on these important issues and as this issue develops
for us to be able to resolve this so that we can move forward
on digital television and protect the privacy and rights of the
individual along with the property rights of those developing
this content.
    With that, because of time constraints I would like to ask
my colleagues if Senator Burns could go next. He has to go to
chair a hearing, if that would be OK. Senator Burns.

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

    Senator Burns. Thank you very much. We have got Interior
Appropriations going on on the floor this morning and I manage
that bill and I thank the Chairman. I thank my colleagues for
allowing me to do this.
    Mr. Chairman, today's hearing addresses an issue of
critical importance to our Nation's continuing technological
development, the protection of intellectual property in the
Internet era. The 1998 Digital Millennium Copyright Act, DMCA,
represented the most comprehensive reform of copyright laws in
a generation, updating the U.S. copyright law for the digital
age. The act included clear provisions prohibiting the
circumvention of technological safeguards on copyrighted
digital material.
    I have always been a strong proponent of laws protecting
intellectual property rights. Such protection is fundamental to
nurturing what is a consistently strong sector of our economy.
At stake in this debate is not only the livelihood of artists
and musicians, but that a significant number of citizens are
involved in the commercialization and distribution of creative
content.
    Such protection has taken on a new meaning in the digital
era, though. Today's technology can not only be directed at
defeating protective mechanisms, but also in sharing pirated
content in volumes and at rates that are resulting in massive
levels of financial loss to owners of copyrighted material.
While digital technology enables the production of high-quality
audio and visual entertainment content, it also makes such
content highly vulnerable to piracy and distribution over the
Internet.
    The move to a digital medium of dissemination is well under
way and at mind there is little that can reverse this process.
Lack of adequate safeguards for content will only prevent our
citizens from enjoying the benefits of this digital
entertainment revolution. Furthermore, inaction in this regard
will put a brake on commercial activity that usually surrounds
adoption of new technologies.
    While I am confident that the marketplace will eventually
evolve a technologically and financially balanced solution that
is agreed upon by a broad cross-section of stakeholders, I am
concerned over the prolonged debate surrounding the issue. I
see the role of government as one that encourages the principal
stakeholders to arrive at an agreement expeditiously. This is a
dynamic technology arena. Government technology mandates, even
if a broadly acceptable set could be devised, would have to be
flexible so as not to thwart or choke technological evolution.
    I am heartened by last Wednesday's FCC decision with regard
to the cable CE or plug-and-play agreement. This decision helps
to establish the technical standards by which digital TV will
receive and display digital television signals available on
cable systems nationwide. While the issues surrounding the
copyright protection in the digital area are difficult and
complex, it is my hope that the parties involved can reach an
agreement on a way to protect content that works
technologically.
    If that is not possible, Congress may indeed have to step
in and take a more active role, a prospect that I do not look
forward to, but which may be necessary as events evolve.
    Mr. Chairman, thanks for holding this hearing today. I am
sorry I am not going to get to participate as much as I would
like. But nonetheless, it is important, and it is just spam
days all over again. It is the industry must make the decisions
and it will be through the industry stakeholders working on
this that we will finally get some sort of settlement. I thank
you for holding the hearing and I thank you for your courtesy
in allowing me to go to the floor now.
    Thank you.
    [The prepared statement of Senator Burns follows:]

   Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
    Mr. Chairman, today's hearing addresses an issue of critical
importance to our Nation's continuing technological development--the
protection of intellectual property in the Internet era. The 1998
Digital Millennium Copyright Act (DMCA) represented the most
comprehensive reform of copyright laws in a generation updating the
U.S. copyright law for the digital age. The Act included clear
provisions prohibiting the circumvention of technological safeguards on
copyrighted digital material.
    I have always been a strong proponent of laws protecting
intellectual property rights. Such protection is fundamental to
nurturing what is a consistently strong sector of our economy. At stake
in this debate is not only the livelihood of artists and musicians but
that of a significant number of citizens involved in the
commercialization and distribution of creative content. Such protection
has taken on new meaning in a digital era. Today, technology can not
only be directed at defeating protective mechanisms but also in sharing
pirated content in volumes and at rates that are resulting in massive
levels of financial loss to owners of copyrighted material.
    While digital technology enables the production of high quality
audio and visual entertainment content, it also makes such content
highly vulnerable to piracy and distribution over the Internet. The
move to a digital medium of dissemination is well underway, and in
mind, there is little that can reverse this process. Lack of adequate
safeguards for content will only prevent our citizens from enjoying the
benefits of this digital entertainment revolution. Furthermore,
inaction in this regard will put a brake on commercial activity that
usually surrounds adoption of new technology.
    While I am confident that the marketplace will eventually evolve a
technologically and financially balanced solution that is agreed upon
by a broad cross-section of the stakeholders, I am concerned over the
prolonged debate surrounding this issue. I see the role of government
as one that encourages the principal stakeholders to arrive at an
agreement expeditiously. This is a dynamic technology arena--government
technology mandates, even if a broadly acceptable set could be devised,
would have to be flexible so as not to thwart or choke technological
innovation.
    I am heartened by last Wednesday's FCC decision with regard to the
Cable-CE ``Plug and Play'' agreement. This decision helps to establish
the technical standards by which digital TVs will receive and display
digital TV signals available on cable systems nationwide.
    While the issues surrounding copyright protection in the digital
era are difficult and complex, it is my hope that the parties involved
can reach agreement on a way to protect content that works
technologically. If that isn't possible, Congress may indeed have to
step in to take a more active role, a prospect that I don't look
forward to but may be necessary as events evolve. Thank you, Mr.
Chairman.

    Senator Brownback. We will go in the order of attendance
unless there are needs, that people have time needs here. So we
will go next with Senator Nelson.

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

    Senator Nelson. Mr. Chairman, thank you, and I will just
make a couple of brief comments.
    The entertainment industry, which is of course big in my
state as well as particularly the Senator seated next to me,
her state, it accounts for nearly 5 percent of the Nation's
economic output. So if damage is done to that marketplace, it
is clearly bad for everybody, but it is especially tough on the
creative artists who depend on the royalties to support their
families.
    I have a daughter who is a songwriter and a singer. Now, we
are not to the point that she is supporting her family. It is
exactly the reverse. But seeing this through her eyes clearly
has been an education for me.
    I think it is unfortunate that the recording industry has
had to resort to the filing of individual lawsuits, but this is
an industry that is facing a very serious and a growing threat.
So it is going to be up to us to strike a careful balance
between protecting the rights of copyright holders and the
right of the Internet users to remain anonymous and to get them
to obey the law. That is a delicate balance for us to find.
    I do not want us to see people hiding behind the veil of
privacy to conduct illegal actions. That is part of our law, is
the law of privacy, but we do not want that to be an excuse for
illegal actions. I believe the burden is on the ISPs to show
that the customer information that they are required to share
is sensitive enough to outweigh the copyright holder's interest
in protecting their property, and if they can demonstrate that
a valid privacy concern exists I am all for changing the law.
If not, we need to move forward with all available speed to
help curb the piracy before it deals a devastating blow to the
entertainment industry.
    With your permission, Mr. Chairman, I am going to go and
introduce a judicial nominee in the Judiciary Committee and
then I will come back.
    Senator Brownback. That would be just fine.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Brownback. Thank you.
    Senator Sununu.

                STATEMENT OF HON. JOHN SUNUNU,
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Mr. Chairman. I very much
appreciate your having the hearing and, while I most certainly
will not be here for the entire hearing, I want to note the
large number of witnesses that we have scheduled and thank them
for their time.
    This is an important issue, as are many of the ones we deal
with. It is a very difficult issue, difficult because it
matches two very important issues, two very important concepts,
one being property rights and intellectual property, which is
just critical to our country. A friend of mine is fond of
saying that intellectual property nourishes the American
economy, and that is absolutely true. But intellectual property
is an element of property rights and in this case we are
dealing not just with the property rights, but also with
privacy rights. So we have a very difficult balancing act to
strike.
    It is also an issue that is not going away. Senator Burns
indicated the pace of evolution that we see, the process of
digitization of so much of the content that we enjoy as
consumers, and the content around which very important segments
of our economy are based. That process of digitization, the
reduction in the cost of transmitting content, is only going to
continue.
    So I have a sense that we are going to be dealing with and
talking about this issue 2 years from now and 4 years from now
and 10 years from now and 15 years from now. So it is important
that we get all the information and the points of view on the
table and that we act in a very, very deliberate way.
    I have, as do many on this committee, significant concerns
about government-mandated standards for technology and that
extends far beyond just the issue of broadcast or the issue of
entertainment or the issues of telecommunications. We need to
be very careful about having the Federal Government try to
forecast what kinds of innovations, breakthroughs, or new
technologies are going to come to the forefront 4, 8, 10 years
from now. So I think it is important that we approach this in a
very steadfast way.
    It is important, it is an importance that has been
recognized by industry, that industry work as collaboratively
as is possible to try to deal with some of these issues.
Senator Burns mentioned the plug-and-play issue that is moving
toward resolution, and I think we should give credit to the
many industry players that have worked to already resolve some
of the concerns that we will be talking about today. But we
have a lot more work to do and I look forward to the testimony.
    Thank you, Mr. Chairman.
    Senator Brownback. Senator Boxer.

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

    Senator Boxer. Senator, thank you very much.
    This is a very important issue for the well-being, economic
well-being, of my state. That means jobs, that means
prosperity; and of course for the entire country.
    Senator Brownback, I did not hear your opening statement. I
did hear the others. I think there is a lot of wisdom in those
statements that I would agree with.
    There are four issues surrounding illegal file-sharing and
these are the issues that I think there are. You may have more.
First, we must clearly define downloading copyrighted work as
theft, because that is what it is. You steal a bike, you steal
a bike. You steal someone's work, it is copyrighted, it is
stealing.
    Second, we must recognize the economic harm that this theft
causes, as well as of course--I know we will look at some of
the victims of these lawsuits--there are victims of theft.
    Three, we must recognize the threat the privacy inherent in
open file-sharing networks, which is really interesting to me.
    Fourth, we must recognize that these networks misleadingly
expose children to pornography. That is an issue that I know,
Mr. Chairman, you care about, as do I.
    First the issue of theft. Using Internet peer-to-peer
networks to acquire copyrighted work for free is theft and it
violates copyright laws. There is such a thing as right and
wrong in our society. There it is: it is theft. It undermines
society's interest in compensating authors for their works and
discourages creative production. If the message coming out of
this hearing is anything other than the fact that stealing a
copyrighted work is theft, then I think we are doing a great
disservice.
    It is perfectly legal to share non-copyrighted work, but it
is not legal to share copyrighted work. There is a difference.
File-sharing, for example, between scientists as they work to
solve a problem, they share their files, that is one thing.
Copyrighted work is something else. Unless you pay for it you
cannot have it.
    Again, I think this is really important and it is a lesson
that we have to teach our children. It is part of family
values.
    Congress addressed this issue in 1998 in a carefully
considered provision of the Digital Millennium Copyright Act.
The provision granted copyright holders the right to access the
names from Internet service providers of those that were
stealing their work. In exchange--and this was a compromise--
service providers were granted broad protection from liability
for theft that was conducted over their networks.
    I strongly believe that was the right thing to do. So the
question is whether this committee will stand behind copyright
laws or whether we will choose to change those laws and,
perhaps inadvertently, doing that encourage theft, because the
only way to enforce the copyright on the net is to find out who
is doing the stealing. It is virtually impossible to find out
those names--if it is, if it is made virtually impossible, then
theft is encouraged. I am very willing to look at ways that we
could work around that, very willing to. But that is the basic
bottom line.
    If you have a lineup if somebody has stolen a car and there
are witnesses looking at the people, if they are all covered up
in a white sheet, each one of them, you cannot find who did it.
So if you want to find the person who committed the theft and
you have got another way to do it, I am willing to listen.
    But we have to emphasize that stealing copyrighted work is
not a victimless crime. The music industry has lost 25 percent
in sales over the last 3 years. It has gone from a worldwide
$40 billion industry in 2000 down to a $26 billion industry in
2002. Fewer artists are being signed and people who work in
distributing and promoting these artists are losing jobs.
    Jobs are being lost, folks, and we have lost in the last
couple of years almost 3 million of them and we cannot afford
to keep losing jobs. Our Nation's creative people--songwriters
from Austin to Memphis, filmmakers from New York to Hollywood,
software developers from northern California to New England,
and authors everywhere--cannot afford to give away their art
for free. It is the way they make a living. Now, maybe some
people can work for free, and if they can it is wonderful. But
in our society most people have to work.
    My third point is that using file-sharing itself poses a
threat to privacy. There are those who will argue today that
the provision in our act that we are discussing is an assault
on privacy because it can be used to unmask anonymous Internet
users. But remember, these are the people who are stealing, so
we have to find out who they are somehow.
    But beyond that, I argue that use of peer-to-peer file-
sharing for piracy actually places your privacy at risk. Most
users have no idea that they are frequently sharing their
private documents with everyone on the network. So let me show
you, Mr. Chairman, a page from Kazaa where you agree in fact
that you will share your files and that your files are in your
shared folder, and it allows you to add any other folder you
wish.
    Users often do not know that a document or an automatic
backup of the document is being saved in their shared folder
and unwittingly they are making those files available to
everyone on the network. A House report from the Committee on
Government Reform found in a search of one peer-to-peer network
at least 2,500 Microsoft Money backup files. Each of these
files store a user's personal financial records and all are
readily available for download.
    That means if your son or daughter downloads music through
Kazaa during the afternoon, the information you work on at
night--private tax returns, medical records, financial
portfolios, and private communications--may also accidentally
become available to everyone else on the network. This is just
something that is happening, that has been proven.
    I am almost done, Mr. Chairman. The fourth and final issue
we must address is how these networks expose children to
pornography, and I am going to show you how that happens.
According to the GAO, juvenile users of peer-to-peer networks
are at significant risk of inadvertent exposure to pornography,
including child pornography.
    Again, let me show you this screen. The user has put in a
search for ``The Beatles.'' That search then generates a series
of files available for download, and it lists them and here
they are listed. Most of these files are copyrighted works and
it is illegal to download them. But look at the file
highlighted on the chart. It is titled ``Drunk Teen Sex 2,''
which is a teen porn file. Plus there is no guarantee that any
of these other files are actually not pornography. Your child
could think she is downloading a Beatles song and actually be
downloading pornography.
    Ultimately, we have to look at what we did in our Copyright
Act. I believe that if we change the law and we make it harder
to enforce the theft of copyright works, we will be
inadvertently expanding the use of pornography to unsuspecting
kids and we will not be enforcing a law that has made our
country great, which is that the owner owns the property and if
you want it you need to pay for it.
    Thank you very much.
    Senator Brownback. Thank you, Senator Boxer.
    We are joined by Senator Coleman, who heads a subcommittee
in the Government Affairs that is looking at this topic, as
well as has a number of personal interests, a great deal of
personal interest in this topic. We welcome your attendance and
your testimony, Senator Coleman.

                STATEMENT OF HON. NORM COLEMAN,
                  U.S. SENATOR FROM MINNESOTA

    Senator Coleman. Thank you, Mr. Chairman, and I do want to
thank you for your leadership on this issue, for holding this
hearing, and for giving me the opportunity to come before you.
    On September 8 the recording industry, RIAA, fired its
first volley of copyright infringement lawsuits. The industry
had promised to, quote, ``approach these suits in a fair and
equitable manner,'' it is initially focusing on egregious
offenders who are engaging in substantial amounts of illegal
activity.
    As Chairman of the Permanent Subcommittee on
Investigations, I requested documents from the recording
industry to assess the scope and nature of the procedures used
to identify and sue consumers who engage in potentially illegal
file-sharing. For the purpose of being equally gracious with
the time you have shared with me, I just want to briefly
outline the problems as I see them and where the PSI intends to
go with our investigation.
    I would note, technology and the Internet offer such great
hope for a bright future, but with it clearly there are
concerns about how it is used and who uses it and how do you
deal with those who use it in an illegal manner.
    On the matter of subpoenas, I am concerned about the scope
and impact of the broad powers extended to the RIAA to issue
subpoenas. To that extent, I believe we need to understand
whether or not it is possible for innocent people to get caught
up in the legal web that the RIAA is trying to create to stop
illegal piracy.
    I understand that there are 60 to 90 million people 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.
    But I do not believe, however, that aggressively suing
offenders will be sufficient to deter the conduct of an entire
generation. We will review penalties, both civil and criminal,
that may be future tools to ward off stealing of copyrighted
materials.
    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 works 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 initially occurring 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 a power of subpoena and the threat of
legal action to compel consumers to cease and desist. I believe
the very future of the American music and motion picture
industries is at stake here and with it a major contributor to
our Nation's economic stability. I believe Senator Nelson noted
that the movie industry alone contributes 5 percent to the
Nation's economic output.
    The growth of current and future technologies bode well for
improving the quality of lives and productivity, but it could
also spell economic doom for the entertainment industry. In a
short time, just a short time, it will be possible to download
a full-length movie picture in just minutes. It will be
possible to have this then distributed across the world before
it makes its cinematic preview.
    I believe we have the capacity to preserve the integrity of
the arts and entertainment industry in America, but it will
take a concerned, cooperative effort among all involved to make
it work. It will require a way of thinking, I believe, 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 new and creative means.
    The goal of the entertainment industry should be to create
loyal long-time customers, not engage in short-term strategies
that scoop up and make example of folks who may or may not have
knowingly engaged in improper behavior, and which then
alienates current and potential customers.
    It is a reality that the state of ethics, law, and
technology are woefully out of step with one another today.
Hopefully the dialogue that we engage in here today in this
hearing and the hearing I will hold on September 30 will be the
factual and intellectual foundation upon which we can engineer
some thoughtful and practical solutions for the future. As
Senator Sununu noted, we are going to be at this discussion for
a while.
    There are challenging issues that are involved here. But
they touch so many, many people and are so important they
deserve this focus. Again, Mr. Chairman, I applaud you and
thank you for your leadership on this issue.
    Senator Brownback. Thank you, Senator Coleman.
    I thought those were all excellent opening statements on a
big issue, the narrow ones that we have cast here and the
overarching ones that are here as well. Thank you very much,
Senator Coleman.
    I call up our first panel. That consists of: Mr. William
Barr, Executive Vice President and General Counsel for Verizon
Communications; Mr. James D. Ellis, Senior Executive Vice
President and General Counsel for SBC; Mr. John Rose, Executive
Vice President of the EMI Group; Mr. Cary Sherman, President of
the Recording Industry Association of America; and Mr. Alan
Davidson, Associate Director, Center for Democracy and
Technology in Washington, D.C.
    Gentlemen, thank you very much for joining the Committee
today on what promises to be an opening salvo of a big
discussion, a big discussion that we need. We will go, proceed
from left to right if that would be OK, and so, Mr. Ellis, let
us start with you, Executive Vice President and General Counsel
of SBC. Thank you for joining us.

 STATEMENT OF JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESIDENT
                      AND GENERAL COUNSEL,

                    SBC COMMUNICATIONS INC.

    Mr. Ellis. Good morning, Mr. Chairman and members of the
Committee. Thank you for the opportunity for SBC to share its
views on the important issue of individual right to privacy,
due process, versus the recording industry's efforts to enforce
its copyrights. It is an important issue and one that we
believe certainly deserves the exposure that these hearings
will provide.
    It is a timely topic. As has been mentioned, the explosion
in subpoenas from the recording industry took place this
summer. I believe the Internet community and the public are
only just now beginning to be aware of the full implications of
the position taken by the recording industry. I believe that
the community as it begins to understand the full scope of the
position advanced by the recording industry is going to become
very vocal and insistent that their right to individual privacy
and due process not be compromised by efforts to enforce
copyrights.
    Having said that, I want to be very clear. SBC's position
is unquestionably that owners of copyrights have every right to
enforce them vigorously. And to that extent, we certainly agree
with most of the comments that have been made here today. We
think it is important to the industry, to the economy, that
copyright protections be served and accomplished.
    Having said that, I would also add that SBC has a lot of
intellectual property and we take every reasonable and
responsible step to enforce those copyrights and protect that
intellectual property. We do so by going to court, filing a
lawsuit, availing ourselves of the rights under the Federal
Rules of Civil Procedure. We obtain subpoenas subject to
judicial oversight and review.
    That happens every day in the courts across this land. That
is how it is done, has been for generations. That is how the
system has worked. In contrast, the recording industry has
taken the position that merely by going into a clerk, making an
assertion that their copyright is being infringed, and without
notice to the Internet user and without any judicial oversight,
they are entitled to obtain the names, address, and telephone
number of that user.
    Now, I do not believe that any civil litigant or law
enforcement agency in this country has that capability. The
essence of their position is that once they make that filing
with the court clerk and pay their $25, due process and
individual right of privacy goes out the window. That cannot be
the law in this country.
    The implications to that go well beyond the recording
industry. If the recording industry can go in to a clerk, pay
their $25, make an allegation, and obtain the name, address and
telephone number, then anyone else in this country, regardless
of their motive, can do the same thing.
    The implications go beyond privacy. They unfortunately go
to personal security. The fact is the Internet is not the
personal safe haven we wish it was. To the degree there is
security, it is usually associated with the fact that e-mails
are anonymous. They do not include, your e-mail address does
not include, the name, address, and telephone number of the
user. So people go into chat rooms, they access web pages, they
use the Internet, counting on that anonymity.
    Now, if the position of the recording industry prevails
that anonymity is stripped away very simply. File your $25 and
submit your statement that somebody is infringing on the
property. That cannot be the test. If it is, I believe it will
be inevitable, inevitable, that the Internet stalker, the child
molester, the abusive spouse, or some other whacko who uses the
Internet is going to use that same approach to find their
victims.
    It is for this reason that we support the legislation that
was introduced by the chairman. It puts the recording industry
in the same position as every other litigant. That is, you go
file your lawsuit, you get your subpoena, and you pursue it
subject to the Rules of Civil Procedure. If the recording
industry has the evidence that people have violated it to the
degree that they are entitled to this subpoena, then file the
lawsuit. They served 2,000 subpoenas and to my knowledge they
filed 200 lawsuits. I assume that means there are 1,800 people
that have had their privacy violated without justification.
    Bottom line for us is very simple: We do not believe that
your constituents, our consumers, and Americans in general lose
the right to privacy and due process simply because somebody
makes an allegation that there has been wrongdoing and pays $25
to a clerk. That cannot be the law.
    I would be happy to have any questions, sir.
    [The prepared statement of Mr. Ellis follows:]

 Prepared Statement of James D. Ellis, Senior Executive Vice President
              and General Counsel, SBC Communications Inc.
    I would first like to thank Chairman McCain and Senator Brownback
and Members of the Committee for inviting me here today to discuss the
important issues surrounding the Digital Millennium Copyright Act, the
privacy and security of Internet users, and the protection of copyright
content.
    SBC has a considerable body of intellectual property and we take
all reasonable and responsible steps to protect those property rights.
We recognize and respect the legitimate interests of other copyright
owners as well.
    However, when SBC acts to protect or assert its intellectual
property rights, it has to follow fundamental and time-tested rules and
procedures that are applied every day in our courts. Others, however,
advocate what we believe to be a misapplication of the DMCA in order to
create a private and limitless right of subpoena--devoid of all rules
and procedures. The recording industry has legitimates rights and
concerns--but the answer is not to create a private right of subpoena
that completely ignores the safety and privacy of America's 100 million
Internet users.
    Peer-to-peer file swapping technology, like that utilized by music
file swappers, did not exist in 1998 when the DMCA was passed. Yet, the
recording industry would have you believe that Congress and the ISPs
foresaw the future and agreed to strip all Internet users of their
rights of privacy, anonymity and due process just because they are
accused of infringing copyright over a peer-to-peer network.
    Under this distorted interpretation of the DMCA, we have already
seen that SBC and all ISPs are being besieged by thousands of
subpoenas, all without any court supervision. Given the fact that these
subpoenas are merely rubber-stamped by a court clerk without judicial
oversight, we are concerned about the protection of our customers'
safety, rights of privacy, anonymity and due process. However, we
remain committed to working with the recording industry and all
copyright owners to find solutions that properly balance the rights of
all interested parties.
I. Accepted Safeguards and Rules of Civil Procedure
    SBC and thousands of other litigants adhere to the following
fundamental and time-tested rules of procedure when protecting their
intellectual property rights:

    i.   We have to investigate our claim and the elements of the
        claim.

    ii.   We have to expose our allegations to the light of day in a
        court of law;

    iii.  When we file a suit, SBC must abide by the requirements of
        Rule 11 of the Federal Rules of Procedure which insures that
        the attorney who signs the pleadings has undertaken a good
        faith investigation of the facts alleged,

    iv.   If necessary, we would petition the court for expedited
        discovery to learn the name and location of unknown defendants;

    v.   We could obtain a subpoena for the records of third parties in
        order to identify such unknown defendants;

    vi.   We would observe the provisions of Rule 45 of the Federal
        Rules of Civil Procedure and insure that the subpoena is issued
        by a Court within 100 miles of the party served which affords
        that party an opportunity to resist the subpoena in a forum
        convenient to them; and

    vii.  Interested parties would be afforded an opportunity to
        challenge us in court under the supervision of a judge or
        magistrate.

    These same procedures are followed by litigants thousands of times
a day in courts all across the country.
II. A System Without Safeguards or Rules
    In contrast to the well-settled rules that everyone else follows,
the Recording Industry Association of America (``RIAA'' or ``Recording
Industry'') and others would propose the following special treatment to
avoid the annoyance of rules and procedures:

    i.   Without regard to Fed. R. of Civ. P. 45, a person claiming to
        be a copyright owner or its agent can pick any Federal District
        Court, from Guam to Maine, and can use that court as its
        private subpoena factory \1\ to generate hundreds or thousands
        of subpoenas on the mere assertion of a ``good faith'' belief
        that their copyright has been infringed;
---------------------------------------------------------------------------
    \1\ RIAA's disregard for Rule 45 by using the District Court in
Washington, D.C. to obtain subpoenas issued to entities located across
the country has resulted in at least four court challenges. In addition
to SBC, Boston College, MIT and Columbia University have all challenged
this disregard for Rule 45. In all but the SBC case, RIAA has either
been defeated in court, withdrawn its subpoenas or abandoned efforts to
enforce them. While indicating its intent to voluntarily have subpoenas
issued from the proper court on a going forward basis, RIAA still
maintains that it can disregard Rule 45 in that ``[t)he DMCA does not
require formal service of subpoenas'' and that ``[t)he DMCA authorizes
nationwide service of process.'' See: RIAA Reply Brief in RIAA v. SBC
Internet Communications Inc., U.S. District Court for the District of
Columbia, Misc. Act. No. 03-MC-1220-IDB, pages 15-16.

    ii.   The ``good faith'' belief is not subject to the obligations
        or sanctions of Fed. R. Civ. P. 11 because no lawsuit need be
---------------------------------------------------------------------------
        filed;

    iii.  After paying a small fee, and without any substantive review,
        the alleged copyright owner can require the clerk of the court
        to issue a subpoena whereby, under force of law, an ISP must
        within 7 calendar days, provide the name, address, telephone
        number and e-mail address of the person or persons informally
        accused of wrong-doing;

    iv.   The alleged copyright owner never needs to file a formal
        claim, and never needs to appear before a judge or magistrate.
        In fact, the party never has to explain what it did with the
        personal information it obtained.

    v.   By the time any Internet subscriber would be allowed to
        protect his/her private information or interests, it would be
        too late.

    Again, Congress did not intend this application of the DMCA to
peer-to-peer activity because peer-to-peer technology did not exist at
the time the DMCA was passed in 1998.
III. The Safety and Privacy Risks of No Court Oversight
    While SBC appreciates the need to protect legitimate copyright
interests, this unsupervised private right of subpoena poses safety,
security and privacy risks to all Internet users. There is great risk
that others who under the guise of a copyright owner would obtain a
subpoena for illicit or illegitimate purposes. A person's name, home
address and telephone number might be released without that person ever
knowing that the information is no longer private. Based on nothing
more than an unverified allegation, personal information can be tied to
activities, subject matter or affiliation of a person on the Internet
and that information can be used for illegitimate reasons that go
beyond copyright enforcement.
    In this system, by the time any abuse is discovered, the name, home
address and telephone number of the Internet subscriber has already
been released. In addition, this private right of subpoena is available
to anyone and everyone, not just the Recording Industry. That thought
is especially disturbing considering this private right of subpoena is
available to a pedophile lurking in an Internet chat room; an abusive
spouse, or a stalker. Someone who is intent on doing bodily harm is not
going to be dissuaded simply because the law states that they may be
liable for ``damages or attorneys fees'' for misrepresentations. By
then, the harm is done.
    This past August alone, SBC's affiliated Internet Service Providers
received almost 200,000 e-mails complaining of abuses of the Internet.
While most of these e-mails complain about spam, and other Internet
abuses, a significant number pertain to harassment and threats.
    A female subscriber recently complained ``This man has been
Internet stalking me. He was first asking me to call him and when I
refused, he started saying that he loved me. Then I received this in my
mail . . . look at the title. I feel he is a threat to me.'' The title
of the e-mail contains clear threats of bodily harm and is too
offensive to repeat in this forum. I have submitted a redacted copy of
the e-mail for the record.
    If this private right of subpoena is ratified, the person making
these threats can go to the clerk of any district court, submit a short
form letter, pay a small fee and force an ISP to tell him this person's
name, where she lives, and what her telephone number is. This is but
one very real example of how the public policy implication of this
issue extends far beyond mere music piracy.
    SBC Internet Services, through its Pacific Bell subsidiary,
recently filed suit in California against a company called Titan Media,
along with the Recording Industry and one other company, over misuse of
the DMCA. Titan Media is a purveyor of gay pornography and, by
obtaining the issuance of one single DMCA subpoena in California, Titan
demanded that Pacific Bell Internet Services turn over the names,
addresses, telephone numbers, and e-mail addresses of 59 individuals
who were alleged to have illegally obtained its pornography through
peer-to-peer file swapping. SBC has no reason to believe that Titan's
intentions and tactics are based upon any motivation other than simply
protecting its copyrights. However, imagine the potential for abuse if
such information is provided to a party with less than honorable
intentions. Even associating a person's name with such material might
have far reaching affects on the individual's personal and professional
life beyond any copyright issues that may exist. The privacy
implications of this unsupervised, private right of subpoena are
frightening.
IV. Private Subpoena Power--Constitutional Issues
    The private right of subpoena sought by the Recording Industry and
its allies present difficult Constitutional problems as well. Article
III of the Constitution limits the power of the courts to pending cases
or controversies. Courts may not be private enforcers. Under this
proposed system, there is no requirement that a lawsuit is ever filed.
The party obtaining the subpoena never has to expose his claims to a
judge or magistrate and never even has to explain what he did with the
personal information he obtained.
    The evidence at hand indicates that the Recording Industry alone
has obtained close to 2,000 subpoenas--all out of the court in
Washington, D.C.--but it has only filed approximately 250 lawsuits.
This is a clear example of our courts acting as private enforcers with
no pending claim or controversy, and this is directly contrary to the
Constitution.
    This unsupervised private right of subpoena also strips Internet
users of their First Amendment rights to communicate and publish
anonymously-without due process of law. The Recording Industry and its
allies have taken the position that they need only make an allegation
of infringement and Internet users have no rights. But that ``guilty
until proven innocent'' proposal goes against our entire judicial
system-whether civil or criminal. That so-called logic is analogous to
saying that citizens who are merely accused of one particular type of
crime have no constitutional rights. Thankfully, our judicial system
requires the often bothersome task of actually proving your allegations
before the rights of the accused are forfeited.
V. Resource Burdens and Substantial Costs
    The interpretation of the DMCA advocated by the Recording Industry
and others would result in a limitless, private right of subpoena. As
the Recording Industry has shown us, this process can be mechanized
like an assembly line. Further, the Recording Industry demands
compliance to its limitless subpoenas, all within 7 calendar days. This
misuse of the DMCA would require ISPs to allocate significant resources
at substantial costs which, according to the RIAA, cannot be recouped
from the party seeking the records. In our experience, each subpoena
requires approximately one hour to fully process, and that assumes that
all information is correct and easily available. That estimate does not
include the time to notify the subscriber that a stranger is asking for
his/her personal information. That estimate also does not include the
cost of assets and tools necessary to do the job.
    The Recording Industry has taken the position that ISPs must
respond within 7 calendar days, and that they must do so free of
charge. This goes against the well-established provisions of Fed. R.
Civ. P. 45, and the DMCA and the Federal District Court in the Verizon
decision both clearly demand that the protections of Rule 45 apply.
    However, this assembly line of subpoenas results in other very real
and practical problems as well. ISPs do not operate with unlimited
resources. Therefore, if any person can submit a limitless number of
private subpoenas and demand an ``expeditious response'' at no cost,
then ISPs will have no choice but to divert resources away from
assisting with law enforcement subpoenas and warrants so that they can
act as unpaid private investigators for the Recording Industry and
others exploiting this abuse of the law.
    This issue is NOT just about music piracy, and it is not just about
the Recording Industry. Before we create an unsupervised private right
of subpoena, sweeping away important procedural and Constitutional
protections, all of these public policy issues should be addressed by
Congress.
VI. Legislative Resolution
    Legislation like that proposed by Senator Brownback addresses all
of these issues because it relies on the same time-tested rules and
procedures that the rest of us must follow. Requiring the filing of a
lawsuit would bring this subpoena power within Constitutional and
procedural safeguards. It would require that the alleged copyright
owner reasonably investigate his claims, and expose his claims to the
light of day, pursuant to the protections of the Federal Rules of
Procedure. In so doing, it would provide Internet users basic notice
and an opportunity to be heard--all the protections denied to them by
the current abuse of the DMCA--and it would require more than a mere
allegation based upon not even the slightest amount of due diligence.
    Finally, a judge or magistrate would be able to examine the
copyright owners' claims, address any glaring deficiencies in the
claims, address any applicable defenses, and ensure that no mistakes
were made by copyright owners or their computerized search robots. It
would recognize the right of third-parties to recover costs associated
with these burdens. And, it would provide basic due process before
privacy and First Amendment rights are forever lost.
    We don't seek to deny them the ability to assert their rights. We
seek an opportunity to work together to protect legitimate copyright
interests, while safeguarding the security and privacy of Internet
users, and respecting the legitimate interests of ISPs. We propose to
do this by applying the same rules to one and all. Thank you for your
time and attention to this important matter.

    Senator Brownback. Thank you very much, Mr. Ellis. We
appreciate it.
    Mr. Rose, Executive Vice President of the EMI Group.
Welcome and the floor is yours.

       STATEMENT OF JOHN ROSE, EXECUTIVE VICE PRESIDENT,
                    EMI GROUP AND EMI MUSIC

    Mr. Rose. Thank you, Mr. Chairman, and thank you, members
of the Committee, for inviting EMI and me in particular to
testify today. Given the short nature of my remarks, I would
ask that my complete statement be entered into the record.
    Senator Brownback. They will. And for all of the witnesses
today, your complete statement will be put in the record, and
so you are free to summarize if you choose.
    Mr. Rose. Thank you.
    Unlike many on this panel, I am not a lawyer. My
responsibilities include strategy, corporate development,
digital distribution, and anti-piracy. I am here today to talk
about the impact of the deliberations today on our business.
    EMI is a music-only company. Music is the only thing we do,
so what is decided and discussed here today is critical to us
and critical to our employees. In the United States we employ
approximately 2,500 people and, contrary to common belief, the
largest concentration of those people are in Jacksonville,
Illinois, and they do things like drive forklift trucks and
work in warehouses.
    I would like to make four points or at least talk about
four topics: first, the degree of change that we are facing in
the industry and how it is transforming our industry and our
relationship to the telecom, computer, and software industries;
second, the economics of piracy, the economics to us and the
economics more broadly to the telecom and computer industries;
third, why this subpoena process is so critical to us; and
fourth, while critical, why it is only one small element in a
much larger set of initiatives that we are addressing and
pursuing to address the changes facing us.
    Turning first to the degree of changes, we are facing the
functional equivalent of a perfect storm, i.e., change on
multiple fronts that are dramatically transforming our
business, changes in technology, changes in consumer behavior,
in the digital world, in the physical world, changes in retail,
and a new set of competitors from other industries, for whom
now the content industries are a critical part of their
businesses.
    Piracy underlies all of these changes and I just want to
point to one of the types of changes we are facing. If you go
back to this chart, back in 1995 the music industry was pretty
simple. You created a disk--vinyl, LP, cassette, CD--you sold
it to a consumer, who put it in a purpose-specific device that
played it. If you look at the world today, however, just a
scant 7 years later, the number of devices have proliferated
dramatically and at this point almost any device--number of
formats have proliferated--and almost any device can play the
content from any format. So we are really facing a world in
which the music itself has been disconnected from the format--
CD, cassette, digital download--on which it rode in.
    One of the things that is doing is changing the underlying
nature between the record industry, the telecom industry, the
computer industry, and the software industry, creating a degree
of interdependency in our economics that heretofore we had
never seen.
    Let me move to the economics of piracy. Piracy hurts us
dramatically in four ways as a record company. First, it
affects our ability to invest in artists. We have had over the
last couple of years to cut our artist roster by 25 percent
because of our inability to continue to invest in generating
new artists.
    Second, it affects our ability to invest in new
technologies and new products and services. Just at the time
when we need to be investing in innovation, we are actually
counting every penny.
    Third, it affects our shareholders. Despite increasing our
profits by 33 percent over our last fiscal year, the market's
view of the future of the record industry has led to a 76
percent drop in our market cap.
    Finally, it affects our employees. Unfortunately, over the
last 2 years we have had to lay off approximately 20 percent of
our workforce in order to provide returns to our shareholders.
    Ironically, in the midst of what has been truly a vitiating
set of economics for the record business, if you look at the
economics of piracy it is kind of interesting to see that there
are actually significant benefits to the telecom, computer, and
software industries and consumer electronics industries from
file-sharing in a peer-to-peer environment. And while a lot of
this debate is about privacy, it is also about economics.
    In a good year, the music business, record and publishing,
earns between $1 billion to $1.5 billion. The last couple years
have not been good. If you decompose the traffic charges, the
network service charges, the incremental profits from the sale
of purpose-specific content equipment, there is approximately
$7 billion of incremental profit that accrued to the telecom,
computer, and software and consumer electronics industries.
    This is preliminary work, it was done by a third party, and
even if it is half right it is pretty important. But those
economics threaten to kill the goose that lays the golden egg.
    These subpoenas are critical to our future because
expeditious identification of infringers are important. One
brief example. One of our leading artists recorded a record.
Before we actually got our hands on it to start developing
marketing plans and manufacturing disks, it was leaked onto the
web. 36 hours later in Asia, in the night markets, there were
physical copies of his new album for sale with bonus tracks
from his previous album, something that dramatically hurt our
sales.
    The DMCA recognizes the balance between the safe harbor for
the ISPs and the need to identify individuals.
    Finally, this is just one of several elements we are
proceeding. We are pursuing a number of initiatives on
enforcement, a lot on awareness, and we are working very hard
to make all of our content available in the digital world. We
have agreements with over 75 different digital providers
currently and we are negotiating more than 100 as we speak now.
    Thank you, Senator.
    [The prepared statement of Mr. Rose follows:]

      Prepared Statement of John Rose, Executive Vice President,
                        EMI Group and EMI Music
    Mr. Chairman, members of the Committee, thank you for inviting EMI
Music to testify at this hearing. I am the Executive Vice President of
the EMI Group and EMI Music. My main areas of responsibility include
business strategy, digital distribution and anti-piracy. I have been
with EMI for the last two years. Prior to joining EMI, I had a 20-year
career as a consultant at McKinsey and Company serving media,
telecommunications, and high tech companies. I am not a lawyer and so
am here today to testify about the impact of piracy on the record
industry and the various ways that we are combating piracy, adapting to
the emergence of new technologies, and creating new products and
services.
    Mr. Chairman, we have to win the battle against digital piracy, and
we need your help. We have to win not only because hundreds of
thousands of American jobs are at stake, not only because a vital
sector of the economy--one of the few that runs a positive trade
surplus--is at stake, and not only because our product helps drive
expansion of the telecommunications, consumer electronics and personal
computer industries. We have to win the battle because the future of a
unique American heritage--music--is at stake. EMI Music is the home to
the recordings of Frank Sinatra and John Coltrane. Where is the next
American music icon? If piracy continues unabated, we may never find
him or her.
    EMI is unique among the music companies--our only business is
music. As a result, we have a big stake in online music. EMI has acted
aggressively to make its music available to consumers through
legitimate online services to meet consumer demand and thereby combat
piracy. The lawsuits brought by the RIAA are only one part of an
overall strategy whose goal is to reduce the amount of egregious
digital piracy that is eroding our business. The other parts of that
strategy are educating consumers and aggressively and eagerly providing
our music to consumers the way they want it--by licensing our music to
any number of legitimate digital distributors. I plan to discuss these
other elements of our strategy later in my testimony.
    The last few years have been dramatic ones for the record industry,
including EMI. Few industries have faced the intensity of discontinuity
felt by the record industry as a result of dramatic changes in
technology, new competition from non-music entertainment products,
consumer behavior through piracy, and a changing retail environment.
Let me give you just one example of the transformative events
experienced by the music business. In 1995, music formats and the
devices for playing them were simple and the relationship between the
two was straightforward. A vinyl record played on a record player. A
cassette tape in a tape deck, a CD in a CD player and so on.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    A mere seven years later, and not only have the number of music
formats and music devices multiplied, but the relationship between the
two has grown remarkably complex:

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Few industries have coped as well with such extensive changes in
their business environment. Still, the future of music has the
potential to be dynamic and exciting. As we digitally deliver music to
consumers and embrace the potential of new forms of distribution, the
music industry has the potential to drive dramatic innovations among
the music, telecommunications, consumer electronics and computer
industries. But if we do not work across industry lines to solve the
music piracy problems we face, the future of the industry also has the
potential to be bleak.
    I am not going to repeat all of the piracy facts that Cary Sherman
of the RIAA has already presented to you in his written testimony. But
I do want to highlight three recent statistics. First, according to the
NPD Group, 7.5 billion music files on Americans' computers were
obtained through peer-to-peer (P2P) file swapping. That's almost two-
thirds of the total number of music files on computers. Second, in June
of this year, even after extensive publicity that music piracy is
illegal, long after the RIAA had initially sought its first subpoena,
and long after the RIAA had won its lawsuit against Napster, only 37
percent of people surveyed in a poll knew that downloading files on P2P
systems is illegal. Third, the growth in these P2P services has
directly and unequivocally harmed our business. Every serious and
credible study of these services--conducted by the industry and by
third parties--concludes that a significant portion of the decline in
record industry sales over the last three years is attributable to
these P2P services.
    At EMI those numbers have had a real and painful effect on us in
several major respects:

   Piracy affects our ability to reinvest in new and developing
        artists thereby imperiling the livelihood of new artists and
        the future of music itself. Last year, at least in part due to
        digital piracy, EMI had to cut its artist roster by roughly
        one-fourth. Moreover, there is simply no question that digital
        piracy affects our decisions about signing new artists, how
        much we are willing to pay artists when we sign them, how long
        we are willing to maintain an unprofitable relationship with
        them hoping it will become profitable, and how many artistic
        risks we are willing to take.

   Piracy affects our ability to invest in new technologies and
        in new or creative ways to distribute our product.

   Piracy affects each of our shareholders. EMI is the most
        profitable large music company. Last fiscal year, our operating
        profits increased 33 percent. But in the same period, our
        market capitalization declined by 76 percent.

   And finally piracy affects our employees. Last year, digital
        piracy contributed to our decision to publicly and painfully
        cut our workforce by about 20 percent. Every other record
        company is facing the same situation.

    In order for us to successfully adapt to these changes and to
combat piracy, the legal environment has to remain stable and our
ability to enforce and protect our property rights has to be
guaranteed. The current legal strategy being pursued by the RIAA using
the subpoena authority granted under the Digital Millennium Copyright
Act (DMCA) is the result of long and careful thought.
    Mr. Chairman, there has been a great deal of debate about the
privacy implications of the DMCA subpoena process. As I say, I am not a
lawyer, but I am confident of three things:

        First, the DMCA subpoena process is structured the right way.
        It facilitates rapid and efficient resolution of copyright
        infringement claims, which is vital if we are to have a legal
        and business climate where technology can develop while at the
        same time content producers can thrive--protecting their
        substantial capital investments and making the reinvestments
        necessary to produce new content.

        Let me elaborate on why an expeditious process is so important.
        Digital piracy of a new CD produced by an EMI artist--or any
        record company's artist--spreads in a flash. A digital pirate
        file on P2P systems multiplies like a virus. The pirate file is
        a perfect replica of the genuine file and enables P2P users to
        essentially set themselves up as miniature digital factories
        that can churn out our CDs faster than we can. In order to
        fight the virus, we have to move very quickly. A delay means
        that the perfect pirate file can have replicated thousands or
        hundreds of thousands of times before we can get to it. The
        DMCA subpoena gives us the speed that is so vital for us to
        survive.

        You may be under the impression that digital piracy is only
        conducted by unsuspecting teenagers who just want to listen to
        the music they love. But that's not the case. Digital piracy
        also encompasses the organized and malicious piracy of hacking
        groups--rings of thieves whose goal is to obtain advance copies
        of music, videogames, business software and movies and to leak
        them onto the web. It also includes the piracy of egregious
        uploaders who make thousands of copyrighted songs available to
        anyone with an Internet connection. In fact, according to NPD
        data, eight percent of the total population of people who save
        digital files on their computers have more than 1,000 files.
        Those eight percent account for nearly 60 percent of the music
        available for download on P2P systems. To be sure, some digital
        piracy is what you may think of as casual--a 14-year-old coming
        home after school and listening to a few favorite songs. And,
        yet, more than 40 percent of all music files downloaded today
        are by people over the age of 30 according to NPD studies. All
        these types of digital piracy have direct connections to global
        physical piracy by organized crime rings.

        In one instance late last year, the new album of one of EMI's
        biggest artists was leaked onto peer-to-peer sites several
        months before the CD was due to arrive in stores. In fact, it
        was leaked before EMI itself even had the master recording or
        could begin to execute its own marketing and sales plan. But
        because of P2P systems, within a matter of hours, a perfect
        digital copy of the music was available worldwide. Organized
        crime rings in parts of Asia were able to download the music,
        burn thousands of physical CDs, and have them on sale on the
        streets of Singapore and Hong Kong within a few days--complete
        with bonus material.

        Second, the recent public debate spurred by the DMCA lawsuits
        has been enormously useful in raising public consciousness. I
        recently met in my office with a father of two children who
        told me that he would never allow his children to copy
        software. But he actually had been proud of his son's ability
        to download music using P2P systems. The RIAA's public
        education and legal strategy helped him realize that no
        principled distinction was guiding his thinking. A three-minute
        piece of intellectual property that you can listen to on radio
        may seem like a very different thing than a computer program.
        But the legal underpinnings of all these copyrighted works is
        the same. If you undermine the legal support structure for one,
        you undermine it for all of them.

        Third, the current argument raised by Verizon and SBC about
        privacy is not so much about their customers' privacy as it is
        about economics. Ironically, Verizon and SBC's bottom lines are
        directly tied to the record industry's fortunes as a result of
        the increasing interdependence and interrelated economics of
        our industries. The real question is whether the relationship
        between their profits and ours has to be inversely related. EMI
        believes that it does not.

    Thus far, the RIAA has asked for approximately 1,500 subpoenas. The
regional Bell operating companies, two of which have representatives
sitting before you today, have more than 200 million customers. They
provide those customers with detailed bills on a monthly basis. They
daily respond to many hundreds of thousands of consumer and government
inquiries that dwarf the number of subpoenas that the RIAA has issued.
Relatively, responding to a few hundred, or even a few thousand, DMCA
subpoenas from the RIAA can hardly be a significant administrative
burden.
    This debate is not about privacy. It is about two phone companies
attempting to protect the anonymity of customers who are breaking the
law. The telecommunications companies, and the PC and consumer
electronics industries, have become increasingly dependent on the
content industries, music, movies and video games, to drive their
businesses. These are the new economics of piracy.
    In a good year, the largest record companies and the largest music
publishers generated combined worldwide profits of approximately $1 to
1.5 billion, and this is likely an overestimate. As you know, the last
few years have not been so good for the record companies, and those
profits have been shrinking.
    EMI recently commissioned a study that demonstrates that the 2.5
billion to 5 billion files traded per month on P2P systems generate
calculable, incremental profits worldwide of almost $7 billion per year
for the telecommunications, PC and consumer electronic industries.
Moreover, these same companies also derive a completely different set
of soft benefits from P2P systems--consumer pick up of their products,
accelerated broadband penetration, consumer loyalty to the phone
service/decreased churn--that are not included in these calculations.
Our findings show that the telecommunications industries alone derive
approximately $3-4 billion in worldwide incremental profits from P2P
activity. The U.S. share of those profits is approximately $1 billion.
The analysis in this study requires further refinement, but it is clear
that these three industries are reaping enormous profits as a direct
result of consumer digital copyright piracy. Even assuming that these
numbers are off by 50 percent, these industries made more profit off
digital piracy than the worldwide profits in 2002 of all the largest
music companies combined.

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    No one in the music industry begrudges the right of the
telecommunications, consumer electronics or PC industries to run
businesses that profit from consumer behavior. But they certainly
should not encourage or protect illegal behavior. A Verizon brochure
from last year illustrates this point. The cover of the brochure on
``broadband living'' highlights three main benefits to buying a
broadband connection: sharing photos, working from home and downloading
music. That brochure then lists among music sites, a P2P site whose
only application for copyrighted music is illegitimate.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    It has never been clearer that what happens in one industry--
telecommunications--affects what happens in the other, the copyright
industries. The DMCA understood and even tried to pave the way for a
mutually beneficial interdependence. ISPs were relieved of liability in
most circumstances--thereby removing a legal burden that could have
hampered their development. But the copyright industries were provided
with a simple, effective and speedy technique for protecting their
property--thereby ensuring that rampant digital piracy would not
undermine the copyright industries' business model. The DMCA
anticipated a collaborative process between all of the stakeholders in
the digital copyright world.
    At EMI we are trying to deliver on that collaborative process. As I
said at the beginning of my testimony, our strategy for combating
piracy has three prongs: enforcement, awareness and availability. We
will enforce our legal rights vigorously. We will strive to make our
music widely available. Finally, we will undertake significant public
awareness campaigns. You are already aware of the enforcement efforts
that the RIAA has undertaken and the public awareness campaigns.
    EMI has been at the forefront of efforts to legally distribute
music online. No other company has been as aggressive and assertive
about these opportunities. EMI was the first of the global record
labels to license its repertoire to Pressplay and MusicNet, the first
two legitimate digital music distributors. To date, EMI has licensed
its music for digital distribution to almost 75 companies, and
approximately another 75 deals are currently in the pipeline. Almost
34,000 EMI tracks are available for download in the United States.
140,000 are available worldwide. Our online music is available at
Apple's iTunes store, at Buymusic.com, at MusicMatch and on nearly
every major portal and site that sells legitimate digital music.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In the face of massive industry change, EMI is actively finding
ways to rethink its product and its distribution approaches. The music
industry is learning to sell its music in an ever-expanding number of
formats in only a few years. EMI has created standard deal terms, legal
licenses, product definitions and deal policies that it uses worldwide.
The music industry has been criticized for being slow to join the
party. But given the dramatic paradigm shift the industry has
undergone, I would say it's actually been faster than other industries
in comparable positions. Our ability as an industry to respond is at
least comparable to that of the computer industry's response to the
evolution from the mainframe to the mini-computer to the personal
computer.
    Mr. Chairman, EMI Music is one of the world's oldest recorded music
companies. It began in 1897 with the formation of two companies, The
Gramophone Company Ltd and the Columbia Graphophone Company Limited.
Those two companies merged in 1931 to create Electric and Music
Industries.
    Today, EMI is the third largest record company in the world and the
fifth largest in the United States. Its labels in the United States are
Capitol, Virgin, Blue Note, Angel, Manhattan, Narada, EMI Christian
Music Group, Capitol Nashville, Astralwerks, Higher Octave and S-Curve.
EMI's employees are not just in New York and Los Angeles. In fact the
majority of our employees are based elsewhere in the United States. We
have employees in Milwaukee, Wisconsin, Jacksonville and Chicago,
Illinois, Atlanta, Georgia, and Miami, Florida among other cities. We
are actually the largest employer in the Nashville music community as
well.
    EMI releases the works of some of the world's best known and loved
artists: the Beatles, the Rolling Stones, Garth Brooks, Frank Sinatra,
the Beach Boys, Norah Jones, Radiohead, Kylie Minogue and Coldplay to
name a few.
    But we also work with a number of artists you may not have heard
of--yet. These are the hundreds of new and developing artists that we
hope to be able to bring to the world. Keri Noble is a new artist with
Angel whose 5 song EP was just recently released. Joss Stone is a
remarkable new soul singer whose first album on S-Curve Records was
released yesterday. Jennifer Hansen and Dierks Bentley are two of
country music's most exciting new acts. Tribalistas are superstars in
Brazil who are beginning to be discovered by American audiences. Maksim
is a classical pianist whose first album has just been released in
Europe. Online piracy threatens EMI's ability to work with and invest
in these new artists and others.
    Digital piracy and its follow-on effects have a serious impact on
the way we do business. The first recordings made for EMI were made
using the old-fashioned horn gramophone. We've been through 78 rpm
records, LPs, eight track, cassette tapes and now CDs. More advanced
audio platforms such as DVD Audio and SACD could be the next technology
leap. But today we have to deal with changes that are among the most
disruptive we've ever faced. Records are still as expensive to produce
and market. Those costs do not go down and in fact they continue to go
up. But because of piracy, it is harder and harder to run a profitable,
long-term business.
    EMI is the only major record company whose sole business is music.
We want to work collaboratively with the telecommunications, consumer
electronics and personal computer industries rather than sitting in
conflict with them. We are dedicated to making the music business work
and thrive. And we have a workable model to accomplish that goal. We
are aggressively distributing our product digitally and physically. We
have implemented significant measures to curb rampant physical piracy,
and we remain committed to intensifying those efforts in the future.
    Thank you for this opportunity to testify.

    Senator Brownback. Thank you, Mr. Rose. We look forward to
the question and answer session.
    Next will be Mr. Cary Sherman. He is President of the
Recording Industry Association of America. Mr. Sherman, thank
you for joining us today.

   STATEMENT OF CARY SHERMAN, PRESIDENT, RECORDING INDUSTRY
                     ASSOCIATION OF AMERICA

    Mr. Sherman. Thank you for inviting me to testify.
    Senator Brownback. You have to get those microphones up
pretty close.
    Mr. Sherman. OK. Is that better?
    Senator Brownback. Much better.
    Mr. Sherman. Thank you.
    I am the President of the Recording Industry Association of
America, the trade association representing the U.S. recording
industry, and our members create, manufacture, and/or
distribute 90 percent of all legitimate sound recordings in the
United States.
    At the outset I would just like to share some of the
startling statistics about the impact of piracy on the music
industry. Over the past 3 years, shipments of recorded new
music in the U.S. have fallen by an astounding 31 percent. Hit
records have been impacted most dramatically. In 2000 the ten
top-selling albums in the U.S. sold a total of 60 million
units. In 2001 that number dropped to 40 million; last year, 34
million.
    The root cause for this drastic decline in record sales is
the astronomical rate of music piracy on the Internet. Although
this Committee has long stood on the front line in the battle
to protect consumer privacy online and offline, it is important
to make one thing crystal-clear: no one has a privacy or First
Amendment right to engage in online copyright infringement. The
issues presented by today's hearing have a lot more to do with
piracy and a false sense of anonymity than privacy.
    Millions of Americans have downloaded P2P software onto
their computers in the last 3 years. By doing so, these
individuals have opened their hard drives to the world,
illegally sharing copyrighted material, and often unwittingly
exposing their most sensitive personal information, including
tax returns, medical and financial records, resumes, and family
photos. At any moment you can log on to Kazaa, the world's most
popular P2P system, and find any of these documents at the
click of a mouse. It is hard to imagine more fertile ground for
identity theft.
    It is no wonder why Judge Bates, who presided over our
lawsuit with Verizon, concluded: ``If an individual subscriber
opens his computer to permit others through peer-to-peer file-
sharing to download material from that computer, it is hard to
understand just what privacy expectation he or she has after
essentially opening the computer to the world.''
    Despite the inherent privacy risks of using peer-to-peer
software, Verizon and SBC have done absolutely nothing to
educate or warn subscribers about the privacy risks of using
these services. The record is no better when it comes to
warning about the legal consequences of using free sites to get
music. Nowhere in their brochures, websites, or advertising are
there any warnings or information about the grave privacy and
real legal risks associated with using this software.
    By contrast, they have used a combination of overt and
subtle marketing strategies to encourage people to sign up for
DSL so that they can get all the music they want for free and
not have to go to the record store any more.
    The motivation for this strategy is clear when you look at
the broadband landscape. According to a USA Today article a few
days ago, 70 percent of Americans with broadband capabilities
use cable modems instead of DSL. The same article quotes an
Internet analyst saying ``It is going to be more streaming
video and music downloading that is really going to dictate the
switch.'' A recent report on broadband found that the growth in
peer-to-peer is really driving the market and P2P traffic now
consumes 50 to 70 percent of the capacity, up from perhaps 20
to 30 percent a year ago.
    With a long way to go before catching up with cable, it is
no wonder Verizon and SBC, the Nation's two largest DSL
providers, are reluctant participants in the fight against
online piracy. Fortunately for the copyright community, the
vast majority of other ISPs around the Nation have been
responsible and constructive partners in this important fight.
    It is difficult to discount the commercial interests of
Verizon and SBC when weighing the merits of their privacy
arguments. After all, rather than focusing on the most pressing
privacy problem facing their customers, they champion
protecting the anonymity of subscribers who are engaged in
clearly illegal activity. So while millions of their users are
exposing their most sensitive personal information to the
world, Verizon and SBC want this community to believe that the
true threat to their customers' privacy is the DMCA information
subpoena process.
    What is even more remarkable is that their alternative to
the DMCA process, John Doe lawsuits, would force copyright
owners to sue ISP customers first and ask questions later. That
strikes me as one of the least consumer-friendly options
imaginable, not to mention the significant and unnecessary
burden it would place on our Nation's already overburdened
Federal courts.
    The reality is that Verizon and SBC, under the self-serving
guise of protecting their customers' privacy, simply do not
want to live up to their end of the DMCA deal struck back in
1998, providing copyright owners with the limited information
necessary to protect their rights in the digital world. In the
end, we believe that Congress struck a fair balance in 1998
when it passed the DMCA and gave copyright owners the limited
ability to access minimal information solely for the purpose of
identifying infringers and enforcing our rights.
    As these issues continue to wind their way through the
courts, we remain ready and willing to talk with ISPs about
ways to ensure that the DMCA process operates smoothly and
fairly, and I hope we can achieve that.
    I look forward to answering the Committee's questions.
Thank you.
    Senator Brownback. Thank you, Mr. Sherman, for your
testimony. I look forward to questions afterwards.
    Mr. William Barr, Executive Vice President and General
Counsel for Verizon. Welcome to the Committee.

STATEMENT OF WILLIAM BARR, EXECUTIVE VICE PRESIDENT AND GENERAL
                COUNSEL, VERIZON COMMUNICATIONS

    Mr. Barr. Thank you, Mr. Chairman.
    The Internet is evolving into the central communications
system for our society and promises vast benefits. It perfects
markets by bringing buyers and sellers together. It is in fact
providing essentially the archetypical public library for our
society and it creates public forums for the exchange and
debate of ideas.
    But, as with any communications system, the vitality of the
Internet ultimately depends on people's confidence in the
security and privacy of their communications. People would not
be using the telephone as much as they do if they felt it was
easy for others to listen in. The Internet's development would
be severely curtailed in our view if people felt that whenever
they went out onto the Internet there were few safeguards
against finding out who they are, what their communications--
what communications they were having, and what websites they
were visiting.
    So apart from any philosophical commitment to privacy
interests, there is a compelling business reason why community
communications companies like Verizon are concerned about the
privacy of their customers. Now, as with any communications
system, they are capable of facilitating a lot of good, but at
the same time they can also be used to do bad things.
Telephones can be used for wire fraud. The Internet is used for
a lot of bad things--dissemination of pornography, for
fraudulent practices, and, yes, for the infringement of
property rights, copyrighted material.
    Now, up until now Congress has recognized that
investigative and enforcement tools that are supposed to police
against these kinds of abuses, these kinds of evils, have to be
carefully crafted and controlled to ensure that they do not
sacrifice legitimate privacy interests. That is why even when
the government itself is pursuing the dire interests of the
public, such as terrorism investigations or investigations into
pedophiliacs stalking kids on the Internet, the government
itself is subject to controls and supervision.
    We agree that the recording industry has compelling
property interests that deserve to be protected. We ourselves
hold intellectual property rights and we try to enforce them.
But that does not justify sweeping, invasive, and unsupervised
access to sensitive information about individuals.
    Now, when people use the Internet they rely on some
protection of their identity, when they are visiting websites,
exchanging e-mails, because they are only identified by a
number, the IP address. What this does is allow someone to come
in, get the IP address, and thus identify them with their
expressive activity.
    Now, as the RIAA is interpreting the statute any individual
can come in, file a one-page form that is based solely on an
assertion and a statement that they believe that a copyright
interest is being infringed, and based on that and on that
alone we are compelled to turn over the identity of our
customer.
    Now, it is important, this is not just a right given the
recording industry. Anybody can use this in our society. And it
does not just relate to recording; it relates to anything that
someone suggests is covered by copyright, including things that
are unregistered and therefore could not serve as a basis for a
suit.
    Now, this is done without any judicial supervision. There
is no one determining the bona fides of the person seeking this
information. There is no protection against someone coming in
and using a false name, getting access to this information.
There is not even an inquiry into whether or not there is in
fact copyrighted material, much less registered material that
could actually serve as the basis for a lawsuit. And there is
no scrutiny as to whether there is any reasonable basis to
believe that the individual has impinged on that property
right.
    The Federal Government does not have this power in any
arena. Congress has not given this power to the Federal
Government investigating terrorism. Why should the record
industry, private citizens, have this unfettered subpoena
authority to reach the most sensitive information that people
have?
    There are no safeguards on its use. There is no requirement
that it is used only for litigation. There are no express
provisions dealing with penalties for the improper disclosure
of this information. The government itself is subject to all
these requirements.
    Now, as you pointed out, Mr. Chairman, this is not just a
tool that would be used by legitimate interests. Pornographers,
stalkers, identity thieves would have the ability to do this
and do it anonymously, so it could never be traced back to
them. Even where the interests are legitimate, as with RIAA, a
blunderbuss approach inevitably leads to abuses and mistakes.
The use of bounty hunters has now arisen because they do not
have to--the holder of the copyright does not have to identify
themselves. They can go through intermediaries and use bounty
hunters.
    We now have the use of robots to track down people on the
Internet, and we have already many examples of mistakes, like
kids getting jerked around because they did a book report on
Harry Potter or a university's system being shut down because a
professor was named ``Usher'' and it was confused with the name
of an artist.
    Now, any response to this really requires three things in
my view. One is a technological approach, and that is clearly
what Congress envisioned in Title I of the Act. What Congress
said in Title I of the Act was, if you protect this information
with encryption or other kinds of protective devices, access
codes, it will be a Federal crime to try to defeat it. So
Congress set the table for the industry to work together to
come up with these technological solutions. That has not
happened because they preferred this jihad against 12-year-old
girls.
    Now, the other thing is an appropriately tailored discovery
device, appropriately tailored like all available--with all the
standard accountability in it, where it deals with registered
material, there has to be specificity in the allegations, and
strict limits on its use, and ultimately judicial supervision
over it.
    Finally, I think there has to be attention to the
incentives, and this is where I think--I do not view the
average American teenager as a thief or intentional thief. I
think that the industry itself has to look in the mirror to see
what created the incentives for this illegal and illicit
activity. It has largely been the untenable business model in
my view of the recording industry.
    What young people want, as we wanted when we were kids: Buy
the 45 rpm, buy the hit, and do your own mix. That is what
people have always wanted. What is the model today? Can you go
out and buy a hit? No. You have to buy a lot of schlock on a CD
and pay 16 bucks for it in order to get the one or two songs
you want. That is called bundling, and that is the business
model necessary to feed the distribution chain that has come up
in this industry.
    Now, I am not justifying the piracy, but in my view it is
not the freeness that drives the kids to download; it is the
desire to be selective in what they want, identify the one
song, and put it on their mixes. The industry itself has now
slowly come to recognize that it left the vacuum. It did not go
out and set up the iTunes or the MP3s that are paid sites. In
fact, it fought them and it fought them up until recently.
    But if the industry itself would move into this area then,
just like the film industry when they tried to--when they said
that the VCR was the Boston Strangler of their industry, they
would end up making more money ultimately.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Barr follows:]

   Prepared Statement of William Barr, Executive Vice President and
                General Counsel, Verizon Communications
    Mr. Chairman and members of the Committee, thank you for inviting
me here today to discuss this important issue.
    We at Verizon recognize the legitimate interests of copyright
owners and the threats to those interests that are posed by the misuse
of new technologies, including peer-to-peer software. Verizon remains
committed to working with the copyright community to find solutions to
these issues that result in effective protection for intellectual
property, without placing substantial burdens on Internet service
providers or violating the privacy and First Amendment interests of
their subscribers. Back in 1998, Verizon and other service providers
agreed in the Digital Millennium Copyright Act (``DMCA'') to conduct
voluntary industry negotiations aimed at developing ``standard
technical measures'' (also known as digital rights management tools),
to protect copyright works from online infringement. The copyright
community has never accepted our offer to begin negotiations on digital
rights management standards and to work cooperatively toward a
technical solution to this problem.
    Indeed, Congress recognized in its report on the DMCA in 1998 that
technological rather than legal solutions constituted the best method
of ensuring the lawful dissemination of copyrighted works in our new
networked, digital environment. See S. Rep. No 105-190, at 52 (1998)
(``The Committee believes that technology is likely to be the solution
to many of the issues facing copyright owners and service providers in
this digital age.''). Congress, in Title 1 of the DMCA created criminal
penalties for those who circumvent such technical measures.
    In the end, as in the area of VHS recordings and cable television
access to broadcast programming, Verizon believes that appropriate
technical and legal solutions will be found. As discussed in detail
below, a new, unbounded subpoena power is not that solution.
    As an Internet service provider, Verizon promptly takes down
infringing material that resides on our system or network in response
to requests from copyright owners and we have strict policies against
infringement of copyrights. Verizon also promotes legitimate pay music
sites such as MP3.com and Rhapsody as part of its ISP service. We will
continue to work with copyright owners to marry the power of the
Internet with the creative genius of content providers through new
business relationships and licensed websites that offer music, video,
and other proprietary content to the over 100 million Internet users in
this country. Verizon believes that lawful and licensed access to
quality content is essential to the continuing development of the
Internet in general and broadband in particular, and we are committed
to exploring technological and other solutions so that copyright owners
may enjoy the fruits of their labors and Internet users will have
access to a rich array of digital content.
    However, the answer to the copyright community's present business
problems is not a radical new subpoena process, previously unknown in
law, that un-tethers binding judicial process from constitutional and
statutory protections that normally apply to the discovery of private
data regarding electronic communications. Verizon believes that the
district court was wrong in concluding that Congress authorized such a
broad and promiscuous subpoena procedure--but whatever the courts
ultimately conclude on this issue--the subpoena power endorsed by the
district court is not an effective remedy for copyright holders and has
great costs in terms of personal privacy, constitutional rights of free
expression and association, and the continued growth of the Internet.
    As interpreted by the district court, this subpoena provision
grants copyright holders or their agents the right to discover the
name, address, and telephone number of any Internet user in this
country without filing a lawsuit or making any substantive showing at
all to a Federal judge. This accords truly breathtaking powers to
anyone who can claim to be or represent a copyright owner; powers that
Congress has not even bestowed on law enforcement and national security
personnel. It stands in marked contrast to the statutory protections
that Congress has enacted in the context of video rentals, cable
television viewing habits, and even the requirements for law
enforcement officers to gain access confidential data associated with
electronic communications.
    All one need do is fill out a one-page form asserting a ``good
faith'' belief that a copyright has been infringed and one can obtain
identifying information about anyone using the Internet There is no
review by a judge or a magistrate; the clerk's office simply issues the
subpoena in ministerial fashion. This identifying information can then
be linked to particular material sent or received over the Internet,
including e-mails, web browsing activity, chat room postings, and file-
sharing activity. This subpoena power applies not just to music
recordings, it applies to the expression contained in an e-mail or
posting in a newsgroup, digital photographs, and even pornographic
materials. It has and will be used and abused by parties far less
responsible than the recording or movie industries. In essence, anyone
willing to assert that they have a good faith belief that someone has
used their words, pictures or other expression without permission
becomes their own roving grand jury, without any of the normal checks
and protections that apply to governmental investigations.
    This subpoena process lacks the most basic protections that are
applied to the discovery of confidential and personal data connected
with expressive activity. As noted above, the filing that need be made
is truly minimal, and is below the standard for the filing of a civil
complaint in Federal court. The normal duties to investigate and
substantiate a civil claim that apply to the filing of a lawsuit under
the Federal Rules of Civil Procedure do not apply. The clerk's office
simply rubberstamps these subpoenas in ministerial fashion--with no
inquiry into the bona fides of the party filing the request or the
self-interested ``belief' that a copyright has been violated.
    The individual subscriber, whose identity is at issue, is not even
entitled to receive notice of the subpoena before his or her personal
information is turned over to a third party. Thus, the subscriber, who
may in fact be doing nothing illegal, will have his or her identity
revealed without ever having an opportunity to be heard. Nor is there
any provision for damages or other punishment for wrongfully obtaining
or misusing the identity of a subscriber subject to such a subpoena. It
is truly ironic that Congress has placed more substantial requirements
and protections on law enforcement access to confidential information
regarding electronic communications than apply to a private party under
this statute.\1\ This combination of unlimited scope, minimal
substantive requirements, and lack of judicial supervision makes both
mistakes and intentional abuses of this new power inevitable. Every
time you send an e-mail, browse a website, or join a discussion in a
chatroom or newsgroup, others gain access the numerical IP address that
you are using. Armed with this IP address, anyone to whom you have sent
an e-mail, from whom you have received an e-mail, with whom you or your
children have spoken in a chat room, or who operates a website you have
visited, no matter how sensitive the subject matter, can unlock the
door to your identity.
---------------------------------------------------------------------------
    \1\ See, e.g., 18 U.S.C. Sec. 3121, et seq. (pen registers and trap
and trace devices limited to govermnental personnel upon court order
for valid criminal investigation); 18 U.S.C. Sec. 2703 (limits on
disclosure of records pertaining to electronic communications
services).
---------------------------------------------------------------------------
    This list is not limited to those with legitimate interests in
enforcing copyrights. As safety and privacy groups like the National
Coalition Against Domestic Violence and WiredSafety stated in our
litigation, it opens the door to your identity to people with
inappropriate or even dangerous motives, such as spammers,
blackmailers, pornographers, pedophiles, stalkers, harassers, and
identity thieves. In fact, over 92 diverse organizations, representing
consumer and Internet interests, submitted letters to this Committee
expressing serious concerns about the privacy, safety, and security of
Internet users arising from the potential misuse of this subpoena
process. These include the ACLU, the American Library Association, the
Consumer Federation of America, and the National Coalition Against
Domestic Violence. These groups do not condone copyright infringement.
Rather, like Verizon, they are concerned that this subpoena power will
cause great harm to privacy, free expression, and even personal
security of Internet users with little gain in copyright enforcement.
    As Ms. Aftab, from WiredSafety states, ``With one broad sweep, the
DMCA subpoena power will frustrate the work of the entire online safety
community to arm our children and their parents with cyber-street-
smarts. It won't matter what they voluntarily or mistakenly give away.
All the information predators need can be obtained far more easily with
the assistance of the local Federal District Court Clerk.'' The
potential for abuse of this new subpoena power is limited only by the
deviousness of the criminal mind.
    Indeed, just since the district court's ruling went into effect in
June, the evidence of mistakes, potential abuses, and troubling uses of
this subpoena power has continued to mount. As you will hear from SBC
directly, their company recently filed a suit in California against the
Recording Industry, a copyright bounty hunter called ``MediaForce'' and
an entity called Titan Media Group. Titan Media, a purveyor of
pornographic videos over the Internet, sent one subpoena to SBC seeking
the names, addresses and phone numbers of 59 individual subscribers who
Titan asserted were infringing its copyrights in gay pornographic
videos by exchanging them over the Internet. Titan eventually withdrew
the subpoena when SBC threatened a court challenge, but the episode
highlights the fact that this new subpoena power applies to anyone who
can claim an interest in any form of expression. Titan Media, imitating
the RIAA, has recently announced its own ``amnesty program.'' Internet
users must reveal their identity to Titan and agree to purchase a copy
of their pornographic material or Titan threatens to use the subpoena
process to expose their identity. In a similar vein, ALS Scan, a
purveyor of graphic Internet pornography, has also been a beneficiary
of this process and submitted a declaration in favor of RIAA's broad
interpretation of the subpoena power in the litigation with Verizon.
The potential for abuse, for invasion of personal privacy, for
reputational harm, and even for blackmail is highlighted by these
examples.
    There is also no requirement that the copyright owner itself obtain
the subpoena; it may be obtained by an agent of the copyright holder. A
whole industry of copyright ``bounty hunters'' has sprung up,
enterprises that search the Internet for possible instances of
copyright infringement spurred on by economic incentives. The use of
automated robots, known as ``bots'' or ``spiders'' has also led to a
significant number of mistaken claims of copyright infringement. These
bats operate much like the spiders that crawled through buildings in
the movie Minority Report, scouring the Internet in search of file
names that look like they match the names of copyrighted works or
artists. Bots are far from perfect. Typing words such as ``Madonna'' or
``the police'' in an e-mail may earn you a DMCA subpoena, because the
``bots'' cannot distinguish the legitimate comment or discourse from
copyright infringement. In 2001, Warner Bros. sent a letter to UUNet
demanding that they terminate the Internet account of someone allegedly
sharing a Harry Potter movie online. The small text file was entitled
``Harry Potter Book Report.rtf,'' with a file size of 1k. The file was
not an unauthorized copy of the movie, it was a child's book report,
but the bot could not tell the difference and such an ``investigation''
can quickly form the basis for a DMCA subpoena.
    In the past few months, RIAA has already admitted numerous cases of
``mistaken identity.'' In one case, RIAA demanded the take down of Penn
State University's astronomy department's servers during finals week,
based on a claim that it contained infringing songs by the artist
Usher. In fact, ``Usher'' is a professor's last name and the file at
issue was his own creation. RIAA later admitted sending at least two
dozen other mistaken notices to Internet users as part of its campaign
to warn peer-to-peer file-sharers. And this was before RIAA began its
new campaign sending hundreds of subpoenas for subscriber identity to
ISPs across the country. These chilling examples all sound like
excerpts from the book ``1984,'' except in this case, ``Big Brother''
isn't the Government, it is interested parties armed with their own
private search warrants.
    RIAA's most recent campaign began in July of this year after the
district court's ruling went into effect. Despite the pending appeal on
this issue, the Recording Industry has chosen to unleash numerous
subpoenas on Internet service providers. Verizon has already received
over 200 subpoenas, with which we have been required to comply. The
Recording Industry alone has sent well over 1600 subpoenas to service
providers across the country, placing a significant strain on the
resources of the clerk's off1ce of the district court in D.C. and on
the subpoena compliance units at many Internet service providers,
including Verizon.\2\
---------------------------------------------------------------------------
    \2\ Indeed, press accounts indicate that the clerk's office of the
district court in D.C. has been overwhelmed with subpoena requests and
has been forced to reassign staff from other judicial duties. See Ted
Bridis, Music Industry Wins Approval of 871 Subpoenas Against Internet
Users, Associated Press (July 19, 2003) at 2 (``The RIAA's subpoenas
are so prolific that the U.S. District Court in Washington, already
suffering staff shortages, has been forced to reassign employees from
elsewhere in the clerk's office to help process the paperwork, said
Angela Caesar-Mobley, the clerk's operations manager.'').
---------------------------------------------------------------------------
    As another example of the overreaching uses of the subpoena
process,, RIAA now claims that it is entitled to discover subscribers'
e-mail addresses and that it may issue these subpoenas from the
district court in Washington, D.C., regardless of the location of the
service provider or the customer. Obviously, obtaining the subpoena in
a distant forum makes it a practical impossibility for many service
providers and most customers to ever raise any objection to the
subpoena. Indeed, Boston College and MIT successfully fought to quash
subpoenas issued out of Washington, D.C. that were aimed at their
students in Massachusetts. SBC's lawsuit includes jurisdictional
challenges. Columbia University is seeking to quash subpoenas that RIAA
has attempted to serve on it issued by the District of Columbia
courts.\3\
---------------------------------------------------------------------------
    \3\ The Federal Rules of Civil Procedure generally provide for the
issuance and service of subpoenas in the district where the party in
possession of the material resides to protect the rights of third
parties to contest the subpoena. See Fed. R. Civ. P. 45(a)(2) &
45(b)(2) (placing jurisdictional and service limitations on district
court subpoenas for the protection of those from whom production is
sought). Despite the fact that Congress expressly provided that the
protections of Rule 45 should apply to Section 512(h) subpoenas, see 17
U.S.C. Sec. 512(h)(6), RIAA has taken the position that it may obtain
and serve a Section 512(h) subpoena from any district court in the
country. Thus, in its view, it could seek a subpoena from the district
court in Guam targeting a small service provider in New England.
---------------------------------------------------------------------------
    In Verizon's view, Congress never intended to unleash a massive
wave of subpoenas on public and private Internet service providers and
their customers. This is not an effective solution to the very real
problems faced by copyright owners; it only creates an additional level
of problems for Internet service providers and chills the free exchange
of protected content over the Internet. The use of the subpoena power
in an attempt to create an in terrorem effect over the entire Internet
is both improper and disserves the long-term interests of both
copyright owners and Internet service providers. The district court has
truly created a Frankenstein monster that Congress never contemplated
and that has the potential to cause irreparable damage to public
confidence in the privacy of Internet communications. Like the
telephone itself, the growth of the Internet as a medium of political,
social and economic change depends upon the confidence of users in the
privacy of their communications and communications habits. Every person
in this room believes that his or her private e-mail or web browsing
habits can and should remain private--yet the district court's
erroneous decision is a direct threat to that privacy. It has also
burdened Internet service providers with responding to thousands of
subpoenas. From our own experience, we can tell you that RIAA's barrage
of subpoenas has diverted and strained our internal resources. This new
burden on service providers--responding to thousands of subpoenas
issued in the conduit context--was never part of the statutory
compromise. It also threatens the limited resources of subpoena
compliance units to satisfy legitimate law enforcement requests--as
RIAA bombards service providers with dozens of subpoenas and purports
to require responses on seven days or less notice. The protection of
copyright, however legitimate a cause, should never be raised above law
enforcement and national security efforts--efforts that Verizon has
always been in the forefront of supporting.
    Both the district court in our case and the copyright owners have
eschewed a more measured remedy that has always existed in the law and
is used by numerous businesses for many purposes, the so-called ``John
Doe'' lawsuit. Under this procedure, a judge or magistrate reviews the
merits of a case before a subpoena is issued, and the defendant is
given notice and an opportunity to contest disclosure. The law demands
a reasonable investigation of the relevant facts, ownership of a valid
copyright registration, and a complaint filed in compliance with Rule
11. Verizon has successfully used this process to sue unknown spammers
who abuse our network. Despite the Recording Industry's assertions to
the contrary, the filing of a John Doe lawsuit is much more protective
of all parties' interests than the DMCA subpoena process.
    Since RIAA launched its subpoena campaign, the DC Clerk's Office
publicly complained that its internal resources were being burdened and
the clerk's office had to re-assign new employees to the fulltime task
of processing subpoenas on an ongoing basis. If the district court's
decision in our case is not overturned quickly, it threatens to turn
the Federal courts into free-floating subpoena mills, unhinged from any
pending case or controversy, capable of destroying anonymous Internet
communication, and threatening privacy and due process rights as well
as public safety.
    While Verizon firmly believes that this subpoena process and the
tactic of targeting college students, universities, libraries and other
individual Internet users is inappropriate and will lead to serious
harms with little gain in copyright protection, Verizon recognizes that
a more comprehensive and long-term solution is necessary. Verizon
commends Senator Brownback for taking a first step by introducing the
Digital Consumer Internet Privacy Protection Act. This bill builds in
necessary protections that addresses the fundamental due process and
privacy rights of all Internet users, and ensures that subpoenas cannot
be issued without sufficient judicial safeguards in place. The bill
also appropriately gives the FTC enforcement authority to monitor the
use of subpoenas involving digital media products and provides remedies
for abuses of the process. An appropriate next step would be for
affected parties to develop effective approaches that combine technical
and legal solutions to balance the legitimate needs of all
stakeholders. We urge Congress to act now before irreparable damage is
done to public confidence in the Internet as a medium of free
expression and association.
    I thank the Chair and the members of this Committee for your
attention. We look forward to working with you to resolve this critical
issue.

    Senator Brownback. Thank you, Mr. Barr. I look forward to
questions.
    Finally will be Mr. Alan Davidson. He is Associate
Director, Center for Democracy and Technology here in
Washington. Mr. Davidson.

  STATEMENT OF ALAN DAVIDSON, ASSOCIATE DIRECTOR, CENTER FOR
                    DEMOCRACY AND TECHNOLOGY

    Mr. Davidson. Thank you, Mr. Chairman, and Members of the
Committee. The Center for Democracy and Technology thanks you
for holding this important hearing and we are pleased to be
included, both because of CDT's long history of involvement on
online privacy issues and also our current efforts to craft a
balanced consumer perspective on digital copyright.
    Our bottom line today is this: the 512(h) subpoena process
is an important tool for copyright holders who are legitimately
seeking to enforce their rights online, but it also raises real
and serious privacy concerns for Internet users. The good news
in our testimony today is that we believe that a package of
minor additions to the law could address many of the most
serious privacy concerns while also preserving and maybe even
enhancing legitimate enforcement.
    I will summarize. Our testimony makes four main points. The
first is this: it is unhealthy for our country and unfair to
copyright holders for large numbers of people to routinely
violate the law of the land. Enforcement actions like those
that have been undertaken by RIAA are, unfortunately, today a
necessary part, though only a part, only a part, of protecting
creators and authors in the digital age.
    We actually agree with the approach that was taken by RIAA
in its statement with the IT industry last winter that
emphasizes new delivery mechanisms, education, and enforcement
rather than seeking controversial new government technology
mandates or network architecture changes.
    Our second point is this: if you believe in enforcement, as
we do, then you must give copyright holders the tools that they
need to do enforcement, and our belief is that a subpoena
process like that under 512(h) has an important role in
assisting enforcement. With appropriate safeguards for
individuals, it could actually be preferable to filing a large
number of Federal lawsuits.
    Our third point, and I think one that we need to say a
little bit more about, is that there really are privacy
concerns raised by the unique subpoena power currently granted
under 512(h). As has been said here, online identity can be a
very sensitive piece of information for people. People online
reasonably expect that they will be largely anonymous when they
visit health websites, when they make political statements,
when they visit chat rooms or become online whistleblowers. For
that reason, our law has traditionally strongly protected
subscriber identity.
    In contrast, section 512(h) contains very few of the
safeguards that are demanded by either fair information privacy
principles or that are typically found in existing subpoena or
court order provisions. We have heard it from several of the
panelists already today: 512(h) is available to any copyright
holder, not just mainstream companies, record companies, or
movie studios; and it can be used based on a mere allegation of
infringement. No judge ever looks at a 512(h) application, no
weighing of the assertions in the application is ever done, no
user ever gets to challenge those assertions. The law places no
real limits on how the information is going to be used, beyond
the very open-ended requirement that it is going to be used
for, ``protecting rights.''
    512(h) gives no notice to end users, who typically have no
idea that their information is being revealed. And notice, I
should say, has long been a bedrock of our privacy law because
it gives the party that is actually harmed the chance to combat
potential misuse.
    Because of all of this, 512(h) we believe is ripe for
misuse: to reveal sensitive activities online, to blacklist
alleged infringers, to embarrass people, to market to them, or
even for criminal purposes. People ask why privacy advocates
seem to be so obsessed or care so much about what might be a
relatively minor provision, and I think it is in part because
512(h) is a very unusual authority and a dangerous precedent.
Many provisions exist for government access to information, but
always in the context of executive powers and almost in all
cases with additional and constitutionally mandated privacy
protections.
    Private use of the courts exists, but it is always tethered
closely to pending litigation and comes with the supervision of
a judge able to assess facts and to balance interests. 512(h)
stands alone.
    Our final point, and I think what we are trying to say
today, is that we think that--we propose in our testimony a
package of suggested safeguards that will address many of the
privacy concerns raised by 512(h) while supporting enforcement.
Chief among those is that we support a notice requirement
before subscriber identity is disclosed. Notice can give people
a meaningful opportunity to quash a subpoena they think is
wrongful. It can also have a major deterrent effect because
subpoena applicants would know that their targets are actually
going to hear of the requests that they make.
    A notice requirement also, I should note, actually could
help legitimate enforcement. An official notice to targets of
investigations that their information was being subpoenaed we
believe would be enough to stop a great deal of infringing
behavior. We also list a whole set of other approaches--
penalties for abuse that could give users redress if a subpoena
is misused, clear limits on how information that is collected
is going to be used. The least controversial of these is a
simple report to Congress on the number of subpoenas requested,
which would provide us with some sense of how often this
process is being used and in what way. We have no idea right
now how many of these subpoenas are being filed and in what
way.
    In summary, we think that there are relatively minor
additional safeguards that do not fundamentally rework the
provisions of the DMCA, but that could protect privacy while
actually preserving legitimate enforcement. We note and agree
that there are a lot of other privacy issues that are raised in
the context of peer-to-peer file trading--the issue of privacy
of sensitive files, as Senator Boxer has said; the issue of
spyware in many applications. And while this hearing is focused
on 512(h), which we think is also important, we stand ready to
work with you on those issues.
    Mr. Chairman, we commend you and members of the Committee
for raising awareness of the very real privacy issues that are
raised by 512(h) subpoenas. We look forward to working with you
and this Committee and others in the community to craft a more
balanced approach to this issue.
    Thank you very much.
    Senator Brownback. Thank you, Mr. Davidson. Thank you for
the constructive thoughts.
    We will run the time clock at 5 minutes if you do not mind,
because we have so many members here that are present and we do
have another panel that is up. I think this has been an
excellent discussion and an opening panel of thought.
    Mr. Sherman, let me ask you just at the outset here. It
seems as if everybody supports the intellectual property right
that your industry has and that there is just not a question of
that. People may vary on the degree of intensity that you think
people really agree with this, but everybody supports that this
is an intellectual property right, it must be protected.
    The narrow focus that we have got on this hearing is on
this particular subpoena issue and that is the thing that has
really driven me the most on it. I wonder, if you went looking
at this, if you just compare even really the PATRIOT Act, the
USA PATRIOT Act, and the ability of the Attorney General to get
a subpoena versus your industry, the industry standards or the
standards subjected to the industry are much lower than they
are to the Attorney General.
    The Attorney General, you must have an application made by
a senior level FBI official. Under 512(h) it is available to
anyone who claims an interest in the copyright. The Attorney
General has to go through the courts. You can file this and a
clerk does it.
    Is there a way that your group could see fit to move those
standards up slightly so that you could still get the subpoena,
but it has an officer of the court that reviews it? And what
would be so harmful to you doing that?
    Mr. Sherman. You have to look at the information that is
actually being sought when the Attorney General is asking for
this information from a court versus the information to which
we are entitled. We are entitled to merely the identity of the
alleged infringer: name, address, telephone number, and e-mail,
nothing else, nothing about what communications they have had,
nothing about who they have been communicating with, nothing
about their credit card information, their usage records, or
any of that.
    That information is available right now under Federal law
under the Electronic Communications Privacy Act without any
judicial supervision, just by someone in the government filing
a form. It is also the same information that SBC and Yahoo
routinely give to marketing partners under their privacy
policy.
    So all we get, the very limited information we get, is who
it is who is engaged in the infringement.
    Senator Brownback. Mr. Barr, Mr. Ellis, is that correct?
    Mr. Barr. That is totally disingenuous. They just do not
get a name. They get the name associated with content, because
that is where the IP address comes from. So it is the
correlation of the name with activity on the Internet that is
the privacy concern. That is what any individual can get under
this process.
    Someone appears on a website with the IP address, they can
find out who that was, and that is the concern. That is the
privacy concern.
    Senator Brownback. Mr. Sherman, a quick response. I have
one more question.
    Mr. Sherman. The reason that the information is available
to be correlated is because it is on a publicly available
network for anybody to see whatsoever. We are getting no more
information than any other user of the Kazaa system could get.
It is as if a street vendor who is selling counterfeit CDs was
complaining that we knew he was selling counterfeit CDs because
he was doing it on the street when we ask what his identity is.
    Senator Brownback. Mr. Davidson, very briefly.
    Mr. Davidson. Yes. I would just like to say, it is not just
about what the recording industry is doing, unfortunately. It
is what other people correlate with other kinds of content. I
mean, the Titan Media example that was raised earlier in
testimony is a great--maybe by you, Mr. Chairman--is a great
example of how correlating identity with access to sensitive or
very private information or private behavior online can be very
troubling.
    Senator Brownback. That was going to be my next question.
It is about the Titan Media example, which I presume we are
going to see more of these. Either Mr. Rose or Mr. Sherman.
Here is a group, hard-core pornographers, asking SBC for 59
Internet subscribers, and then Titan offers an amnesty: you can
either buy our pornography and in exchange we will not identify
you.
    That seems to border, if not be, blackmail. I am concerned
that we are going to see more examples of situations like that
coming up with this type of process. Do you share that concern?
    Mr. Sherman. This problem is not attributable to the
procedures that we are talking about here. The fact is that
under the John Doe process that Verizon and SBC are suggesting
Titan Media would be able to get exactly the same kind of
information, in fact a whole lot more, because under the DMCA
information subpoena process you are limited to just name,
address, and so on, whereas in a lawsuit you can get all those
other records that we were talking about earlier. Even under
the legislation you have introduced, Senator, Titan Media would
be entitled to all of that information in the ordinary course
of a lawsuit, and that request for information would not even
be reviewed by a judge.
    Senator Brownback. Mr. Ellis, real quickly, is that
accurate?
    Mr. Ellis. No, I do not agree at all. The real heart of the
dispute as I understand it between the industry and at least
our company goes to the way Mr. Sherman characterized the
situation, ``the alleged infringer.'' If we are dealing with
somebody who has violated their copyright and they have the
reason, the 59 for example in the case of the Titan, and they
have reason to believe, then go file the lawsuit. And when you
file the lawsuit, it is subject to all the standard protections
that judicial review, substantive showings, and all of those
protections.
    What is at stake here is alleged infringers, the 59 people.
If they had the evidence that they are all guilty, then go sue
them. The issue is they are trying to use this as a fishing
expedition. In this country there is a presumption of innocence
until you have the evidence. That is the difference in the two
views. We oppose simply fishing expeditions where you pay 25
bucks, make an assertion. They take the position they need that
to go get the evidence. That is contrary to basic
constitutional law: Get your evidence, go file your lawsuit; do
not use the subpoena process to go get the evidence.
    Mr. Sherman. May I please have the courtesy of a response?
    Senator Brownback. Fifteen seconds. My time is up, but
please.
    Mr. Sherman. We have the evidence. We go into court with
the evidence. We do not issue a subpoena to get evidence. We
just issue a subpoena to find out who the evidence is
identifying. We have the evidence. In fact, the DMCA process
requires the virtual prima facie case of copyright infringement
in order for an information subpoena to issue.
    Senator Brownback. Mr. Sherman, it would seem to me then,
why not go ahead and have a little higher level of review by an
officer of the court? I would hope really, as we look down the
road of this process, this is something that reasonable minds
really could work out.
    Senator Boxer.
    Senator Boxer. Thank you.
    I wanted to just put in the record an article by Lee Gomes,
who does a column for the Wall Street Journal, and just read a
little bit of it. It ran on Monday. So can I place that in the
record in its entirety?
    Senator Brownback. Yes, without objection.
    [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Senator Boxer. I will just read the important part that I
think weighs on what we are doing today. He said that: ``With
these suits, the industry is inviting a backlash among users
and in Congress.'' He says: ``Maybe I am''--he says: ``Maybe,
but I am hugely sympathetic to the record industry in this
fight, largely because of the way I answer one of the central
questions in the online music debate.'' He says: ``It is this:
Are music downloaders basically honest people who are simply
yearning to breathe free of the inconvenience and high prices
forced on them by the tyrannical music industry, or are they
just trying to get something for nothing? Are they freedom-
fighters or thieves? Maybe I am projecting from my own circles,
but I have always assumed the latter.''
    He says: ``I certainly understand why someone would want to
buy only a single hit song off a CD''--which is what Mr. Barr
said--``but should that be elevated to a Jeffersonian right? I
like only the middle part of an Oreo. Does that mean I can just
steal them?''
    ``Many people argue the record industry needs to make music
easier to buy, but what could be easier to buy than a CD? And
while I may not like the price, that is also true for Sub-Zero
refrigerators. And yes, by having to drive to the music store
or wait for a FedEx delivery from Amazon you do not get your
music right this very second. But society needs to be careful
about making a social virtue of impatience or about insisting
that an industry provide a product in a manner conducive to its
theft.''
    The point here--and he goes on with some very interesting
things that he says. I think every industry can be criticized.
Look, that is a fact of life. So can yours, Mr. Barr. Do you
not share private information with your affiliates?
    Mr. Barr. Yes, we do. And that is customer information
within our corporation. We do not give it to third parties. My
point--my point was----
    Senator Boxer. How many affiliates do you have, Mr. Barr?
How many affiliates do you have?
    Mr. Barr. Hundreds.
    Senator Boxer. Exactly my point. That is why in California
we have a law that would prohibit you from sharing private
financial information.
    So here is the deal here. I see just a little bit of
hypocrisy.
    Mr. Barr. This has nothing to do with hypocrisy.
    Senator Boxer. Excuse me, sir. It is my time to speak.
    Mr. Barr. I thought that was a question.
    Senator Boxer. Mr. Ellis--no, I made an observation. You do
not have to agree with it. That is fine. I have no problem with
your not agreeing with me. We agree on a lot of things, but not
on this issue.
    I find this kind of holier-than-thou discussion from SBC
and Verizon amazing, because they share so much information
with their hundreds of affiliates and do not think two wits
about it. And they admit that they go to court to protect their
property rights. But yet they are coming up with this John Doe
idea, which they know very well is going to make it exceedingly
burdensome for copyright holders to make sure there is as
little theft as possible.
    These are real lives you are talking about. As I understand
the law, and I just had my staff give it to me, you control the
information, Mr. Barr, that you give to Mr. Sherman when he
files these suits. It says ``only sufficient to identify the
alleged infringer.'' So you are the one that controls the
information.
    As far as the answer that you gave, it is what Mr. Sherman
has to do and the industry has to do is figure out exactly how
many, how many cases of theft there are. So yes, they are going
to look at the theft. It seems to me you are trying to protect
privacy of theft. That is what you are really about, and I
think it is a problem.
    Now, on your own site this is what you say: ``Free sites:
Likely to have pretty much everything''--I want to make sure
this is--this is Verizon, OK. Quoting from your brochure,
``Your Guide to Broadband Living,'' quote: ``Subscription sites
do offer MP3s, the format for music files, to download.
However, the official sites typically do not offer all music
that is selling exceedingly well in stores. By contrast, the
free sites are likely to have pretty much everything, but you
may be pelted with some unwanted ads.''
    Now, how is that getting the information to people that
what they are doing is illegal? I mean, it seems to me you are
promoting this illegal downloading.
    Mr. Barr. Well, actually that is one edition ago, but if
you go to the very first paragraph of that guide you will see
that we tell people that it is illegal to infringe on people's
copyrights and that, with all the available sites now that are
authorized to provide music, people should be able to get music
with a free conscience.
    Moreover, that sentence that you take out----
    Senator Boxer. Is that what you say, you can ``get music
with a free conscience?'' Or do you say ``the free sites are
likely to have pretty much everything, but you may be pelted
with some unwanted ads?''
    Mr. Barr. And that sentence, of course, you are taking--
that is a paragraph that comes after the warning about
infringement.
    Senator Boxer. I would ask unanimous consent to put this
all into the record because, frankly, the message I get is not
the message you are saying.
    Mr. Barr. There is nothing illegal about a free site. There
are authorized free sites and unauthorized free sites. You are
trying to put a gloss on that.
    Senator Brownback. That will be put into the record, and
the Senator's time has expired.
    Senator Boxer. I think this will answer our argument.
    Senator Brownback. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN,
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Mr. Chairman.
    As I think the witnesses know, I have spent a lot of time
over the last couple of years trying to find some common ground
in this area. I have introduced the Digital Right to Know
legislation that essentially empowers the consumers to make
choices here, because I think, A, piracy is wrong; and B, I do
not want to freeze innovation.
    I am going to spend my time just over the next few minutes
again looking for ways in which I think we can get to the
bigger picture. I mean, you are not going to hold back demand
here. Consumers want music in this way. They find it
convenient, they find it attractive, and my sense is they are
willing to pay for it and will be supportive of legal
strategies if efforts are made to make that possible.
    So I begin if I might with you, Mr. Sherman. You all seem
to almost be on the cusp of a litigation forever strategy,
which I think is unfortunate. We have got 261 suits. I gather
grandmothers are getting sued, 12-year-olds are getting sued.
You all want to send a message against piracy, and I support
the efforts to go after piracy.
    But give us a sense of how long this is going to go on? I
mean, are you going to file 5,000 suits or 10,000 suits? At
what point is that going to give way to something that people
like me, who think your industry has got a point and the
technology side has got a point, are going to take over? I
mean, Apple iTunes has got an idea. It may not be the way to
go. I have got a proposal in terms of digital right to know. I
mean, there are proposals, it seems to me, that could help to
find the common ground.
    But tell us, if you would, how long do you see this
litigation derby going on? Is there something that you can
offer in terms of what you really hope to get out of this?
    Mr. Sherman. I will be happy to respond, but I am also
going to ask Mr. Rose to respond----
    Senator Wyden. All right, good.
    Mr. Sherman.--because you have to understand that the
litigation is just one piece of a much larger series of
concurrent strategies to force a paradigm shift in the way
people get music. Right now people--up until recently, people
did not even think twice about downloading music and did not
even think about, let alone worry about, whether it was right
or wrong, legal or illegal.
    The result of these lawsuits, something we did not want to
do and something we did not take lightly, has been to inform
more people in the space of a week that this conduct is illegal
than anything we have done, notwithstanding a multi-year
education program featuring artists, songwriters, and the
entire music community. So it is having an effect.
    Orientation programs at colleges have changed as a result.
Parents are discussing with their kids what they are doing on
the Internet, which has the added value of not just talking
about the illegal activities such as downloading music, but
also what they are doing with respect to the security of the
computer at home, the privacy of their hard drive, viruses
being spread, as well as pornography and kiddy porn.
    So this national debate that has been ignited I think has
been beneficial to everybody with respect to the ethics and the
legality of online behavior. But all this would be irrelevant
if we were not offering legitimate alternatives that consumers
prefer, and that is why I wanted Mr. Rose to refer to some of
the things that we are doing.
    Senator Wyden. Because my time is short, all right, let us
say it has been relevant up to this point. At what point--I
really am curious, how many suits will be enough? I mean, how
many kids and grandmothers and the like are going to be chased
down before we get down to what I think are the kinds of
approaches, both legislatively and technologically, that are
going to bring people together? Will 5,000 suits send the
message you want?
    Mr. Sherman. I really cannot answer the question because
this is an evolving target, in which we are trying to change
people's mind set and encourage consumers to migrate to
legitimate services where they can get exactly what they want,
but legally.
    How many suits has DirecTV had to file in order to
discourage satellite theft? They are over 10,000 now. You do
not read anything about it. Why is this somehow--why is music
property less respected than signal theft?
    If I can just pass this off.
    Mr. Rose. Thank you, Mr. Sherman.
    We are working extraordinarily hard, by the way
collaboratively, with most of the telecommunications, computer
companies, software companies, and consumer electronics
companies, to launch a number of legitimate services. And the
notion that file-sharing is occurring among teenagers because
the only product they can buy is a CD is absolutely no longer
true. First, more than 40 percent of the downloading is done by
people over 30. Second, for almost a year now every single
radio release, meaning every single hit that EMI sells, has
been available for purchase through the legitimate download
services the day it went to radio, on an unbundled basis,
before it goes to retail.
    Third, almost every CD that we have for sale is available
on a legitimate basis on a track by track basis, and we are
focusing now on legitimate downloads.
    That is just one of probably 50 different products that we
are working with the telecom companies and computer companies
to provide.
    Senator Wyden. Mr. Chairman, if I could just get one other
question, because I am not going to stay.
    In my legislation, and I think it goes right to the heart
again of my concern that the only thing that is getting
attention is lawsuits rather than efforts to bring people
together. I introduced the Digital Consumer Right to Know Act,
and it grows out of the fact that not too long ago some CDs
were released with a copy protection system that made it
impossible to play the CD on a computer, and somebody went out
and bought the CD with the specific intention of playing it on
their personal computer, they sued.
    I said, would it not make a lot more sense and an approach
that would be fairer to all sides to just let people know up
front what their rights are. I mean, something like that, while
certainly not dealing comprehensively with the piracy issue,
could be one significant step in solving this problem, empower
consumers, be fair to your industry, be fair to technology as
well.
    I just wanted to wrap up, with the graciousness of the
chairman, about whether or not you all would support as part of
the solution a digital right to know that would empower the
consumer when they walk into stores to actually know what their
rights are as part of this effort to be fair to the responsible
parties.
    Mr. Sherman. Actually, I think your legislation has helped
stimulate an inter-industry dialogue on voluntary labeling
standards that all the digital media industries can embrace,
that will give consumers the information that they need to know
how their products will work. Everybody shares the view that
consumers need to know what they are buying, what they can do
with it, and it is a question of how to communicate that
information in the best possible way. So we certainly agree
with the objective.
    Senator Brownback. Thank you very much. I think that is a
very constructive thought. I have put similar labeling
provisions in the bill that I have put forward as well, and
hopefully we can get to some agreements on a few items.
    Senator Inouye.

              STATEMENT OF HON. DANIEL K. INOUYE,
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. I have been listening, Mr. Chairman, to the
questions. Very interesting.
    Two months ago I read an article in the New Yorker
magazine, and it was such a profound statement I thought I
would take it down: ``Maybe it is because I am in college, that
I have an 18-year-old sister and a 10-year-old brother, but let
me tell you, nobody I know buys CDs any more. My sister, she
just gets on her computer and knows only two things: file-
sharing and instant messaging. She and her friends go online
and one instant messages the other and says, oh, there is this
cool song I found, and they go and download it, play it, and
instant message back about it. My brother has never seen a CD
except for the ones my sister burns.''
    And this is a quote from a University of Virginia student.
    Is this piracy that widespread, Mr. Sherman?
    Mr. Sherman. Absolutely. In fact, it has really been the
combination of downloading and burning that has had the most
tremendous impact on sales. When you see those lines converging
about the uptick in downloading and CD burner penetration and
the number of blank CD disks sold and you start looking at the
sales figures, they correlate rather precisely.
    The impact is bad, it is worldwide, it is getting worse,
and if something is not done about it the creative industries
will not be able to sustain a future. This is not just music.
This is movies next, and then software. The BSA just came out
with a study yesterday showing student attitudes toward
software copying and it became quite clear that, because of
music downloading, they feel very little compunction about
copying software programs as well.
    So it holds a terrible future for what is now the copyright
industry's contribution to the GNP, 5 percent of our GNP and
our number one export, and it is all at risk.
    Senator Inouye. So it involves much more than just a few
computer hacks?
    Mr. Sherman. Absolutely.
    Senator Inouye. What you are trying to tell me is that it
is part of our culture now?
    Mr. Sherman. It has become a part of our culture. We need
to begin to change that culture. This is not going to change
overnight. This requires a multipronged effort. That is why we
have embarked on education campaigns, technical measures, but
most important of all, offering legitimate alternatives that
will attract consumers back into the paying marketplace.
    Senator Inouye. I have no other questions.
    Senator Brownback. Thank you, Senator Inouye.
    Senator Lautenberg.

            STATEMENT OF HON. FRANK R. LAUTENBERG,
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman.
    I have not devoted as much time as I would have liked to to
a full comprehension, but the one thing--to start with first of
all, I would like to put my opening statement in the record as
if read.
    Senator Brownback. Without objection.
    Senator Lautenberg. The one thing that I do start with is
that we have to protect the process and the value of
copyrights. If we understand that, there is an obligation in
some way to pay for that creativity and the production of the
material that people are so eager to get their hands on. That
seems to be only, Mr. Chairman, in your remarks counterbalanced
by the subpoena opportunity to find out who is doing what. I
would imagine that there are ways to deal with this.
    But just in getting some knowledge here, does a company,
Mr. Barr, like Verizon advertise--I know that Senator Boxer
talked about that briefly--advertise the fact that this is
available? What do you say in terms of offering your broadband
services? Do you include music and video and so forth?
    Mr. Barr. Yes, I think we do provide a guide, both a
printed guide and an online guide. I think two or three
editions ago Morpheus was listed as a site in one of the
guides, and then we deleted it.
    Senator Boxer. I have it here, 2002.
    Mr. Barr. Well, it was produced in 2001. And it was deleted
from the subsequent guides. Our guides indicate that infringing
is wrong, that you do not have to do it. We have a financial
interest in promoting MP3 in Rhapsody, which are authorized
sites, and we are promoting them, advertising them. On the
bottom of every page on our website, we state that unauthorized
downloading of songs is illegal and we discourage it.
    Senator Lautenberg. I wondered, each of you, is there a
responsibility--and, Mr. Davidson, you can respond--to launch
an educational campaign to inform their DSL customers about the
illegality of trading or downloading copyrighted content over
the Internet? After I hear Senator Inouye's report on the
letter from the child that does not buy CD's any more, but the
people who produce them still have the expense and still have
the artists who create this hard at work trying to make the
product. Go ahead, Mr. Davidson.
    Mr. Davidson. Maybe I can jump in by just saying first of
all, yes, I think there actually, there should be more done
along educational efforts, and I think that the enforcement
efforts that are going on will be wasted unless we can figure
out how to educate a new generation and also provide them with
real alternatives, because there is clearly a giant demand for
digital music and we have not yet figured out how to meet that
demand.
    I would just like to say, both to your question and to
Senator Boxer's about the motive, underlying motivations here,
I do not think it is fair to the consumer interests that are
here also. We do not make any money from selling broadband. I
do not think many of the privacy groups that signed onto briefs
and have written in support of Verizon or SBC do, either. We
think that, independent of that debate, which you can all have,
there is also a real privacy concern here and one that we think
can be addressed. I just did not want that to get overlooked.
    Senator Lautenberg. Mr. Rose.
    Mr. Rose. Thank you, Senator. There is really an underlying
economic issue here and it is important. We have gone from a
world where the economics of the telecom industry and the
economics of the content industries were relatively unlinked to
a world where they have become increasingly linked.
    The primary applications that people who sign up for
broadband services are interested in, among others, are
entertainment-driven services, and the free and easy
accessibility of the peer-to-peer networks have been to a
certain extent a driver of the adoption of those services, as
well as the underlying traffic on the networks that they create
drives real economics.
    We are actively seeking collaborative ways to develop new
and legitimate products and services with the telecom
industries and with the computer industries. But it is
absolutely true that our economic interests in the short term
are not aligned. In the long term, they have to be aligned. The
telecom and computer industries desperately need a vital and
robust set of content businesses to create the very content
that people want to move over their networks and use their
access devices for. But in the short term, we have been to a
reasonable degree at loggerheads, and it is interesting to note
that it is only these kinds of processes that have made the
public statements and consumer information around the
illegality of digital downloads move to the forefront of the
Verizon and other telecom companies' communications.
    Senator Lautenberg. The question I asked, is it realistic
to educate, to try to educate people? The demand is so great,
the volume of transactions so enormous, to think that this, all
of the education in the world, can make a difference? I mean,
is this young woman that Senator Inouye referred to, is she
going to feel guilty about burning this music into a disk that
she has at home now, the process is so available and so
commonplace?
    Mr. Rose?
    Mr. Rose. If all of the grocery stores in the world had no
cashiers, no one would be interested in buying groceries. They
would just go and take them.
    We have to really do three things. One is make legitimate
music no more than one click away, any music that you want, in
whatever form that you want it, so that consumers have the
ability to find the music that they love and buy it in
convenient ways. We are working with the computer and telecom
industries very hard to do that.
    That alone will not be enough. Without enforcement and
awareness, those three planks--i.e., ongoing awareness
campaigns in colleges and elsewhere, so that people understand
that file-sharing and moving content around without payment is
illegal, and the enforcement tools to identify people who
infringe--without those three things, the world will not
change. With all three of them, it will change dramatically.
    Mr. Sherman. If I could just add one point, as somebody who
was actively involved in changing the mindset about tobacco, I
think you know that a battle can be won; it just may take some
time.
    Senator Lautenberg. There is more physical evidence,
though, on tobacco than there are of the dangers of pirating a
song that young people love.
    Yes, Mr. Davidson.
    Mr. Davidson. May I just add?
    Senator Lautenberg. May I ask for a minute more?
    Senator Brownback. Yes.
    Mr. Davidson. I just wanted to add a quick point, which
was--thank you very much--which was that the old conventional
wisdom was that you cannot compete with free downloading. I
think that the new conventional wisdom--I think anybody who has
used some of these fabulous new downloading products like the
Apple iStore--and I am a music addict and I have become an
iStore addict. Unfortunately, my wife has been lecturing me
about this.
    These are fabulous services. I think that they can compete
with free. I think that they are fast, they are virus free, and
they are legal. There is a lot of experimentation going on. It
is going a little bit slower than some of us would like, but it
is happening. And I do believe that real alternatives, coupled
with education and enforcement activity, can make a very big
difference.
    But if we do not have the legal alternatives, this becomes
like Prohibition. You know, we are just suing lots of people
and not giving them an outlet for what they really want to do.
    Senator Lautenberg. It is a very simple route, obviously,
Mr. Chairman. I leave it in your hands.
    [Laughter.]
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg,
                      U.S. Senator from New Jersey
    Mr. Chairman:

    This is a pretty timely hearing.
    The media have characterized the ongoing dispute and litigation
between the music recording industry and Internet Service Providers
(ISPs) as ``piracy versus privacy.''
    I think it's important to understand that both sides, in a sense,
need to prevail. We need to stop digital piracy, but not at the expense
of privacy. Conversely, we can't protect privacy at the expense of
copyrighted material.
    We all recognize that musicians and the recording industry are
losing millions of dollars from copyrighted materials being downloaded
and shared illegally.
    If you want proof, just look at the fact that music CD sales have
dropped 26 percent since 1999. Meanwhile, the number of blank,
recordable CDs sold at retail increased by 40 percent last year alone.
    Piracy is not only affecting the music industry. Two weeks before
the big screen release of the summer blockbuster ``The Hulk,'' bootleg
copies of the film started showing up on file-sharing networks around
the world.
    It cost Universal Studios 150 million dollars to make ``The Hulk,''
yet anyone with a high-speed Internet connection and a big enough hard
drive could see it for free.
    This problem for the movie industry will only get worse when
technology freely allows consumers to trade or swap movies similar to
the way they now trade music files.
    The recording and movie industries have the right to protect their
copyrights.
    But I do have concerns about the subpoena process used to obtain
the names of those who allegedly engage in significant copyright
infringement.
    Due process is important. And I believe a consumer's due process
rights exist even before a lawsuit is actually filed in court.
    The bottom line here is that the music and movie industries and
Internet Services Providers will have to get creative and invest in
encryption technology, consumer education, and new products that are
priced appropriately. That kind of collaboration may be preferable to a
``legislative fix'' since technology is always faster than Congress!
    I look forward to hearing from the witnesses on this important
subject.
    Thank you, Mr. Chairman.

    Senator Brownback. Well, we would get it done that way.
    I cannot help but think, as Mr. Rose put it, that we have
got industries represented here that are absolutely critical to
the future of this country and global in their span, and that
cannot people of good minds be able to resolve this, because
both of you need each other and will into the future. So I am
hopeful that we can.
    We will continue this debate and this discussion, but I am
hopeful we are going to be able to work it out and move forward
in the interest of all as we protect the intellectual property
rights and we also protect the privacy of the individual. It
has been an excellent panel.
    Senator Boxer. Mr. Chairman, I wonder if I could just have
a chance at another round, because this is so critical to my
state. I could make it 5 minutes if you allow.
    Senator Brownback. We are really tight. We have got the
next panel, too, that is going to be up.
    Senator Boxer. I will make it 4 minutes.
    Senator Brownback. How about two questions and we will do
that. Can we do that?
    Senator Boxer. Well, I will do it as fast as I can.
    Senator Brownback. Run it at 4 minutes here.
    Senator Boxer. I will just make a closing statement on the
panel and I will try to do it in a couple of minutes.
    Some unanswered points here. I think the fact is that the
Digital Millennium Copyright Act did try to do exactly what we
are talking about today, find a balance. And guess what, it was
not easy. Why we would want to open it up is beyond me.
    My Chairman feels he needs the courts more involved. The
courts are involved. You have got to prove before you can go
forward that you have got a case to make that there was good
reason to believe there was copyright infringement.
    I know that the Internet service providers were involved in
this compromise. You wanted to be off the hook. You did not
want to be liable for stealing. You did not want to be liable
for the porn that is coming up on these sites. You did not want
to be liable. You wanted to wash your hands of it and you got
your wish, and now you are not cooperating with the industry.
And that was written into the law, that your safe harbor was
based upon the fact that you would cooperate with the industry.
    So I am rather sad that we have come to this circumstance,
because I think we listened to you, we gave you the safe
harbor. And I do agree with Mr. Sherman. You know, all of us
who have raised kids, we know something about how you change
behavior. It is not easy and maybe sometimes we never do. But
if we keep saying, if you do this you are going to be grounded;
oh, you did it, okay; the next time you do this, you do it, you
are going to be grounded, and you keep threatening, it never
changes the behavior.
    You have got to carry out. You have to have the
enforcement. And if you start going this John Doe route, it is
going to be a legal nightmare.
    I honestly do think, with the combination of the new
technologies like the iTunes and making that more available,
and with the cooperation of the ISPs on this, not saying, oh,
you can go to a free provider but you may get annoyed by
popups. Wrong. You may get annoyed by a lawsuit.
    We have to all work together. I am really sad that you are
just not working together. So my message to you is, as Senator
Brownback has said, both of these industries are crucial to the
future of our country. Our country has got so many problems. Do
we really need this one? Can you please figure it out?
    You are all business people. You all know that you need to
protect your intellectual property. So why do you not get
together, shake hands, and work together, and then we will not
need to open up this whole law, because I am not for that. I
just think that is a nightmare.
    So thank you very much, Mr. Chairman, for giving me the
chance to speak about something that is so crucial to the jobs
in my state and to the economy of my state. Thank you.
    Senator Brownback. Thank you, Senator Boxer.
    I want to thank the panel very much. It has been quite
illuminating and hopefully we can move forward on this.
    Our second panel is: Mr. Lawrence Blanford, President and
Chief Executive Officer of the Philips Consumer Electronics
Company; Mr. Jack Valenti, Chairman and Chief Executive Officer
of the Motion Picture Association of America; Mr. Christopher
Murray, Legislative Counsel for the Consumers Union; and Dr.
Edward W. Felten, Professor of Computer Science at Princeton
University.
    We will get that panel in place as soon as possible. Let us
get seated as quickly as we can with the panelists in the room
in order so we can move forward. The hour is late. We have gone
a long period of time.
    We start this second portion with--I want to enter into the
record a letter sent to the Chairman of this Committee,
Chairman McCain, dated September 4, 2003. It is sent by two
pages, two and a half pages, of groups that have problems with
the subpoena process that has developed by virtue of the RIAA
versus Verizon lawsuit. I want to note that to the people
present and the members, that it contains an eclectic group of
individuals, consumer activists, privacy concerns. A women's
shelter group, I believe, as well is in this because they are
concerned about these identity issues coming forward. Hopefully
this is something that we can get dealt with.
    This is the second issue, no longer on the subpoena, but
this is about really issues of built-in hardware to protect
intellectual property rights, and the industries' interaction,
difficulty of interacting back and forth on the protection of
intellectual property right, but at the same time building
hardware that will work and hardware that will work for the
consumer. So I am glad to have this panel to develop and to go
into this topic in some depth.
    We will start with Mr. Lawrence Blanford. He is President
and CEO of Philips Consumer Electronics. Mr. Blanford.

               STATEMENT OF LAWRENCE J. BLANFORD,

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

           PHILIPS CONSUMER ELECTRONICS NORTH AMERICA

    Mr. Blanford. Thank you, Mr. Chairman, and thank you,
Members of the Committee. I am President and Chief Executive
Officer of Philips Consumer Electronics in North America.
Philips is a leader in digital television and digital content
protection technologies. Philips commends the Committee for
holding such a timely and important hearing and you, Senator
Brownback and Senator Wyden, for your leadership in this area.
    Mr. Chairman, let me be clear. Philips is 100 percent
committed to working collaboratively with the studios to
develop consumer-respectful solutions that safeguard against
what my fellow witness Jack Valenti fears will be the
Napsterization of video. That said, what are the essential
elements of a digital broadcast content production system
around which we in the industry and public policymakers can
coalesce?
    First, it must work. A solution that does not provide
effective protection in our view is not a good solution.
    Second, it must respect consumers' fair use expectations,
enable consumers to benefit from the incredible openness and
flexibility of digital technology and the Internet, and not be
so costly and complex that it will slow rather than accelerate
consumer acceptance of digital television.
    Third, it must not constrain competition or impede
innovation. A solution that enshrines by government regulation
a particular digital protection technology is usually a bad
idea. If that government mandate also carries with it a set of
obligatory licensing terms that makes licensors gatekeepers,
yet does not contain strong and enforceable safeguards against
anti-competitive practices, the resulting solution goes from
bad to intolerable.
    With these principles in mind, the question then becomes
what is the role of government? To begin, in our view Congress
should be the first to act to decide the extremely important
public policy issues raised in this debate and provide clear
guidance to the FCC about how to implement those goals. Among
the issues on which Congress should provide guidance are the
following: A, should we even be contemplating the encryption of
programming that always has been available in the clear the
consumers over airwaves they own? And B, where do we strike the
right constitutional balance between the property rights of
copyright holders and the First Amendment rights of the public
to access and use information?
    Second, the government should not pick technology winners
and losers. Where there is an absolutely unavoidable need for a
technology mandate, it should be done with only great care and
with explicit Congressional guidance.
    Third, if the FCC after receiving a clear grant of
statutory authority and appropriate Congressional guidance
mandates a digital broadcast content protection regime, it must
maintain an ongoing oversight role to safeguard the opportunity
for fair, open and unbiased adoption of alternative digital
content protection technologies and to ensure that any
associated licensing terms and conditions do not interfere with
the public's legitimate use of content or harm competition.
    Unfortunately, the encryption technology mandate proposal
advocated by the Motion Picture Association of America and the
5C companies in the pending FCC broadcast flag proceeding
violates every one of the principles I have just articulated.
For starters, it does not work. The proposal leaves wide open
the so-called analog hole. MPAA itself acknowledges this flaw
in its public filings. In the just completed plug-and-play
proceeding, MPAA stated:

        ``Systems that permit the continued availability of
        unprotected analog connections fail to achieve
        meaningful protection of digital content. This is
        because it is essentially as easy to convert analog to
        digital for Internet retransmission as it is to
        retransmit digital content in its native format.''

    The proposal also fails to address circumvention by
software demodulators, basically TV tuners you can download
from the Internet. In fact, the proposed solution leaks like a
sieve, and yet its implementation would require consumers to
replace and the FCC to regulate virtually every single device
in the home network.
    Let me just point to the chart to my right. Basically, what
would happen is that we would end up erecting enormous cost and
complexity barriers to consumers realizing the same hard-fought
fair use recording capabilities in the digital realm as they do
in today's analog environment. What you can see by looking at
the chart, the typical consumer devices down the left-hand side
and the points of functionality across the top over which the
proposal in front of the FCC would impact.
    So you can see that indeed the proposal is not innocuous.
It is exceedingly pervasive relative to consumer electronics
that consumers enjoy today.
    Senators of the Committee, were this proposal adopted by
the FCC your staff, say in your State office, would be
prevented from e-mailing to you in Washington a digital
broadcast clip about a breaking news story back at home. Nor
could a loving child e-mail to an ailing parent a digital
broadcast clip containing news of a revolutionary treatment for
the disease afflicting the parent.
    Finally, the encryption technology mandate proposal would
provide a small group of companies, through their control of
authorized technologies that are mandated by the government,
with the incentive and opportunity to constrain competition in
digital content protection technology and digital consumer
electronics products. Imagine the uproar in Congress if the
Department of Transportation were to mandate that General
Motors had to seek prior approval from a committee consisting
of Toyota, Nissan, Mitsubishi, and Ford before it could
implement a new braking system. That is precisely the situation
created by the encryption technology mandate proposal.
    Along with its specific deficiencies, the proposal suffers
from a classic case of mission creep. What began 2 years ago as
an attempt to prevent the unauthorized redistribution of
pristine high-definition TV programming over the Internet to
the public today encompasses all digital video programming,
standard as well as high-definition, broadcast as well as cable
and DVD, and extends to all unauthorized redistribution, not
just to the public and not just over the Internet.
    Senator Brownback. Mr. Blanford, let us wrap your statement
up if you could.
    Mr. Blanford. Yes, I will. Thank you, Senator.
    In fact, your bill, the Consumers, Schools, and Libraries
Digital Rights Management Awareness Act of 2003, cures many of
these problems and we commend you on its introduction.
    Mr. Chairman, last, there is no imminent crisis. Given the
technical limitations on bandwidth compression, we have time to
develop and implement more effective pro-consumer alternatives
that avoid anti-competitive and anti-innovation consequences.
In my written testimony I discuss Philips' hope for
watermarking and its commitment to work with the studios on
that system. Let us take the time to work together as never
before to develop digital broadcast content protection
technology solutions that will take us forward, not backward.
    Philips will be the first in line in such collaborative
behavior.
    Thank you, Senator.
    [The prepared statement of Mr. Blanford follows:]

         Prepared Statement of Lawrence J. Blanford, President
and Chief Executive Officer, Philips Consumer Electronics North America
Executive Summary
    Philips has been a leader in digital television, one of a handful
of companies that developed the digital terrestrial broadcast
transmission standard adopted by the FCC, and a pioneer in digital
content protection technologies for audio and video.
    Philips is deeply appreciative of the efforts of this Committee,
other Committees of the Congress and the Federal Communications
Commission to illuminate the key public policy issues raised by digital
rights management, particularly the ``broadcast flag'' in open, fair
public proceedings, removing decisionmaking from back rooms occupied
exclusively by private parties with huge financial stakes in the
outcome.
    Philips is 100 percent committed to working with all stakeholders--
the studios, computer hardware and software companies, other consumer
electronics manufacturers and, most importantly, consumers--to develop
and implement technology solutions that protect high definition and
other high value digital broadcast content from unauthorized
redistribution to the public over the Internet.
    There are three essential elements of a digital broadcast content
protection system necessary for a consensus solution. First, it must be
effective to prevent the abuse it is designed to stop. Second, it must
respect consumers' fair use expectations and their aspirations to
utilize digital technology to provide advances in their ability to
store, record and make innovative use of digital broadcast content.
Third, it must not constrain competition or impede innovation.
    What is the appropriate role of government, especially the Congress
and the FCC, in digital broadcast content protection?
    First, the Congress should decide overarching public policy issues:
What is the impact of encrypting free over-the-air digital broadcasts,
whether at the source or at the instant of reception, on the historic
model of broadcasting which has been ``in-the-clear'' over public
airwaves? How do we balance the competing, constitutionally rooted
rights of copyright holders and consumers? If necessary, Congress
should confer a specific grant of authority on the FCC and guidance on
how to regulate.
    Second, the government, whether the Congress or the FCC, should not
pick technology winners and losers. Such government technology-specific
mandates are hostile to competition and innovation.
    Third, the government must be the guarantor of a fair, open and
transparent decisionmaking process and must maintain an ongoing
oversight role, through enforceable safeguards, to prevent
anticompetitive and anti-innovation practices or efforts, either in the
approval of technologies or the terms with which licensees are
obligated to comply.
    Applying these tests to the Encryption Technology Mandate advocated
by the MPAA and broadcasters in the pending FCC ``Broadcast Flag''
proceeding, the proposal fails on every count. It is not effective
because it leaves the analog hole wide open and also can be subverted
by software demodulators. It levies significantly increased complexity
and hundreds of dollars in new equipment purchase costs on consumers to
realize the same fair use recording capabilities that they enjoy today
while precluding them from being able to send a digital broadcast clip
in an e-mail to themselves at their office, to a professor as part of a
student presentation, or to a parent or child.
    lt is a hybrid proposal which at once asks the FCC to mandate, as
part of a 20-page government regulation, specified digital content
protection technologies, but at the same time effectively delegates the
approval of alternative technologies to private parties and direct
competitors, acting as gatekeeper with zero safeguards to prevent
anticompetitive practices.
    There is another far better way, suggested by Senator Brownback's
``Consumer, Schools and Libraries Digital Rights Management Awareness
Act of 2003.'' That bill's prohibition on specific technology mandates
and its reliance on functional regulation and self-certification would
enable competitive and innovative digital content protection
technologies to flourish, fulfill the legislative objective of content
providers to prevent the unauthorized redistribution of high definition
and other high value digital broadcast content over the Internet to the
public, and give consumers a choice.
    Philips reiterates its commitment to work shoulder to shoulder with
the content community on digital broadcast content solutions that meet
the criteria I have outlined here. In particular, my written testimony
discusses the promise of watermarking, which many studios embrace, and
on which Philips already has made substantial progress. In light of the
technical limitations on compression and bandwidth, there is time to do
this right!
Introduction
    Mr. Chairman, Senator Hollings and Members of the Committee, my
name is Larry Blanford and I am President and Chief Executive Officer
of Philips Consumer Electronics North America, a division of Philips
Electronics North America Corporation, which is the U.S. subsidiary of
Royal Philips Electronics of The Netherlands. In the United States,
Philips employs approximately 35,000 dedicated workers and sells over
$10 billion of goods and services in the areas of consumer electronics,
lighting, medical systems and devices, semiconductors, personal care
products and domestic appliances.
    Philips commends the Committee for holding this extremely timely
hearing, as the Federal Communications Commission nears a decision in
its ``Broadcast Flag'' proceeding. Both this Committee, the House
Energy and Commerce Committee, through its hearings, roundtable
discussions and its carefully crafted September, 2002 staff discussion
draft, and the Senate and House Judiciary Committees, have played
absolutely crucial roles in ventilating important public policy issues
in the digital rights management area, especially concerning the
broadcast flag. Congressional oversight has illuminated issues that
must be discussed openly and not decided in back rooms by private
parties with enormous financial stakes in the outcome.
    Similarly, Philips commends the FCC for its fair and open conduct
of the broadcast flag proceeding. The Notice of Proposed Rulemaking
issued by the FCC in the Broadcast Flag proceeding reads more like a
Notice of Inquiry, putting out for public comment virtually all of the
fundamental issues associated with protection of digital broadcast
content from unauthorized redistribution, including whether the FCC has
jurisdiction to regulate in this area.
    The efforts of the Congress and the FCC to date have gone a long
way toward easing the profound procedural concerns Philips had about
the work of the inter industry group known as the Broadcast Protection
Discussion Group (BPDG). This hearing and the current intensive phase
of FCC deliberations in the Broadcast Flag proceeding now bring us face
to face with the serious substantive public policy issues raised by the
Broadcast Flag proceeding, which will consume much of my testimony.
Philips Is a Leader in Both DTV and Content Protection Technologies
    Philips has a very proud history--and today is at the cutting
edge--of introducing world-class products designed to bring consumers
the benefits of the latest digital technologies for television and
television displays (including the widescreen television format and
flat TV). It is a leader in video compression, storage and optical
products, as well as in semiconductor technology.
    Philips co-invented the Compact Disk, or ``CD,'' the most widely
implemented digital technology. Philips is among the leading suppliers
of DVD players and DVD recorders, and is a leader in the PC monitor and
recordable CD markets.
    Philips was a founding member of the Grand Alliance, which
pioneered the ATSC DTV standard, adopted by the FCC in 1996 as the
digital terrestri.al television standard in the United States, and has
been a leader in the development and implementation of terrestrial
digital television in the United States.
    Philips also has been an active participant in the development of
content protection technologies. Philips invented, and offered to the
consumer electronics industry, at no cost, the Serial Copy Management
System, or SCMS, a ``bit flag'' technology which, by providing the
necessary instruction to the recording device as to whether and to what
extent copying is or is not allowed, prevents the unauthorized
reproduction of multiple generations of copies of digital audio works
from a copyright-protected original (while permitting a single
generation of copies). Philips also is actively developing watermarking
and fingerprinting technology to protect digital video and audio
content.
    Philips is committed to seeking content protection solutions that
strike the proper balance among consumers, content owners and equipment
manufacturers. For years, Philips has been a constructive participant
in inter-industry content protection activities, and has dedicated
millions of dollars and thousands of hours of effort from its best
engineers to groups such as the Copy Protection Technical Working Group
(CPTWG) and the Secure Digital Music Initiative (SDMI). Most recently
and relevantly, Philips has participated heavily in two inter-industry
discussion groups, comprising consumer electronics companies,
broadcasters, content owners, IT companies and others, tasked with
finding solutions for the protection of over-the-air digital broadcast
content. The Broadcast Protection Discussion Group (BPDG), which was
unable to reach consensus on a solution, nonetheless, over vigorous
opposition, hurriedly released a Co-Chair's report discussing a
proposal advocated by the major Hollywood studios, the so-called ``5C''
companies--Sony, Toshiba, Matsushita Hitachi and Intel--and the so-
called ``4C'' companies--Toshiba, Matsushita Intel and IBM--which would
require all devices to recognize a data bit in the digital television
signal--the ``broadcast flag''--and respond by encrypting that signal
using only ``authorized technologies.'' The only ``authorized
technologies'' were proprietary technologies licensed by authorities
consisting of the 5C and 4C companies. That proposal, in essence, is
the Encryption Technology Mandate Proposal supported by MPAA in the
pending FCC Broadcast Flag proceeding. Today, Philips is a leading
participant in another effort--the Analog Reconversion Discussion Group
(ARDG)--which is addressing the question of how to protect digital
content when it is passed through an analog output (an issue more
commonly referred to as ``the analog hole'')--an essential component of
any system that purports to provide meaningful protection for digital
content.
    Philips' strong record of achievement in technological innovation--
and consumer acceptance of these technologies--is directly attributable
to the availability and use of open standards, a commitment to
preserving consumers' fair use expectations, and a competitive
environment that promotes the development and introduction of
innovations in technology and products while not overburdening
manufacturers.
Digital Broadcast Content Protection: We Must Work Together
    This debate is about how best to achieve the twin goals of
providing appropriate protection for high definition and other high
value over-the-air digital broadcast television content against
unauthorized redistribution to the public over the Internet and
ensuring that the digital television experience that consumers receive
meets or exceeds their fair use and technological expectations.
    Philips believes firmly that these need not--and must not--be rival
objectives, for each addresses a legitimate concern with long-term
implications for the future of digital entertainment and innovation and
acceptance by consumers.
    Just as with digital music, over-the-air digital television raises
understandable concerns for content owners about the potential
vulnerability of their content to large scale unauthorized
redistribution to the public over the Internet. Philips is supportive
of content owners when they seek solutions that provide meaningful and
effective protection for their content to ensure its continued value.
    At the same time, consumers have been promised revolutionary
enhancements to their television experience. In addition to prettier,
better, high-resolution pictures and better sound, that means more
flexibility, more functionality and more interactivity. At a bare
minimum, it also means no loss of functionality from what they
experience today, including with regard to recording and time-shifting
of free over-the-air television. These promises simply must be kept if
consumers are to embrace DTV. Indeed, the legitimate utilization of
broadcast content (at a time and place of their own choosing) by
consumers should be enhanced by the introduction of digital television.
    All of the affected industries-studios, broadcasters, and consumer
electronics manufacturers-must work with each other and, most
importantly, with consumers, to strike the delicate balance needed to
achieve both critical objectives. Such cooperation and dialogue should
be characterized by open processes and be framed by a commitment to
competition, innovation and the constitutionally-rooted rights of both
copyright holders and the viewing public. Philips reaffirms its
unwavering dedication to developing collaboratively digital content
protection solutions. Unless all stakeholders commit to that course, we
risk, at best, a legal and political quagmire, and, at worst, consumer
rejection of DTV. Neither is a risk we can afford to take if we are
serious, as we must be, about moving the transition to DTV toward an
expeditious and successful conclusion.
The Role of Government
    Clearly, the issue of digital broadcast content protection raises
fundamental questions of public policy--with far-reaching effects on
consumers. Should we be encrypting free, over-the-air broadcast
programming, whether at the source or the instant a consumer receives
it, because it is now transmitted digitally? If so, how does that
affect the fundamental broadcasting model in the United States? Will
the technology choices preserve consumer fair use rights and enable
consumers to exploit the enormous flexibility of digital technology and
the openness of the Internet while effectively protecting copyright
holders' property interests? Are there safeguards in place to prevent
practices, through technology selection or licensing terms, that
restrain competition and inhibit innovation?
    Government has an essential role to play in answering these
overarching public policy questions and in ensuring that the public
interest will not become captive of private, parochial interests
seeking competitive advantage for their business models or technologies
in the marketplace. Specifically, if over-the-air television content is
going to be protected in light of digital technology, Congress should
be the first to act. This is the only way to ensure that digital
content protection measures, whatever they may be, reflect and adhere
to the broad policy parameters Congress deems necessary to protect the
interests of consumers, content owners, competition and innovation.
    Moreover, Philips believes that the Communications Act confers no
authority upon the FCC to regulate in this area absent an unambiguous
grant of statutory authority by Congress, similar to that which enabled
the Commission to adopt requirements for the V-Chip, closed captioning,
competitive availability of navigation devices and cable compatibility.
In fact, FCC adoption of the Encryption Technology Mandate Proposal
currently before it--which would require the issuance of 20 pages of
regulations dictating the design and manufacture of virtually every
consumer electronics device in the home and mandating the use of
``authorized'' encryption and decryption technologies--would run
directly contrary to Congress's recent policy decision, in Section
1201(c)(3) of the Digital Millennium Copyright Act, not to require
consumer electronics or computer products to respond to particular
technological measures. In fact, this provision--which explicitly
required the use only of one, analog technology--Macrovision--was a
core compromise that permitted passage of that legislation, and
represents a clear policy direction adopted by Congress. Any
determination to undo that compromise and change the policy direction
adopted by Congress in that Act must necessarily be made by Congress,
not the FCC.
The Brownback Bill
    Senator Brownback's legislation clearly recognizes the importance
of having Congress, not the FCC, take the first step toward, and lay
out the appropriate ground rules for, digital broadcast content
protection. Philips strongly supports Senator Brownback's efforts and
leadership in this area, and commends him and his staff for the
legislation that we are focusing upon today.
    Senator Brownback ``gets it right.'' By that I mean that he clearly
recognizes that protecting digital content and protecting consumers'
fair use expectations necessarily must go hand-in-hand, and that
digital content protection solutions must be developed in fair and open
processes, address narrowly-defined goals, and above all, not impede or
diminish consumers' fair use expectations, especially in the DTV arena.
These are not, from a public policy perspective, mutually exclusive. In
fact, they are and must be complementary.
    Importantly, the approach taken by the Brownback bill focuses on
functional regulation. It relies on self-certification rather than
government selection of technology ``winners and losers''--a critical
element to protecting, indeed driving, robust competition and
innovation in digital broadcast television content protection software
and hardware markets. In so doing, it respects the policy determination
made by Congress in Section 1201(c)(3) of the DMCA. In this regard, it
contains common elements with the House Energy and Commerce Committee's
September 2002 staff discussion draft which envisions pro-competition
and pro-innovation safeguards regarding the broadcast flag and
expressly commends self-certification.
    By contrast, proposals that would have the government put its
imprimatur on specific technologies would have precisely the opposite
effect, harming competition and innovation, upending the compromise
struck in the DMCA, and threatening consumer acceptance of DTV.
    The ``Consumers, Schools and Libraries Digital Rights Management
Awareness Act of 2003'' is worthy of the Committee's support and
Philips hopes that the Committee will act quickly toward its enactment.
The Encryption Technology Mandate Proposal Advocated by MPAA In the
        FCC's Broadcast Flag Proceeding Fails Every Test
    Unfortunately, the Encryption Technology Mandate Proposal made by
the Motion Picture Association of America to the FCC is neither an
effective content protection solution, nor does it enable digital
television to meet consumers' expectations.
    The Encryption Technology Mandate Proposal Erects Unacceptable Cost
and Complexity Barriers to Consumer ``Fair Use.'' Proponents of the
Encryption Technology Mandate Proposal claim that its approach
preserves consumers' fair use recording capability for over-the-air
broadcast content. However, this claim conveniently omits the fact
that, under the proposed system, in order for a consumer to replicate
today's ``freely copiable'' over-the-air television environment--
wherein multiple devices within a consumer's home network seamlessly
receive and send content to and from each other for recording and/or
display--consumers first must replace virtually every existing digital
device in their home with those that contain the same ``authorized''
encryption/decryption technology. That is simply the nature of
encryption systems: they rely on an ``unbroken chain'' of devices that
all exchange content using the same encryption and decryption
technologies. And, as illustrated by the chart below, virtually every
single device within the home would be regulated under the Encryption
Technology Mandate Proposal:

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Moreover, the Encryption Technology Mandate Proposal would stifle
use of the Internet for the wholly lawful and desirable purpose of
transmitting free, over-the-air digital content from a consumer's home
to an office, second home, automobile, or other remote location. These
transmissions pose no threat at all to content owners' syndication
markets and foreign broadcast rights--the problem they repeatedly claim
to be addressing. In fact, it's very possible that permitting such non-
public, directed transmissions could benefit broadcasters and content
owners by increasing viewership of DTV programming and its associated
advertisements.
    The MPAA Encryption Technology Mandate Proposal places fundamental
public policy decisions in the hands of a self-selected group of
private interests. Under the MPAA Proposal, each device that handles
broadcast DTV content over a digital interface or from a digital
recording would be subject to a regulatory regime triggered by the
mandatory use of ``authorized technologies.'' These ``authorized
technologies'' would be subject to private control, such that the major
Hollywood studios would have ``veto power'' over their selection, and
thus their success in the marketplace. Specifically, to become an
``authorized technology,'' the technology would have to meet one of
four criteria for approval:

   Criterion 1: approved by three major studios or two major
        studios and a major television broadcast group;

   Criterion 2: licensed by ten major device manufacturers and
        approved or used by two major studios;

   Criterion 3: at least as effective as a technology already
        approved, subject to objection by major studios and/or major
        television broadcast groups; or,

   Criterion 4: listed as permitted under a license applicable
        to an already approved technology.

    These criteria, which proponents claim to be market-based, are in
fact neither market-based nor objective, and will harm competition in
both the. markets for digital content protection technologies and
consumer electronics products.
    The first two criteria require at least two of the major motion
picture studios to grant approval. Criterion 1 also requires an
additional major studio or major television broadcast group to approve,
but since three of the four major broadcast networks are owned by major
studios, and the remaining ``broadcast groups'' are dependent on
studios for programming, this criterion is essentially a studio
designation mechanism. Criterion 2 at least affords device
manufacturers a role, but requires licensing by ten major device
manufacturers before a technology will be accepted, and still
necessitates approval by two major studios, highlighting studio
dominance of the selection process. Criterion 3 would appear to allow a
role for the FCC in the addition of alternative technologies, but that
role is very tightly circumscribed, with deference to the views of
studios and broadcast groups, and relies on vague criteria the baseline
for which is established by the pre-approved 5C and 4C technologies and
license terms. Moreover, the technologies that MPAA and 5C argue should
be exempt from analysis are proprietary, making it difficult, if not
impossible, for a developer of new technologies to learn the standards
against which it will be judged. Criterion 4 explicitly turns licensors
of previously approved technologies into gatekeepers, and allows them
to leverage their control over those technologies to new technologies.
It is perhaps the most dangerous of the criteria from a public policy
point of view, paving the way for leveraging market power into adjacent
markets and technologies.
    Thus, the criteria for selection of authorized technologies are not
market-based--they are studio-based.
    In addition, under the Encryption Technology Mandate Proposal,
device functionality is dictated by compliance rules set by the
approved technologies. Those rules permeate to every device in the
chain other than the receiving device. The power to establish and
change compliance rules (in ways that differ from those set by the FCC)
is a key place where the Proposal would place the power over
fundamental public policy decisions in private hands. Rules to which
devices must conform should be set by those who answer to the public,
not by private groups of self-interested parties.
    In fact, we have already seen significant changes to the rules, and
others are being ``negotiated'' even as we speak. The private control
that these select parties can exert does not promote consumers' ability
to utilize and enjoy DTV, nor does it promote a competitive and
innovative marketplace. It does just the opposite.
    The Encryption Technology Mandate Proposal contains no safeguards
to prevent anticompetitive abuses by technology licensors. In fact,
under this scheme, content owners and digital content protection
technology licensors (the 5C and 4C companies) would have both the
incentive and ability to abuse their control of so-called ``authorized
technologies'' and the licenses that accompany them to the competitive
disadvantage of their direct competitors. Unlike the far-preferable
``functional regulation'' and self certification approach taken in the
Brownback bill, the Encryption Technology Mandate Proposal's ``pre-
anointment'' of the 5C and 4C content protection technologies sets a
very dangerous precedent for government selection of technology winners
and losers.
    Let's look at one recent instance. Just as an open inter-industry
group--the Analog Reconversion Discussion Group, or ARDG--is addressing
technical solutions to the so-called ``analog hole'' issue, the 4C
companies (three of which also are part of 5C), have made sweeping
changes in the compliance rules applicable to one of the ``authorized
technologies''--CPRM. These changes obligate consumer electronics
devices licensed to make recordings using CPRM to search all analog
content reaching the device for rights information transmitted using a
marking technology called CGMS--A. No similar obligation is imposed on
computers or devices used with computers.
    These changes to the CPRM compliance rules provide a stark
demonstration of the concerns identified by Philips and confirm that
the Encryption Technology Mandate Proposal would grant the providers of
a government-anointed technology:

   The right and ability to change the relevant rules
        unilaterally, without advance notice, public scrutiny, FCC
        scrutiny, or even licensee input or consultation;

   The ability to preempt public discussion of basic public
        policy issues (in this case, the analog hole), despite the
        ongoing consideration of the issue by the FCC and a multi-
        industry working group;

   The ability to distort competition in technology markets, by
        tying their selected technology to inferior or ineffective
        technologies at the expense of superior technologies (such as
        watermarking), in which others own relevant IP;

   The ability to distort competition in product markets by
        adopting changes in the rules governing their selected
        technology that further their own competitive interests;

   The ability to discriminate without justification between
        consumer electronics products and computer-related products;

   The ability to attempt to extend the power of their license
        agreements into functions of a device that do not in any way
        make use of the licensed technology, in a manner contrary to
        basic principles of IP licensing.

    What is particularly perplexing is the fact that many in the
industry, including content companies, have observed that CGMS-A is
easily strippep or forged, thereby depriving the content of any
protection. This is precisely the kind of behavior that threatens to
deprive technology innovators, device manufacturers and consumers of
the benefits of robust competition and innovation in digital content
protection technologies and equipment.
    The Encryption Technology Mandate Proposal Fails to Provide
Meaningful Protection Against The Very Threat It Seeks to Address. At
the outset, there is a very real question about the nature of the
threat the content community seeks to address. Early in the debate,
nearly two years ago, the objective of the studios and the major
broadcast networks owned by studios was clear: prevent the unauthorized
retransmission of high definition and other high value digital
broadcast content over the Internet to the public because failure to do
so would result in HDTV and the highest value digital programming
migrating from free, over-the-air broadcast television to pay services,
namely cable and direct broadcast satellite. The Encryption Technology
Mandate Proposal pending before the FCC, however, is much broader. It
applies to all digital broadcast transmissions, standard as well as
high definition, and it applies to all unauthorized redistribution,
with no limitation to the Internet and no limitation to the public at
large. This ``mission creep'' of the Encryption Technology Mandate
Proposal raises the fundamental question of whether this proposal is
aimed at saving broadcast television or securing control over consumer
electronic devices and how consumers use them.
    Even if one accepts the greatly increased scope of the proposed
regulations as legitimate, most incredibly, the proposed system just
doesn't work. In fact, it leaks digital content like a sieve--leading
many to point out that the proposed system, while locking the front
door, leaves the rear door--and perhaps a few windows--wide open. This
is due, most notably, to its failure to protect digital content that
has been passed through analog outputs, which can easily be
redigitized, stripped of its protection, and sent off to the Internet.
    This is not an oversight on MPAA's part, but rather reflects a
recognition of the fact that restrictions on analog outputs would doom
the DTV transition to certain failure by causing the obsolescence of
hundreds of millions of legacy devices. Nevertheless, because it does
not protect analog content, the Encryption Technology Mandate Proposal
fails to achieve its core goal of effectively preventing unauthorized
redistribution of digital broadcast content to the public over the
Internet. In fact, MPAA itself has admitted this, stating in the FCC's
just completed ``Plug and Play'' proceeding that systems''. . . [that
permit] the continued availability of unprotected analog connections .
. . [fail] to achieve meaningful protection of digital content.''\1\
---------------------------------------------------------------------------
    \1\ Comments of MPAA on the FCC's Notice of Proposed Rulemaking in
the ``Plug and Play'' Agreement (CS Docket 97-80, PP Docket 00-67)
(March 28, 2003) at 2.
---------------------------------------------------------------------------
    The proposed system has the potential to leak in other ways as
well--including through the expected use of ``software demodulators.''
Because the proposed system cannot protect digital content in a
pervasive or robust manner, there is simply no sustainable public
policy rationale for its adoption and implementation, especially in
light of the substantial cost and complexity impact it would have on
consumers.
    For these and other reasons, and like so many other groups--
including major public interest groups, software companies, IT and
computer companies, libraries, consumer electronics companies,
advocates for persons with disabilities, privacy groups, and literally
thousands of individual consumers--Philips believes that adoption of
the Encryption Technology Mandate Proposal would be a grave mistake. We
can and must work together to explore alternatives that are both
consumer friendly and effective.
There is Time To Explore Alternatives
    Importantly, there is time to find such an alternative. The state
of consumer broadband technology--both in terms of bandwidth and
digital compression--largely mitigates the immediacy of the threat of
widespread redistribution of high definition digital broadcast content
over the Internet.
    First of all, the vast majority of consumers do not have the
necessary bandwidth to engage in widespread uploading and downloading
of HDTV content to and from the Internet. In fact, today and for the
foreseeable future, sending broadcast HDTV over the Internet in any
reasonable amount of time requires such a level of compression as to
necessarily degrade the signal well below even today's analog
television resolution.
    In fact, as revealed in the chart below, using today's Internet
technology, it would take at least 25 hours using even an advanced
(i.e., 1.5 Mbps) broadband connection, and 28 days using a more common
dial-up modem, to retransmit a 2-hour HDTV broadcast movie in its
native resolution, even assuming that the connections operated at their
maximum speed, which they rarely, if ever, do. Even a 2-hour SDTV
broadcast would take approximately 5 hours to retransmit in its native
resolution using a perfect 1.5 Mbps broadband connection, or 142 hours
over a 56 kbps dial-up modem.

                                    Current Transfer Speeds for HDTV and SDTV
----------------------------------------------------------------------------------------------------------------
   Signal                Upload/Download Connection                     Time to Transfer a 2-Hour Program
----------------------------------------------------------------------------------------------------------------
      9HDTV  1.5 mbps (broadband_max/atypical)                  25 hours, 44 minutes0

       HDTV  1.0 mbps (broadband_typical)                       38 hours, 36 minutes

       HDTV  56K (dial-up_never actually achieved)              689 hours, 17 minutes (28.7 days)

       HDTV  53K (dial-up_actual max)                           728 hours, 18 minutes (30.3 days)

       HDTV  50K (dial-up_typical)                              772 hours (32.2 days)

      9SDTV  1.5 mbps (broadband_max/atypical)                  5 hours, 20 minutes0

       SDTV  1.0 mbps (broadband typical)                       8 hours

       SDTV  56K (dial-up_never actually achieved)              142 hours, 51 minutes (5.9 days)

       SDTV  53K (dial-up_actual max)                           150 hours, 56 minutes (6.3 days)

       SDTV  50K (dial-up_typical)                              160 hours (6.7 days)
----------------------------------------------------------------------------------------------------------------

    And, importantly, no meaningful advances in digital compression
technology are envisioned in the foreseeable future that would provide
uploads and downloads of high resolution content at any reasonable
speed. Even assuming that a twice as efficient compression scheme as
MPEG2 were developed (and it has not been), the transmission times are
still too lengthy to make widespread broadband Internet distribution of
high definition content an imminent or significant problem. Thus, to
the extent content owners are concerned that the existence of digital
television receivers suddenly dramatically increase the risk of massive
unauthorized redistribution to the public over the Internet of their
``highest value'' content, Philips would respond that such concern is
unfounded and should not drive us to accept content protection
solutions that do not achieve minimally acceptable levels of competence
and consumer friendliness.
Watermarking Offers A Better Answer
    Given the fact that we have time to do so, we owe it to consumers,
in particular, to work together to seek a more holistic solution that
provides effective and pervasive protection for digital broadcast
content from unauthorized redistribution to the public over the
Internet--including after it has been passed through an analog output--
and that has as light a touch on both devices and consumers as
possible. Philips believes that a system, based principally on
watermarking, instead of encryption, offers such a solution.
    It could preserve the functionality of legacy equipment and permit
seamless interactivity between both existing digital devices and those
designed to recognize the watermark. Unlike the ``chaining
dependencies'' that afflict an encryption system, devices in this
system function independently of others, thus avoiding any need to
replace an entire system. Rather, a consumer will add compliant
equipment in the normal course of upgrading. A watermarking system can
preserve fair use without imposing unfair costs on consumers.
    It could effectively and pervasively address concerns about
Internet redistribution of digital content, including content that has
passed through an analog output, by making content that has traversed
the Net incapable of being re-recorded or displayed. By recognizing
when a watermark has been copied--which is what occurs in Internet
retransmission--this system could prohibit a compliant device from
either recording or displaying that content, essentially making the
content useless to the recipient.
    Finally, unlike the Encryption Technology Mandate Proposal and
other encryption approaches, which can impose multiple layers of
encrpytion/decryption requirements (including licensing costs) on every
digital interface in every device in a home network, a watermarking-
based system could be far less invasive, less co:: tly and less
complicated to regulate.
    This is not to say that a solution based upon watermarking a
technology that content owners strongly support--is achievable
overnight. The complexity of the business, technical, and legal issues
at stake necessarily require a fully cooperative effort be undertaken,
in an open process, by all stakeholders. Just as the stalemate over
DTV-cable compatibility was successfully ended when the cable and
consumer electronics industries negotiated in good faith for months to
develop an agreement, so too will DTV content protection only be
achieved in a manner acceptable to all parties when all of those
parties agree to work together in good faith.
Conclusion
    In closing, Philips calls upon Congress to ensure that the adoption
of any digital broadcast content protection system meets the core
requirements we believe are essential to consumers and to the
successful transition to digital television: meaningful competency in
protecting against unauthorized retransmission of high definition and
other high value digital content to the public over the Internet,
preservation of consumers' fair use expectations without oppressive
costs and complexity, and clear and enforceable safeguards to ensure
robust competition and innovation in the CE and digital content
protection marketplaces.
    Philips pledges its full, continued support toward finding
solutions that meet these requirements, and further pledges to do its
part to make technological solutions available on open, fair and
reasonable terms to all interested parties. We look forward to this
Committee's continued leadership in this critical arena and I would be
please to take any questions you might have.

    Senator Brownback. Thank you, Mr. Blanford.
    Mr. Jack Valenti, the eternal head of the MPAA, also has a
star in Hollywood. Always a pleasure to have you here.

         STATEMENT OF JACK VALENTI, PRESIDENT AND CEO,
             MOTION PICTURE ASSOCIATION OF AMERICA

    Mr. Valenti. Thank you, Senator.
    A quick retort to the distinguished Mr. Blanford. What he
forgot to tell you was that 70 organizations--big computer
companies, consumer elec companies and others--all gathered
together. Fifty six of them embrace the broadcast flag. Eight
did not. Philips was one of the eight.
    And the abstruse and technical aspects of his testimony
only confirms my belief and others' that the Congress is not
equipped to deal with this kind of technology. That is why you
have an expert agency like the FCC to deal with it.
    Having said that, I thank you, Mr. Chairman, very much for
allowing me to come here to tell you and your colleagues about
the perils of digital piracy, which if it goes unchecked will
disfigure and decay America's great intellectual property
industry. Now, why is this a national problem? Because
intellectual property is America's greatest trade export and it
is an awesome engine of economic growth. We are creating new
jobs at three times the rate of the rest of the economy at a
time when we are suffering a two million job loss. We bring in
more international revenues than aircraft, than agriculture,
than automobiles and auto parts. We comprise more than 5
percent of the GDP. The movie industry alone has a surplus
balance of trade with every single country in the world. I do
not believe any other American enterprise can make that
statement at a time when we are hemorrhaging, this Nation is,
from a $400 billion deficit balance of payments.
    Now, piracy is the darker side of digital subversion. To
the almost one million people in this country who have jobs in
some aspect of the intellectual property--I mean, the movie
business, 99 percent of whom do not make big salaries. They are
good citizens, they are good neighbors, they have kids to send
to college and mortgages to pay. Their livelihoods are put to
hazard if we do not find some way to stop this increased
velocity in digital stealing, a casual disregard for other
people's property.
    Now, let me tell you how bad it is. Outside estimates say
that some 500,000 movies are being illegally uploaded and
downloaded every day on file-swapping sites. I call them file-
stealing sites--Kazaa, Morpheus, Grockster, Nutella, eDonkey,
Imesh, and the list goes on. And if we do not stop that, then I
think we are going to watch and be witness to the slow undoing
of an industry that is the envy of every single country in the
world.
    I believe that if you impose--well, first I want to say
that no one knows the future. The future is wrapped in shrouds
and it is vapory and blurred. But what we do know, Mr.
Chairman, is that all the technology that we find so magical
today will seem primitive 18 months from now. That is why I
think to impose an absolute ban on technical mandates is, I
respectfully submit, is not good government policy. It is not
in the national interest to ban what you cannot see, to
prohibit what you do not know, to turn your back on what you
cannot measure. That is not good.
    Now, the broadcast flag about which Mr. Blanford talked is
a classic example of a beneficial technical mandate. What does
it do? It has one simple design, that is all. It says that you
cannot redistribute a digital over-the-air program back to the
Internet, that is all. And by the way, the customer will never
know there is a broadcast flag. He can do anything he is doing
in the future that he is doing now, copy to his heart's
content, except if he wants to take that digital program and
shoot it back to the Internet where it is easy prey to
thievery. Cannot do that.
    So that is why I think that the broadcast flag is good.
Now, without the broadcast flag, without it, free over-the-air
high-quality programs digitized in the future are going to
migrate from free broadcasting to pay services, where they can
be better protected. No sane business executive is going to
allow his high-quality program in digital form to go out
unprotected, naked and alone, easy prey to thievery. Not going
to do it, and that is an example of, I think, good business
sense.
    Now, our anxieties are about the future. If we could stop
time and motion right now, Mr. Chairman, and leave everything
as it is, I think we could get along OK. But the fact is that
time and change are very restless and they resist containment,
and it is going to be moving with such velocity.
    CalTech has just announced an experiment called FAST, F-A-
S-T. I am going to be giving a lecture out there in 10 days and
I am going to visit those laboratories personally. FAST brings
down a DVD-quality movie in 5 seconds. Internet 2 is another
experiment, which has deployed 6.7 gigabytes, 6.7 billion
bytes, halfway around the world, 12,000 miles, in 5 minutes.
    It is that kind of change that we are looking at and where,
if you impose a ban on technical mandates, who is going to save
us?
    Now, we love the technology of the Internet. We think it is
the greatest and most glorious delivery system yet known, and
we want to use it to put thousands of our movies up there, our
new movies, our classics, all genres, 10, 15,000, so that the
customer will have an absolute abundance of choices. But Mr.
Chairman, those valuable works have to be protected. The
Congress should not close a door on possible new technologies,
possible, that have a potential to salvage the future, new
designs that will give more choices to consumers and at the
same time keep alive this great intellectual property industry
which, as I said, is an awesome engine of economic growth.
    Thank you, sir.
    [The prepared statement of Mr. Valenti follows:]

        Prepared Statement of Jack Valenti, President and CEO,
                 Motion Picture Association of America
The Perils of Movie Piracy--and its dark effects on consumers, the
        million people who work in the movie industry, and the nation's
        economy
Some facts, worries and a look at the uncharted future

The peril of piracy, to the nation and to the almost one million men
        and women who create, distribute and market movies
    No nation can lay claim to greatness or longevity unless it
constructs a rostrum from which springs a ``moral imperative'' which
guides the daily conduct of its citizens. Within the core of that code
of conduct is a simple declaration that to take something that does not
belong to you not only is wrong, but it is a clear violation of the
moral imperative, which is fastened deep in all religions.
    That is fundamental to how this Nation fits itself to honorable
conduct. Anyone who deals in infirm logic to certify that ``stealing
movies off the Internet is okay, nothing wrong about it since everybody
does it, and no one gets hurt,'' is obviously offering up a defunct
mythology to cover their tracks.
    Piracy, or ``stealing,'' is the darker side of digital subversion.
Digital theft has an inevitable leaning toward a future darkly seen by
those who create, distribute and market films. For the almost one
million men and women who work in some aspect of the movie industry--99
percent of whom don't make big salaries, who are good citizens and good
neighbors, with mortgages to pay and kids to send to college--their
livelihood is perilously in doubt if digital stealing goes on,
increasing in velocity with a casual disregard for other people's
intellectual property.
Piracy is a National Problem because Intellectual Property nourishes
        the American economy
    Piracy is a national problem. It must be a high priority of the
officials who comprise the Federal Government. Intellectual property
(movies, TV programs, home video, books, music, and computer software)
is an awesome engine of growth which nourishes the national economy.
Not only is intellectual property America's largest trade export,
bringing in more international revenues than agriculture, aircraft,
automobiles and auto parts, but it is creating new jobs at three times
the rate of the rest of the economy, and is responsible for over five
percent of the GDP. The movie industry alone has a surplus balance of
trade with every single country in the world. No other American
enterprise can make that statement--and at a time when this country is
bleeding from a $400 billion-plus deficit balance of trade.
    The movie industry sits on a fragile fiscal bottom. Only one in ten
films ever gets its investment returned through theatrical exhibition.
Films have to journey through many market venues--premium and basic
cable, satellite delivery, home video, network and individual TV
stations, international--in order to try to recoup the private risk
capital that brings a movie to life. If a film is kidnapped early in
that journey, it's obvious the worth of that film can be fatally
depleted long before it can retrieve its investment.
    At this moment, the movie industry is suffering from a loss of some
$3.5 billion annually from hard-goods piracy--DVD, VCD, videotape. We
are every hour of every day fighting that theft all over the world. As
yet, we have not put a loss-figure on digital piracy. We are working on
it. We do know from outside estimates that some 400,000 to 600,000
films are being stolen every day, and it is getting progressively
worse.
The movie industry is trying to explain to and educate youngsters and
        not-so-young about the value of copyrighted material
    The movie industry is laboring to find rebuttals to piracy. We have
launched an education project through TV public service announcements,
trailers in theaters, an alliance with one million students via Junior
Achievement to `explain and educate' why copyright is central to
intellectual property growth, and why filching movies in digital form
by uploading and downloading on the Net, is not only just plain wrong,
but has a malignant effect on the future of American consumers.
    We are also launching a long-term technological research project
enlisting the finest brains in the high tech industry to discover ways
and means to baffle piracy, technologically. We are constantly looking
for innovative and robust ways to protect American creative works
which, I am proud to report, finds a hospitable reception on all the
continents, where our films are patronized and enjoyed by all creeds,
cultures and countries.
    That is why I am here today--to tell you of the immeasurable
economic and entertainment value of American films--and to ask for your
help in the never-ceasing fight to combat theft of our movies.
No one can predict the shape and form of the future
    I don't know, nor does anyone else, the shape and form of the
future. We do know that the technology we find so magical today will
seem primitive 12 to 18 months from now. The ascending curve of change
is mind-bending. But no one can chart the digital future.
    That is why to impose an absolute congressional exile on so-called
``technology mandates'' is not good public policy. No one can forecast
what future technology mandates will be needed. That's why it is not in
the national interest to ban what you cannot see, to prohibit what you
do not know, to turn your back on what you cannot measure
    An absolute ban on technology mandates for access control or
redistribution control technologies would injure the discretion of the
FCC. It is an agency created by Congress to regulate in the public
interest. To do that it needs the tools to do the job, to carry out its
legislative command. Expert agencies like the FCC were created to take
on the burden of detailed, abstruse regulations that Congress has
agreed it is not equipped to do. To tie the FCC's hand in advance is
surely not in the public interest.
    I agree that the proposed ban on technology mandates cheers those
whose mantra is ``all content must be free,'' including pornography and
material stolen from its owners. But their view collides with the
public interest.
    The FCC should have the authority to adopt regulations that serve
the interests of consumers. That may very well include technical
mandates that would create a safe environment in which valuable content
would be made available in vast amounts to consumers.
    The Broadcast Flag is a good example of a technological mandate
that will serve consumers.
    The Broadcast Flag is designed simply to stop digital over-the-air
broadcasts from being re-directed to the Internet for anyone to pilfer,
easily, swiftly. By the way, consumers will never know there is a
Broadcast Flag, unless they try to re-distribute a program to the
Internet. The Flag enjoys cross-industry support. Without such a
mandate, companies that agree to abide by the Flag would be at a
disadvantage from companies that did not. In the end, as it always
happens, it is the consumer who would get it in the neck. Why? Without
a Flag, high-value content would surely migrate from free over-the-air
broadcast, which would not be able to protect content from piracy, to
pay systems which offer some protection. Sane business executives would
never allow their finest programs to go over-the-air, unprotected,
hapless prey to digital pirates.
    Of course, in the realm of technological mandates, all companies
competing in the digital arena have singular preferences. For example,
Philips supported the ``Plug & Play'' agreement at the FCC. And with
some qualification, so did the Consumers Union. Philips has also
developed a watermarking technology to solve the so-called analog
reconversion problem--which occurs when a protected digital signal is
converted in the consumer's home TV to analog and back to digital--
wherein all the encrypted protection is stripped away, leaving a movie
naked and unprotected against illegal copying. To implement Philips'
watermarking as a standard across the board would require a technology
mandate.
    Our most anxious concerns are not about the present, but the
future. Is the Congress familiar with experiments now going on that
will reshape and enlarge the ease and speed of digital thievery? Cal
Tech reported one experiment called ``FAST,'' which can download a
quality DVD movie in five seconds! Another experiment, ``Internet-2,''
has dispatched 6.7 gigabytes halfway around the world in one minute! (A
DVD-movie contains some 4.6 gigabytes.) What is experiment today will
be commonplace in the community three to four years from now. Which
means that the glorious enticement of FREE and easy uploading and
downloading movies, with little risk, will be far more intense than it
is now.
Pornographic Content on the Internet, so easily available to children
    This Committee must be sensitive to a most unwholesome fungus which
infests ``peer-to-peer file swapping sites'' such as Gnutella,
Morpheus, KaZaa, iMesh, E Donkey, Grockster, etc. That disfiguring
fungus is pornography on a scale so squalid it will shake the very core
of your being. As easy as it is to illegally download movies, it is
equally easy to bring home this foul pornography. Any 10-year-old can
do it--and probably does. Do parents know this?
    While searching for pirated material on these P2P sites, MPAA
technicians discovered large caches of pornography disguised as child-
friendly fare. This awful content is ``meta-tagged'' or coded to
searches children are likely to undertake, like ``Disney,'' ``Harry
Potter,'' or ``Spy Kids.'' Is it the intent of this Committee to ban
expert agencies from mandating technical remedies yet to be found to
allow parents to fence off this foul material from their children?
What the movie industry needs
    We need the Congress to understand and appreciate the vast worth of
copyrighted intellectual property. In the global film arena the United
States is preeminent. We need the Congress to heed our warnings that
unless there is put in place various baffle-plates of protection, we
will bear witness to the slow undoing of this huge economic and
creative force.
    Which is why I urge the Congress not to close the legislative door
on any new technological magic that has the capacity to combat digital
thievery which--if unchecked--will drown the movie industry in ever-
increasing levels of piracy.

    Senator Brownback. Thank you. Thank you, Mr. Valenti.
    Dr. Edward Felten is a Professor of Computer Science at
Princeton University. Thank you for joining us.

 STATEMENT OF EDWARD W. FELTEN, PROFESSOR OF COMPUTER SCIENCE,
                      PRINCETON UNIVERSITY

    Mr. Felten. Thank you.
    I would like to offer a computer technologist's perspective
on the issue of technology mandates. In my view, the best
future for both the entertainment and technology industries is
to embrace innovation, to concentrate on making the legitimate
entertainment experience as attractive as we can.
    Now, innovation is inherently experimental in nature. We
try many things and most of them fail, but we learn from the
mistakes. And the process of innovation is unpredictable. We do
not know which approaches will turn out to work. We do not know
which will turn out to fail. Because of the experimental and
unpredictable nature of innovation, it is especially sensitive
to being derailed by regulation.
    This is particularly true in areas where the technology is
immature, as in digital rights management technologies, the
technologies that are designed to attempt to prevent copying
and redistribution of content. Now, the goal of DRM technology
ought not to be to control legitimate consumer use of content
within the home. It ought to be to prevent the wholesale
infringement that Mr. Valenti so rightly worries about, in
other words to prevent Napsterization of content.
    What we are worried about, then, is that someone, a single
person somewhere, will rip the content to a digital file and
distribute it worldwide across the Internet, of course in
violation of the law. It follows then that a DRM technology in
order to be effective and to prevent this threat must do more
than prevent 95 percent or 99 percent of the would-be
infringers from ripping the content and redistributing it. It
needs to work against every single person out there who has the
knowledge and the willingness to break the law to redistribute
the content.
    That is a very high bar that the technology must meet, and
today's technologies are not up to that challenge. We do not
come anywhere close to having a technology that can really
provide the level of protection that Mr. Valenti and the people
in the industry would like to see. We may never have
technologies strong enough to prevent--to act by themselves to
prevent this threat.
    But if there is a hope of better DRM technologies which can
more effectively protect the content, that hope lies in further
experimentation and further trying of new technical approaches.
So it is particularly important to leave the field open for
innovation in this area. The worst case outcome in my view is a
mandate which locks in today's state-of-the-art with its
insufficient protection while preventing the exploration of new
approaches that can provide better protection in the future.
    Now, I recognize that mandates may be a reality despite
their effect on innovation. If we must have technology
mandates, there are things we can do to limit their impact on
innovation and to keep as open as we can the possibility that
we will have better technologies in the future. I would suggest
four guidelines to that end:
    The first is that the technologies ought to be aimed
squarely at stopping infringement and not at controlling
legitimate uses of content by consumers at home.
    Second, it is important that the evaluation criteria be
simple and neutral and applied in a neutral fashion and be
based on technical performance or lack thereof.
    Third, I think it is important that a mandate process
allows the possibility that no satisfactory technology is found
to exist. The process ought to be willing to hold off mandates
until a sufficiently strong technology comes along, rather than
insisting on imposing a mandate because the schedule calls for
it.
    Finally, it is important I think to ensure that a mandate
applies to as narrow a class of device as possible so as not to
have impact on devices that are fundamentally unrelated to the
problem. It is especially important that mandates try to avoid
impinging on the design of general purpose technologies such as
telecommunications, computers, or the Internet.
    Now, the common thread in all of this is the desire and the
need to keep the field open for further innovation and further
discovery. The technologies that all of us would like to see
will come into being only if we keep that field open.
    The key to progress is not to limit technical innovation,
but to embrace it.
    Thank you.
    [The prepared statement of Mr. Felten follows:]

Prepared Statement of Edward W. Felten, Professor of Computer Science,
                          Princeton University
    Digital technology presents an unprecedented opportunity for the
entertainment industry--and an unprecedented challenge. As the price of
storing and distributing digital content drops, new services and
business models become possible. New types of copyright infringement
become possible too; and unfortunately infringement has become all too
common. The debate is not about whether this infringement is harmful--
we all know it is--but rather about how we should respond to it.
    Entertainment companies are understandably concerned about the rise
in infringement, and they have proposed technology mandates as one
response. While well intentioned, these mandate proposals are of
dubious technical merit. Worse yet, they may cause serious harm, by
curbing innovation in information technology and consumer electronics.
The worst case--which is very possible--is that mandates will retard
the development of legitimate technologies, while failing to make any
dent in infringement. If it is not possible to avoid mandates
altogether, the next best alternative is to limit their scope carefully
so as to reduce the harm they cause.
    Technology, like the rest of our culture, relies on a community of
creative people striving to combine old ideas with new to advance a
common body of knowledge. Although textbooks portray technical progress
as an inexorable advance along nearly preordained lines, in practice
the process of discovery is anything but predictable. It is only
through trial and error--with many zigzags and false starts--that we
know which way to go. Technology moves fastest in an open and chaotic
marketplace of ideas, unconstrained by mandates.
The Digital TV Transition
    The transition to digital television (DTV) will greatly increase
the clarity and visual resolution of TV programming. This change will
reduce piracy, by increasing the quality difference between legitimate
and pirated programming.
    Consider the mechanics of DTV piracy. Full-resolution DTV images
require an enormous amount of hard drive space to store and an enormous
amount of bandwidth to transmit. A three-hour TV movie in ATSC format
occupies about 26 Gigabytes (i.e., about 26 billion bytes) of storage.
To store just one such movie requires a hard drive that costs about
$50--enough money to buy two or three DVD copies of the same movie. To
transfer this file across the Internet to one other person, assuming
both parties have fast home broadband connections, takes about two
days. Few would-be pirates would go to this much trouble, when the same
movie is available, sooner and at a lower price, on DVD or pay-per-view
instead.
    A pirate would choose instead to compress the video file, to make
it smaller at the cost of reducing visual quality. A file small enough
to transfer quickly over a broadband connection will have fairly poor
visual quality. Whether would-be infringers are willing to download
these infringing files depends on how the files' quality compares to
that of legitimately obtained content.
    Today's analog television offers mediocre visual quality, so highly
compressed files may be an acceptable visual substitute (for customers
who ignore copyright law). However, DTV offers a much better visual
experience, making the degraded quality of compressed files much more
evident. The highly compressed files offered by pirates will therefore
be less attractive after the DTV transition than they are today.
    The DTV transition will make legitimate content better, without
affecting the quality of pirated on-line content. The result will be to
raise the demand for legitimate content. Because of this, technology
mandates make even less sense in the future DTV world than they do
today.
Innovation and Regulation
    The main effect of mandates would be to impede legitimate technical
progress.
    Innovation is inherently unpredictable. If we know how to do
something, we are already doing it; so a technology advance is by
definition a surprise. The path forward is not a straight one. We move
forward by trial and error, as new insights teach us how to build on
past failures.
    To foster innovation, then, we must keep the field clear for
surprising developments, so that experimenters and entrepreneurs can
pursue whatever avenue of progress they discover. Closing off these
avenues through overregulation carries a high price, in missed
opportunities and inventions that are never made.
    It is tempting to imagine that we can concoct a regulatory regime
that is truly technology-neutral, not favoring one technical approach
over others but discriminating among products based only on their
effectiveness. In practice, though, any regulation will encode certain
assumptions into its definitions, its terminology, and its criteria.
Those assumptions might seem innocuous when the regulation is written,
but over time they will channel and limit progress. Existing approaches
will move ahead, but new, innovative technical approaches will be
stifled if they conflict with the regulatory assumptions. Since we
cannot predict the technical future, we will not be able to write
regulations that keep the road clear for future inventions. The winning
products, and the winning technical approaches, will be chosen not by
the market but by the regulators. Inevitably, this will retard
technical progress.
Regulation and General Purpose Technologies
    Regulation has an especially harsh effect on general-purpose
technologies such as personal computers and the Internet, which are
capable of performing powerful operations on data without needing to
understand that data in detail.
    The classic example of a general-purpose technology is the
telephone network, which can carry a conversation about any topic,
between any two people, and can do this without the network itself
having to understand what those people are talking about. The telephone
network is designed for the simple, general-purpose task of
transmitting sounds from one place to another. It is indispensable
precisely because it is general-purpose--because it can be used to talk
about any topic whatsoever, and because it transmits faithfully every
pause, inflection, and nuance in the speakers' voices; and it is
feasible to build a flexible, inexpensive, and easy-to-use telephone
system only because that system does not try to understand what it is
transmitting.
    Personal computers and the Internet are also general-purpose
technologies, as they are designed to operate on data of absolutely any
type, without the need to understand that data. As with the telephone,
the general-purpose nature of these technologies makes them both more
useful and much easier to build than the special-purpose alternatives.
    Regulation poses a special danger to general-purpose technologies,
because those technologies are capable of such a wide range of uses.
Any regulatory ban on devices that are merely capable of certain
disapproved uses will necessarily ensnare general-purpose technologies,
even if those technologies are not designed for or primarily used for
nefarious purposes.
    Consider, for example, a hypothetical regulation that bans
technologies that can be used to negotiate drug deals. This regulation,
though presumably well intentioned, would amount to a ban on telephones
and the telephone network. Someone who did not understand how
telephones work might reply that the solution is to redesign the
telephone network so that it cannot be used to talk about illegal
drugs. But such a mandate would be contrary to the nature of the
telephone network, which is fundamentally incapable of understanding
how it is being used. Even if it were somehow possible to build such a
restricted telephone network, the regulation would still fail to
achieve its goal, as drug dealers would just switch to talking in code,
perhaps discussing purchases of ``sugar'' and ``flour.'' General-
purpose technologies will always be capable of both good and bad uses.
To eliminate the bad uses is to eliminate the technologies themselves.
    This is not to say that nothing can be done about telephonic drug
dealing, or about any other misuses of general-purpose technologies. My
point is that mandates are not the right solution to these problems,
which are best addressed through other means, such as traditional
police work.
A Technical Perspective on Mandates
    An analysis of technology mandates must start with a clear
understanding of what the mandates are trying to achieve. There are two
possible goals: they might be intended to control consumers' use of
content, or they might be designed to prevent ``Napsterization,'' or
widespread copyright infringement. To put it more bluntly, a mandate
may try to change the rules of our copyright system, by transferring
certain rights (in practical terms) from the public to copyright
owners; or it may simply try to better enforce the traditional
copyright system.
    It is easy to see how controlling legitimate use serves certain
private interests; but mandating such technological control amounts to
a significant change in public policy. Other witnesses are addressing
the implications of this transfer in more depth, so I will not dwell on
it here, except to say that such a policy change, if it is to be made
at all, should not be introduced through a regulatory back door.
    If the goal is to prevent Napsterization, then the protective
technology must be especially effective. Network redistribution is such
a serious threat because it allows a single illicit copy of a work to
become available to hundreds of millions of people all over the world.
To prevent Napsterization, then, it is not enough to prevent most
consumers from copying most of the time. As long as even one consumer
has the technical knowledge to ``rip'' and redistribute the content,
along with the inclination to do so in spite of the law, the content
will become available to everybody--it will be Napsterized. To prevent
Napsterization, a protective technology must be so strong that not even
one would-be pirate can defeat it.
    Today's anti-copying technologies don't even come close to meeting
this challenge. At best, they control and limit the activities of
ordinary users; but a would-be pirate with a moderate level of
technical skill can defeat them with moderate effort. Today's
technologies do not, and cannot, prevent Napsterization.
    Most independent technical experts believe that no technology will
ever prevent the capture and redistribution of digital content by
determined pirates. Certainly, this view is consistent with the
checkered history of anti-copying technology. If this view is correct,
then--like it or not--technology is not the answer to the digital
copyright dilemma, and the result of mandates will be all pain and no
gain.
    Even if a technical antidote to Napsterization is in our future,
that antidote will come about only through continued research and
experimentation. Restricting technical progress by over-regulating will
only lock in today's level of ignorance, delaying the day (if it ever
comes) when we know enough to solve this technical puzzle. If we are
not careful, we will mandate the use of ineffective technologies, while
preventing the creation of better ones.
Reducing the Harm Done by Mandates
    I have argued above that technical mandates retard innovation and
provide few if any benefits in return. My hope is that we will have no
technical mandates at all.
    If we must have mandates, they should be structured carefully so as
to minimize the harm they cause. To that end, I would suggest four
guidelines.
    First, any mandate should be aimed at preventing infringement, and
not at controlling consumers' legitimate, fair uses of content. The
mandate should be limited to technologies that leave fair use and the
right of first sale intact.
    Second, technologies should be evaluated according to simple,
neutral technical criteria. Keeping the criteria simple and neutral
will reduce their influence on the direction of technical progress, and
will keep the barriers to entry low so that new technical approaches
can be tried. The criteria should be based on results achieved rather
than on the use of specific technical methods.
    Third, the mandate should allow for the possibility that no
satisfactory technologies exist, rather than simply assuming that a
suitable technology can be found. If nothing works, the mandate process
should be willing to admit that fact and wait for better technologies
to develop, rather than locking in a bad solution.
    Fourth, the set of devices subject to the mandate should be as
narrowly defined as possible, so as to minimize the regulatory impact
on unrelated markets. A device should not be regulated merely because
it might conceivably be modified or reprogrammed for an infringing use.
It is especially important to protect general-purpose technologies,
which by their nature are especially susceptible to regulatory harm.
Conclusion
    Copyright infringement is a serious problem that has no easy
solution. We should resist the ``quick fix'' of technology mandates,
which will do little if anything to reduce infringement, but will
impose a regulatory drag on the very industry whose progress might
yield a better solution to the piracy problem. If we must have
technology mandates, they should be narrow and carefully focused. The
path to a better future lies not in limiting technical progress but in
embracing it.

    Senator Brownback. Thank you, Dr. Felten.
    Mr. Murray, Christopher Murray, Legislative Counsel
Director for Consumers Union, welcome.

STATEMENT OF CHRISTOPHER MURRAY, LEGISLATIVE COUNSEL, CONSUMERS
                             UNION

    Mr. Murray. Senator Brownback, Senator Inouye, and Senator
Lautenberg. I would first like to thank you for your kindness
and tenacity in hanging through the lunch hour and listening to
our testimony today. I know that this can perhaps be an opaque
subject because it is a little bit technical. I will try to be
a little controversial for the sake of keeping us all awake.
    I love gadgets. I love movies. I love all of the technology
that consumers use today, and that is what our magazine,
``Consumer Reports,'' tries to rate for consumers. We try to
look at products and see where there is a horse race and see if
there are ways that technology can be made in better ways and
in worse ways.
    I think it should be obvious from the fact that we produce
a magazine that without copyright I would not have a job, and I
would not be able to be here before you today. So we are 100
percent committed to the protection of intellectual property,
and we are quite concerned about the piracy problem that I see
facing both the movie studios and the music industry today. I
think it is an immense problem.
    I want to drill down just for a few minutes into the
broadcast flag particularly because that is the nearest term
thing on the FCC's docket. A decision is perhaps in the 8- to
12-week range or even sooner by some accounts. And I think that
this is an underappreciated docket over at the commission,
because it has the potential to mess with consumers'
televisions and we know that there are few things that raise
consumer ire like messing with their televisions.
    I am going to suggest that the broadcast flag is a solution
to a problem that we do not yet have, with technology that we
have not yet seen; and that, furthermore, engineers that I
trust and respect tell me it is the least effective and most
costly way to solve this problem, assuming that it ever does
become a problem. I think that is a reasonable assumption, that
the problem we are talking about will become a problem.
    But as policymakers I think it is important for you to
distinguish what the problem is. Is there a problem of
redistribution on the Internet of high-definition digital
television? I am going to submit that the answer is no. When
people redistribute content on the Internet, they scale it down
to postage stamp size so that it is reasonable to redistribute
on the Internet. Otherwise you would be there for years trying
to redistribute that content.
    Now, I can do that same kind of redistribution without a
digital source. I can take any analog signal that comes today
over rabbit ears television and for less than $100 I can go to
Radio Shack and buy a device that will allow me to convert that
signal to something that a computer can read and that can then
be redistributed on the Internet.
    So again, what I am not saying is that there is no piracy
problem here, but that we must distinguish what the exact
piracy problem we have is. I do not want to be too shrill about
this, but, Senator Brownback, you mentioned the Laurie Kraner
study from AT&T Labs which cited the fact that about 80
percent, 77 percent, of the content that is currently on the
Internet is the back of the truck problem. Now, that is not to
diminish the scale of that problem. It is simply to say let us
go after the problem where it exists.
    While I do not support tech mandates generally, I think
were the government to be issuing tech mandates we should issue
them in a space where there is a problem currently. Internet
redistribution of music is a huge problem. It is not clear to
me exactly how much it is cutting into sales, but I think we
can all consent with the fact that it is at least somewhat
diminishing music industry sales. That is a problem I think we
should be aiming to solve in the near term. Internet
redistribution, again, of high-definition digital television is
not currently a problem.
    The second thing I said is that it is a solution to a
problem that does not exist, with technology that we have not
yet seen yet. We have been told that this technology is going
to allow consumers to do the same fair use and reasonable
things that they have always done. I can take a tape of a show,
a new show perhaps that I was on, to my grandmother's house,
show that to her. I can take a tape of ``Friends'' to my
friend's house and we can watch that together.
    What I do not understand is how we are going to on the one
hand protect that content from piracy in a robust fashion and
on the other hand not preclude some of those uses. Now, it
may--excuse me. It very well may be that I am just not smart
enough to understand how they are going to do that. But that is
my point. I have not seen the technology. I think it would be
extremely unwise for the FCC to buy this pig before they take
it out of the poke.
    I would also submit that it is Congress and not the FCC
that is going to have its head handed to it when consumers get
really upset about the fact that perhaps they cannot do the
things that they are currently today used to doing with their
television sets.
    The other thing that I said is that engineers I trust tell
me that it is the least effective and it is the most expensive
way to do this. Let me offer an example. Imagine that we are
the National Security Agency and we want to communicate
securely with only the people that we want to get that
communication. There is a couple ways we could do that. One way
would be we could encrypt that information at the source and
then we could send it out and not so much worry about where it
is going to be picked off because it is going to be scrambled
when people get it.
    The other way that we could do it, were we the NSA, is we
could broadcast that information in the clear and then go
around and make sure that every radio that is produced in the
world cannot pick up that information or that once they pick up
that information that they have got to do something in
particular with it. Now, that is obviously a more costly way
and probably not the wisest way to do it, and it is not the way
that we run our intelligence operation.
    I will wrap up quickly. On the cost point, the reason this
is such an expensive proposition is because, as has been
pointed out here, this is intending to regulate a very large
swath of our economy. Not only--actually, let me just quote
from MPAA's broadcast flag comments at page 14. Quote: ``An
effective comprehensive solution must be mandated by the
commission for pertinent products.''
    In case we were not clear on what pertinent products are,
in the parentheses that follows they say: ``Although the
commission's notice refers to consumer electronics devices, it
is essential, and we assume the commission intended, that
computer or IT products be regulated as well as so-called
consumer electronics products.'' That is an immense scope.
    I want to help solve this problem when this problem comes
up and I think we should be forward-looking about solving this
problem. But let us do it in an effective way. Let us not give
hackers a huge target of an unmoving object that they can then
hack and then we have precluded a whole next generation of
technology of DRM, as Professor Felten pointed out, from
emerging because we have mandated the wrong one.
    If we mandate the wrong technology, you are going to have
people back here asking, not once for consumers to pay this
transition, but twice they will have to pay for this
transition.
    My final sentence. Forgive me for running over. The beauty
of the computer is that it can be a typewriter and a television
and a recipe book, but it is not the function of recipe books
and typewriters and televisions to be computers. We should
strive to have devices that have not just features but
potentials.
    Thank you.
    [The prepared statement of Mr. Murray follows:]

    Prepared Statement of Christopher Murray, Legislative Counsel,
                            Consumers Union
    Chairman McCain, Ranking Member Hollings, and Senator Brownback, I
am grateful for the opportunity to represent Consumers Union,\1\ the
publisher of Consumer Reports magazine, and Public Knowledge \2\ before
your distinguished committee today.
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    \1\ Consumers Union is a nonprofit membership organization
chartered in 1936 under the laws of the State of New York to provide
consumers with information, education and counsel about goods,
services, health, and personal finance; and to initiate and cooperate
with individual and group efforts to maintain and enhance the quality
of life for consumers. Consumers Union's income is solely derived from
the sale of Consumer Reports, its other publications and from
noncommercial contributions, grants and fees. In addition to reports on
Consumers Union's own product testing, Consumer Reports and Consumer
Reports Online (with approximately 5 million paid circulation)
regularly carry articles on health, product safety, marketplace
economics and legislative, judicial and regulatory actions which affect
consumer welfare. Consumers Union's publications carry no advertising
and receive no commercial support.
    \2\ I am especially grateful for the immense contribution to this
testimony of Mike Godwin, Senior Technology Counsel for Public
Knowledge. Public Knowledge is a public-interest advocacy organization
dedicated to fortifying and defending a vibrant information commons.
This Washington, D.C.-based group works with wide spectrums of
stakeholders--libraries, educators, scientists, artists, musicians,
journalists, consumers, software programmers, civic groups and
enlightened businesses--to promote the core conviction that some
fundamental democratic principles and cultural values--openness,
access, and the capacity to create and compete--must be given new
embodiment in the digital age.
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    Consumers Union is deeply concerned about piracy, and believes that
copyright is crucial to the creation of content. Indeed, we wouldn't
have a business without the revenues that copyright allows us to
generate through the production of our magazine.
    We also take seriously that copyright law strikes balances that
benefit the public during the term of copyright ownership--that even
unlicensed use of copyrighted works, according to fair use and other
principles--benefits citizens generally even in some instances where it
does not directly benefit \3\ the copyright owner. That is why, for
example, we have such a strong tradition of public libraries in this
country.
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    \3\ Of course, it may indirectly benefit copyright holders, as for
example in the movie ``High Fidelity,'' when John Cusack's character, a
record-store owner, plays tapes of music he loves and inspires shoppers
to buy new records. The shoppers get a ``free performance,'' but the
artist gets new sales.
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    These carefully crafted balances are threatened when new
technologies make it possible for a single individual to share, in
effect, thousands of copies of copyrighted works with millions of
users. Music is particularly vulnerable in this scenario because the
file sizes of digitized music have grown small enough that even
Internet users with relatively slow connections to the Internet can
still find and download a favorite song in a short period of time.
    Statistics from the music industry indicate that record sales have
declined over the last two or three years. While some of that decline
might be blamed on business decisions by the record companies (given
that they have released fewer albums over that time than they did at
other times when sales were stronger),\4\ or the war, or the recent
economic malaise, our instincts tell us that much of this phenomenon is
traceable directly to the free downloading of music files from the
Internet, via peer-to-peer software or other mechanisms.
---------------------------------------------------------------------------
    \4\ See http://www.soundandvisionmag.com/
article.asp?section_id=2&article_id=453 and the underlying study cited
by the article (see above) by George Ziemann, MacWizards.
---------------------------------------------------------------------------
    Couldn't we simply outlaw peer-to-peer software, or at least impose
stronger legal restrictions on it? The answer to this is mixed: peer-
to-peer activity on the Internet (a network of computers in which any
two can share resources, including but not limited to content and other
data) is a central part of the Internet design. A better approach, we
think, is to look at ways our legal system can adapt itself to reduce
the large-scale trading of music online--from one music fan to ten
million strangers, for example--while at the same time exploiting new
technologies that both deliver more music to more music fans, that pay
more artists more money, that encourage the growth and exploitation of
the open-architecture Internet, and that strike a fair deal that
benefits artists, publishers, and ordinary citizens in general as we
enter the first fully digital century.
    As consumer advocates, we necessarily favor policies that ensure
artists and publishers' getting paid for their creative work. We are
willing to work with the record companies and the studios to come up
with creative ways solve their piracy problem. What we won't do, and
what we believe the Congress shouldn't do either, is attempt to set in
stone the business models of the past while moving forward into the
digital world. Ordinary citizens and consumers are forced to adapt to
the rapid changes brought about by digital technology, and publishers,
record companies, and studios will have to change too. Indeed, already
many of them are showing signs of positive change, through the immense
public success of Apple's iTunes Music Store (and its quickly
responding imitators) to the decision by many studios to deliver movie
content to theaters digitally--yet safely--because the content is
protected by ``digital-rights-management'' (DRM) technologies.
    As always, those who truly understand and embrace the future of
technology are quickest to succeed at new models--especially if their
competitors, like King Canute knew he could not,\5\ sit in their
thrones at the edge of the sea and order the tide not to come in. Do
not take this example (a story incidentally drawn from the public
domain) to mean that we believe obedience to the law and the balances
struck by the law are unimportant--take it instead to mean that we
believe our legal responses should be thoughtfully applied in a
targeted way that not only does justice in particular cases but also
communicates to the general public a sense of fairness, of proper
scale, and of balance.
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    \5\ http://www.zyra.org.uk/canute.htm
---------------------------------------------------------------------------
    We accept the need for the deterrent effect of properly targeted
enforcement efforts. We also stand opposed to measures, whether they
are driven by our legislature or by our regulatory agencies, that
attempt to slow down, or throttle, or centralize the digital
technological innovation that has been--perhaps even more that the
creative works of the movie studios and recording artists--a driving
force in our economy for the last two decades. We believe there are
ways to capture that ever-increasing technological momentum through
approaches that ride the tide of technological innovation rather than
seeking to slow or halt it.
    The open architectures of the Internet and personal computers have
revolutionized and benefited American lives already in countless ways.
We now have an entire generation of children whose reflexive approach
to answer a question may be to ask Google about it, then to trace down
the answer on the World Wide Web.
    Although the same computer and network technology has given us the
new problems of copyright protection, it would be a tragedy if the
measures we took to protect copyrighted works made the Internet less
open, or the personal computer less useable--except when the user pays
the appropriate toll.
    Consumers want cool, convenient, connected gadgets. New technology
has always forced us to continually rethink our laws, to reexamine the
balance of copyright--from the printing press to the photocopier, from
VCRs and MP3 players to personal video recorders like TiVo and Replay
TV--and the United States has always embraced that new technology and
that is a large part of the formula for our success. New devices have
continually transformed the balance between creators and users, but
historically we have erred on the side of allowing technology to
flourish even when there was potential leakage, for the sake of
capturing the substantial benefits of that new technology.
    If content-protection measures are put on the table that do not
centralize the process of innovation, that give consumers new
functionalities, give them better products at better prices, we would
support them. Unfortunately, many of the current proposals--especially
the broadcast flag scheme--require a top-to-bottom redesign of the
architectures of digital tools and perhaps even the Internet itself.
The cable-compatibility ``plug-and-play'' proceeding at the Federal
Communication Commission, depending on its details (which have not yet
been published), could have a similar chilling effect on both
innovation and access to information and even on the revenues of
artists, who are already exploring new ways of showing and selling
their creative works online through our dynamically open and evolving
Internet.
    The broadcast flag and certain aspects of the plug-and-play
regulation currently before the Commission present the possibility that
a small set of companies will be given a de facto veto on new business
models based on political criteria. A much better approach would be to
develop, collectively, a set of neutral technological criteria for
standards that protect broadcast and cable-carried content--ideally one
objective enough to provide predictability to innovators while open-
ended enough to inspire ongoing innovation in ways to both protect and
present content through digital systems.
    Make no mistake about it. Closing the architecture of the Internet
or of the personal computer will not merely harm consumers in terms of
the value they receive when they buy new systems. Nor will the damage
be limited to the computer industry, which has relied on open systems
to fuel a generation of astounding innovation in digital products.
Perhaps the worst aspect is that certain content-protection approaches,
because they focus more on limiting consumer uses of traditionally
distributed content than on creating new business models and new kinds
of offerings, will ultimately hurt creators and publishers as well, and
may even slow the already lagging transition to digital television.
    There are other approaches, including more nuanced ``digital-
rights-management'' approaches, that may not only work better than the
content-protection standards currently being developed at the FCC, but
also may have positive consumer effects.
    Imagine, for example, how computer-based DRM could enable a person
with disabilities to view a first run movie--on a one-performance-only
ticketed basis--through their home theater system, rather than
struggling with accessibility issues at a movie theater or simply
waiting for the new film to become available on cable or DVD. Or
imagine how the Internet could be used to present in-classroom
performances of current films with educational value--in ways that both
protect the value of the copyrighted work and widen the audience for
it.
    We believe DRM can be overly restrictive as well, but that the
leavening effect of allowing a variety of DRM solutions to compete in
the marketplace, rather than a narrow, and possibly obsolete scheme
being mandated by Congress or by a regulatory agency, will help ensure
that consumer flexibility in access to, as well as use of, new content
will remain part of our longstanding copyright-law traditions.
    In a minimally regulated free market for copyrighted works, the
consumer wins. The example of DRM in spreadsheet software in the 80s is
instructive. Initially, LOTUS 1-2-3 was strongly copy-protected and had
a high pricepoint (and probably therefore had a higher need for
protection because the incentives to circumvent were so great).
Eventually a competitor (Borland, headed by Phillipe Kahn) came into
the market with a product that was sold at a much lower price and
unprotected. Because the product had a reasonable price--one that more
consumers could afford to pay--the need for over-restrictive DRM was
lessened, and software consumers generally find today that such DRM as
continues to be used is far more humane than the harsh DRM regimes of
the 1980s.
    Please note that nothing we say here should be taken to mean that
there is no room for DRM in the market--indeed, properly calibrated and
flexible DRM schemes may serve as a consumer-engagement tool. In fact,
we encourage the providers of DRM technologies to devote some fraction
of their energies to making public-domain works more available through
their digital-media platforms, with as few restrictions (or even fewer)
than those in traditional analog publishing.
    Today, the consumer's experience of DRM is all too often that it
blocks something he or she might wish to do, and that he or she might
have no problem doing with the work's analog counterpart. For example,
it may be easy and cheap to photocopy a page of a book for an English
lesson than it is to extract that same text from the digital version of
that same book--even when the work itself is in the public domain.
    We believe that if consumers had more positive experiences in
purchasing and using DRM-protected works, and knew from experience that
the DRM-imposed limitations on their use came from publishers' choices
and not from the technology itself, this rationalizing of the content
market in itself would both give a human face to digital content
platforms and serve to persuade many content vendors, still all-too-
fearful of the digital world, to loosen the restrictions they impose
through DRM on digital works.
The FCC's Broadcast Flag and ``Plug and Play'' Orders
    The broadcast flag dramatically expands the FCC's regulatory
authority and would have the agency regulate personal computers \6\ in
ways it never has before. What is now a decentralized industry--where
the way entrepreneurs now get their products to market is they build
them and they sell them--will now come under the purview of the Federal
Communications Commission. If Congress wants the FCC to turn itself
into the Federal Computer Commission, then the broadcast flag is the
quickest way to do it I can imagine.
---------------------------------------------------------------------------
    \6\ MPAA Broadcast Flag comments at p. 14: ``An effective
comprehensive solution must be mandated by the Commission for pertinent
products. (Although the Commission's notice refers to `consumer
electronic devices,' it is essential, and we assume the Commission
intended, that computer or `IT' products be regulated, as well as so-
called `CE' products.)''
---------------------------------------------------------------------------
    We have always joined the FCC in wishing for convergence between
digital computer-based tools and the consumer-electronics market, but
we dare not accept convergence at the price of mandating a single
closed-architecture approach for every computer that wants to be an
avenue for television and movie content. Already, new innovative
offerings from companies like Hewlett-Packard and Gateway, not to
mention TiVo, have made clear the potential for open-architecture
computers to serve at the heart of our home entertainment systems and
protect content as well.\7\
---------------------------------------------------------------------------
    \7\ See Ex Parte Communication from Microsoft and Hewlett-Packard,
In re Implementation of Section 304 of the Telecommunications Act of
1996; Commercial Availability of Navigation Devices, CS Docket No. 97-
80; In re Compatibility Between Cable Systems and Consumer Electronics
Equipment, PP Docket No. 00-67, August 8, 2003.
---------------------------------------------------------------------------
    The studios have acknowledged that the broadcast flag is an
incomplete solution,\8\ and perhaps not the most robust way to protect
content. However, rushing into a scheme that won't actually work to
protect content against piracy and then having to go back and redo this
again means that consumers may be forced to pay for this technology
transition not once, but twice. When we find out that the broadcast
flag doesn't work, and then we're told that we're going to need ``just
this one more thing'' again, consumers are going to be faced with
another generation of legacy technology, more stuff that they have to
throw out. When that happens, they're going to come to Congress for an
answer, not to the FCC.
---------------------------------------------------------------------------
    \8\ ``The Broadcast Flag is only one part of the solution to the
problem of widespread unauthorized redistribution of copyrighted
content. Other steps include addressing analog reconversion and
unauthorized peer-to-peer file trafficking.'' See Joint Reply Comments
of the Motion Picture Association Of America, Inc., et al., at 12.
---------------------------------------------------------------------------
    The broadcast flag requires great swathes of the digital
environment in the home and in the outside world to be redesigned to
monitor for the flag. This cannot be done without great costs, both in
allocating design and manufacturing resources and in removing
flexibility and value from digital products offered to consumers.
Furthermore, the flag scheme isn't even a complete solution. As they
have told us, shortly after passage of the flag, the studios will be at
the Commission asking for a fix to their ``analog hole'' problem.
    Congress has been told before by studios that if Congress will just
give them this one thing and they'll roll out digital television--just
give them hundreds of billions of dollars worth of digital spectrum for
free and they'll roll out DTV right away--but broadcasters have never
given in return any enforceable commitments, and they still look as far
away from giving back their analog spectrum as they did at the
beginning of this transition.
    At the very least, I do not see how or why Congress should allow
the FCC to commit to a vast new regulatory scheme without an
enforceable timeline for the DTV transition. And I do not see that
enforceable timeline on the table right now.
    The FCC's broadcast flag rulemaking would also be ill-advised to
proceed without Congressional input as to what kind of reasonable
consumer uses any such technology mandate must protect. It is
inevitable that any protection scheme will involve some choices
regarding what uses will continue into this next generation of
technology and what uses will not be allowed. If consumers turn on
their expensive new DTVs in three years and discover they cannot do
many of the lawful and reasonable things they used to be able to do
with older technology, it will be Congress--not the FCC--who will be
held to answer.
    We have seen no technology that demonstrates it is possible to
protect fair use and other reasonable consumer uses, while at the same
time protecting content from piracy. Before the Commission begins to
demand that such a wide range of consumer electronics have the flag in
it, they should insist upon a demonstration of the actual technology
and show us how it will work.
    We support measures to protect content that generally work well,
such as encryption or ``scrambling'' content at the source. That is the
approach taken by the DVD market, and even the efforts of a few
computer hackers who succeeded in defeating these protection measures
had no effect on the DVD market, which continues to grow rapidly. Once
again, we favor protection schemes that allow variety and flexibility
for consumers--DVDs' content protection does not yet do this, but,
unlike the broadcast flag, for example, DVDs make up for this lack in
flexibility in other ways, typically by offering additional features.
CU believes the market in sales of digital entertainment will continue
to evolve, given the right competitive environment, and avoiding a one-
size-fits-all government-imposed solution.
    The FCC's cable ``Plug and Play'' agreement (also known as the
cable ``encoding rules''), which ostensibly sought to ``ease the
digital transition for consumers'' by mandating that digital
televisions be compatible with the content protection systems that
cable operators are using and will use. But in the process of
supposedly facilitating the digital transition, the FCC excluded
computers--a device present in approximately 70 million consumers'
homes that is capable today of displaying a digital signal.
    The Plug and Play order ensures that cable televisions will have
content protection built into them, and ensures that the outputs on
digital televisions will not be able to hook up with computers or any
devices that are not ``secure.'' ``Plug and Play'' used to mean just
that: consumers could buy a device, plug it in, and it worked. Now
``Plug and Play'' means something quite different. It means, rather
counter-intuitively, that consumers' ``Plug and Play'' TV sets won't
work until they get a special card from their cable operators. And in
an especially ironic twist, consumers won't be notified that their
``Plug and Play'' sets won't Plug and Play (because they'll need the
security card from their operator) until after they purchase those TV
sets. This is a guaranteed recipe to provoke consumer anger.
    Depending on the details of the final order, Plug and Play sets the
digital TV transition back by not contemplating computers as
``unidirectional content receivers'' whose generally open architecture,
modifiable by the owner, hasn't prevented companies like TiVo from
figuring out how to protect content. Furthermore, there are
approximately 70 million devices on the market that could receive a
digital signal today: personal computers (with a tuner add-on). But the
FCC has specifically excluded computers from this agreement. It is
ironic that the FCC has trumpeted the coming convergence of the
functionalities of computing and television, yet when presented with an
opportunity to do something concrete about that convergence, failed to
contemplate computers within the scope of the order.
Conclusion
    Article 1 Section 8 of the United States Constitution tells us that
the goal of copyright is ``To promote the Progress of Science and
useful Arts;'' The reason that the Framers put Copyright law into the
Constitution was not to protect a small class of citizens who happen to
be writers or artists. It was to benefit everybody by encouraging
writers and artists to create more. That very same clause says that we
have to reward inventors because we know that the health of the Nation
is built on technological openness and new frontiers.
    The greatest industrial innovation we've seen in the last half
century has been cybernetics, the use of tools that process
information. Not a year goes by that computing technology does not
revolutionize another sector of industry, science, and the arts. We
have to find a way to harmonize the creativity of the content producers
and the creativity of the engineers and scientists and computer
programming that doesn't involve a prohibition of thinking new thoughts
and building new devices, but rather embraces an exploration of all the
new things that haven't been created yet.
    The incredible changes that we've seen in the world are about the
fact that literary and artistic creators and engineers and scientific
creators have been unfettered and they've found new tools for content.
Sometimes these things do shake things up, but we're good enough and
clever enough to deal with that.
    There are all sorts of ways to protect content that don't involve
creating content prisons. We could have digital tools that are
interoperable, open, and mutable--and protect content at the same time.
Why not set our sights instead on how best to put tools in the hands of
inventive men and women, set our sights on how to keep computers open,
included in the long-awaited world of convergence, and protect content
all at the same time?
    The beauty of the computer is that it can be a TV or a typewriter
or a recipe book, but recipe books and TVs and typewriters can't be
computers. We should not force computer manufacturers to choose either
to continue being open, general purpose devices or to become closed
platform media appliances.
    Why turn the clock back on computers merely to return to the world
of the 1980s? Why aren't we looking forward to a 21st century where
individuals get to use the content they pay for more flexibly on more
platforms in ways that even better fit their lifestyles and schedules?
The best way to allow that is to permit the convergence of
communications and computing technologies with mainstream media
devices. But the FCC's decisions on the broadcast flag and cable Plug
and Play could potentially set us back two decades.
    Without computers there would be no TiVo, without the World Wide
Web there would be no online programming guides, no radio broadcast
over the Internet. There are so many things that computers have
enabled--we must aim as high as we can see, aim to have devices not
just with features, but with potentials.

    Senator Brownback. Thank you, Mr. Murray, and thank the
panelists. That is a very good discussion and quite
illuminating.
    Mr. Blanford, everybody wants to protect the intellectual
property rights and recognizes the great stake that our economy
has in this, as Mr. Valenti put forward so articulately. And I
know that Philips Consumer Electronics wants that technology--
or wants that intellectual property right out there as well,
because without that you are not going to sell as many devices,
either, here or anywhere around the world.
    I put forward in the proposal a self-certifying process.
How do you see this process working to be able to protect Mr.
Valenti's companies' intellectual property right?
    Mr. Blanford. Mr. Chairman, we believe self-certification
would certainly be to the extent that we need technology to do
this, and we would concur that technology would certainly play
a role along with a number of other mechanisms, including new
business models. Self-certification would certainly allow
companies such as Philips and others to develop appropriate
technologies to meet objective standards to protect the
technology without having to work against a specific mandated
technology, which we believe if mandated could provide
significant anti-competitive effects.
    We are very, very concerned about the nature of one
technology that would prevent companies like Philips from
innovating.
    Senator Brownback. Give me an example? Can you give me an
example of what you are talking about there?
    Mr. Blanford. Yes. I believe that certainly an example, a
recent example in fact, in the so-called 5C-4C technologies
that are proposed here--and let me, if I might, just quickly
correct Mr. Valenti because it is related to your question. He
referenced a large group that had agreed to the use of those
particular technologies. In reality there was a much smaller
group that was meeting behind closed doors that we attempted to
participate in and were shut out of.
    This is a bit of old news in that a year ago we went before
the House Energy and Commerce Committee and, with members from
both sides of the aisle there, asked that they get this whole
issue out of the back room and into an open and transparent
vehicle. They chose the FCC and we applaud that, and we are
supporting the FCC in this whole discussion and debate. So that
is point number one.
    With respect to your specific question, already even while
this is still under debate in the FCC there has been a
unilateral move by the 4C companies to modify the 4C license
that is embedded inside of the potential broadcast flag
mandate, without any ability for us to respond to that or to
affect it. So we are very concerned about that.
    Senator Brownback. Mr. Blanford, my time is short on this.
I just want to make the point here, and I want to make sure
that this is where Philips Consumer Electronics is, is that you
are committed toward protection of these intellectual property
rights that Mr. Valenti's companies represent?
    Mr. Blanford. We absolutely are committed to do that.
    Senator Brownback. But you just have a concern that we are
going to put some sort of technology mandate, either through
the FCC or other route, that you cannot comply with as a
consumer electronics company; is that correct?
    Mr. Blanford. That is correct, or to comply with it it puts
us at a competitive disadvantage, similar to the example I used
in my opening statement. If you have several companies who are
in fact in control of the technology, they know where it is
going, and if they can make changes they can--they have the
advantage of building into their equipment well in advance of
changes in those technologies, those protective technologies,
ahead of the rest of the field. That would put us at a severe
competitive disadvantage. So that is certainly an issue for us.
    Senator Brownback. Mr. Valenti, Dr. Felten is a wise man
sitting next to you, he knows the computer industry, and puts
forward this concept that we really cannot mandate this
technology right now because we do not know for sure where it
is going. I have been around here enough to see that when we
put something in as a static situation today and things start
changing on us tomorrow, we are in trouble because we cannot
seem to catch up fast enough with how the changes are taking
place. That is the proposal I put forward in this bill: no tech
mandate and let us let the industry work with this and work
this out.
    What is wrong with that model of thinking about dealing
with this issue and protecting the intellectual property rights
of your industry?
    Mr. Valenti. Well, the principal thing, Mr. Chairman, that
gives me a Maalox moment is the fact that you keep waiting,
saying you cannot do anything because technology is changing,
changing, and changing, and by the time of 2026 that you decide
to do something we are dead.
    What I take issue with, if for example Mr. Murray says,
well, wait until there is a problem, that means you do not put
a burglar alarm system in your house until it has been
ransacked, then you put the burglar alarm system in. We are
trying to look to the future, to save ourselves. I see what has
happened to the music industry. It has been pillaged and it is
going downhill, and I do not know what is going to happen
there. I want to make sure that does not happen to the movie
industry by trying to look ahead.
    I am not looking for----
    Senator Brownback. If I could be real quick, what is wrong
with Dr. Felten's line of his saying, here are the ways we need
to go at this? He seems to have been pretty thoughtful about
that and concerned about your industry as well.
    Mr. Valenti. I am not going to debate computer science with
Professor Felten, because I am technologically illiterate. But
I have experts around me who I think have the same capacities
that he has and that Philips has, and they tell me something
different. They tell me that you can make a standard and then
on top of that standard people can build their own proprietary
interests. Philips can build on that, Microsoft can build on
it. But there has to be a standard to allow us to begin now to
protect our property.
    We are looking at--the digital age will be on us in 2, 3,
4, 5 years. You cannot wait 5 years from now before you begin
to set in place the kind of rebuttal that you need to save this
industry.
    Mr. Murray. If I could respond briefly.
    Senator Brownback. Mr. Murray.
    Mr. Murray. I am not saying do not put a burglar alarm on
the house. I am saying do not leave the front door open and
then say that the problem is the burglar alarm is not there.
    Mr. Valenti. I do not know what that means. What are you
talking about?
    Mr. Murray. The broadcast flag, what it does--my example
with the NSA, which I did not really take home. What the
broadcast flag does is it transmits all the information in the
clear. It is unencrypted. Anybody that can figure out how to
just kind of snatch that signal out, that is the front door
that is wide open. What it does is it forces us to, instead of
closing the front door, it forces us to re-architect all of the
consumer electronics and information technology industries.
    That is all I am saying, is it is an extremely clunky
solution to a problem that could be solved by closing the front
door.
    Senator Brownback. Dr. Felten?
    Mr. Felten. Just briefly, Mr. Murray talked about waiting
until there is a problem. I think we also need to wait until we
know there is a solution. I remain convinced that we do not
know how to protect this content, and the broadcast flag as
proposed seems not to be the right solution.
    The industry, all of the affected industries, are free and
they are trying to come up with new solutions and new ideas. I
think the best course is to simply allow that to happen. Once
we see a technology that can prove itself, then we can move
forward to adopt it.
    Mr. Valenti. Senator, I am not here to offer any mandate
right now, not at all. We do not have any legislative plans to
put before you at all. As a matter of fact, the movie industry
is launching a well-funded technological research program that
we hope over the next 18 months we can come up with some
solutions, enlisting the best brains in the high tech industry,
people like Professor Felten and others, to try to find the
solutions.
    On the broadcast flag, 56 of the most respected companies
in the world in the high tech industry believe the broadcast
flag as it is now mandated, now designed, will work for over-
the-air free broadcasts. What we are trying to say, Mr.
Chairman is the broadcast flag embeds a sequence of digital
bits in the program, that is all it does. And if you want to
send a picture of your baby to your grandmother you can,
because the broadcast flag is a sequence of digital bits
embedded in a television program, and if a program comes in
that does not have those bits then the flag does not work. It
only works with high-value digital over-the-air free
broadcasts.
    I promise you, sir, that if we go into the digital world
and we cannot protect digital free broadcasts they are going to
migrate. That is an absolute necessity.
    Senator Brownback. As I understand, Mr. Valenti, the 56
companies embraced the concept of a flag that could be used to
protect DTV, but they did not necessarily support the MPAA's
proposal for the details behind the flag that you put forward.
Now, is that correct?
    Mr. Murray. If I could say, that was never put to a vote in
either of the two fora, the Broadcast Protection Discussion
Group or the Copy Protection Working Group, to the best of my
knowledge.
    I would also like to not stand for the proposition that I
am saying wait until there is a problem here to protect this
content, because that is not what I am saying. I am saying we
do have a very real piracy problem, but that piracy problem is
being used to sort of get the camel's nose under the tent here
where there is not a problem. What I am saying is, if we are
going to solve a problem let us get an effective solution on
the table. And I agree with Professor Felten: We do not see one
yet.
    Senator Brownback. Senator Inouye has been patient to allow
me. Please. That is pretty much good for me.
    Senator Inouye. In 1959 soon after Hawaii became a state, I
found myself, at the request of the State Department, going to
the Far East. When I landed in--I will not mention the country.
When I landed in my first visit to Asia, I was presented with a
gift and the gift was a book, ``Advise and Consent.'' That book
had not been published yet in the United States. Later on it
became a best seller. The movies had not been made yet.
    But here was a book that was counterfeited somewhere in
Asia, and the people who presented that to me were rather proud
that they were able to steal this from America and give it to
me, about the U.S. Senate. Since then I have been quite
concerned about intellectual piracy, not just abroad but here.
    I have been here for a little while now and every time this
matter comes up you have a whole flock of people opposed to it,
saying: No, it is too soon; the technology is not ready; you
are going to violate rights and everything, etcetera, etcetera,
etcetera. Now, if this continues, Mr. Valenti, what is the
reasonable future of your industry?
    Mr. Valenti. Well, I think it is put to hazard, Senator. I
cannot tell you, but we see what is happening to the music
industry. And when you have a 30 percent drop in sales and a
continuing drop--it is getting worse--I can see when CalTech's
experiment becomes commonplace, when Internet 2, 3 to 4, 5
years from now is in the marketplace, where you can bring down
movies in minutes and even seconds, you can imagine what will
happen to the kind of thievery that will go on.
    As a matter of fact, most of the thievery that is going on
now is in colleges and universities, where they have high-
speed, large-pipe, high-velocity broadband systems where you
can bring down movies a lot faster than you can with a 56K
modem.
    So I see distress, I see shrinkage, and I see a lot of
desolation among the one million people who work in this movie
industry. Some of them are going to lose their jobs, there is
no question about that, unless we begin to act now. I am not
saying today, but I mean an open mind by Congress, not putting
any bans on the FCC.
    Right now on this broadcast flag, we can argue all we want.
There is a concept there. The FCC is deciding now whether or
not this implementation ought to take place. That is what its
job is to do. Congress set it up to do detailed scientific work
that the Congress does not have the capacity to do.
    Senator Inouye. The bill being considered this morning bans
technology mandate. Is there a technology mandate that is now
under consideration by the FCC?
    Mr. Valenti. Well, yes. The broadcast flag by definition is
a technological mandate, yes, sir.
    Mr. Blanford. With associated encryption technologies, the
so-called 5C-4C, Senator.
    Mr. Valenti. I do not know whether this body knows what 5C-
4C is. Sometimes when they use acronyms, the people I work with
use acronyms, I throw up my hand in frustration and make them
spell out exactly what it means.
    Senator Inouye. You know, I am still waiting because people
have been all unanimous against intellectual piracy, but I
still have hope, but when will this happen? And I am just
hoping something will happen.
    You have been talking at times on pornography. What are
your thoughts on that?
    Mr. Valenti. Well, Mr. Chairman, I am in a business where I
have seen a number of pornographic films in my time, and I
thought that I had seen it all. But I urge Members of the
Congress to get their staff to go on Kazaa, as our people have
done, and where you can see ``Brittany Spears'' or ``Disney''
or ``Harry Potter,'' which are key words, and what you bring
down is material that is so squalid it will shake the very
foundations of your comprehension.
    The Suffolk County prosecutor convicted 11 people for child
pornography on the Internet and he said that the kind of
destructive material they saw was the worst in all his 30 years
of prosecution. It is unspeakable, where children are doing
sexual acts. It is bestiality. It is unbelievable. And guess
what, Senator. Any 10-year-old can bring it down and, guess
what, probably does.
    I think this thing is a national sin and I urge this
committee to get their staff to go on there so you can see for
yourself this unwholesome squalid material. And it is on all
these file-sharing sites.
    Mr. Blanford. Senator, I would agree with Mr. Valenti's
comments about how grotesque it is. But what we are talking
about here is broadcast television. I do not think we are
talking about pornography being broadcast by our major
networks. We are talking about broadcast television and we are
talking about whether or not broadcast television that is
broadcast should first and foremost, which had been free to air
for as long as I know the existence of television, now being
encrypted when they enter the consumers' homes.
    So I just want to maybe bring us back on the subject at
hand.
    Senator Inouye. How would you solve this?
    Mr. Blanford. I think what we have argued is that we need,
first of all, some time. We are absolutely committed to solving
this. The technologies proposed right now do not solve it, for
the reasons already commented on here at the table. We think
that there could be some superior technologies. We are working,
we are actively working on them. Watermarking is one that we
are working on at Philips and there are other companies working
on it as well.
    I think at the end of the day the issue is going to require
a host of activities, including education, potentially law
enforcement, technology, and new business models. But I again
would first bring the Senators back to a fundamental issue that
I think the FCC does need guidance on, and we believe in the
process that is going on over there, but it is should broadcast
television, which has been free to air for all of these
decades, fundamentally now be encrypted going forward?
    As was already pointed out at the table earlier, you can
take broadcast television today in analog form, digitize it,
and send it out over the Internet. Yet I do not think we are
talking about trying to take today's television and tie it up.
This is a fundamental philosophical issue that I do not--I
mean, technologists can potentially address this, I think, once
Congress provides some direction to the FCC.
    Mr. Valenti. There is a bit of sophistry going on here and
let me just break in. What Mr. Blanford is saying is off the
mark. We are not encrypting anything. We are putting some
little sequence of digital bits in a television program that
the customer will not know anything about. It will not bother
him at all, unless, unless he tries to take that digitized
program, not analog but digitized program, and send it back to
the Internet, where it is open and naked and prey to everybody.
    That is all it is. It is a very simple thing. And by the
way, the experts that I have consulted--and I think they are as
wise as the people at this table--tell me this is not a big
deal. And the cost is not, as Mr. Blanford said, in dollars; it
is in cents.
    Mr. Blanford. Let me just----
    Mr. Valenti. Let me just finish and then I will let you go.
    Mr. Blanford. That is fine, go ahead.
    Mr. Valenti. I bought this mike and I am going to use it,
as President Reagan once said.
    Senator Brownback. Please proceed, Mr. Valenti.
    Mr. Valenti. The only point I want to make is that the
broadcast flag is for digitized programs coming into the home.
It will not invade, torture, or shrink anything the consumer is
doing now, not one bit.
    Take off.
    Mr. Blanford. Thank you very much, Mr. Valenti. I really do
appreciate you handing me this mike that you paid for.
    Let me just make a comment. We see it very differently.
Every consumer will have to replace in essence every piece of
equipment in their home in order to work with the new broadcast
flag-enabled equipment. That was what this chart that I
presented earlier is all about.
    Let me just give you a simple example that may bring this
home. Here is the example. A consumer makes a recording with a
new broadcast flag-enabled DVD recorder. What happens? The
consumer finds that the disk will not play on the DVD player
that they already own. The only way to solve the problem is to
replace all of the DVD players in their home that they have
today. That means that American families will have to replace
all 40, 45 million DVD players that are now in the country and
in consumers' homes.
    This is not innocuous. This is massive, absolutely massive.
    Mr. Valenti. Now, the thing is Mr. Blanford again is
dealing in sophistry. You can play it back on the machine you
recorded it on. No problem. You recorded it and you play it
back on that machine.
    The other thing is, though, that he is saying that you have
got to replace----
    Mr. Murray. But can you take it to another location, Mr.
Valenti? Can you take it upstairs?
    Mr. Blanford. You can play it back on that machine, but you
cannot play it back on the other three DVD players that you
have in your home. Go ahead.
    Mr. Valenti. But you can play it back on that machine.
    Mr. Blanford. That is correct.
    Mr. Valenti. So you do not have to replace it then, do you?
    Mr. Blanford. You have to replace the other DVD players.
    Mr. Valenti. No, but you have a machine you can play it on.
    Mr. Blanford. If you want to always watch your DVD in that
location, that is fine.
    Go ahead, jump in here.
    Senator Brownback. Mr. Murray.
    Mr. Murray. The only thing I wanted to add regarding
whether or not this is going to be a problem in the future, I
really--if there is a piracy problem, the broadcast flag does
not solve that piracy problem.
    Here is what I am saying about the future: We have got a
track record with this industry. We were told in 1982 that the
VCR was a huge threat. I hope Mr. Valenti will forgive me for
reading from his testimony from the House Judiciary Committee
on April 12, 1982:

        ``The question comes, what is wrong with the VCR? One
        of the Japanese lobbyists, Mr. Ferris, has said the VCR
        is the greatest friend that the American film producer
        ever had. I say to you that the VCR is to the American
        film producer and the American public as the Boston
        Strangler is to the woman home alone.''

    He continued on: ``We are going to bleed and bleed and
hemorrhage unless this Congress at least protects one industry
that is able to retrieve a surplus balance of trade and whose
total future depends on its protection from the savagery and
the ravages of this machine.''
    The VCR has become one of the most lucrative slices of the
movie industry's copyright pie. If they had shut it down then,
one of the main sources of revenue that not only these
companies but this country enjoys would have been precluded. I
am just suggesting that perhaps their foresight is not 100
percent, as, humbly, I would suggest mine is not. But that is
why we should not lock in a tech mandate on this.
    Mr. Valenti. Mr. Chairman, I would like to say that----
    Senator Brownback. Just a second.
    Mr. Inouye, do you have any other questions, Senator
Inouye?
    Senator Inouye. This is so interesting.
    [Laughter.]
    Senator Brownback. It is entertaining.
    Mr. Valenti. Mr. Chairman, if I may. I hope that Mr. Murray
some time in his life says something that somebody quotes it
back 28 years later. Frankly, I think that is a memorable
phrase, and it is the only thing I have ever said that has
lasted 28 years. So I am very grateful that I said it.
    Mr. Murray. Touche.
    Senator Brownback. I think the point, though, is that we
are trying to balance what the industry, the hardware industry,
can do and the protections of intellectual property rights. And
this has been a long, ongoing battle, as Senator Inouye has
noted during his tenure here in the Senate.
    So what I am trying to put forward in a bill is a
sensible--what I hope is a sensible approach to deal with this,
to protect the rights along with being able to move this on
forward. So I would hope that all would look at that as trying
to balance what we do, because we want to protect intellectual
property rights. At the same time, we want to do something we
can get done and make sure that we maintain some malleability
to be able to maneuver in the future and not lock it down at a
technology freeze point when the technology, as several of you
noted, will change and change rapidly in the near future.
    It has been a very informative panel, engaging as always,
and I thank you all very much. Thank you, Senator Inouye, for
attending.
    The hearing is adjourned.
    [Whereupon, at 12:38 p.m., the Committee was adjourned.]
                            A P P E N D I X

            Prepared Statement of Hon. Ernest F. Hollings,
                    U.S. Senator from South Carolina
    Today, the Committee returns its attention to the vexing problem of
digital piracy. While roughly 18 months have passed since our last
hearing on this subject, I regret to say that the problem of digital
piracy is getting worse, not better.
    Without question, advances in digital technology and the growing
popularity of decentralized file sharing services such as Morpheus and
KaZaa (cuh-zah) are resulting in an enormous drain on the music
business and other content industries. According to one recent analyst
report, each month there are 2.6 billion illegal downloads of audio
files. Not surprisingly, CD sales have dropped 26 percent since 1999.
At the same time, the yearly numbers of blank, recordable CDs sold at
retail increased by 40 percent in 2002, and now outsell prerecorded CDs
by 2 to 1.
    In addition, even though today's limits on broadband capacity make
it much easier to download a 3 minute song than a 30 minute television
show or a 2 hour movie, the movie and television industries already
face a significant threat. Today, MPAA estimates that over 600,000
video files traded per day over the Internet. Moreover, in the first 5
months of 2003, 16 million blank DVDs were shipped, perfect for burning
large video files. In addition, over 70 million copies of DIVX, a
compression technology that permits more efficient storage and
distribution of video content, have been downloaded. As one analyst
surmised recently, Hollywood has roughly a ``two-year window'' before
it experiences the same rampant piracy problems that currently plague
the music industry.
    Despite clear evidence of the problem before us, there are an
alarming number of industry groups who continue to stick their heads in
the sand. The latest chapter is being written by those wishing to re-
open the compromise struck between the content community and Internet
Service Providers (ISPs) through the passage of the Digital Millennium
Copyright Act of 1998. Under Title II of that Act, ISPs received
liability protections in exchange for assisting copyright owners in
identifying and dealing with subscribers who steal copyrighted works.
As many of my colleagues are aware, claims raised today about the
privacy implications of the DMCA are currently being litigated in
courts across the Nation.
    As the author of consumer privacy legislation that was favorably
reported out of this committee last year, I recognize the importance of
these issues. As such, I welcome the exploration of ideas to protect
the personal information of innocent subscribers. But in doing so, we
must be wary of solutions that prevent copyright owners from swiftly
identifying those stealing copyrighted works. On that score, our
message should be clear, we will not condone piracy under the guise of
protecting privacy.
    In addition, today's hearing also allows us to examine the proper
role of government in facilitating the implementation of copy
protection solutions. As I have noted previously, Congress and the FCC
have a long history of working with industry to adopt technology
mandates that benefit consumers.
    In 1962 under the All Channel Receiver Act, Congress mandated that
all television receivers include the capability to tune all channels
(UHF and VHF) allocated to the television broadcast service. More
recently, in 1998, Congress required that all analog VCRs recognize a
standard copy control technology (known as ``Macrovision''). In the
former case, the Federal Government and the FCC took the lead. In the
latter case, industry first agreed upon the ``macrovision'' standard
and Congress validated the agreement in legislation. So, whether
Congress or industry has led the way, the results have benefitted
consumers and industry, by providing Americans with wider access to
programming and content.
    At present, the FCC is considering yet another technology solution
known as the ``broadcast flag'' designed to spur the digital television
transition and provide consumers with ready access to high value,
digital television content. This technology has already been endorsed
by a large cross section of industry participants and has been awaiting
Commission action since the fall of last year. As a result, it is my
hope that the FCC will act swiftly, responsibly, and consistent with
the public interest to ensure that consumers receiving over-the-air
signals are not left with second class content.
    Given the importance of these issues, I look forward to hearing
from our panels today.